Zogenix Annual Report 2013

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549____________________________________ Form 10-K ____________________________________(Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2013or¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to ____________________________________ Commission file number: 001-34962Zogenix, Inc.(Exact Name of Registrant as Specified in its Charter)Delaware 20-5300780(State or Other Jurisdiction ofIncorporation or Organization) (I.R.S. EmployerIdentification No.) 12400 High Bluff Drive, Suite 650San Diego, California 92130(Address of Principal Executive Offices) (Zip Code)858-259-1165(Registrant’s Telephone Number, Including Area Code)Securities registered pursuant to Section 12(b) of the Act:Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock, par value $0.001 per share The NASDAQ Global MarketSecurities registered pursuant to Section 12(g) of the Act:NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No xIndicate 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 thepreceding 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 90days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submittedand posted 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 tosubmit and post such files). x Yes ¨ NoIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of theregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer ¨ Accelerated filer x Non-accelerated filer o Smaller reporting company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No xAs of June 28, 2013, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $107,302,329, based on theclosing price of the registrant’s common stock on the Nasdaq Global Market of $1.71 per share.The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of March 3, 2014 was 139,539,151.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with theregistrant’s 2014 Annual Meeting of Stockholders, which will be filed subsequent to the date hereof, are incorporated by reference into Part III of this Form 10-K. Such proxystatement will be filed with the Securities and Exchange Commission not later than 120 days following the end of the registrant’s fiscal year ended December 31, 2013. Table of ContentsZOGENIX, INC.FORM 10-K — ANNUAL REPORTFor the Year Ended December 31, 2013Table of Contents PagePART I Item 1Business3Item 1ARisk Factors38Item 1BUnresolved Staff Comments76Item 2Properties76Item 3Legal Proceedings76Item 4Mine Safety Disclosures76 PART II Item 5Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities77Item 6Selected Financial Data80Item 7Management’s Discussion and Analysis of Financial Condition and Results of Operations82Item 7AQuantitative and Qualitative Disclosures About Market Risk98Item 8Financial Statements and Supplementary Data98Item 9Changes in and Disagreements With Accountants on Accounting and Financial Disclosure98Item 9AControls and Procedures98Item 9BOther Information100 PART III Item 10Directors, Executive Officers and Corporate Governance101Item 11Executive Compensation101Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters101Item 13Certain Relationships, Related Transactions and Director Independence101Item 14Principal Accounting Fees and Services101 PART IV Item 15Exhibits, Financial Statement Schedules102 Signatures iTable of ContentsPART IForward-Looking Statements and Market DataThis Annual Report on Form 10-K and the information incorporated herein by reference contain forward-looking statements that involve substantialrisks and uncertainties. These forward looking statements include, but are not limited to, statements about:•our ability to maintain and increase market demand for, and sales of, Sumavel DosePro;•our ability to successfully execute our sales and marketing strategy for the commercialization of Sumavel DosePro and Zohydro ER, including theplanned launch of a 4 mg dose of Sumavel DosePro;•the progress and timing of clinical trials for Relday and our other product candidates;•adverse side effects or inadequate therapeutic efficacy of Sumavel DosePro or Zohydro ER that could result in product recalls, market withdrawals orproduct liability claims;•the safety and efficacy of our product candidates;•the market potential for migraine treatments, and our ability to compete within that market;•the market potential for extended-release/long-acting (ER/LA) opioid products, and our ability to compete within that market;•the goals of our development activities and estimates of the potential markets for our product candidates, and our ability to compete within those markets;•the ability to develop an abuse deterrent formulation of Zohydro ER;•estimates of the capacity of manufacturing and other facilities to support our products and product candidates;•our ability to ensure adequate and continued supply of Sumavel DosePro and Zohydro ER to successfully meet anticipated market demand;•our and our licensors ability to obtain, maintain and successfully enforce adequate patent and other intellectual property protection of our products andproduct candidates and the ability to operate our business without infringing the intellectual property rights of others;•our ability to obtain and maintain adequate levels of coverage and reimbursement from third-party payors for Sumavel DosePro, Zohydro ER or any ofour product candidates that may be approved for sale, the extent of such coverage and reimbursement and the willingness of third-party payors to pay forour products versus less expensive therapies;•the impact of healthcare reform legislation; and•projected cash needs and our expected future revenues, operations and expenditures.The forward-looking statements are contained principally in the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and “Business.” In some cases, you can identify forward-looking statements by the following words: “may,” “will,”“could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or thenegative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements relate to futureevents or our future financial performance or condition and involve known and unknown risks, uncertainties and other factors that could cause our actualresults, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. We discussmany of these risks, uncertainties and other factors in this Annual Report on Form 10-K in greater detail under the heading “Item 1A — Risk Factors.”Given these risks, uncertainties and other factors, we urge you not to place undue reliance on these forward-looking statements, which speak only as ofthe date of this report. You should read this Annual Report on Form 10-K completely and with the understanding that our actual future results may bematerially different from what we expect. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statementscontained in the Private Securities Litigation Reform Act of 1995. We undertake no obligation to revise or update publicly any forward-looking statements,whether as a result of new information, future events or otherwise, unless required by law.This Annual Report on Form 10-K also contains estimates, projections and other information concerning our industry, our business, and the marketsfor Sumavel DosePro, Zohydro ER, Relday and other drugs, including data regarding the estimated size of those markets, their projected growth rates, theincidence of certain medical conditions, statements that certain drugs, classes of drugs or dosages are the most widely prescribed in the United States or othermarkets, the perceptions and preferences of patients and physicians regarding certain therapies and other prescription, prescriber and patient data, as well asdata regarding market research, estimates and forecasts prepared by our management. Information that is based on estimates, forecasts, projections, marketresearch or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events andcircumstances reflected in this information. Unless otherwise expressly1Table of Contentsstated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market researchfirms and other third parties, industry, medical and general publications, government data and similar sources. In particular, unless otherwise specified, allprescription, prescriber and patient data in this Annual Report on Form 10-K is from Source Healthcare Analytics, Source® Pharmaceutical Audit Suite(PHAST) Institution/Prescription, Source® PHAST Prescription, Source® Prescriber or Source® Dynamic Claims. In some cases, we do not expressly refer tothe sources from which this data is derived. In that regard, when we refer to one or more sources of this type of data in any paragraph, you should assume thatother data of this type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the context otherwise requires.DosePro®, Relday™, Sumavel®, Zogenix™ and Zohydro™ ER are our trademarks. All other trademarks, trade names and service marks appearing inthis Annual Report on Form 10-K are the property of their respective owners. Use or display by us of other parties’ trademarks, trade dress or products is notintended to and does not imply a relationship with, or endorsements or sponsorship of, us by the trademark or trade dress owner.Unless the context requires otherwise, references in this Annual Report on Form 10-K to “Zogenix,” “we,” “us” and “our” refer to Zogenix, Inc.,including, as of June 7, 2010, its consolidated subsidiary.2Table of ContentsItem 1. BusinessOverviewWe are a pharmaceutical company committed to developing and commercializing therapies that address specific clinical needs for people living withpain-related conditions and central nervous system disorders who need innovative treatment alternatives to help them return to normal daily functioning. OnOctober 25, 2013, we received marketing approval from the U.S. Food and Drug Administration, or FDA, for Zohydro™ ER (hydrocodone bitartrate)extended-release capsules, an opioid agonist, extended-release oral formulation of hydrocodone without acetaminophen, for the management of pain severeenough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. Zohydro ER is the firstextended-release oral formulation of hydrocodone without acetaminophen. Zohydro ER was launched on March 3, 2014. In addition, we are commercializingSumavel® DosePro® (sumatriptan injection) Needle-free Delivery System. Sumavel DosePro offers fast-acting, easy-to-use, needle-free subcutaneousadministration of sumatriptan for the acute treatment of migraine and cluster headache in a pre-filled, single-use delivery system. Sumavel DosePro is the firstdrug product approved by the FDA that allows for the needle-free, subcutaneous delivery of medication.Sumavel DosePro and Zohydro ER each have the potential to address significant unmet medical needs and become important and widely-used additionsto the treatment options available to patients and physicians in the United States’ multi-billion dollar migraine and chronic pain markets, respectively.Sumavel DosePro serves as a treatment alternative to oral and nasal triptans, and may offer simple, convenient administration when compared totraditional, needle-based sumatriptan injection. According to its Prescribing Information, Sumavel DosePro can provide onset of migraine pain relief in as littleas ten minutes for some patients. As a result, we believe that Sumavel DosePro has the potential to be prescribed by a broad physician audience, especially fordifficult to treat migraine episodes.Migraine is a syndrome that affects over 29.5 million people in the United States, according to the National Headache Foundation, or NHF, website.Triptans are the class of drugs most often prescribed for treating migraines. In the United States in the 12 months ended December 2013, triptans generatedsales of approximately $4.7 billion and sumatriptan, including branded and generic forms, represented the largest market share of the seven approvedtriptans, with sales of approximately $2.8 billion, according to Source Healthcare Analytics (Source® PHAST Institutional Prescription January 2013 -December 2013).We launched the commercial sale of Sumavel DosePro in the United States in January 2010 with our original co-promotion partner, Astellas PharmaUS, Inc., or Astellas. Our collaboration with Astellas terminated on March 31, 2012, at which time we assumed full responsibility for the commercializationof Sumavel DosePro. In August 2012, Mallinckrodt began promoting Sumavel DosePro under our co-promotion agreement, pursuant to which we granted toMallinckrodt a co-exclusive right (with us) to promote Sumavel DosePro in the United States. Our co-promotion agreement with Mallinckrodt terminated inJanuary 2014 and we assumed full responsibility for the commercialization of Sumavel DosePro beginning in February 2014.For the twelve months ended December 31, 2013, we recognized $31.7 million in net product revenue from sales of Sumavel DosePro, represented bymore than 81,000 aggregate dispensed prescriptions (Source® PHAST Prescription, January 2013 — December 2013). Prescriptions for Sumavel DoseProcontinue to be written by prescribers in both the neurology and primary care settings. The product has gained use from a range of patient segments, includingnew triptan users, patients being converted to the product from other migraine drugs and patients who have been prescribed Sumavel DosePro and also haveother triptan prescriptions. This experience is consistent with our belief that many patients will selectively use Sumavel DosePro for their more challengingmigraine episodes, while continuing to use oral triptans to treat their less severe migraine episodes. Through our ongoing efforts with the largest commercialhealth plans, Sumavel DosePro is achieving broad coverage in the United States, with a reimbursement claims approval rate of approximately 83% sincelaunch (Source® Dynamic Claims January 2010 — December 2013).We believe that our new product, Zohydro ER, has the potential to be an important therapeutic alternative to existing hydrocodone products, includingthe branded products Vicodin, Norco, Lorcet, Lortab and their generic equivalents, which contain the analgesic combination ingredient acetaminophen and,if taken in high quantities over time, can lead to serious side effects such as liver toxicity. Zohydro ER utilizes the SODAS® Technology, Alkermes’proprietary multiparticulate drug delivery system that allows the development of customized extended-release profiles and serves to enhance the release profileof hydrocodone in Zohydro ER. We believe these release properties have the potential to provide longer lasting and more consistent pain relief with fewer dailydoses than the commercially available formulations of hydrocodone. As a result of its unique single-entity extended-release profile, we believe Zohydro ER hasthe potential to generate sales from both patients who use immediate-release products on a chronic basis and patients already using extended-release products inthe prescription opioid market. We in-licensed exclusive U.S. rights to Zohydro ER from Alkermes in 2007.3Table of ContentsThe Institute of Medicine Report from the Committee on Advancing Pain Research, Care, and Education reported in 2011 that an estimated 116 millionpeople in the United States are burdened with chronic pain, at a national economic cost of $560 to $635 billion annually. Chronic pain can be treated withboth immediate-release and extended-release opioids, as well as non-opioid analgesics. We define our target market for Zohydro ER as prescription, non-injectable codeine-based and extended-release morphine-based pain products. This market generated U.S. sales of approximately $14.4 billion for the yearended December 2013, based on average wholesale price, on approximately 208 million prescriptions. During the same period, existing hydrocodoneproducts, the most commonly prescribed pharmaceutical products in the United States, generated $3.7 billion in sales on approximately 125 millionprescriptions. (Source® PHAST Prescription January 2013 - December 2013).We are also developing Relday™, a proprietary, long-acting injectable formulation of risperidone using Durect Corporation's SABER™ controlled-release formulation technology through a development and license agreement with Durect. Risperidone is used to treat the symptoms of schizophrenia andbipolar disorder in adults and teenagers 13 years of age and older. If successfully developed and approved, we believe Relday may be the first subcutaneousantipsychotic product that allows for once-monthly dosing. In May 2012, we filed an investigational new drug, or IND, application with the FDA. In July2012, we initiated our first clinical trial for Relday. This Phase 1 clinical trial was a single-center, open-label, safety and pharmacokinetic trial of 30 patientswith chronic, stable schizophrenia or schizoaffective disorder. We announced positive single-dose pharmacokinetic results from the Phase 1 clinical trial onJanuary 3, 2013. Based on the favorable safety and pharmacokinetic profile demonstrated with the 25 mg and 50 mg once-monthly doses tested in the Phase 1trial, we extended the study to include an additional cohort of 10 patients at a 100 mg dose of the same formulation. We announced positive top-line resultsfrom the extended Phase 1 clinical trial on May 2, 2013. The results for the extended Phase 1 clinical trial showed risperidone blood concentrations in thetherapeutic range were achieved on the first day of dosing and maintained throughout the one-month period. In addition, dose proportionality was establishedacross all dose ranges that were studied. The positive results from this study extension position us to begin a multi-dose clinical trial, which we believe willprovide the required steady-state pharmacokinetic and safety data prior to initiating Phase 3 development studies. We plan to commence this multi-dose clinicaltrial in the second half of 2014.The development of Relday will first focus on its delivery by conventional needle and syringe in order to allow the administration of different volumes ofthe same formulation of Relday by a healthcare professional. We anticipate that the introduction of our DosePro needle-free technology for administration ofRelday can occur later in development or as part of life cycle management after further work involving formulation development, technology enhancements andapplicable regulatory approvals.Our DosePro technology is a novel, patent-protected, needle-free drug delivery system designed for self-administration of a pre-filled, single dose ofliquid drug. We believe the FDA’s approval of Sumavel DosePro represents an important validation of the technology. Results from our pre-clinical and clinicalstudies demonstrate that DosePro can be used successfully with small molecules and biological products, including protein therapeutics and monoclonalantibodies. We are building our internal product pipeline by investigating proven drugs that can be paired with DosePro to enhance their benefits andcommercial attractiveness. We are also evaluating the market potential, formulation requirements and clinical development pathway of an additional centralnervous system, or CNS, compound that could be paired with DosePro to enhance its commercial attractiveness. We are also seeking to capitalize on ourDosePro technology by out-licensing it to potential partners enabling them to enhance, differentiate or extend the life cycle of their proprietary injectableproducts. We acquired the DosePro technology and related intellectual property from Aradigm Corporation in August 2006.Our StrategyOur core strategy is to commercialize and develop differentiated CNS and pain therapeutics that can address significant unmet medical needs andovercome limitations of existing products. Key elements of our strategy include:•Executing our sales and marketing strategy for the commercialization of Zohydro ER for the management of pain severe enough to require daily,around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. Zohydro ER is the first hydrocodoneproduct to offer the benefit of less frequent dosing and the ability to treat chronic pain patients without the risk of liver injury associated with the use ofacetaminophen in high dosages or over long periods of time. We received marketing approval for Zohydro ER from the FDA on October 25, 2013 andlaunched the product on March 3, 2014. We expanded resources for all commercial functions to approximately 190 employees prior to launch, includingsales, marketing, managed markets, commercial analytics and trade teams. This expansion included an increase in our field sales personnel toapproximately 165 employees to support broader reach to pain specialists. Further,4Table of Contentsif combination hydrocodone products are rescheduled from Schedule III to Schedule II, we may seek a co-promotion or other partnering opportunity forZohydro ER, or may further expand our sales force.•Increasing sales and continuing to drive patient and physician adoption of Sumavel DosePro in the United States. We continue to leverage ourcommercial infrastructure and our investment in sales and marketing programs to help increase awareness and adoption of, and access to, SumavelDosePro with prescribers, patients, third-party payors, pharmacists and employers. In June 2013 we launched a new and improved Sumavel DoseProMigraine Toolbox, which is provided to patients by their physicians, to support patient education and empowerment regarding migraine treatment options.In December 2013 the FDA approved our supplemental New Drug Application for a 4 mg dose of Sumavel DosePro, and we plan to extend the SumavelDosePro line by launching this 4 mg dose, alongside the currently marketed 6 mg dose, in mid-2014.•Developing Relday for the treatment of schizophrenia and bipolar disorder in adults. We filed an IND application for Relday with the FDA in May2012. On January 3, 2013, we announced positive single-dose pharmacokinetic results from a Phase 1 clinical trial. Based on the favorable safety andpharmacokinetic profile demonstrated with the 25 mg and 50 mg once-monthly doses tested in the Phase 1 trial, we extended the study to include anadditional cohort of 10 patients at a 100 mg dose of the same formulation. We announced positive top-line results from the extended Phase 1 clinical trial inMay 2013, which positions us to begin a multi-dose clinical trial, which we believe will provide the required steady-state pharmacokinetic and safety dataprior to initiating Phase 3 development studies. We plan to commence this multi-dose clinical trial in the second half of 2014.•Expanding our product pipeline in CNS disorders and/or pain. We are utilizing our proprietary DosePro technology to add to our internal productpipeline. We are evaluating the market potential, formulation requirements and clinical development pathway of an additional CNS compound that couldbe paired with DosePro to enhance its commercial attractiveness.•Out-licensing our proprietary DosePro technology. We are seeking and evaluating opportunities to capitalize on our DosePro needle-free drug deliverytechnology by out-licensing it to potential partners enabling them to enhance, differentiate or extend the life-cycle of their injectable products. We have a co-marketing and development services agreement with Battelle Memorial Institute, or Battelle, pursuant to which we granted to Battelle the exclusive right toco-market our DosePro drug delivery technology and Battelle's DosePro development services to prospective pharmaceutical clients.•Securing rights to complementary products and product candidates that address CNS disorders and/or pain. To strategically leverage ourcommercial resources and generate additional revenue, we are seeking third-party co-promotion opportunities. In June 2013, we entered into a co-promotionagreement with Valeant Pharmaceuticals North America LLC, or Valeant. Under the terms of the co-promotion agreement, we were granted the exclusiveright (with Valeant or any of its affiliates) to promote Migranal® (dihydroergotamine mesylate) Nasal Spray, or Migranal, to a prescriber audience ofphysicians and other health care practitioners in the United States. We believe Migranal is a complement to Sumavel DosePro and supports our MigraineToolbox that we launched in June 2013. In the future, we will also consider in-licensing or acquisition opportunities with a focus on product candidatesthat utilize novel technologies to improve the profile of existing compounds for CNS disorders and/or pain.Our Products and Product CandidatesSumavel DosePro for the Acute Treatment of Migraine and Cluster HeadacheWe launched the commercial sale of Sumavel DosePro in the United States in January 2010 with our original co-promotion partner, Astellas. OurSumavel DosePro (sumatriptan injection) Needle-free Delivery System offers fast-acting, easy-to-use subcutaneous administration of sumatriptan for theacute treatment of migraine and cluster headache. Sumavel DosePro utilizes our proprietary DosePro system which enables patients to self-administersubcutaneous sumatriptan in three easy steps. Sumavel DosePro may serve as a treatment alternative to oral and nasal triptans and may offer simple,convenient administration when compared to traditional, needle-based sumatriptan injection. As a result, we believe that Sumavel DosePro has the potential tobe prescribed by a broad physician audience, especially for difficult to treat migraine episodes.Migraine MarketMigraine is a chronic neurovascular disorder characterized by episodic attacks. According to the NHF website, more than 29.5 million people in theUnited States suffer from migraines, with women three times more likely to suffer migraines than men. Migraine attacks typically manifest themselves asmoderate to severe headache pain, with symptoms that often include nausea and/or vomiting and abnormal sensitivity to light and sound. Migraines canseverely limit the normal daily functioning of patients, who may seek dark, quiet surroundings until the episode has passed. According to the InternationalHeadache Society, the duration of untreated or unsuccessfully treated migraine episodes ranges from four to 72 hours. According to data published in theMarch 2002 issue of Neurology, 63% of patients suffer one or more attacks per month, 25% of patients have5Table of Contentsone or more attacks per week and the median duration of an untreated migraine is approximately 24 hours. Overall, the cost burden of migraine in the UnitedStates was estimated by Thomson Medstat in June 2006 to approach $25 billion annually, including $12.7 billion in direct medical costs and $12 billion inindirect costs related to employee absenteeism, short-term disability and workers’ compensation costs to employers.Cluster headaches are characterized by groups or clusters of debilitating headaches lasting weeks or months, then disappearing for months or years.This type of headache affects an estimated one million sufferers in the United States, and approximately 90% of these sufferers are male, according to theNHF website. Due to the severe nature of cluster headache, patients are commonly treated with prescription medication.Acute therapies dominate the prescription migraine and cluster headache market and are used during intermittent attacks. The goals of acute therapy areto stop the attack quickly and consistently, minimize the use of backup and rescue medications, enhance self-care and restore the patient’s ability to function,use the least amount of medication and limit adverse side effects.A major advancement in the acute treatment of migraine began in 1993 with the launch of the first triptan, sumatriptan injection (Imitrex), in the UnitedStates. All triptans are selective agonists for the 5-HT1B and 5-HT1D receptors. Triptans presumably exert their antimigrainous effect through binding tovascular 5-HT1 receptors, which have been shown to be present on both the human basilar artery, one of the major arteries that supplies blood to the brain,and the outermost membrane covering the brain. Triptans activate these receptors to cause vasoconstriction, an action in humans correlated with the relief ofmigraine and cluster headache. Sumatriptan was subsequently joined by other drugs in the triptan class. By the year 2003, there were seven approved triptansin the United States with a focus on oral delivery forms to offer convenience of dosing for migraine patients. Sumatriptan is the only triptan available in oral,nasal and subcutaneous forms, each of which has different pharmacokinetic properties.Triptans remain the drugs of choice and the most often prescribed therapy for the acute treatment of migraine and cluster headache. The following tableprovides a breakdown of the U.S. triptan market, including sales and doses prescribed for oral (tablets and melts), nasal and injectable forms of triptan forthe 12 months ended December 2013.U.S. Triptan Market(12 months ended December 2013) Triptan FormSales (millions) $ Share Doses (millions) Dose ShareOral Tablet$3,730 79.0% 133.3 86.6%Oral Melt471 10.0 13.7 8.9Nasal139 2.9 3.0 1.9Injectable381 8.1 4.0 2.6Total$4,721 100% 154.0 100% Source ® PHAST Institution/Prescription.As indicated in the prior table, the triptan market is dominated by oral dosage forms (tablets and melts), with approximately 95% of U.S. triptan dosestaken as oral formulations and the remaining 5% split between injectable and nasal formulations. Branded and generic sumatriptan, in all dosage forms,remains the most prescribed triptan molecule with sales of approximately $2.8 billion (59% dollar share of the triptan market). Of that amount, the injectableforms of sumatriptan accounted for $381 million. By comparison, ergotamine agents, another class of drugs used for the acute treatment of migraine,including injectable DHE and Migranal, accounted for $117 million in sales in the United States during the same 12-month period. (Source® PHASTInstitution/Prescription January 2013 - December 2013). Sumatriptan is the only triptan available to patients in the injectable form and, with the exception ofSumavel DosePro, all other forms of injectable sumatriptan make use of needle-based injections for their administration.In five major European countries (France, Germany, Italy, Spain and the United Kingdom), triptans generated total sales of approximately $550 millionfor the 12 months ended June 2007, according to average wholesale price data published by IMS Health MIDAS. Of that $550 million, the Europeanequivalent of Imitrex, Imigran, represented sales of approximately $148 million, of which the injectable form accounted for approximately $35 million.6Table of ContentsMigraine Market DynamicsThe type of migraine treatment utilized by patients often depends on the frequency and severity of the headache, its speed of onset and previous responseto medication. In published studies, migraine sufferers most often cite faster onset of pain relief as a key therapeutic attribute they would like from theirmigraine medication.Patients with more frequent or severe migraines or those who do not respond to simple analgesics may seek medical attention with a primary carephysician initially and then with a headache clinic or neurology specialist if needed. Once a physician makes a diagnosis of migraine, oral triptans aregenerally prescribed as first-line therapy.If a patient does not respond to one triptan product, the physician may switch to another triptan or dosage form or add another triptan or dosage form toa patient’s treatment armamentarium. Market research conducted on our behalf by Boston Healthcare Associates, Inc. indicates that it is common for amigraine patient to be offered several different oral triptan options before being offered a nasal or injectable product. In addition, the same market researchindicates that approximately 25% of migraine patients had two or more active prescriptions for different brands and/or forms of triptan therapy. We believethese patients maintain multiple prescriptions because they have found that certain medications or dosage forms work better for certain types of migraines andchoose which medication to use based on the type of migraine episode they are experiencing.Clinical research has substantiated that the nature of migraine episodes varies widely. In some episodes, patients can sense a migraine coming and taketheir medication accordingly. In other episodes, patients may wake up with a migraine already in progress or the migraine may come on suddenly. Anestimated 48% of migraines occur between the hours of 4:00 a.m. and 9:00 a.m., according to an article published in the June 1998 issue of Headache.Migraines may also be associated with nausea and/or vomiting. Twenty-nine percent of patients reported vomiting as a symptom of migraine attacks,according to the American Migraine Study II, and epidemiological studies in migraine reveal that over 90% of patients have experienced nausea during amigraine attack and more than 50% have nausea with the majority of attacks, according to an article published in Drugs in 2003 (Volume 63, Issue 21).Depending on the type of migraine episode, a treatment may be more or less effective. For example, oral treatments may be of little value in a patient who isvomiting or who is experiencing migraine-associated gastric stasis. There is also clinical evidence that oral agents may be less effective when taken at a laterstage of a migraine attack, rather than at an earlier stage. Consequently, rapid onset migraine and waking with a migraine attack may reduce the benefits topatients of oral triptans, because both represent fully-developed attacks.The following table compares the time to maximum drug concentration in blood, or Tmax, and pain relief of oral forms, including melts and tablets, andnasal forms of marketed triptans to sumatriptan injection. The data are derived from Prescribing Information for the different formulations of these marketedtriptans and not for head-to-head direct comparison studies:Triptan Prescribing Information DataForm/Product (API)Tmax Relief at 1hour (1)(2) Relief at 2hours (2) Subcutaneous Sumavel DosePro (sumatriptan injection)12 minutes 70% 81-82% Nasal Imitrex (sumatriptan)Not provided 38-46% 43-64% Zomig (zolmitriptan)3.0 hrs 60% 69-70% Oral — Melt Zomig-ZMT (zolmitriptan)3.0 hrs 33-43% 63% Maxalt-MLT (rizatriptan)1.6-2.5 hrs 38-43% 59-74% Oral — Tablets Imitrex (sumatriptan)2.0-2.5 hrs 28-36% 50-62% Treximet (sumatriptan/naproxen sodium)1.0 hrs 28% 57-65% Zomig (zolmitriptan)1.5 hrs 35-45% 59-67% Maxalt (rizatriptan)1.0-1.5 hrs 38-43% 60-77% Amerge (naratriptan)2.0-3.0 hrs 19-21% 50-66%(3) Axert (almotriptan)1.0-3.0 hrs 32-36% 55-65% Frova (frovatriptan)2.0-4.0 hrs 12% 37-46% Relpax (eletriptan)1.5 hrs 20-30% 47-77% 7Table of Contents(1)Other than Sumavel DosePro (sumatriptan injection), we have estimated one-hour pain relief data for all forms/products based on Kaplan-Meier plotsincluded in each product’s Prescribing Information of the probability over time of obtaining headache response following treatment.(2)Range reflects headache relief data obtained in placebo controlled clinical studies, which include different doses of the same triptan.(3)Represents pain relief at four hours.Tmax closely correlates to speed of onset of pain relief, and has also been shown to be correlated with completeness of pain relief and pain freedom overtime. Relief at two hours is the standard endpoint used in migraine studies and represents the percentage of patients reporting a reduction of migrainesymptoms from a classification of severe or moderate to mild or none within two hours after taking the medication. As indicated in the prior table,sumatriptan injection has the earliest Tmax, reaching maximum blood concentration in 12 minutes, as compared with one or more hours for the othermarketed triptan products, and exhibits the highest percentage of patients reporting pain relief at two hours (81%-82%) as compared to all other marketed oraland nasal triptan products (37-77%). Sumatriptan injection is the only migraine product that explicitly reports pain relief at one hour in its PrescribingInformation. The efficacy profile of sumatriptan injection has been suggested to be related to its faster rate (not extent) of drug absorption compared to oral andnasal forms of triptans. Nasal forms, while claimed by some to be fast-acting, have drug absorption profiles similar to oral forms because a large portion ofthe administered dose is usually swallowed prior to absorption.Unmet Needs in Acute Migraine TherapyTriptans have been widely used in clinical practice for more than 15 years and are generally considered to be safe and effective for many patients duringtheir migraine episodes. However, more than half of all patients are unsatisfied with their current migraine therapy, as reported from a national survey of 500migraine sufferers published by the NHF in June 2010 and supported by a grant from us and Astellas. Specifically, the NHF survey results indicate that threein four migraine sufferers said that their current medication did not work fast enough to get them back to their life when a migraine strikes suddenly or uponwaking, and a majority of migraine sufferers said their prescription oral migraine medication was not useful for every migraine attack. Limitations of oral andnasal triptan formulations include:•Slower onset of pain relief. As shown in the prior table, compared to Sumavel DosePro, each oral and nasal triptan has a longer Tmax, which iscorrelated with a slower onset of pain relief.•Lower degree of pain relief. As shown in the prior table, oral and nasal triptans may have a lower percentage of patients reporting pain relief at one andtwo hours following treatment as compared to Sumavel DosePro.•Significant numbers of non-responders. According to our market research with physicians and patients, approximately 30% of migraine patients fail torespond to an oral or nasal triptan.•Nasal route unpleasant. The nasal route is an alternative to oral delivery; however, nasal spray can be unpleasant in taste.Some of these limitations are more pronounced depending on the type of migraine episode the patient is suffering. For example, when waking with amigraine already in progress, speed to onset of pain relief is important. In migraines with nausea and/or vomiting, a patient may not be able to ingest an oraltreatment.Despite its speed of onset and completeness of pain relief advantages over oral and nasal triptans, needle-based sumatriptan injection has been limited toless than 10% of the U.S. triptan market on a dollar basis and less than 5% on a total dose basis (Source® PHAST Institution/Prescription, January 2013 —December 2013). We believe this is largely due to limitations related to its delivery system which include:•Needle-based. Approximately 50% of patients refuse to use a needle-based injectable product for migraine because of needle anxiety or fear, or a lack ofconfidence in their ability to administer an injection correctly, according to physician market research conducted in 2006 by Palace HealthcareGroup, Inc. on our behalf.•Cumbersome to use. The Imitrex STATdose System, or Imitrex STATdose, GlaxoSmithKline's, or GSK's, autoinjector for delivering sumatriptan witha needle, and its generic equivalents require more than 15 steps per their published instructions to prepare, administer and reload for its next use. Thismulti-step process, which patients have to complete during a migraine episode, is prone to error. Further, market research conducted by Palace HealthcareGroup on our behalf finds that physicians report that the training required for Imitrex STATdose is a barrier to prescribing.•Needlestick risk. Needle-based systems may require special handling and needle disposal, or sharps, containers to avoid needlestick injuries.Due to these limitations, there has historically been a limited prescriber base for injectable delivery forms of sumatriptan. Of an aggregate of over380,000 prescribers of triptans in the United States, only an approximate 69,000 had written a prescription for sumatriptan injection (including SumavelDosePro) in the 12 months ended December 31, 2013 (Source8Table of ContentsHealthcare Analytics, Source® PHAST Prescription, January 2013 — December 2013). As a result, a limited number of patients are offered injectable deliveryforms. Only 54% of migraine patients had ever been offered sumatriptan injection according to patient market research conducted by Boston HealthcareAssociates, Inc. in 2007 on our behalf.Our Solution: Sumavel DoseProSumavel DosePro is a pre-filled, single-use disposable, needle-free drug product that subcutaneously delivers 6 mg of sumatriptan in 0.5 mL of sterileliquid. Sumavel DosePro was designed to be portable, intuitive and easy-to-use. To use, the patient simply snaps off a plastic tip, flips back a lever andpresses the end of the DosePro to the skin of the abdomen or thigh. Under the force of a small amount of compressed nitrogen gas, the liquid form ofsumatriptan is expelled out of the DosePro as a thin jet of medication, which pierces the skin and selectively deposits into the subcutaneous tissue. Thisprocess occurs in less than 1/10th of a second.Due to its unique attributes, Sumavel DosePro has the potential to expand the dosage share for injectable sumatriptan beyond the traditional needle-basedforms because it reduces the barriers inherent in needle-based delivery systems to being prescribed by physicians and accepted by patients. Sumavel DosePromay provide patients with the following benefits when compared to alternative triptan formulations:•Rapid, more complete, migraine pain relief. Sumavel DosePro can provide onset of migraine pain relief in as little as ten minutes for some patients,according to its Prescribing Information. The Prescribing Information for the product indicates that an average of 81% (vs. an average of 34% for placebo)of patients show pain relief at two hours following administration of Sumavel DosePro, and that 49% of patients were pain free within 1 hour (vs. 9% forplacebo) and 64% were pain free within two hours (vs. 15% for placebo) following administration.•Help for sufferers of morning migraines, fast onset migraine and migraines with vomiting. According to two studies published in the October 2006issue of Clinical Therapeutics, 48% and 57% of patients with waking migraines were pain free at two hours (vs. 18% and 19% for placebo) followingadministration of sumatriptan injection. Subcutaneous sumatriptan is also as efficacious when administered early during a migraine attack as when theattack is full-blown. In addition, the pharmacokinetics of subcutaneously delivered sumatriptan is not affected by gastric stasis, nausea and/orvomiting.•Help for triptan tablet non-responders. Clinical research published in the January 2007 issue of Journal of Headache and Pain suggests injectablesumatriptan provides relief in up to 90% of migraine patients who have not responded to oral tablet triptans in at least two of their last three migraines. Inthis study, 43 patients who had failed to respond to oral triptans in at least two of their last three migraines were given sumatriptan injection for their nextmigraine. Of these patients, 91% reported pain relief at two hours, 56% reported being pain free at two hours and 32% reported sustained pain freedomthrough 24 hours following treatment of their first headache.•Simplicity, through a convenient and easy-to-use option. Sumavel DosePro is based on our unique delivery system, which was designed to be portable,intuitive and easy-to-use, and can be disposed following use without the need of a sharps container. We believe healthcare providers appreciate thesimplicity of DosePro because it is easy to train patients to use properly. Our usability study of Sumavel DosePro showed 98% of patients were able toself-administer Sumavel DosePro in the home during an acute migraine attack, without clinical supervision and with minimal prior training.•Needle-free, eliminating needle-based issues. Because it is needle-free, we believe Sumavel DosePro may eliminate the basis for patient needle phobiaand fear. Additionally, it removes the risks of needlestick injury, the cost and inconvenience of needle disposal, issues resulting from poor injectiontechnique and costs associated with professionally administered needle-based injections. Studies show when a choice between needle-based and needle-freeinjection is available, the majority of patients prefer needle-free injection. More specifically, in a head-to-head study conducted by GSK of SumavelDosePro versus the European branded version of Imitrex STATdose, a needle-based delivery system, 61% of migraine patients preferred using SumavelDosePro while only 18% preferred using the European branded version of Imitrex STATdose, with the remaining patients expressing no preference.In addition, we believe that the unique attributes of Sumavel DosePro have the potential to reduce productivity loss in the workplace for patientssuffering from migraine. According to a study published in the May 1998 issue of Archives of Internal Medicine, results from a placebo-controlled clinicalstudy of 135 patients having migraine indicated that use of sumatriptan injection may reduce migraine-associated productivity loss. This decrease is afunction of both a reduction in time lost due to reduced effectiveness while working and a reduction in time lost due to missing work altogether. Moreover,52% of patients using sumatriptan injection (vs. 9% for placebo) returned to normal work performance within two hours after dosing.9Table of ContentsSumavel DosePro Commercialization StrategyWe continue to develop and execute a sophisticated and comprehensive commercialization strategy for Sumavel DosePro supported by a range ofmarketing programs. The strategy and tactical plan was built taking into consideration the unmet needs in the migraine market in conjunction with the uniqueproduct attributes of Sumavel DosePro. Key objectives of our commercialization strategy are to:•validate the unmet needs of patients during challenging migraine episodes and position Sumavel DosePro as an effective treatment solution that should beadded to the patient's treatment toolbox;•enhance speed of physician adoption by focusing promotional efforts on prescribers of migraine medications across specialties;•ensure a positive first-dose experience for patients; and•achieve broad patient access to Sumavel DosePro by ensuring nationwide retail distribution and adequate third-party payor reimbursement status, as wellas providing a co-pay discount program to all qualifying patients.In support of these strategic objectives, we are executing a variety of marketing programs to educate customers, which include providing our MigraineToolbox to new customers, direct-to-physician promotional materials, speaker programs, digital media, participation in selected medical conventions andreimbursement support programs. In addition, we provide product samples to physicians so that their patients may try Sumavel DosePro during an acutemigraine attack before filling their first prescription.Sumavel DosePro Regulatory ApprovalWe sought and received FDA marketing approval of Sumavel DosePro under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act, or theFFDCA, utilizing Imitrex sumatriptan injection as the reference listed product. Section 505(b)(2) of the FFDCA permits the filing of a new drug application,or NDA, where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicanthas not obtained a right of reference. This expedited the development program for Sumavel DosePro by decreasing the overall scope of clinical and pre-clinicalwork required to be completed by us.The clinical efficacy of subcutaneous injectable sumatriptan for migraine and cluster headache has been established by the reference listed product,Imitrex sumatriptan injection, which was approved in 1992. Based on our clinical bioequivalence studies, the FDA concluded that Sumavel DosePro isbioequivalent to injectable sumatriptan administered to the thigh or abdomen using Imitrex STATdose and is well tolerated when compared to this referencelisted product. Our Sumavel DosePro NDA was approved by the FDA on July 15, 2009, and the Sumavel DosePro Prescribing Information includes thehistorical efficacy data of sumatriptan injection.A Marketing Authorization Application for Sumavel DosePro was submitted by our former collaborator to the Federal Institute for Drugs and MedicalDevices (Bundesinstitut für Arzneimittel und Medizinprodukte (BfArM)) in Germany, the reference member state, through the Decentralized Procedure inOctober 2009, following completion of a European pivotal bioequivalence trial comparing needle-free Sumavel DosePro to a traditional needle-basedautoinjector, Imigran-Inject, the European brand of Imitrex STATdose. In November 2010, Denmark became the first member of the European Union toapprove marketing of Sumavel DosePro. Subsequently, Sumavel DosePro received marketing approval in Germany, Sweden, the United Kingdom, Norwayand France. The marketing authorizations in Sweden, Norway, France and the United Kingdom were withdrawn as of December 31, 2013. Sumavel DoseProreceived marketing authorization for Lebanon and Iraq in November 2012, and received marketing authorization for Israel in 2014.Sumavel DosePro Pivotal Clinical ProgramBased on discussions with the FDA, and due to the existing body of data on injectable sumatriptan, our pivotal clinical program evaluated SumavelDosePro in studies for pharmacokinetics, bioequivalence, safety, local injection site signs and reactions, and usability by patients with migraine. Weconducted a single pivotal pharmacokinetics and bioequivalence clinical trial for the purpose of providing evidence of bioequivalence and safety of SumavelDosePro as compared to Imitrex STATdose. This study, completed in April 2007, was a randomized, open-label, cross-over trial comparing safety, tolerabilityand pharmacokinetics in 54 subjects. The primary endpoint of bioequivalence was demonstrated in the commonly used abdomen and thigh injection sites. Aseparate 52-patient usability study was conducted in the second half of 2007 to evaluate the usability of Sumavel DosePro in patients during acute migraineattacks in an outpatient setting. In this study, 98% were able to use Sumavel DosePro correctly during a migraine attack on their first attempt, thus confirmingthe product candidate’s ease of use. Further use of Sumavel DosePro by the same patients in their treatment of subsequent migraine attacks provided consistentevidence of usability in the outpatient setting. In addition, we concluded a successful safety trial with Sumavel DosePro in December 2007 to study the effectof repeat dosing and multiple injections. Adverse events seen in our clinical10Table of Contentsstudies were consistent with previously reported adverse events for sumatriptan injection. The most common treatment-emergent adverse reactions (reported byat least 5% of patients) for sumatriptan injection as described in the Sumavel DosePro Prescribing Information summarizing two large placebo-controlledclinical trials were injection site reaction (59%), atypical sensations (42%), dizziness (12%), flushing (7%), chest discomfort (5%), weakness (5%), andneck pain/stiffness (5%).Sumavel DosePro Post-Approval Clinical ProgramIn addition to the clinical program completed in support of product approval, we completed a Phase 4 open-label, multicenter study in the United Statesto evaluate treatment satisfaction, treatment confidence and subject preference for Sumavel DosePro in adult subjects diagnosed with migraine and currentlytreated with triptans. More than 200 subjects, who were predominantly taking oral triptan therapy, tried Sumavel DosePro to treat up to four migraines over a60-day period. The study utilized the Patient Perception of Migraine Questionnaire-Revised, or PPMQ-R, to evaluate patient satisfaction with migrainetreatment through analysis of efficacy, functionality, ease of use and tolerability/side effects. The primary endpoint PPMQ-R Overall Satisfaction scoreincreased significantly from baseline to end of treatment (p=0.0007), an improvement that met the criterion for clinical significance. From baseline to the end oftreatment, PPMQ-R scores also improved significantly for efficacy (p<0.0001), functionality (p<0.0001) and tolerability (p=0.02), but declined for ease of use(p<0.0001). In addition, the percentage of patients confident or very confident in treating repeated migraine attacks increased from 41.0% at baseline to 64.6%at the end of treatment with Sumavel DosePro. The magnitude of improvement in treatment satisfaction from baseline to the end of the treatment period waseven greater in a prospectively defined subset of 90 patients who were identified as requiring a change in therapy through use of the Migraine-ACT (Migraine— Assessment of Current Therapy) questionnaire. The four-item questionnaire is an assessment tool for use by primary care physicians to identify patientswho require a change in their current acute migraine treatment. Using Sumavel DosePro, 33% of the 669 treated migraine episodes in the study had painrelieved in 15 minutes, with 70% achieving pain relief within 30 minutes. Pain freedom was achieved in 61% of the treated attacks within two hours. Theseincidences of pain relief and pain-free response for needle-free Sumavel DosePro are consistent with those demonstrated by previous double-blind, placebo-controlled clinical studies of injectable sumatriptan. Given that rapid pain reduction is the primary determinant of patient satisfaction with migraine, theseresults may explain the high rate of satisfaction with Sumavel DosePro reported by patients in the current study.Sumavel DosePro 4 mg Line ExtensionBased upon physician feedback, we initiated development of a 4 mg dosage strength of Sumavel DosePro and submitted an NDA supplement to theFDA to demonstrate the manufacturability and stability of the new dosage strength in January 2013. In December 2013 the FDA approved our supplementalNDA for the 4 mg dose of Sumavel DosePro, and we plan to launch the new dose in mid-2014.DosePro and Sumavel DosePro Sound EnhancementIn order to further enhance the DosePro technology and Sumavel DosePro, we have completed additional engineering and design work aimed at softeningthe sound emitted by the DosePro system upon drug delivery. Rather than the current sound, which is similar to the opening of a can of soda, heard upondelivery with the current DosePro system, this enhanced version will sound like the click of a pen upon drug delivery. We submitted a Prior ApprovalSupplement to the FDA regarding the implementation of this minor change, and in October 2012, the FDA issued a complete response letter, or CRL,requesting more information. We subsequently corresponded with the FDA and are currently working to address this CRL. The CRL has no impact on theavailability of the currently marketed Sumavel DosePro product or the launch of the 4 mg product.DosePro and Sumavel DosePro Clinical ExperienceThe DosePro drug delivery system has been in development for more than fifteen years. During this time, more than 9,000 injections have beenadministered in multiple clinical studies to assure the proper functioning of the system and to establish the safety and tolerability of needle-free administrationby DosePro. While our experience indicates that some patients will experience pain upon injection with the DosePro technology, this pain sensation is consistentwith the pain sensation associated with injection with a fine gauge needle and can be generally characterized as transient mild discomfort.Zohydro ER for the Treatment of Moderate to Severe Chronic PainZohydro ER (hydrocodone bitartrate) is a 12-hour extended-release formulation of hydrocodone without acetaminophen for the treatment of pain severeenough to require daily, around-the-clock, long-term opioid treatment for which alternate treatment options are inadequate. We completed Phase 3 developmentof Zohydro ER in 2011, and we submitted an NDA for Zohydro ER to the FDA in May 2012. The FDA approved the NDA for Zohydro ER in October 2013and we launched the product on March 3, 2014. We believe Zohydro ER has the potential to be an important therapeutic alternative to existing11Table of Contentsextended-release opioids as well as immediate release hydrocodone products, including the branded products Vicodin, Norco, Lorcet, Lortab and their genericequivalents, which contain the analgesic combination ingredient acetaminophen and, if taken in high quantities over time, may lead to serious side effectssuch as liver toxicity. Zohydro ER utilizes the SODAS Technology, Alkermes’ proprietary multiparticulate drug delivery system that allows the developmentof customized extended-release profiles and serves to enhance the release profile of hydrocodone in Zohydro ER. We believe these release properties have thepotential to provide longer lasting and more consistent pain relief with fewer daily doses than the other commercially available formulations of hydrocodone.As a result of its unique single-entity extended-release profile, we believe Zohydro ER will generate sales from both patients who use immediate-release productson a chronic basis and patients already using extended-release products in the prescription opioid market.Zohydro ER is subject to the Risk Evaluation and Mitigation Strategy, or REMS, program for extended-release and long-acting opioid analgesics, orER/LA opioids, with the goal to reduce serious adverse outcomes resulting from inappropriate prescribing, misuse, and abuse of ER/LA opioids whilemaintaining patient access to pain medication. The REMS program requires a medication guide for patients and training for prescribers to facilitate appropriateprescribing, dispensing and use of ER/LA opioids like Zohydro ER, and manufacturers of products that are subject to REMS must monitor and submitperiodic assessments of the program to FDA. Zohydro ER also bears a boxed warning that highlights the risks of addiction, abuse, and misuse; life-threatening respiratory depression; accidental exposure; neonatal opioid withdrawal syndrome; and interaction with alcohol.Zohydro ER is designated as a U.S. Drug Enforcement Administration, or DEA, Schedule II product, as it is a single-entity product, which makes itmore tightly regulated than other currently available combination hydrocodone products, all of which are currently designated as Schedule III products. Thismeans that Zohydro ER does not qualify for automatic refills. We believe this restriction will help facilitate more responsible prescribing of Zohydro ER interms of the dose and capsule count. On February 27, 2014, the DEA issued a notice of proposed rulemaking to reschedule hydrocodone combinationproducts from Schedule III to Schedule II, but we cannot predict the timeframe in which the rule may become final and when, if ever, these products will berequired to comply with Schedule II requirements.We are committed to developing an abuse deterrent formulation of Zohydro ER and have begun clinical development of abuse deterrent technology withAlkermes. Further, in November 2013, we entered into a development and option agreement with Altus Formulation, Inc., or Altus, for the development ofabuse deterrent formulations of hydrocodone using Altus' Intellitab™ drug delivery platform. We believe that we are developing technology with robustresistance to manipulation and abuse, and with the ability to match the pharmacokinetic profile of Zohydro ER so additional Phase 3 studies will not berequired.The Chronic Pain MarketPain is a worldwide problem with serious health and economic consequences. Chronic pain may be defined as pain that lasts beyond the healing of aninjury or that persists beyond three months. Common types of chronic pain include lower back pain, arthritis, headache and face and jaw pain. While mildpain does not typically stop an individual from participating in his or her daily activities, moderate pain may prevent an individual from participating in hisor her daily activities and severe pain typically stops an individual from participating in his or her daily activities and induces a patient to exhibit painavoidance behaviors.Chronic pain treatment depends on the individual patients, their diagnosis and their pain severity. Chronic pain patients typically first attempt to self-medicate with over-the-counter drugs such as acetaminophen, aspirin or another non-steroidal anti-inflammatory drug, or NSAID. Patients with moreconstant and/or moderate to severe pain typically seek medical attention and prescription pain medication from a primary care physician and, if necessary, arereferred to a neurologist or a physical medicine or pain specialist. Physicians generally assess the patient and, if appropriate, start treatment with a trial ofopioid therapy to determine the optimal opioid regimen. At this point, physicians commonly prescribe opioids, including products from the codeine andmorphine classes. The general objective of the physician is to safely achieve adequate control of pain.Physicians generally prefer to start patients on less potent opioids where possible. A trial of opioid therapy usually begins with short-acting doses takenon an as-needed basis. This allows the clinician and patient to assess the total opioid requirement. Patients taking substantial doses of short-acting opioidsmultiple times per day may find substitution of an extended-release agent, taken one to two times per day, extremely helpful to provide more constant painrelief. We believe the more constant opioid blood levels of extended-release products may provide better pain relief and better sleep quality. Dosing intervalslonger than every four to six hours may also provide improved patient adherence to the prescribed regimen and improved patient convenience. Finally,individual patients may do poorly on one opioid, but better after switching to another. This practice is called opioid rotation and is regularly employed inchronic pain management. Opioids, while generally effective for pain12Table of Contentstreatment, are associated with numerous potential adverse effects, including opioid induced bowel dysfunction, sedation, nausea, vomiting, decreasedrespiratory function, addiction and, in some instances, death.Hydrocodone is often used as a “starter” opioid to initiate opioid therapy because it is viewed by many physicians as a less potent opioid andpotentially more tolerable. Historically, hydrocodone preparations in the United States have been utilized primarily for treatment of acute pain followingsurgery or injury. For this purpose, they were combined with non-opioid analgesics, including acetaminophen or an NSAID, which treat the acuteinflammatory component of the pain. These non-opioid analgesics are generally safe when used at lower doses or for short periods of time. However, at higherdoses or over extended periods of time, they may significantly increase patient risk for gastrointestinal, liver and kidney damage.As the practice of pain management has broadened to include chronic therapy for moderate to severe pain, physicians continue to broadly usehydrocodone combinations. In the United States, market research conducted by bioStrategies Group in 2011 on our behalf indicates that nearly 30% of theprescriptions of immediate-release combination products that include hydrocodone are for the treatment of chronic pain and that approximately half of thoseprescriptions, or 14%, would be replaced with an extended-release hydrocodone product if it were available. However, the non-opioid analgesic component incombination hydrocodone products can create a ceiling effect when physicians wish to escalate doses. For example, the most commonly prescribed dose ofVicodin (5 mg hydrocodone/500 mg acetaminophen) given at a maximum dose of eight tablets per day delivers 4 g of acetaminophen, which approaches orexceeds recommended acetaminophen dosing, while only delivering 40 mg of hydrocodone, based on the Vicodin Prescribing Information. If a furtherincrease in opioid dose is warranted, a physician is compelled to transition to an opioid not in combination, such as oxycodone, or more potent opioids suchas fentanyl or oxymorphone.In the 12 months ended December 2013, our target market, which we define as prescription non-injectable codeine-based and extended-releasemorphine-based pain products, generated sales of approximately $14.4 billion in the United States on approximately 208 million prescriptions. Of the$14.4 billion, hydrocodone products, the most commonly prescribed opioid and the most commonly prescribed pharmaceutical products in the UnitedStates, generated $3.7 billion in sales on approximately 125 million prescriptions. (Source® PHAST Prescription January 2013 - December 2013).In June 2009, the FDA organized a joint meeting of the Drug Safety and Risk Management Advisory Committee, Nonprescription Drugs AdvisoryCommittee, and the Anesthetic and Life Support Advisory Committee to discuss how to address the public health problem of liver injury related to the use ofacetaminophen in both over-the-counter and prescription products. The expert panel specifically considered the elimination of combination prescriptionproducts containing acetaminophen (including Vicodin and its generics) from the U.S. market. Twenty of the 37 working group members (ten saying thiswas a high priority) voted in favor of removing such products from the market. The working group ultimately did not recommend withdrawal of theseproducts stating that the benefits of access to Schedule III acetaminophen/ hydrocodone combination products over Schedule II opioids outweighed the risk ofremoving the combinations from the market. The working group also noted that the logical choice to substitute for the combination products would be a single-entity formulation of hydrocodone. Subsequently, in January 2011, the FDA asked manufacturers of prescription combination products that containacetaminophen to limit the amount of acetaminophen to no more than 325 mg in each tablet or capsule and announced that it would require manufacturers toupdate labels of all prescription combination acetaminophen products to warn of the potential risk for severe liver injury. Along with this announcement, theFDA issued letters to sponsors of prescription acetaminophen drugs proposing various modifications to the drug labeling, including adding a boxed warningfor hepatoxicity. Within 30 days of the date of the letters, the holders of approved applications for prescription acetaminophen drugs were required to submit asupplemental NDA to the FDA proposing labeling changes that reflect the new safety information about acetaminophen and liver toxicity, or a statementdetailing the reasons why such change would not be warranted. Zohydro ER is currently the only approved product formulated with hydrocodone alone.In January 2013, the FDA organized a meeting of the Drug Safety and Risk Management Advisory Committee to discuss the public health benefits andrisks, including the potential for abuse of drugs containing hydrocodone either combined with other analgesics or as an antitussive, and the impact ofrescheduling these hydrocodone products from Schedule III to Schedule II. Nineteen of the 29 Advisory Committee members voted in favor of recommendingto the DEA that products containing hydrocodone be reclassified from a Schedule III to a Schedule II controlled substance, and the Department of Health andHuman Services made the recommendation in late 2013. On February 27, 2014, the DEA issued a notice of proposed rulemaking to reschedule hydrocodonecombination products from Schedule III to Schedule II. Zohydro ER is a Schedule II product.13Table of ContentsLimitations of Other Current Hydrocodone Pain TherapiesWhile hydrocodone in combination products remains the most commonly prescribed opioid, other currently available hydrocodone formulations haveseveral major limitations, including:•Hydrocodone only available in short-acting/immediate-release form. There are currently no extended-release hydrocodone formulations on the marketother than Zohydro ER.•Adherence dependent. Other than Zohydro ER, hydrocodone is available only in immediate-release formulations that are dosed every four to six hours,and as a result, its around-the-clock efficacy is dependent on diligent adherence by the patient. Published studies across therapeutic categories, includingthe treatment of diabetes, hypertension and infectious disease, demonstrate that patient adherence to drug regimens declines as the number of daily drugdoses increases.•Inconsistent pain relief. Because of the dosing issues noted above, many patients experience suboptimal pain relief due to variable opioid blood levels,particularly towards the end of dosing intervals.•Opioid dose is limited by combination analgesics. The overwhelming majority of currently approved hydrocodone products include acetaminophen intheir formulation. Because of the potential side effects of increasing acetaminophen doses, the acetaminophen component of these combination productscan become a dose limiting factor. When this occurs, patients must limit their total hydrocodone dose to avoid potential liver and other side effects ofacetaminophen and thus may receive a sub-optimal daily dose of hydrocodone, or they must switch to other single-entity opioids, such as oxycodone.Hydrocodone combinations with NSAIDs have similar dose limitations due to the gastrointestinal side effects associated with NSAIDs.•Widespread use of acetaminophen leading to increased toxicity risk. Even when combination products are carefully prescribed, patients are at risk ofacetaminophen toxicity due to the prevalence of acetaminophen in many over the counter products and individuals’ lack of knowledge about the dangersand/or awareness of acetaminophen in other products.While extended-release, single-entity opioids exist, published study reports indicate that patients are regularly taking more daily doses of extended-releaseopioids than the recommended labeled dose, suggesting that not all of them provide true 12- or 24-hour dosing. For example, results from a study of 437patients published in the May/June 2003 issue of the Journal of Managed Care Pharmacy indicated that despite the “every 12-hours” dosing regimenrecommended in its Prescribing Information, patients taking extended-release oxycodone on average took 4.6 tablets per day, at an average dosing interval ofonly 7.8 hours. In the same study, among extended-release oxycodone patients, only 1.9% reported the duration of pain relief as 12 or more hours. A separatestudy published in the September/October 2004 issue of The Clinical Journal of Pain indicated that the prescribed frequency of dosing extended-releaseoxycodone determined through clinical practice was twice daily for 33% of patients, with 67% of patients requiring greater than twice daily dosing.Our Solution: Zohydro ERWe believe that Zohydro ER may provide patients and physicians with the following benefits when compared to other opioid pain medications:•Single-entity hydrocodone. Zohydro ER is the first non-combination, extended-release hydrocodone product commercialized in the United States, givingphysicians and patients a hydrocodone option unencumbered with acetaminophen or NSAIDs and their potential adverse effects.•Twelve hour exposure provides true around-the-clock relief when administered twice daily. Zohydro ER, via its unique extended-release profile, isdesigned to provide consistent relief of moderate to severe chronic pain over a 12-hour period per dose. Clinical studies have shown a pharmacokineticprofile that supports the expected extended relief profile of Zohydro ER. In addition, there are five other marketed products using SODAS technology thatare dosed every 24 hours, which we believe helps validate the controlled release technology underlying the formulation of Zohydro ER.•Easier adherence/greater patient convenience. Because of its 12-hour dosing regimen, Zohydro ER requires fewer daily doses than currently availablehydrocodone formulations, thereby increasing the likelihood of patient adherence and convenience.•Another opioid option for chronic medication rotation. The unique profile of Zohydro ER provides another option for physicians investigating newalternatives to offer patients who require medication rotation due to tolerance, side effects or poor pain control.Zohydro ER Phase 3 Clinical Development ProgramWe initiated a single pivotal Phase 3 efficacy trial (Study 801) in March 2010 and completed patient enrollment in February 2011. This trial was arandomized, 12-week, double-blind, placebo-controlled trial to evaluate the safety and efficacy of Zohydro ER for the treatment of moderate to severe chroniclower back pain in opioid-experienced adult subjects. Our trial utilized a protocol design that has been used successfully to demonstrate the efficacy of otherextended-release opioid therapies14Table of Contentsfor chronic pain. Patients in this study were converted from their existing opioid treatment regimen to Zohydro ER and titrated to an effective dose of ZohydroER during an initial up to 6-week open-label conversion and titration phase, and were then randomized to receive either placebo or active drug for a 12-weekplacebo-controlled treatment phase. During the entire study period, patients in both arms of the clinical trial had access to rescue medication. The primaryefficacy endpoint in this trial was the mean change in average daily pain intensity scores between Zohydro ER and placebo.We reported positive results for our pivotal Phase 3 efficacy trial in August 2011. The trial successfully met the primary efficacy endpoint indemonstrating a significant difference (p=0.008) between the mean changes from Baseline to Week 12 or Final Visit in average daily pain intensity NumericRating Scale (NRS) scores obtained from patient diaries between Zohydro ER and placebo groups. The two key secondary endpoints were also met. Withrespect to the responder analysis secondary endpoint, the proportion of patients with at least 30% improvement in pain intensity from screening to end of studywas significantly higher for Zohydro ER compared to placebo (67.5% versus 31.1%; p<0.001). The proportion of patients with at least 50% improvement inpain intensity from screening to end of study was also significantly higher for Zohydro ER versus placebo (47.7% versus 23.3%; p<0.001). The other keysecondary endpoint, using the Subject Global Assessment of Medication questionnaire, showed that patients on Zohydro ER were significantly more satisfied(p<0.001) with their pain treatment at the end of the study compared to their pre-study medication. The study further demonstrated that Zohydro ER was safeand generally well tolerated. The incidence of adverse events was 33.7% and 28.8% in the open label titration and double blind treatment periods, respectively.Overall, the most commonly reported adverse events (≥2%) were constipation, nausea, somnolence, fatigue, headache, dizziness, dry mouth, vomiting,pruritusk, abdominal pain, edema peripheral, upper respiratory tract infection, muscle spasms, urinary tract infection, back pain and tremor. These aretypical adverse events associated with chronic opioid therapy.To further assess the safety and tolerability of Zohydro ER as a chronic pain therapy, we also conducted an open-label Phase 3 trial in opioid-experiencedadult subjects with any indication appropriate for continuous, around-the-clock opioid therapy for an extended period of time (Study 802). We completed thetrial in December 2011. The goal of this trial was to evaluate the safety and tolerability of Zohydro ER for up to 12 months of treatment. The study furtherdemonstrated that Zohydro ER was safe and generally well tolerated, and the incidence of adverse events was generally consistent with that seen in our pivotalPhase 3 efficacy trial. The safety and efficacy data from this trial was submitted as part of our NDA to the FDA in May 2012.We have also initiated 2-year carcinogenicity studies in two animal species and we obtained FDA agreement on the protocols for both studies. Thesestudies are an ongoing commitment and were not required for approval of the NDA for Zohydro ER. In July 2012, the FDA accepted our NDA as beingsufficiently complete for a full review. On October 25, 2013 the FDA approved our NDA for Zohydro ER and we launched the product on March 3, 2014.Relday for the Treatment of SchizophreniaRelday is a proprietary, long-acting injectable formulation of risperidone using Durect’s SABER™ controlled-release formulation technology. Ifsuccessfully developed and approved, we believe Relday may be the first subcutaneous antipsychotic product that allows for once-monthly dosing. We believeDurect’s SABER controlled-release technology will allow Relday to be delivered subcutaneously on a once-monthly basis with a simplified dosing regimen,improved pharmacokinetic profile and significant reduction in injection volume versus currently marketed long-acting injectable antipsychotics. Based uponthese characteristics, Relday may provide an important alternative to currently marketed long-acting injectable antipsychotics as well as a new long-actingtreatment option for patients that currently use daily oral antipsychotic products. In May 2012, we filed an IND application with the FDA. In July 2012, weinitiated our first clinical trial for Relday. This Phase 1 clinical trial was a single-center, open-label, safety and pharmacokinetic trial of 30 patients withchronic, stable schizophrenia or schizoaffective disorder. We announced positive single-dose pharmacokinetic results from the Phase 1 clinical trial in January2013. Based on the favorable safety and pharmacokinetic profile demonstrated with the 25 mg and 50 mg once-monthly doses tested in the Phase 1 trial, weextended the study to include an additional cohort of 10 patients at a 100 mg dose of the same formulation. We announced positive top-line results from theextended Phase 1 clinical trial in May 2013. The results for the extended Phase 1 clinical trial showed risperidone blood concentrations in the therapeutic rangewere achieved on the first day of dosing and maintained throughout the one-month period. In addition, dose proportionality was demonstrated across the fulldose range studied. The positive results from this study extension position us to begin a multi-dose clinical trial, which we believe will provide the requiredsteady-state pharmacokinetic and safety data prior to initiating Phase 3 development studies. We plan to commence this multi-dose clinical trial in the secondhalf of 2014.15Table of ContentsThe Antipsychotic MarketSchizophrenia is a complex, chronic, severe and debilitating mental disorder that often develops between the ages of 16 and 30 years, and the NationalInstitute of Mental Health, or NIMH, estimated in 1993 that the 12-month prevalence of schizophrenia is 1.1% of the U.S. adult population. The symptomsof schizophrenia are often categorized as positive, negative or cognitive in nature. Positive symptoms include hallucinations, delusions, disorganized thinkingand movement disorders. Negative symptoms of schizophrenia can include flat affect, inability to feel pleasure and speaking little, and the cognitivesymptoms of schizophrenia can include poor executive function, problems with working memory and attention deficits. This combination of symptoms oftenmakes it challenging for many schizophrenic patients to care for themselves or hold jobs, resulting in significant societal costs. The direct and indirect costs ofschizophrenia in the United States in 2002 were estimated at $62.7 billion, including $22.7 billion in direct medical costs for outpatient care, medications,inpatient care, and long-term care, according to an article published in 2005 in The Journal of Clinical Psychiatry.Bipolar disorder, or manic depressive illness, is another chronic, recurring psychiatric illness that is characterized by extreme or unusual shifts inmood, energy and activity levels. In general, patients with bipolar disorder suffer over time from episodes of both mania and depression. The NIMH estimatedin 2005 that the average age of onset for bipolar disorder is 25 years, and the 12-month prevalence of bipolar disorder is 2.6% of the U.S. adult population. Inmany cases, the recurring episodes of mania and depression are so severe that the patient cannot maintain normal relationships or function normally at home,work or school, and suicide attempts occur in 25-50% of bipolar disorder patients.First line therapy for most schizophrenia patients today are drugs generally known as atypical or second generation antipsychotics. Theseantipsychotics have been named atypical for their ability to treat a broader range of negative symptoms with improved side effect profiles versus the first-generation or typical antipsychotics, which were mostly introduced in the 1950s with drugs such as chlorpromazine and haloperidol. The first atypicalantipsychotics to be approved by FDA in the United States were Clozaril (clozapine) in 1989, followed by Risperdal (risperidone) in 1993 and Zyprexa(olanzapine) in 1996. Similarly, over the last decade, atypical antipsychotics have become increasingly utilized in the treatment of bipolar disorder, either asmonotherapy or as part of a polytherapy regimen, most often being prescribed in conjunction with a mood stabilizer such as lithium or valproic acid, andsometimes in conjunction with both a mood stabilizer and additional medications.Patient compliance with medication has been a long-standing problem in the treatment of both schizophrenia and bipolar disorder. Results from theClinical Antipsychotic Trials in Intervention Effectiveness conducted between 2001 and 2004, and published in The New England Journal of Medicine in2005, indicated that over 70% of schizophrenia patients became non-compliant with their medication within 18 months of commencing therapy. Similarly a2004 study of the VA National Psychosis Registry published in the journal Bipolar Disorder in October 2006 found that, of the 45% of bipolar patients whowere being prescribed an antipsychotic, just over half of individuals appeared to be fully adherent with their antipsychotic medications, while the remainingindividuals were either partially adherent or non-adherent with their antipsychotic medications.In an attempt to improve patient compliance, physicians increasingly administer antipsychotic drugs through long-acting depot injections. Long-actingdepot injections release medication slowly over weeks rather than over hours or days for conventional injections or oral medications, thereby dramaticallyreducing the number of times a patient needs to take their medication. Currently available long-acting injectable products include Risperdal Consta and InvegaSustenna, both marketed by Johnson & Johnson, Zyprexa Relprevv, marketed by Eli Lilly & Co, and Abilify Maintena, marketed by Otsuka AmericaPharmaceutical, Inc. These drugs provide two to four weeks of therapy per dose.Overall, the global atypical antipsychotic market was estimated to be in excess of $17.1 billion in 2011, based upon published sales reports of certainpharmaceutical companies. In 2013, atypical antipsychotics comprised approximately 91% of all antipsychotic prescriptions in the United States, accordingto data from Source Healthcare Analytics (Source® PHAST Prescription, January 2013 — December 2013). The existing long-acting injectable risperidoneproduct, Risperdal Consta, achieved global net sales of $1.3 billion in 2013, according to industry reports, and has a wholesale acquisition cost ofapproximately $304 per bi-weekly dose, or more than $600 per month, for the 25 mg dosage strength (Source: Gold Standard). Finally, in the United States,prescribers of long-acting antipsychotics are highly concentrated with approximately 18,300 total prescribers of long-acting injectable products, includingapproximately 10,700 psychiatrists in 2013 (Source® PHAST Prescription, January 2013 — December 2013).16Table of ContentsThe Relday OpportunityMarket research conducted on our behalf by bioStrategies Group in 2013 indicates that psychiatrists in the United States and Europe see significantpotential advantages for Relday over the currently marketed long-acting risperidone injectable, specifically identifying the first-day therapeutic plasma levels,once monthly dosing and subcutaneous features of Relday as important differentiators versus the currently marketed long-acting antipsychotics. We believe onthe basis of our clinical development work and market research that, if successfully developed and approved, Relday could potentially provide a significantimprovements over existing treatment options for patients suffering from schizophrenia as a result of:•Therapeutic Plasma Levels on First Day: Relday has demonstrated in a Phase 1 single-dose clinical study in schizophrenic patients the ability toachieve therapeutic plasma levels of risperidone within 24 hours of initial dosing with an acceptable initial burst (i.e., plasma levels less than thecomparable oral dose). Achieving first-day therapeutic plasma levels avoids the need for oral supplementation in connection with the initiation of therapyor following a missed or delayed dose. Risperdal Consta requires supplementation with oral risperidone for the first three weeks following initiation oftherapy or following a missed dose of the injectable due to its pharmacokinetic profile.•Once-monthly dosing: Relday has demonstrated in a Phase 1 single-dose clinical study in schizophrenic patients a pharmacokinetic profile that willallow for once-monthly dosing with dose proportionality across the therapeutic range. Risperdal Consta provides therapy for only two weeks, resulting inmore frequent physician visits and a greater number of annual injections.•Subcutaneous delivery: All the currently available long-acting atypical antipsychotics are administered intramuscularly and, other than the lowest dosagestrength of Invega Sustenna, have injection volumes greater than Relday. Intramuscular injections have been associated with inadvertent vascularinjection, leading to rapid release of the drug and related adverse events, and in addition can also result in slow, painful and/or difficult injections.Utilizing the unique attributes of the Durect’s SABER technology, Relday has been designed to be administered subcutaneously.•No reconstitution: Relday is formulated as a pre-filled, single-dose product that does not require reconstitution, or the addition of a liquid dilutent, priorto administration. Risperdal Consta, Zyprexa Relprevv and Abilify Maintena all require reconstitution prior to injection, which is generally considered aninconvenience for busy healthcare practitioners.•Preferred active ingredient: Our market research indicated that in nearly all cases, long-acting injectable antipsychotics are prescribed to patients whohave experience taking the same molecule orally and have demonstrated some level of acceptable efficacy and tolerability. Oral risperidone is now thesecond most commonly prescribed atypical antipsychotic compound in the United States, accounting for 24% of total prescriptions in the twelve monthsended December 2013 (Source® PHAST Prescription, January 2013 — December 2013).If successfully developed and approved by the FDA, we plan to commercialize Relday in the United States by further leveraging our commercialinfrastructure and sales force. We also plan to seek a development and commercialization partner or partners for Relday in territories outside of the UnitedStates such as Europe and Japan. While our current development plans are focused on schizophrenia, in the future we may consider expanding the program toaddress additional indications, such as bi-polar disorder.Our DosePro Technology and Pre-clinical PipelineOur proprietary DosePro technology is a first-in-class, easy-to-use drug delivery system designed for self-administration of a pre-filled, single dose ofliquid drug, subcutaneously, without a needle. The DosePro technology has undergone more than fifteen years of design, process engineering, clinicalevaluation and development work, including significant capital investment by the predecessor owners of the technology, Weston Medical Group, plc andAradigm. Our team has over four years of experience commercializing DosePro since the launch of Sumavel DosePro in January 2010. We acquired theDosePro technology and related intellectual property from Aradigm in August 2006. We believe the approval and launch of Sumavel DosePro in the UnitedSates validates the technology’s commercial viability and readiness for other potential drug applications.We believe that DosePro offers several benefits to patients compared to other subcutaneous delivery methods, and that it has the potential to become apreferred delivery option for patients and physicians for many injected medicines beyond sumatriptan, particularly those that are self-administered. Thesebenefits include less anxiety or fear due to the lack of a needle, easier disposal without the need for a sharps container, no risk of needlestick injury orcontamination, an easy-to-use three step process, no need to fill or manipulate the system, reliable performance, discreet use and portability. In several clinicaltrials and market research studies, DosePro has been shown to be preferred by patients over conventional needle-based systems. For example, in a head-to-headstudy conducted by GSK of Sumavel DosePro versus the European branded version of Imitrex STATdose, a needle-based delivery system, 61% of migrainepatients preferred using Sumavel DosePro while only 18% preferred using the European branded version of Imitrex STATdose, with the remaining patientsexpressing no preference. In addition, in a market study conducted on our behalf by Boston Healthcare Associates, Inc. in 2007, 76% of patients indicated17Table of Contentsthat they preferred the Sumavel DosePro delivery method over Imitrex STATdose. In addition, DosePro requires less time from physicians and other caregiversto train patients to use the system.Physician preference for DosePro as a needle-free alternative to conventional needle-based injections has also been demonstrated in market researchstudies. For example, in a study conducted by Palace Healthcare Group, Inc. in 2006 on our behalf, 94% of primary care physicians and 98% of neurologistsindicated they would be more willing to prescribe an injectable migraine product if it were needle-free.In order to further enhance the DosePro technology and Sumavel DosePro, we have completed additional engineering and design work aimed at softeningthe sound emitted by the DosePro system upon drug delivery. Rather than the current sound, which is similar to the opening of a can of soda, heard upondelivery with the current DosePro system, this enhanced version will sound like the click of a pen upon drug delivery. We submitted a Prior ApprovalSupplement to the FDA regarding the implementation of this minor change, and the FDA issued a CRL requesting more information. We subsequentlycorresponded with the FDA and are currently working to address this CRL. The CRL has no impact on the availability of the currently marketed SumavelDosePro product or the launch of the 4 mg product.Clinical studies suggest that DosePro will have significant versatility in its ability to deliver various types of therapeutic compounds, including bothsmall molecules and biologic products where the dose volume is 0.5 mL or less. In addition to positive results using DosePro in clinical studies performed withsaline and sumatriptan, there have been three positive single-dose human pilot studies conducted with a combination of a protein pharmaceutical and DosePro.These studies include pharmacokinetic bioequivalence studies comparing DosePro to a conventional needle injection for human growth hormone anderythropoietin and pharmacodynamic equivalence study using granulocyte colony-stimulating factor. Pre-clinical work with monoclonal antibodies evaluatingbioavailability, pharmacokinetics and a lack of immunogenicity has also been conducted. In vitro studies with DosePro technology have demonstrated thepotential to allow the subcutaneous delivery of highly viscous formulations, which can be a limiting factor for use of traditional needle-based delivery systems.At the 2013 National Biotechnology Conference of the American Association of Pharmaceutical Scientists, the results of two in vitro studies examining theintegrity of three monoclonal antibody formulations after delivery by the DosePro technology were presented; these studies demonstrated that biologic integrityis not significantly different with DosePro vs. needle-based delivery controls. As a result of the versatility of DosePro to deliver various types of drug products,this technology may have significant market potential across a broad range of therapeutic areas, including those typically treated with small volume injectableproducts, such as hepatitis, infertility, multiple sclerosis and rheumatoid arthritis.Since some drug formulations cannot be accommodated in a 0.5 mL dose volume, we have initiated early stage design and development of a largervolume, second generation version of our DosePro technology, which if successfully developed, would allow for a broader range of potential applications forour technology. Full development of such technology will require additional investment and we may consider entering into a third-party collaboration in order tofully develop such technology. There is no guarantee that we or any potential future third-party collaborator will successfully develop such a technology,whether for financial or technical reasons or otherwise.We are building our internal product pipeline by investigating proven drugs that can be paired with DosePro to enhance their benefits and commercialattractiveness. We are also evaluating the market potential, formulation requirements and clinical development pathway of an additional CNS compound thatcould be paired with DosePro to enhance its commercial attractiveness. We are also seeking to capitalize on our DosePro technology by out-licensing it topotential partners enabling them to enhance, differentiate or extend the life cycle of their proprietary injectable products. We have a co-marketing anddevelopment services agreement with Battelle pursuant to which we granted to Battelle the exclusive right to co-market our DosePro drug delivery technologyand Battelle's DosePro development services to certain prospective pharmaceutical clients.Sales and MarketingWe have built a highly experienced sales and marketing organization in the United States focused on marketing and selling our products to physicians,nurses and other healthcare professionals. As of December 31, 2013, our sales and marketing organization was comprised of 74 professionals, which includedapproximately 54 field sales personnel. Prior to the launch of Zohydro ER on March 3, 2014, we expanded our resources for all commercial functions toapproximately 190 professionals, including sales, marketing, managed markets, commercial analytics and trade teams. This expansion included an increasein our field sales personnel to approximately 165 employees to support broader reach to pain specialists. With the launch of Zohydro ER, we expect ourprimary target audiences may expand to include anesthesiologists, pain specialists, physical medicine specialists and additional primary care physicians. Ifcombination hydrocodone products are rescheduled from Schedule III to Schedule II, we may seek a co-promotion or other partnering opportunity for ZohydroER, or may further expand our sales force.18Table of ContentsWe believe our sales force is differentiated by its level of experience and background in the industry, including extensive experience in the pain andopioid space. Each of our sales representatives, regional sales managers and area business directors undergoes a formal training program focused on diseasebackground, our products, competitive products and territory management, as well as compliance with applicable laws. Our training program also includessignificant ongoing and field-based learning to provide a comprehensive understanding and perspective as to our markets and disease states and the needs ofboth physicians and patients. As part of our safe use initiatives, commencing in 2014, our incentive compensation program for Zohydro ER will be basedupon education and corporate commitment initiatives, rather than a traditional program based upon prescription sales.In addition to our field sales team, we also have an experienced team of field-based managed markets and trade personnel. This team works closely withour field sales team to engage with third-party payors to ensure and expand reimbursement coverage and patient access for our products and implementpharmacy based educational programs. To date, we have entered into a number of contracts with private health insurers, managed care organizations,government entities and other third-party payors that provide coverage for our products.We are supporting this field based organization with an internal team which includes product management, communications, commercial analytics andsales operations staff. This team is focused on the implementation of a variety of marketing programs to educate customers, which include direct-to-physicianeducational and promotional materials, speaker programs, direct-to-patient educational resources, digital media, participation in selected medical conventionsand reimbursement support programs.CompetitionThe pharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary therapeutics.We face competition from a number of sources, some of which may target the same indications as our products or product candidates, including largepharmaceutical companies, smaller pharmaceutical companies, biotechnology companies, academic institutions, government agencies and private and publicresearch institutions, many of which have greater financial resources, sales and marketing capabilities, including larger, well established sales forces,manufacturing capabilities, experience in obtaining regulatory approvals for product candidates and other resources than us. We face competition not only inthe commercialization of Sumavel DosePro, Zohydro ER or any product candidates for which we obtain marketing approval from the FDA or other regulatoryauthorities, but also for the in-licensing or acquisition of additional product candidates, and the out-licensing of our DosePro drug delivery technology.Sumavel DoseProSumavel DosePro competes against other marketed migraine therapeutics. The largest class of marketed prescription products for treatment of migraineis the triptan class. The largest selling triptan is sumatriptan, with the branded products Imitrex and Treximet marketed by GSK and Sumavel DosePromarketed by us. There are six other branded triptan therapies being sold by pharmaceutical companies including AstraZeneca plc, Endo PharmaceuticalsHoldings Inc., Johnson & Johnson, Merck & Co., and Pfizer, Inc. in the United States.In addition to those migraine therapeutics, there are other marketed non-triptan migraine therapeutics such as Cambia sold by Depomed, Inc. Inaddition, Allergan, Inc., is now marketing BOTOX botulinum toxin for the treatment of chronic migraine. We also face competition from generic sumatriptanoral tablets and sumatriptan injection, now marketed in the United States as an authorized generic of the Imitrex STATdose System, or Imitrex STATdose, byPar Pharmaceutical Companies, Inc. In addition, in June 2010, the FDA approved Alsuma (sumatriptan injection), a needle-based autoinjector which wasdeveloped and is manufactured and marketed by Pfizer and its subsidiary, Meridian Medical Technologies, Inc.. Finally, generic injectable sumatriptan in theform of vials and prefilled syringes is available from a number of pharmaceutical companies, and most recently, the FDA granted approval for a needle-basedgeneric sumatriptan auto-injector from Sun Pharmaceutical Industries Limited in June 2011 and from Dr. Reddy's Laboratories Ltd. in January 2014.Although these products may not be directly substituted for Sumavel DosePro, generic versions of sumatriptan injection and alternative autoinjector forms ofsumatriptan injection may reduce the future adoption of Sumavel DosePro by third-party payors and consumers, as financial pressure to use generic productsmay encourage the use of a generic product over Sumavel DosePro. Sumavel DosePro is currently more expensive on a per dose basis than most of thecompeting branded and all of the generic triptan products for migraine, which may also limit the coverage and reimbursement by third-party payors, whichcould adversely affect adoption by physicians and patients.In addition to already marketed therapeutics, we also face competition from product candidates that are or could be under development by many of theabove-mentioned entities and others. For example, there are several product candidates for the19Table of Contentstreatment of migraine under development by large pharmaceutical companies such as GSK, Merck & Co. and Avanir Pharmaceuticals, Inc. In addition, TevaPharmaceutical Industries Ltd. intends to launch its migraine patch, Zecuity, in 2014.Zohydro ERZohydro ER competes against other marketed branded and generic pain therapeutics. Opioid therapeutics generally fall into two classes: codeines,which include oxycodones and hydrocodones, and morphines. Zohydro ER is a hydrocodone, the most commonly prescribed opioid in the United States,and Zohydro ER competes with therapeutics within both the codeine and morphine classes. These therapeutics include both Schedule II and Schedule IIIcontrolled substance products being marketed by companies such as Endo Pharmaceuticals Holdings Inc., Johnson & Johnson, Mallinckrodt Inc., Pfizer,Purdue Pharma L.P., Teva Pharmaceutical Industries Limited and Actavis, Inc. On February 27, 2014, the DEA issued notice of proposed rulemaking toreschedule hydrocodone combination products from Schedule III to Schedule II, but we cannot predict the timeframe in which the rule may become final andwhen, if ever, these products will be required to comply with Schedule II requirements. Zohydro ER is already a Schedule II product.Zohydro ER will also compete with a significant number of opioid product candidates under development, including abuse deterrent and tamperresistant formulations of currently available opioids, novel opioids and alternative delivery forms of various opioids under development at otherpharmaceutical companies, including single-entity extended-release hydrocodone product candidates, which include abuse deterrent and tamper resistantformulations, being developed by Egalet A/S, Pfizer, Purdue Pharma L.P. and Teva Pharmaceutical Industries Limited. Zohydro ER may also face competitionfrom non-opioid product candidates including new chemical entities, as well as alternative delivery forms of NSAIDs. These new opioid and non-opioidproduct candidates are being developed by companies such as Acura Pharmaceuticals, Inc., Collegium Pharmaceutical, Inc., Eli Lilly and Company, ElitePharmaceuticals, Inc., Hospira, Inc., Inspirion Delivery Technologies, LLC, Intellipharmaceutics International Inc., Nektar Therapeutics, Pfizer andQRxPharma Ltd.ReldayIf approved for the treatment of schizophrenia, we anticipate that Relday will compete against other marketed, branded and generic, typical and atypicalantipsychotics, including both long-acting injectable and oral products. Currently marketed long-acting injectable atypical antipsychotic products includeRisperdal Consta, and Invega Sustenna marketed by Johnson & Johnson, Zyprexa Relprevv marketed by Eli Lilly & Company, and Abilify Maintena(apripiprazole) marketed by Otsuka Pharmaceutical Co., Ltd. and H. Lundbeck A/S. Currently approved and marketed oral atypical antipsychotics includeRisperdal (risperidone) and Invega (paliperidone) marketed by Johnson & Johnson, generic risperidone, Zyprexa (olanzapine) marketed by Eli Lilly andCompany, Seroquel (quetiapine) marketed by AstraZeneca plc, Abilify (aripiprazole) marketed by BMS/Otsuka Pharmaceutical Co., Ltd., Geodon(ziprasidone) marketed by Pfizer, Fanapt (iloperidone) marketed by Novartis AG, Saphris (asenapine) marketed by Merck & Co., Latuda (lurasidone)marketed by Dainippon Sumitomo Pharma and generic clozapine. Finally, in addition to these currently marketed products, we may also face competitionfrom additional long-acting injectable product candidates that could be developed by the large companies listed above, as well and by other pharmaceuticalcompanies such as Alkermes, Endo Health Solutions Inc., Laboratorios Farmaceuticos Rovi SA, Novartis AG, and Reckitt Benckiser Group plc, each ofwhich has announced they are developing long-acting antipsychotic product candidates.DosePro TechnologyTraditional needle and syringe remain the primary method for administering subcutaneous injections. The injectable drug market is increasinglyadopting new injection systems including pre-filled syringes, pen injectors and autoinjector devices. The majority of these devices, however, still employ aneedle. We will compete with companies operating in the needle-based drug delivery market. These companies include, but are not limited to, Becton,Dickinson and Company, Owen Mumford Ltd. and Ypsomed AG. Additional competition may come from companies focused on out-licensing needle-freetechnology including Antares Pharma Inc. and Bioject Inc., which have commercialized gas- or spring-driven, multiple-use, patient-filled, needle-free injectors,primarily for injecting human growth hormone or insulin for diabetes. Other companies may also be developing single-use, pre-filled, needle-free deliverysystems. We also may experience future competition from alternative delivery systems which bypass the need for an injection, including inhaled, nasal,sublingual or transdermal technologies.DistributionWe primarily sell Sumavel DosePro and Zohydro ER to wholesale pharmaceutical distributors, who, in turn, sell the products to pharmacies, hospitalsand other customers. Three wholesale pharmaceutical distributors, McKesson Corporation, Cardinal Health, Inc. and AmerisourceBergen Corporation,individually comprised 30.5%, 30.3% and 16.6%, respectively, of20Table of Contentsour total gross sales of Sumavel DosePro for the year ended December 31, 2013. In addition, CVS.com, who purchases from us directly, individuallycomprised 14.6% of our total gross sales of Sumavel DosePro for the year ended December 31, 2013.We use a third-party logistics provider, Cardinal Health 105, Inc. (a/k/a Specialty Pharmaceutical Services), for key services related to logistics,warehousing and inventory management, distribution, contract administration and chargeback processing, accounts receivable management and call centermanagement. We also rely on GENCO and Inmar Inc. to process our product returns. In addition, we utilize other third parties to perform various otherservices for us relating to drug safety monitoring and surveillance, sample accountability and regulatory monitoring, including adverse event reporting,education regarding the safe use of our products, safety database management and other product maintenance services.21Table of ContentsManufacturingSumavel DosePro and our DosePro technology are manufactured by contract manufacturers, component fabricators and secondary service providers.Suppliers of components, subassemblies and other materials are located in the United Kingdom, Germany, Ireland and the United States. All contractmanufacturers and component suppliers have been selected for their specific competencies in the manufacturing processes and materials that make up theDosePro system. FDA regulations require that materials be produced under current Good Manufacturing Practice, or cGMP, or Quality System Regulations, orQSR, as required for the respective unit operation within the manufacturing process. Manufacturing equipment specific to the production of critical DoseProcomponents and assemblies was developed and purchased by us and the prior owners of the DosePro technology and is currently owned by us.We manage the supply chain for Sumavel DosePro, consisting of the DosePro system and the active pharmaceutical ingredient, or API, internally withexperienced operations professionals, including employees residing in the United Kingdom who oversee European contract manufacturing operations. We haveentered into supply agreements relating to Sumavel DosePro with our critical contract manufacturers, most component fabricators and secondary serviceproviders to secure commercial supply for Sumavel DosePro and expect manufacturing capacity to adequately support our projected Sumavel DoseProdemand through 2014. Each of these manufacturers and each other company that supplies, fabricates or manufactures any component used in our DoseProsystem is currently the sole qualified source of their respective components. If demand exceeds our expectation in 2015 and beyond, we may be required toexpand the capacity of some of our existing contract manufacturers and suppliers or qualify new manufacturers or suppliers.DosePro systems intended for clinical trials of DosePro-based products other than Sumavel DosePro are provided by using the existing manufacturinginfrastructure, supplemented with clinical scale aseptic fill/finish as appropriate for the stage and scale of the product under clinical development.Alkermes Pharma Ireland Limited, or APIL, an affiliate of Alkermes, is the exclusive manufacturer and supplier (subject to certain exceptions) forZohydro ER under the terms of our commercial manufacturing and supply agreement described below.The following are manufacturing and supply arrangements and agreements that we believe are material to the ongoing operation of our business.Patheon UK LimitedIn November 2008, we entered into a manufacturing services agreement with Patheon UK Limited, or Patheon, located in Swindon, United Kingdom, aspecialist in the aseptic fill/finish of injectables and other sterile pharmaceutical products. Under the terms of the agreement, Patheon serves as our exclusivemanufacturer for the aseptic capsule assembly, filling and inspection, final system assembly and packaging of Sumavel DosePro, as well as othermanufacturing and support services. The agreement had an initial five-year term, which expired October 31, 2013. In February 2013, we entered into a newmanufacturing services agreement with Patheon to replace our original manufacturing services agreement upon its expiration. The new manufacturing servicesagreement had a termination date of April 31, 2015. In August 2013, we entered into an amendment to the new manufacturing services agreement, or theamended services agreement, with Patheon which replaced our original manufacturing services agreement upon its expiration. The amended services agreementhas similar terms to the original agreement and will expire on April 30, 2016. The parties may mutually agree in writing to renew the agreement for additionalterms prior to the expiration of the then-current term.Although we are not required to have any minimum quantity of Sumavel DosePro manufactured under the agreement, we have agreed to provide Patheonwith forecasts of the required volumes of Sumavel DosePro we need, and we are required to pay Patheon a monthly manufacturing fee of £311,000, orapproximately $513,000 (based on the exchange rate as of December 31, 2013), through October 2013 and a monthly manufacturing fee of £409,000, orapproximately $674,000 (based on the exchange rate as of December 31, 2013), from November 1, 2013 through the remaining term of the amended servicesagreement, aggregating to £11,452,000, or approximately $18,882,000, over the remaining amended term. Under the agreement, we are also required to paysupport and service fees, with the level of service fees increasing if annual production exceeds a specified volume.Under the amended services agreement, either party may terminate the agreement (1) upon specified written notice to the other party, (2) upon writtennotice if the other party has failed to remedy a material breach of any of its representations, warranties or other obligations under the agreement within aspecified period following receipt of written notice of such breach, and (3) immediately upon written notice to the other party in the event that the other party isdeclared insolvent or bankrupt by a court of competent jurisdiction, a voluntary petition of bankruptcy is filed in any court of competent jurisdiction by suchother22Table of Contentsparty or the agreement is assigned by such other party for the benefit of creditors. Patheon may also terminate the agreement upon specified written notice if weassign the agreement to certain specified parties.Nypro LimitedNypro Limited, located in Bray, Ireland, manufactures the actuator assemblies and injection molded components for our DosePro system pursuant topurchase orders. We do not currently have a long-term commercial supply agreement with Nypro.Nipro Glass, Germany AG (formerly MGlas AG)In May 2009, we entered into a commercial manufacturing and supply agreement with Nipro Glass, Germany AG, or Nipro Glass, located inMunnerstadt, Germany. Under the terms of the agreement, Nipro Glass is our exclusive supplier of the glass capsule that houses the sumatriptan API inSumavel DosePro (and will be the exclusive supplier of glass capsules for any future 0.5 mL DosePro product candidates or products). The agreement had aninitial three-year term, which expired in May 2012. Although the commercial manufacturing and supply agreement with Nipro Glass expired in May 2012, wehave continued to exclusively purchase glass capsule from Nipro Glass under the expired agreement terms. We are currently negotiating an extension of thecommercial manufacturing and supply agreement with Nipro Glass to continue the exclusive supply of the glass capsule.Dr. Reddy’s Laboratories, Inc.We are party to a supply agreement with Dr. Reddy’s Laboratories, Inc., or Dr. Reddy’s, which was originally entered into between Aradigm andDr. Reddy’s in September 2004. Under the terms of the agreement, Dr. Reddy’s, a global pharmaceutical company and supplier of bulk API located in India,agreed to supply us with the sumatriptan API for Sumavel DosePro at a specified price. Dr. Reddy’s has agreed to sell to us, and we agreed to purchase on anon-exclusive basis from Dr. Reddy’s, not less than 50% of our quarterly requirements for sumatriptan in the United States, Canada and the EuropeanUnion. The initial term of the agreement expires in 2020. The term of the agreement may be extended by us for successive one-year periods by written notice toDr. Reddy’s, unless Dr. Reddy’s gives written notice to us that it does not wish to extend the term. We may terminate the agreement upon written notice ifDr. Reddy’s is unable to deliver sufficient amounts of sumatriptan over a specified period of time. We may also terminate the agreement if we are negotiatingan agreement with a third party to commercialize such third party’s formulation of sumatriptan and such agreement would preclude us from sourcingsumatriptan from any party other than such third party. Either party may terminate the agreement upon written notice if the other party commits a materialbreach of its obligations and fails to remedy the breach within a specified time period, if the other party becomes insolvent or subject to bankruptcyproceedings, or where a force majeure event continues for a specified period of time.Alkermes Pharma Ireland LimitedIn November 2012, we entered into a commercial manufacturing and supply agreement for Zohydro ER finished commercial product with APIL. Underthe agreement, APIL is the exclusive manufacturer and supplier to us, subject to certain exceptions, of Zohydro ER. We must purchase all of our requirementsof Zohydro ER, subject to certain exceptions, from APIL.Under the agreement, we will provide APIL with an 18 month forecast on a monthly basis and with a three-year forecast on an annual basis forcommercial supply requirements of Zohydro ER. In each of the four months following the submission of the 18-month forecast, we are obligated to order thequantity of Zohydro ER specified in the forecast. APIL will use commercially reasonable efforts to supply the orders of Zohydro ER subject to the availabilityof the DEA quota for hydrocodone. APIL is not obligated to supply us with quantities of Zohydro ER in excess of forecasted amounts, but has agreed to usecommercially reasonable efforts to do so. Further, we are obligated to purchase at least 75% of forecasted quarterly quantities of Zohydro ER from APIL, andare required to make compensatory payments if we do not purchase 100% of our requirements from APIL, subject to certain exceptions.If a failure to supply occurs under the agreement, other than a force majeure event, APIL must use commercially reasonable efforts to assist us intransferring production of Zohydro ER to either us or a third-party manufacturer, provided that such third party is not a technological competitor of APIL. In afailure to supply circumstance, we would be able to utilize (or sublicense to a third party who is not a technological competitor of APIL) the manufacturinglicense rights granted to us in the license agreement with Alkermes, until such time as APIL can resume supply of Zohydro ER.Either party may terminate the agreement by written notice if the other party commits a material breach of its obligations which is either incapable ofremedy or is not remedied within a specified period following receipt of written notice of such breach. Unless otherwise terminated due to a material breach, theagreement will continue until the expiry or termination of the license agreement with Alkermes described below.23Table of ContentsCollaborations, Commercial and License AgreementsMallinckrodt LLC Co-Promotion AgreementIn June 2012, we entered into a co-promotion agreement with Mallinckrodt. Under the terms of the agreement, Mallinckrodt was granted a co-exclusiveright (with us) to promote Sumavel DosePro in the United States and we remained responsible for the manufacture, supply and distribution of commercialproduct for sale in the United States. Mallinckrodt’s sales team began selling Sumavel DosePro to its customer base of prescribers in August 2012.Mallinckrodt committed to a minimum number of sales representatives for the initial term of the agreement, which was to run through June 30, 2014. InJanuary 2014, we entered into a termination and amendment to the co-promotion agreement, whereby the agreement terminated on January 31, 2014. Weassumed full responsibility for the commercialization of Sumavel DosePro in February 2014.In partial consideration of Mallinckrodt’s sales efforts, we paid Mallinckrodt a service fee on a quarterly basis that represented a specified fixedpercentage of net sales of prescriptions generated from Mallinckrodt’s prescriber audience over a baseline amount of net sales to the same prescriber audience.In addition, following completion of the co-promotion term in January 2014, we are required to pay Mallinckrodt a one-time tail payment calculated as a fixedpercentage of net sales from the Mallinckrodt targeted prescriber audience during the 12-month period ending on January 31, 2015.Altus Formulation Inc. Development and Option AgreementIn November 2013, we entered into a development and option agreement with Altus Formulation Inc., or Altus. Under the agreement, Altus is responsiblefor the development of abuse deterrent formulations of hydrocodone using Altus’ Intellitab™ drug delivery platform and will be reimbursed by us for itsdevelopment efforts on the product. We are responsible for the conduct of the clinical development of the product. We paid a non-refundable upfront fee toAltus of $0.8 million and we are also obligated to pay Altus up to $3.5 million in total future milestone payments upon the achievement of variousdevelopment and regulatory milestones. The term of the development agreement will end upon expiration of the earlier of (1) the date upon which an NDA orsimilar application for regulatory approval is submitted by us for an Altus abuse deterrent formulation of hydrocodone, or (2) November 1, 2016.Pursuant to the development agreement, we were granted an option to obtain an exclusive, royalty-bearing license, with the right to sublicense, to certainAltus intellectual property rights to make, have made, use, sell, have sold, offer for sale and import an abuse deterrent formulation of hydrocodone for thetreatment or relief of pain in the United States. However, we will need to obtain the consent of Alkermes or otherwise amend our license agreement withAlkermes for Zohydro ER in order to exercise the option and ultimately commercialize an Altus abuse deterrent formulation of hydrocodone. If we exercise thisoption, Altus will be eligible to receive additional regulatory and sales milestones and a royalty based on net sales of the licensed product.Valeant Pharmaceuticals North America LLC Co-Promotion AgreementOn June 27, 2013, we entered into a co-promotion agreement with Valeant. Under the terms of the agreement, we were granted the exclusive right (withValeant or any of its affiliates) to promote Migranal to a prescriber audience of physicians and other health care practitioners in the United States. Our salesteam began promoting Migranal to prescribers in August 2013. The term of the agreement will run through December 31, 2015 (unless otherwise terminated),and can be extended by mutual agreement of the parties in additional 12-month increments. Valeant remains responsible for the manufacture, supply anddistribution of Migranal for sale in the United States. In addition, Valeant will supply us with a specified amount of product samples every six months, andwe will reimburse Valeant for the cost of additional samples and any promotional materials that we order.In partial consideration of our sales efforts, Valeant pays us a co-promotion fee on a quarterly basis that represents specified percentages of net salesgenerated by us over defined baseline amounts of net sales, or the Baseline Forecast and Adjusted Baseline Forecast. In addition, upon completion of the co-promotion term, and only if the agreement is not terminated by Valeant due to a bankruptcy event (as defined in the agreement) or a material failure by us tocomply with our material obligations under the agreement, Valeant will be required to pay us an additional tail payment calculated as a fixed percentage of ournet sales over the Baseline Forecast (or Adjusted Baseline Forecast) during the first full six months following the last day of the term.We may terminate the agreement in the event of a Valeant supply failure (as defined in the agreement) or material product recall, or if the net sales price ina fiscal quarter is less than a specified percentage of the net sales price in the immediately preceding quarter, if the reduction in such net sales price would havea material adverse effect on our financial return as a result of performance of our obligation under the agreement.24Table of ContentsEither party may terminate the agreement with six months' notice. Either party may terminate the Valeant Agreement with 30 days' prior notice if our netsales within a fiscal quarter fall below the Baseline Forecast (or Adjusted Baseline Forecast) for one or more fiscal quarters, or following the commercialintroduction of a generic product to Migranal promoted or otherwise commercialized by a third party in the United States. In addition, either party mayterminate the agreement in the event of a change of control of itself or the other party (upon 90 days' prior written notice), upon any action taken or objectionraised by governmental authority that prevents either party from performing its obligations under the agreement, upon the filing of an action alleging patentinfringement, in connection with the material breach of the other party's material obligations, or if a bankruptcy event of the other party occurs.Astellas Co-Promotion AgreementIn July 2009, we entered into a co-promotion agreement with Astellas. Under the terms of the agreement, we granted Astellas the co-exclusive right (withus) to market and sell Sumavel DosePro in the United States (excluding Puerto Rico and the other territories and possessions of the United States). Under theagreement, both Astellas and we were obligated to collaborate and fund the marketing of Sumavel DosePro and to provide annual minimum levels of saleseffort directed at Sumavel DosePro. In December 2011, we entered into an amendment to the agreement, whereby the agreement terminated on March 31, 2012.Under the terms of the agreement, we were responsible for the manufacture, supply and distribution of commercial product for sale in the United States. Inaddition, we supplied product samples to Astellas, at an agreed upon transfer price.The target audience for Astellas’ sales efforts was primarily comprised historically of prescribers classified as primary care physicians (includinginternal medicine, family practice and general practice), OB/GYNs, emergency medicine physicians and urologists, or collectively the Astellas Segment. Thetarget audience for our sales effort was primarily comprised historically of neurologists and other prescribers of migraine medicines who fell outside theAstellas Segment. In addition, our representatives historically had the right to call upon a specified number of key prescribers within the Astellas Segment;conversely Astellas’ representatives historically had the right to call upon a specified number of neurologists. Under the amended agreement, beginning in thefirst quarter of 2012, we began to assume responsibility from Astellas for marketing Sumavel DosePro to selected high prescribing primary care physiciansand other Astellas-targeted physicians and professionals within the Astellas Segment pursuant to a promotion transition plan. We then assumed fullresponsibility for the commercialization of Sumavel DosePro following termination of the agreement in March 2012.Under the agreement, Astellas paid us upfront and milestone payments in an aggregate amount of $20.0 million. Astellas is not obligated to pay us anyadditional milestone payments. In consideration for Astellas’ performance of its commercial efforts, we were required to pay Astellas a service fee on aquarterly basis that represents a fixed percentage of between 45% and 55% of Sumavel DosePro net sales to the Astellas Segment. Astellas was notcompensated for Sumavel DosePro sales to neurologists, any other prescribers not included in the Astellas Segment or for non-retail sales. In addition,following completion of the co-promotion term in March 2012, we were required to pay Astellas one annual tail payment in July 2013 and are required to payAstellas another tail payment in July 2014, calculated as decreasing fixed percentages (ranging from a mid-twenties down to a mid-teen percentage) of net salesin the Astellas Segment during the 12 months ended March 31, 2012.Durect Corporation Development and License AgreementIn July 2011, we entered into a development and license agreement with Durect. Under the terms of the agreement, we are responsible for the clinicaldevelopment and commercialization of Relday. Durect is responsible for non-clinical, formulation and chemistry, manufacturing and controls, or CMC,development responsibilities. Durect will be reimbursed by us for its research and development efforts on the product.We paid a non-refundable upfront fee to Durect of $2.25 million in July 2011. We are obligated to pay Durect up to $103.0 million in total futuremilestone payments with respect to the product subject to and upon the achievement of various development, regulatory and sales milestones. We are alsorequired to pay a mid single-digit to low double-digit percentage patent royalty on annual net sales of the product determined on a jurisdiction-by-jurisdictionbasis. Further, until an NDA for Relday has been filed in the United States, we are obligated to spend no less than $1.0 million in external expenses on thedevelopment of Relday in any trailing twelve-month period beginning in July 2012. The patent royalty term is equal to the later of the expiration of all Durecttechnology patents or joint patent rights in a particular jurisdiction, the expiration of marketing exclusivity rights in such jurisdiction, or 15 years from firstcommercial sale in such jurisdiction. After the patent royalty term, we will continue to pay royalties on annual net sales of the product at a reduced rate for solong as we continue to sell the product in the jurisdiction. We are also required to pay to Durect a tiered percentage of fees received in connection with anysublicense of the licensed rights.Durect granted to us an exclusive worldwide license, with sub-license rights, to Durect intellectual property rights related to Durect’s proprietarypolymeric and non-polymeric controlled-release formulation technology to make and have made, use, offer for sale, sell and import risperidone products,where risperidone is the sole active agent, for administration by injection in25Table of Contentsthe treatment of schizophrenia, bipolar disorder or other psychiatric related disorders in humans. Durect retains the right to supply our Phase 3 clinical trialand commercial product requirements on the terms set forth in the agreement.Durect may terminate the agreement with respect to specific countries if we fail to advance the development of the product in such country within aspecified time period, either directly or through a sublicensee. In addition, either party may terminate the agreement upon insolvency or bankruptcy of the otherparty, upon written notice of a material uncured breach or if the other party takes any act that attempts to impair such other party’s relevant intellectualproperty rights. We may terminate the agreement upon written notice if during the development or commercialization of the product, the product becomessubject to one or more serious adverse drug experiences or if either party receives notice from a regulatory authority, independent review committee, data safetymonitory board or other similar body alleging significant concern regarding a patient safety issue and, as a result, we believe the long-term viability of theproduct would be seriously impacted. We may also terminate the agreement with or without cause, at any time upon prior written notice.Desitin License and Distribution AgreementIn March 2008, we entered into a licensing and distribution agreement with Desitin. Under the terms of the agreement, we granted Desitin the exclusiveright under our intellectual property rights related to Sumavel DosePro to develop, use, distribute, sell, offer for sale, and import Sumavel DosePro and anypotential modified versions of Sumavel DosePro in the European Union, Norway, Switzerland and Turkey. In August 2013, we entered into an amendment tothe licensing and distribution agreement, whereby the agreement terminated on October 1, 2013.Under the agreement, Desitin had the right, but with the exception of Germany not the obligation, at its own expense, to develop, obtain marketingapproval and commercialize Sumavel DosePro in the European Union, Norway, Switzerland and Turkey. In addition, Desitin had a right of first refusal onthe commercialization of any potential line extensions of Sumavel DosePro. We manufactured and supplied the product to Desitin for commercial sale in thelicensed territories. Desitin paid us a specified transfer price for commercial product and a low single-digit percentage royalty on net sales of the product. Themarketing authorization for Sumavel DosePro was withdrawn in Sweden, Norway, France and the United Kingdom as of December 31, 2013.Alkermes License Agreement (formerly Elan Pharma International Limited)In November 2007, we entered into a license agreement with Alkermes, which was amended in September 2009. Under the terms of this licenseagreement, Alkermes granted to us an exclusive license in the United States and its possessions and territories, with defined sub-license rights to third partiesother than certain technological competitors of Alkermes, to certain Alkermes intellectual property rights related to our Zohydro ER product. The agreementgrants us the exclusive right under certain Alkermes patents and patent applications to import, use, offer for sale and sell oral controlled-release capsule ortablet formulations of hydrocodone, where hydrocodone is the sole active ingredient, for oral prescriptions in the treatment or relief of pain, pain syndromesor pain associated with medical conditions or procedures in the United States. This right enables us to exclusively develop and sell Zohydro ER in the UnitedStates. Alkermes has retained the exclusive right to take action in the event of infringement or threatened infringement by a third party of Alkermes’ intellectualproperty rights under the agreement. We have the right to pursue an infringement claim against the alleged infringer should Alkermes decline to take or continuean action.Under the terms of the agreement, the parties agreed that, subject to the negotiation of a supply agreement, Alkermes, or an affiliate of Alkermes, wouldhave the sole and exclusive right to manufacture and supply finished commercial product of Zohydro ER to us under agreed upon financial terms. Asdiscussed above, in November 2012, we entered into a commercial manufacturing and supply agreement for Zohydro ER finished commercial product withAPIL, under which APIL is the exclusive manufacturer and supplier to us, subject to certain exceptions, of Zohydro ER.Alkermes also granted to us, in the event that Alkermes is unwilling or unable to manufacture or supply commercial product to us, a non-exclusivelicense to make product under Alkermes’ intellectual property rights. This non-exclusive license also includes the right to sublicense product manufacturing toa third party, other than certain technological competitors of Alkermes.Under the license agreement, we paid an upfront fee to Alkermes of $0.5 million. We paid additional milestone payments to Alkermes in the amount of$0.8 million in August 2011 in connection with the completion of the treatment phase of our pivotal efficacy Phase 3 clinical trial, Study 801, and $1.0million upon submission of the first NDA to the FDA in May 2012. Further, we paid Alkermes $2.75 million in milestone payments upon the FDA'sapproval of Zohydro ER in October 2013. We are also required to pay a mid single-digit percentage royalty on net sales of the product for an initial royalty termequal to the longer of the expiration of Alkermes’ patents covering the product in the United States, or 15 years after commercial launch, if Alkermes does nothave patents covering the product in the United States. After the initial royalty term, the license agreement26Table of Contentswill continue automatically for three-year rolling periods during which we will continue to pay royalties on net sales of the product at a reduced low single-digitpercentage rate in accordance with the terms of the license agreement.Either party may terminate the agreement upon a material, uncured default or certain insolvency events of the other party or upon 12 months’ writtennotice prior to the end of the initial royalty term or any additional three-year rolling period. We may also terminate the agreement, with or without cause, at anytime upon 12 months’ prior written notice , or if the sale of Zohydro ER is prohibited by regulatory authorities.Aradigm Corporation Asset Purchase AgreementIn August 2006, we entered into an asset purchase agreement with Aradigm. Under the terms of the agreement, Aradigm assigned and transferred to usall of its right, title and interest to tangible assets and intellectual property related to the DosePro needle-free drug delivery system. Aradigm also granted to us anon-exclusive, fully paid, worldwide, perpetual, irrevocable, transferable, sublicensable license under all other intellectual property of Aradigm that wasowned, controlled or employed by Aradigm prior to the closing of the asset purchase and that is necessary or useful to the development, manufacture orcommercialization of the DosePro delivery system. Aradigm also retained a worldwide, royalty-free, non-exclusive license, with a right to sublicense, under alltransferred intellectual property rights solely for purposes of the pulmonary field, and we granted Aradigm a license under other intellectual property rightssolely for use in the pulmonary field.At the time of the closing of the asset purchase, we paid to Aradigm a sum of $4.0 million as consideration. Under the agreement, we also paid asubsequent milestone payment to Aradigm of $4.0 million upon the U.S. commercialization of Sumavel DosePro in February 2010. We are also required to paya 3% royalty on global net sales of Sumavel DosePro, by us or one of our licensees, if any, until the expiration of the last valid claim of the transferred patentscovering the manufacture, use, or sale of the product.In addition, in the event we or one of our future licensees, if any, commercializes a non-sumatriptan product in the DosePro delivery system, we will berequired to pay Aradigm, at our election, either a 3% royalty on net sales of each non-sumatriptan product commercialized, or a fixed low-twenties percentageof the royalty revenues received by us from the licensee, if any, until the later of the ten year anniversary of the first commercial sale of the product in theUnited States or the expiration of the last valid claim of the transferred patents covering the manufacture, use or sale of the product. Royalty revenues underthis agreement include, if applicable, running royalties on the net sales of non-sumatriptan products, license or milestone fees not allocable to development orother related costs incurred by us, payments in consideration of goods or products in excess of their cost, or payments in consideration for equity in excess ofthe then fair market value of the equity.Intellectual PropertyOur success will depend to a significant extent on our ability to obtain, expand and protect our intellectual property estate, enforce patents, maintaintrade secret and trademark protection and operate without infringing the proprietary rights of other parties.Needle-free Drug Delivery TechnologiesSumavel DosePro is a drug-system combination that subcutaneously delivers sumatriptan utilizing our proprietary needle-free drug delivery system totreat migraine and cluster headache. Our patent portfolio is directed to various types and components of needle-free and other drug delivery systems. As ofFebruary 1, 2014, we have 22 issued U.S. patents, 12 pending U.S. patent applications, 61 issued foreign patents and 35 pending foreign patentapplications. Of the above, we have 18 issued U.S. patents, 3 pending U.S. patent applications, 51 issued foreign patents and 2 pending foreign patentapplications relating to various aspects of Sumavel DosePro and our DosePro technology.Our issued U.S. Patent No. 5,891,086 covers a particular actuator mechanism forming a part of the needleless injector system, and is expected toexpire in 2014. We have a corresponding patent in Canada, and two each in Germany, Spain, France, United Kingdom, Italy and Japan, which are allexpected to expire in 2014. Our issued U.S. Patent No. 5,957,886 claims a needleless injector system using a viscous damping medium, and is expected toexpire in 2016. We have corresponding patents (one each in Canada, Germany, France, United Kingdom and Japan), which are all expected to expire in 2015.Our issued U.S. Patent No. 6,135,979 covers a needleless injector with particular safety mechanisms, and is expected to expire in 2017. We havecorresponding patents in Germany, France, United Kingdom and Japan, which are all expected to expire in 2016. Our issued U.S. Patents Nos. 7,776,007and 8,287,489 each cover systems with a cap and latch mechanism, and are expected to expire in 2026 and 2024, respectively. We have a correspondingpatent in Japan. Our issued U.S. Patent Nos. 7,901,385 and 8,267,903 encompass various embodiments of the casing for enclosing the injection systems,and are expected to expire in 2026 and 2023. We have corresponding patents in Australia, Canada, Germany, Spain, France, United Kingdom, Italy, andJapan. Our issued U.S. Patent Nos. 8,118,771, 8,241,243 and 8,241,244 correspond to methods of reducing breakage of glass capsules used in the system,and are expected to expire in 2023, 2025 and 2022, respectively. We have corresponding patents in27Table of ContentsCanada, Germany, France, United Kingdom and Japan. Our U.S. Patent No. 8,343,130 covers a method of reducing the propensity to create a shock wave onfiring the system used in Sumavel DosePro and expires in 2022. We have corresponding patents in Canada, Germany, France and the United Kingdom, andtwo in Japan. Our U.S. Patent No. 8,491,524 relates to a drug capsule filled with a formulation purged with an inert gas and expires in 2022. U.S. Patents5,891,086; 5,957,886; 6,135,979; 7,776,007; 7,901,385; 8,267,903; 8,118,771; 8,241,243; 8,241,244; 8,287,489; and 8,343,130 are listed in theFDA Orange Book for Sumavel DosePro.We also have three U.S. Patents Nos., 7,150,297, 6,554,818 and 6,280,410, and one each in Canada and Japan, and two each in Germany, Franceand the United Kingdom corresponding to methods of filling needle-free injector capsules and the filled capsules, such as those used in the manufacture ofSumavel DosePro. These U.S. patents are expected to expire in 2022, 2017 and 2017, respectively.We also have three U.S. Patents Nos. 6,174,304, 6,681,810 and 6,251,091, and one in Japan corresponding to needle-free injector drug capsules aswell as methods and adaptors for filling capsules with liquid drug, such as those used in the manufacture of Sumavel DosePro. These U.S. patents areexpected to expire in 2022, 2025 and 2016, respectively.Our remaining issued patents, pending U.S. patent applications and pending foreign patent applications are not currently used in Sumavel DosePro, butmay be used with alternate versions of, or future product candidates utilizing, our DosePro technology.We do not have patent protection for Sumavel DosePro in a significant number of countries, including large territories such as India, Russia and China,and accordingly we are not able to use the patent system to provide for market exclusivity in those countries. Additionally, the eleven U.S. patents listed in theFDA Orange Book for Sumavel DosePro expire on various dates between 2014 and 2026. Upon expiration, we will lose certain advantages that come withOrange Book listing of patents and will no longer be able to prevent others in the U.S. from practicing the inventions claimed by the eleven patents.Zohydro ERZohydro ER is an oral version of an opioid pain reliever, which is designed to offer an extended-release profile that utilizes Alkermes’ proprietarySODAS delivery system. Our in-licensed patents from Alkermes relating to Zohydro ER are expected to expire in 2019. U.S. Patent Nos. 6,902,742 and6,228,398 relating to Zohydro ER cover a modified release composition containing hydrocodone and are expected to expire in November 2019. Pending U.S.Patent No. 2006/0240105, if granted, is also expected to expire in November 2019. Upon the expiration of these patents, we or Alkermes, as applicable, willlose the right to exclude others from practicing the claimed inventions.ReldayWith respect to Relday, Zogenix has licensed a number of United States and foreign patent applications from Durect that are intended to cover theformulation of Relday and its delivery. However, as the formulation and delivery of Relday are the subject of on-going research it remains uncertain if theDurect patents or applications, should they issue as patents, will cover the final formulation or delivery of Relday.Government RegulationFDA Approval ProcessIn the United States, pharmaceutical products are subject to extensive regulation by the FDA. The FFDCA and other federal and state statutes andregulations govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion andmarketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Failure to comply withapplicable FDA or other requirements may subject a company to a variety of administrative or judicial sanctions, such as the FDA’s refusal to approvepending applications, a clinical hold, warning letters, recall or seizure of products, partial or total suspension of production, withdrawal of the product fromthe market, injunctions, fines, civil penalties or criminal prosecution.FDA approval is required before any new unapproved drug or dosage form, including a new use of a previously approved drug, can be marketed in theUnited States. The process required by the FDA before a drug may be marketed in the United States generally involves:•completion of pre-clinical laboratory and animal testing and formulation studies in compliance with the FDA’s current good laboratory practiceregulations;•submission to the FDA of an IND for human clinical testing which must become effective before human clinical trials may begin in the United States;28Table of Contents•approval by an independent institutional review board, or IRB, at each clinical trial site before a trial may be initiated at the site;•performance of adequate and well-controlled human clinical trials in accordance with current good clinical practices, or GCP regulations, to establish thesafety and efficacy of the proposed drug product for each intended use;•satisfactory completion of an FDA pre-approval inspection of the facility or facilities at which the product is manufactured to assess compliance with theFDA’s cGMP regulations, and for devices and device components, the QSR, and to assure that the facilities, methods and controls are adequate topreserve the drug’s identity, strength, quality and purity;•submission to the FDA of an NDA;•satisfactory review by an FDA advisory committee, if applicable; and•FDA review and approval of the NDA.The pre-clinical and clinical testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that anyapprovals for our product candidates will be granted on a timely basis, if at all. Pre-clinical tests include laboratory evaluation of product chemistry,formulation, stability and toxicity, as well as animal studies to assess the characteristics and potential safety and efficacy of the product. The results of pre-clinical tests, together with manufacturing information, analytical data and a proposed clinical trial protocol and other information, are submitted as part of anIND to the FDA. Some pre-clinical testing may continue even after the IND is submitted. The IND automatically becomes effective 30 days after receipt by theFDA, unless the FDA, within the 30-day time period, raises concerns or questions relating to one or more proposed clinical trials and places a trial on clinicalhold, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA mustresolve any outstanding concerns before the clinical trial can begin. As a result, our submission of an IND may not result in FDA authorization to commence aclinical trial. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development.Further, an independent IRB, covering each site proposing to conduct the clinical trial must review and approve the plan for any clinical trial andinformed consent information for subjects before the trial commences at that site and it must monitor the study until completed. The FDA, the IRB, or thesponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptablehealth risk or for failure to comply with the IRB’s requirements, or may impose other conditions.Clinical trials involve the administration of an investigational drug to human subjects under the supervision of qualified investigators in accordancewith GCP requirements, which include the requirement that all research subjects provide their informed consent in writing for their participation in anyclinical trial. Sponsors of clinical trials generally must register and report, at the NIH-maintained website ClinicalTrials.gov, key parameters of certain clinicaltrials. For purposes of an NDA submission and approval, human clinical trials are typically conducted in the following sequential phases, which mayoverlap or be combined:•Phase 1: The drug is initially introduced into healthy human subjects or patients and tested for safety, dose tolerance, absorption, metabolism,distribution and excretion and, if possible, to gain an early indication of its effectiveness.•Phase 2: The drug is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate theefficacy of the product for specific targeted indications and to determine dose tolerance and optimal dosage. Multiple Phase 2 clinical trials may beconducted by the sponsor to obtain information prior to beginning larger and more extensive Phase 3 clinical trials.•Phase 3: These are commonly referred to as pivotal studies. When Phase 2 evaluations demonstrate that a dose range of the product appears to beeffective and has an acceptable safety profile, Phase 3 trials are undertaken in large patient populations to further evaluate dosage, to obtain additionalevidence of clinical efficacy and safety in an expanded patient population at multiple, geographically-dispersed clinical trial sites, to establish the overallrisk-benefit relationship of the drug and to provide adequate information for the labeling of the drug.•Phase 4: In some cases, the FDA may condition approval of an NDA for a product candidate on the sponsor’s agreement to conduct additional clinicaltrials to further assess the drug’s safety and effectiveness after NDA approval. Such post-approval trials are typically referred to as Phase 4 studies.The results of product development, pre-clinical studies and clinical trials are submitted to the FDA as part of an NDA. NDAs must also containextensive information relating to the product’s pharmacology, CMC and proposed labeling, among other things.For some drugs, the FDA may determine that a REMS is necessary to ensure that the benefits of the drug outweigh the risks of the drug, and mayrequire submission of a REMS as a condition of approval. Under federal law, the submission of an NDA is additionally subject to a substantial applicationuser fee, and the manufacturer and/or sponsor under an approved NDA29Table of Contentsare also subject to annual product and establishment user fees. The FDA has 60 days from its receipt of an NDA to determine whether the application will beaccepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. The FDA may request additionalnecessary information rather than accept an NDA for filing. In this event, the NDA must be resubmitted with the additional information and may be subject topayment of additional user fees. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission has beenaccepted for filing, the FDA begins an in-depth substantive review.The FDA may refer applications for novel drug products or drug products which present difficult questions of safety or efficacy to an advisorycommittee for review, evaluation and recommendation as to whether the application should be approved and under what conditions. In December 2012, theFDA convened an advisory committee that voted 2-11 (with 1 abstention) against the approval of Zohydro ER. The FDA is not bound by the recommendationof an advisory committee, but it considers such recommendations carefully when making decisions. The final decision regarding NDA approval is made bythe FDA, as evidenced by the fact that although an advisory committee voted against the approval of Zohydro ER in December 2012, the FDA approvedZohydro ER in October 2013. In addition, for combination products like Sumavel DosePro or future product candidates utilizing the DosePro technology, theFDA’s review may include the participation of both the FDA’s Center for Drug Evaluation and Research and the FDA’s Center for Devices and RadiologicalHealth, which may complicate or prolong the review.Before approving an NDA, the FDA may inspect the facility or facilities where the product is manufactured. The FDA will not approve an applicationunless it determines that the manufacturing processes and facilities are in compliance with cGMP, and if applicable, QSR, requirements and are adequate toassure consistent production of the product within required specifications. Additionally, the FDA will typically inspect one or more clinical sites to assurecompliance with GCP before approving an NDA. During 2012, the FDA inspected two clinical sites where Zohydro ER studies were conducted and did notissue any inspection observations.After the FDA evaluates the NDA and, in some cases, the related manufacturing facilities, it may issue an approval letter, or it may issue a CRL toindicate that the review cycle for an application is complete and that the application is not ready for approval. CRLs generally outline the deficiencies in thesubmission and may require substantial additional testing or information in order for the FDA to reconsider the application. Even with submission of thisadditional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when the deficiencieshave been addressed to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drugwith specific prescribing information for specific indications.Once issued, the FDA may withdraw product approval if ongoing regulatory requirements are not met or if safety problems are identified after theproduct reaches the market. In addition, the FDA may require post-approval testing, including Phase 4 studies, and surveillance programs to monitor the effectof approved products which have been commercialized, and the FDA has the authority to prevent or limit further marketing of a product based on the resultsof these post-marketing programs. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved label,and, even if the FDA approves a product, it may limit the approved indications for use for the product or impose other conditions, including labeling ordistribution restrictions or other risk-management mechanisms. Further, if there are any modifications to the drug, including changes in indications, labeling,or manufacturing processes or facilities, the sponsor may be required to submit and obtain FDA approval of a new or supplemental NDA, which may requirethe development of additional data or conduct of additional pre-clinical studies and clinical trials.Post-Approval RequirementsOnce an NDA is approved, a product will be subject to pervasive and continuing regulation by the FDA, including, among other things, requirementsrelating to drug/device listing, recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverseexperiences with the product. There also are extensive U.S. Drug Enforcement Administration, or DEA, regulations applicable to marketed controlledsubstances.In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register theirestablishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance withcGMP or QSR requirements. Changes to the manufacturing process are strictly regulated and generally require prior FDA approval before being implemented.FDA regulations also require investigation and correction of any deviations from cGMP or QSR and impose reporting and documentation requirements uponus and any third-party manufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area ofproduction and quality control to maintain cGMP or QSR compliance.Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or ifproblems occur after the product reaches the market, though the FDA must provide an30Table of Contentsapplication holder with notice and an opportunity for a hearing in order to withdraw its approval of an application. Later discovery of previously unknownproblems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply withregulatory requirements, may result in, among other things:•restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;•fines, warning letters or holds on post-approval clinical trials;•refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of product approvals;•product seizure or detention, or refusal to permit the import or export of products; or•injunctions or the imposition of civil or criminal penalties.The FDA strictly regulates the marketing, labeling, advertising and promotion of drug and device products that are placed on the market. Whilephysicians may prescribe drugs and devices for off label uses, manufacturers may only promote for the approved indications and in accordance with theprovisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off label uses, and acompany that is found to have improperly promoted off label uses may be subject to significant liability.In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, and associated FDAregulations, which governs the distribution of drugs and drug samples at the federal level, and sets minimum standards for the registration and regulation ofdrug distributors by the states. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirementsto ensure accountability in distribution, including a drug pedigree which tracks the distribution of prescription drugs. With the enactment of the Drug Qualityand Security Act in November 2013, drug manufacturers will also be subject to new requirements for identifying and tracking prescription drugs as they aredistributed in the United States. The requirements of the new law will be phased in over a ten-year period, including requirements for unique productidentifiers and provision of product handling information to the FDA.The FDA may require post-approval studies and clinical trials if the FDA finds they are appropriate based on scientific data, including informationregarding related drugs. The purpose of such studies would be to assess a known serious risk or signals of serious risk related to the drug or to identify anunexpected serious risk when available data indicate the potential for a serious risk. The FDA may also require a labeling change if it becomes aware of newsafety information that it believes should be included in the labeling of a drug. For example, on September 10, 2013, the FDA announced class-wide safetylabeling changes, including required new boxed warnings, and new post-market study requirements for all ER/LA opioids intended to treat pain. FDA requiresa boxed warning (sometimes referred to as a "Black Box" Warning) for products that have shown a significant risk of severe or life-threatening adverse events.Including the additional warnings FDA added with the class-wide safety labeling changes, Zohydro ER's boxed warnings highlight the product's risk ofaddiction, abuse, and misue; life-threatening respiratory depression; accidental exposure; neonatal opioid withdrawal syndrome; and interaction with alcohol.Applicable ER/LA opioid marketers, including us, are required to comply with the labeling requirements and conduct post-market studies and clinical trials toassess the known serious risks of misuse, abuse, increased sensitivity to pain (hyperalgesia), addiction, overdose and death. Zohydro ER bears the requiredlabeling and we are currently participating with eight other NDA holders of ER/LA opioid analgesics to address the FDA's post-marketing study requirements.The FDA also has the authority to require a REMS to ensure that the benefits of a drug outweigh its risks. In determining whether a REMS is necessary,FDA must consider the size of the population likely to use the drug, the seriousness of the disease or condition to be treated, the expected benefit of the drug,the duration of treatment, the seriousness of known or potential adverse events, and whether the drug is a new molecular entity. If the FDA determines a REMSis necessary for a new drug, the drug sponsor must submit a proposed REMS as part of its NDA prior to approval. The FDA may also impose a REMSrequirement on a drug already on the market if the FDA determines, based on new safety information, that a REMS is necessary to ensure that the drug'sbenefits continue to outweigh its risks. A REMS may be required to include various elements, such as a medication guide or patient package insert, acommunication plan to educate health care providers of the drug’s risks, limitations on who may prescribe or dispense the drug, requirements that patientsenroll in a registry or undergo certain health evaluations and other measures that the FDA deems necessary to assure the safe use of the drug. In addition, theREMS must include a timetable to assess the strategy, at a minimum, at 18 months, three years, and seven years after the strategy’s approval.In February 2009, the FDA informed opioid analgesic drug manufacturers that it would require a class-wide REMS for all long-acting and sustained-release opioid drug products, and as an extended release formulation of hydrocodone, Zohydro ER became subject to the ER/LA opioid REMS upon approval.Pursuant to the FFDCA, the manufacturers subject to this class-wide REMS must work together to implement the REMS as part of a single shared system toreduce the burden of the REMS31Table of Contentson the healthcare system. The central component of the ER/LA opioid REMS program is an education program for prescribers and patients. Specifically, theREMS includes a Medication Guide available for distribution to patients who are dispensed the drug, as well as a number of elements to assure safe use.These elements include training for healthcare professionals who prescribe the drug; information provided to prescribers that they can use to educate patientsin the safe use, storage, and disposal of opioids; and information provided to prescribers of the existence of the REMS and the need to successfully completethe necessary training. The prescriber training required as part of the REMS is conducted by accredited, independent continuing education providers, withoutcost to the healthcare professionals, under unrestricted grants funded by the opioid analgesic manufacturers. Moreover, REMS assessments must besubmitted on an annual basis to assess the extent to which the elements to assure safe use are meeting the goals of the REMS and whether the goals or elementsshould be modified.With respect to post-market product advertising and promotion, the FDA imposes a number of complex regulations on entities that advertise andpromote pharmaceuticals, which include, among others, standards for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific andeducational activities, and promotional activities involving the internet. The FDA has very broad enforcement authority under the FFDCA, and failure to abideby these regulations can result in penalties, including the issuance of a warning letter directing entities to correct deviations from FDA standards, a requirementthat future advertising and promotional materials be pre-cleared by the FDA, and state and federal civil and criminal investigations and prosecutions.Section 505(b)(2) New Drug ApplicationsAn applicant may submit an NDA under Section 505(b)(2) of the FFDCA to seek approval for modifications or new uses of products previouslyapproved by the FDA. Section 505(b)(2) was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, also known as theHatch-Waxman Amendments, and permits the filing of an NDA where at least some of the information required for approval comes from studies notconducted by or for the applicant and for which the applicant has not obtained a right of reference. The applicant may rely upon published literature and theFDA’s previous findings of safety and effectiveness for an approved product based on the prior pre-clinical or clinical studies conducted for the approvedproduct. The FDA may also require companies to perform new studies or measurements to support the change from the approved product. The FDA may thenapprove the new product candidate for all or some of the label indications for which the referenced product has been approved, as well as for any newindication sought by the Section 505(b)(2) applicant.To the extent that a Section 505(b)(2) NDA relies on studies conducted for a previously approved drug product, the applicant is required to certify to theFDA concerning any patents listed for the approved product in the FDA's current list of "Approved Drug Products with Therapeutic EquivalenceEvaluations," known as the Orange Book. Specifically, the applicant must certify for each listed patent that (1) the required patent information has not beenfiled; (2) the listed patent has expired; (3) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or(4) the listed patent is invalid, unenforceable or will not be infringed by the new product. A certification that the new product will not infringe the alreadyapproved product’s listed patent or that such patent is invalid is known as a Paragraph IV certification. If the applicant does not challenge the listed patentsthrough a Paragraph IV certification, the Section 505(b)(2) NDA application will not be approved until all the listed patents claiming the referenced producthave expired. The Section 505(b)(2) NDA application also will not be accepted or approved until any non-patent exclusivity, such as exclusivity for obtainingapproval of a New Chemical Entity, listed in the Orange Book for the referenced product, has expired.If the 505(b)(2) NDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IVcertification to the referenced NDA and patent holders once the 505(b)(2) NDA has been accepted for filing by the FDA. The NDA and patent holders maythen initiate a legal challenge based on the Paragraph IV certification. Under the FFDCA, if a patent infringement lawsuit is filed against the 505(b)(2) NDAapplicant within 45 days of receipt of the Paragraph IV certification notice, an automatic stay of approval is imposed, which prevents the FDA fromapproving the Section 505(b)(2) NDA for 30 months, or until a court decision or settlement finding that the patent is invalid, unenforceable or not infringed,whichever is earlier. The court also has the ability to shorten or lengthen the 30 month stay if either party is found not to be reasonably cooperating inexpediting the litigation. Thus, the 505(b)(2) NDA applicant may invest a significant amount of time and expense in the development of its product only to besubject to significant delay and patent litigation before its product may be commercialized.The 505(b)(2) NDA applicant may be eligible for its own regulatory exclusivity period, such as three-year new product exclusivity. The first approved505(b)(2) applicant for a particular condition of approval, or change to a marketed product, such as a new extended release formulation for a previouslyapproved product, may be granted three-year Hatch-Waxman exclusivity if one or more clinical studies, other than bioavailability or bioequivalence studies,was essential to the approval of the application and was conducted/sponsored by the applicant. Should this occur, the FDA is precluded from makingeffective any other application for the same condition of use or for a change to the drug product that was granted exclusivity until after32Table of Contentsthat three-year exclusivity period has run. Additional exclusivities may also apply, such as an added six-month pediatric exclusivity period based on studiesconducted in pediatric patients under a written request from the FDA.Additionally, the 505(b)(2) NDA applicant may list its own relevant patents in the Orange Book, and if it does, it can initiate patent infringementlitigation against subsequent applicants that challenge such patents, which could result in a thirty-month stay delaying those applicants.DEA RegulationOne of our products, Zohydro ER, is regulated as a “controlled substance” as defined in the Controlled Substances Act of 1970, or CSA, whichestablishes registration, security, recordkeeping, reporting, storage, distribution and other requirements administered by the DEA. The DEA is concerned withthe control of handlers of controlled substances, and with the equipment and raw materials used in their manufacture and packaging, in order to prevent lossand diversion into illicit channels of commerce.The DEA regulates controlled substances as Schedule I, II, III, IV or V substances. Schedule I substances by definition have no established medicinaluse, and may not be marketed or sold in the United States. A pharmaceutical product may be listed as Schedule II, III, IV or V, with Schedule II substancesconsidered to present the highest risk of abuse and Schedule V substances the lowest relative risk of abuse among such substances. Zohydro ER, ourproprietary oral, extended-release version of hydrocodone, is listed by the DEA as a Schedule II controlled substance under the CSA. Consequently, itsmanufacture, shipment, storage, sale and use is subject to a high degree of regulation. For example, all Schedule II drug prescriptions must be signed by aphysician, physically presented to a pharmacist and may not be refilled without a new prescription.Annual registration is required for any facility that manufactures, distributes, dispenses, imports or exports any controlled substance. The registrationis specific to the particular location, activity and controlled substance schedule. For example, separate registrations are needed for import and manufacturing,and each registration will specify which schedules of controlled substances are authorized.The DEA typically inspects a facility to review its security measures prior to issuing a registration. Security requirements vary by controlled substanceschedule, with the most stringent requirements applying to Schedule I and Schedule II substances. Required security measures include background checks onemployees and physical control of inventory through measures such as cages, surveillance cameras and inventory reconciliations. Records must be maintainedfor the handling of all controlled substances, and periodic reports made to the DEA, for example distribution reports for Schedule I and II controlledsubstances, Schedule III substances that are narcotics, and other designated substances. Reports must also be made for thefts or losses of any controlledsubstance, and authorization must be obtained to destroy any controlled substance. In addition, special authorization and notification requirements apply toimports and exports.In addition, a DEA quota system controls and limits the availability and production of controlled substances in Schedule I or II. Distributions of anySchedule I or II controlled substance must also be accompanied by special order forms, with copies provided to the DEA. Because Zohydro ER, an oral,extended-release version of hydrocodone, is regulated as a Schedule II controlled substance, it is subject to the DEA’s production and procurement quotascheme. The DEA establishes annually an aggregate quota for how much hydrocodone may be produced in total in the United States based on the DEA’sestimate of the quantity needed to meet legitimate scientific and medicinal needs. This limited aggregate amount of hydrocodone that the DEA allows to beproduced in the United States each year is allocated among individual companies, who must submit applications annually to the DEA for individualproduction and procurement quotas. We and our contract manufacturers must receive an annual quota from the DEA in order to produce or procure anySchedule I or Schedule II substance, including hydrocodone for use in manufacturing Zohydro ER. The DEA may adjust aggregate production quotas andindividual production and procurement quotas from time to time during the year, although the DEA has substantial discretion in whether or not to make suchadjustments. Our contract manufacturers’ quota of an active ingredient may not be sufficient to meet commercial demand or complete clinical trials. Any delayor refusal by the DEA in establishing our contract manufacturers’ quota for controlled substances could delay or stop our clinical trials or product launches,which could have a material adverse effect on our business, financial position and results of operations.To meet its responsibilities, the DEA conducts periodic inspections of registered establishments that handle controlled substances. Failure to maintaincompliance with applicable requirements, particularly as manifested in loss or diversion, can result in enforcement action that could have a material adverseeffect on our business, results of operations and financial condition. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiateproceedings to revoke those registrations. In certain circumstances, violations could eventuate in criminal proceedings.Individual states also regulate controlled substances, and we and our contract manufacturers will be subject to state regulation on distribution of theseproducts.33Table of ContentsInternational RegulationIn addition to regulations in the United States, we are subject to a variety of foreign regulations regarding safety and efficacy and governing, among otherthings, clinical trials and commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we must obtain thenecessary approvals by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in thosecountries. The approval process varies from country to country and can involve additional product testing and additional review periods, and the time may belonger or shorter than that required to obtain FDA approval and, if applicable, DEA classification. The requirements governing, among other things, theconduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country. Regulatory approval in one country does notensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process inothers.Under European Union regulatory systems, marketing authorizations may be submitted either under a centralized or decentralized procedure. Thecentralized procedure provides for the grant of a single marketing authorization that is valid for all European Union member states. The decentralizedprocedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submitan application to the remaining member states. Within 90 days of receiving the applications and assessment report, each member state must decide whether torecognize approval.In addition to regulations in Europe and the United States, we are subject to a variety of other foreign regulations governing, among other things, theconduct of clinical trials, pricing and reimbursement and commercial distribution of our products. If we fail to comply with applicable foreign regulatoryrequirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions andcriminal prosecution.Healthcare Fraud and Abuse LawsWe are subject to various federal, state and local laws targeting fraud and abuse in the healthcare industry. For example, in the United States, there arefederal and state anti-kickback laws that prohibit the payment or receipt of kickbacks, bribes or other remuneration intended to induce the purchase orrecommendation of healthcare products and services or reward past purchases or recommendations. Violations of these laws can lead to civil and criminalpenalties, including fines, imprisonment and exclusion from participation in federal healthcare programs. These laws are potentially applicable tomanufacturers of products regulated by the FDA, such as us, and hospitals, physicians and other potential purchasers of such products.In particular, the federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or providingremuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, forwhich payment may be made under a federal healthcare program such as the TRICARE, Medicare and Medicaid programs. The term “remuneration” is notdefined in the federal Anti-Kickback Statute and has been broadly interpreted to include anything of value, including for example, gifts, discounts, thefurnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payments, ownership interests and providing anything at less thanits fair market value. Moreover, the lack of uniform court interpretation of the Anti-Kickback Statute makes compliance with the law difficult. In addition, therecently enacted Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the PPACA,among other things, amends the intent requirement of the federal Anti-Kickback Statute and the applicable criminal healthcare fraud statutes, as discussedbelow. Pursuant to the statutory amendment, a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order tohave committed a violation. In addition, the PPACA provides that the government may assert that a claim including items or services resulting from a violationof the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act (discussed below) or the civil monetarypenalties statute, which imposes fines against any person who is determined to have presented or caused to be presented claims to a federal health care programthat the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements within the healthcareindustry, the U.S. Department of Health and Human Services’ Office of Inspector General, or OIG, issued regulations in July of 1991, and periodically sincethat time, which the OIG refers to as “safe harbors.” These safe harbor regulations set forth certain provisions which, if met in form and substance, willassure pharmaceutical companies, healthcare providers and other parties that they will not be prosecuted under the federal Anti-Kickback Statute. Additionalsafe harbor provisions providing similar protections have been published intermittently since 1991. Although full compliance with these provisions ensuresagainst prosecution under the federal Anti-Kickback Statute, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarilymean that the transaction or arrangement is illegal or that34Table of Contentsprosecution under the federal Anti-Kickback Statute will be pursued. However, conduct and business arrangements that do not fully satisfy each applicablesafe harbor may result in increased scrutiny by government enforcement authorities, such as the OIG or federal prosecutors. Additionally, there are certainstatutory exceptions to the federal Anti-Kickback Statute, one or more of which could be used to protect a business arrangement, although we understand thatOIG is of the view that an arrangement that does not meet the requirements of a safe harbor cannot satisfy the corresponding statutory exception, if any, underthe federal Anti-Kickback Statute.Additionally, many states have adopted laws similar to the federal Anti-Kickback Statute. Some of these state prohibitions apply to referral of patientsfor healthcare items or services reimbursed by any third-party payor, not only the Medicare and Medicaid programs in at least some cases, and do not containsafe harbors or statutory exceptions. Government officials have focused their enforcement efforts on marketing of healthcare services and products, amongother activities, and have brought cases against numerous pharmaceutical and medical device companies, and certain sales and marketing personnel forallegedly offering unlawful inducements to potential or existing customers in an attempt to procure their business or reward past purchases orrecommendations.Another development affecting the healthcare industry is the increased use of the federal civil False Claims Act and, in particular, actions broughtpursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The civil False Claims Act imposes liability on any person or entity who, amongother things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. The qui tam provisionsof the False Claims Act allow a private individual to bring civil actions on behalf of the federal government alleging that the defendant has submitted a falseclaim to the federal government, and to share in any monetary recovery. In recent years, the number of suits brought by private individuals has increaseddramatically. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained bythe government, plus civil penalties of $5,500 to $11,000 for each separate false claim. There are many potential bases for liability under the False ClaimsAct. Liability arises, primarily, when an entity knowingly submits, or causes another to submit, a false claim for reimbursement to the federal government.The False Claims Act has been used to assert liability on the basis of inadequate care, kickbacks and other improper referrals, improperly reportedgovernment pricing metrics such as Best Price or Average Manufacturer Price, improper use of Medicare numbers when detailing the provider of services,improper promotion of off-label uses (i.e., uses not expressly approved by FDA in a drug’s label), and allegations as to misrepresentations with respect to theservices rendered. In addition, various states have enacted false claim laws analogous to the False Claims Act. Many of these state laws apply where a claim issubmitted to any third-party payor and not merely a federal healthcare program. Our activities relating to the reporting of discount and rebate information andother information affecting federal, state and third party reimbursement of our products, and the sale and marketing of our products and our servicearrangements or data purchases, among other activities, may be subject to scrutiny under these laws. We are unable to predict whether we would be subject toactions under the False Claims Act or a similar state law, or the impact of such actions. However, the cost of defending such claims, as well as any sanctionsimposed, could adversely affect our financial performance.Also, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, created several new federal crimes, including health care fraud, andfalse statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing a scheme to defraud any health carebenefit program, including private third-party payors. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up amaterial fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items orservices.The PPACA also imposes new reporting and disclosure requirements on drug manufacturers for any “transfer of value” made or distributed toprescribers and other healthcare providers. In addition, drug manufacturers will also be required to report and disclose any investment interests held byphysicians and their immediate family members during the preceding calendar year. Failure to submit required information may result in civil monetarypenalties of up to an aggregate of $150,000 per year (and up to an aggregate of $1 million per year for “knowing failures”), for all payments, transfers of valueor ownership or investment interests not reported in an annual submission. Manufacturers were required to begin data collection on August 1, 2013 and arerequired to report such data to the government by March 1, 2014 and by the 90th day of each calendar year thereafter. Such information will be made publiclyavailable on or before September 30, 2014.In addition, under California law, pharmaceutical companies must adopt a comprehensive compliance program that is in accordance with both theOffice of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers, or OIG Guidance, and the Pharmaceutical Research andManufacturers of America Code on Interactions with Healthcare Professionals, or the PhRMA Code. The PhRMA Code seeks to promote transparency inrelationships between health care professionals and the pharmaceutical industry and to ensure that pharmaceutical marketing activities comport with thehighest ethical standards. The PhRMA Code contains strict limitations on certain interactions between health care professionals and the pharmaceuticalindustry relating to gifts, meals, entertainment and speaker programs, among others. Also, certain states have35Table of Contentsimposed restrictions on the types of interactions that pharmaceutical and medical device companies or their agents (e.g., sales representatives) may have withhealth care professionals, including bans or strict limitations on the provision of meals, entertainment, hospitality, travel and lodging expenses, and otherfinancial support, including funding for continuing medical education activities.Healthcare Privacy and Security LawsWe may be subject to, or our marketing activities may be limited by, HIPAA, and its implementing regulations, including the final omnibus rulepublished on January 25, 2013, which established uniform standards for certain “covered entities” (healthcare providers, health plans and healthcareclearinghouses) governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of protected health information. TheAmerican Recovery and Reinvestment Act of 2009, commonly referred to as the economic stimulus package, included sweeping expansion of HIPAA’s privacyand security standards called the Health Information Technology for Economic and Clinical Health Act, or HITECH, which became effective on February 17,2010. Among other things, the new law makes HIPAA’s privacy and security standards directly applicable to “business associates” — independentcontractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity.HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, andgave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’sfees and costs associated with pursuing federal civil actions.Third-Party Payor Coverage and ReimbursementThe commercial success of Sumavel DosePro, Zohydro ER and our product candidates, if and when commercialized, will depend, in part, upon theavailability of coverage and reimbursement from third-party payors at the federal, state and private levels. Third-party payors include governmental programssuch as Medicare or Medicaid, private insurance plans and managed care plans. These third-party payors may deny coverage or reimbursement for a productor therapy in whole or in part if they determine that the product or therapy was not medically appropriate or necessary. Also, third-party payors have attemptedto control costs by limiting coverage through the use of formularies and other cost-containment mechanisms and the amount of reimbursement for particularprocedures or drug treatments.Changes in third-party payor coverage and reimbursement rules can impact our business. For example, the PPACA changes include increased rebates amanufacturer must pay to the Medicaid program, addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug RebateProgram are calculated for drugs that are inhaled, infused, instilled, implanted or injected, and established a new Medicare Part D coverage gap discountprogram, in which manufacturers must provide 50% point-of-sale discounts on products covered under Part D. Further, the law imposes a significant annual,nondeductible fee on companies that manufacture or import branded prescription drug products. Substantial new provisions affecting compliance have alsobeen enacted, which may require us to modify our business practices with health care practitioners. Although it is too early to determine the full effect ofPPACA, the new law appears likely to continue the pressure on pharmaceutical pricing, and may also increase our regulatory burdens and operating costs.Moreover, other legislative changes have also been proposed and adopted in the United States since the PPACA was enacted. On August 2, 2011, theBudget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction,tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, therebytriggering the legislation's automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to2% per fiscal year, which went into effect on April 1, 2013. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012,or the ATRA, which among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatmentcenters, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws mayresult in additional reductions in Medicare and other health care funding, which could have a material adverse effect on our customers and accordingly, ourfinancial operations.In addition, the cost of pharmaceuticals and devices continues to generate substantial governmental and third party payor interest. We expect that thepharmaceutical industry will experience pricing pressures due to the trend toward managed health care, the increasing influence of managed care organizationsand additional legislative proposals. Our results of operations and business could be adversely affected by current and future third-party payor policies as wellas health care legislative reforms.Some third-party payors also require pre-approval of coverage for new or innovative devices or drug therapies before they will reimburse health careproviders who use such therapies. While we cannot predict whether any proposed cost-containment measures will be adopted or otherwise implemented in thefuture, these requirements or any announcement or36Table of Contentsadoption of such proposals could have a material adverse effect on our ability to obtain adequate prices for Sumavel DosePro, Zohydro ER and our productcandidates and to operate profitably.In international markets, reimbursement and healthcare payment systems vary significantly by country, and many countries have instituted priceceilings on specific products and therapies. There can be no assurance that our products will be considered medically reasonable and necessary for a specificindication, that our products will be considered cost-effective by third-party payors, that an adequate level of reimbursement will be established even ifcoverage is available or that the third-party payors’ reimbursement policies will not adversely affect our ability to sell our products profitably.Manufacturing RequirementsWe and our third-party manufacturers must comply with applicable FDA regulations relating to FDA’s cGMP regulations and, if applicable, QSRrequirements. The cGMP regulations include requirements relating to, among other things, organization of personnel, buildings and facilities, equipment,control of components and drug product containers and closures, production and process controls, packaging and labeling controls, holding and distribution,laboratory controls, records and reports, and returned or salvaged products. The manufacturing facilities for our products must meet cGMP requirements tothe satisfaction of the FDA pursuant to a pre-approval inspection before we can use them to manufacture our products. We and our third-party manufacturersare also subject to periodic unannounced inspections of facilities by the FDA and other authorities, including procedures and operations used in the testing andmanufacture of our products to assess our compliance with applicable regulations. Failure to comply with statutory and regulatory requirements subjects amanufacturer to possible legal or regulatory action, including, among other things, warning letters, the seizure or recall of products, injunctions, consentdecrees placing significant restrictions on or suspending manufacturing operations and civil and criminal penalties.Other Regulatory RequirementsWe are also subject to various laws and regulations regarding laboratory practices, the experimental use of animals, and the use and disposal ofhazardous or potentially hazardous substances in connection with our research. In each of these areas, as above, the FDA has broad regulatory andenforcement powers, including, among other things, the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recallproducts, and withdraw approvals, any one or more of which could have a material adverse effect on us.EmployeesAs of December 31, 2013, we employed 114 full-time employees. Of the full-time employees, 74 were engaged in sales and marketing, 7 were engaged inmanufacturing operations, 16 were engaged in product development, quality assurance and clinical and regulatory activities and 17 were engaged in generaland administrative activities (including business and corporate development). We expanded resources across all departments to approximately 235 full-timeemployees prior to the launch of Zohydro ER on March 3, 2014. This expansion was focused on increasing our commercial functions to approximately 190employees, including sales, marketing, managed markets, commercial analytics and trade teams. This expansion included an increase in our field salespersonnel to approximately 165 employees to support broader reach to pain specialists.None of our employees are represented by a labor union, and we consider our employee relations to be good. We currently utilize TriNet EmployerGroup, Inc., an employer services company, to provide human resource services. TriNet Employer Group is the employer of record for payroll, benefits,employee relations and other employment-related administration.Research and DevelopmentThe Company invested $12.8 million, $21.4 million and $33.0 million in research and development in the years 2013, 2012 and 2011, respectively.About ZogenixWe were formed as a Delaware corporation on May 11, 2006 as SJ2 Therapeutics, Inc. We commenced our operations on August 25, 2006 and changedour name to Zogenix, Inc. on August 28, 2006. Our principal executive offices are located at 12400 High Bluff Drive, Suite 650, San Diego, CA 92130, andour telephone number is 1-866-ZOGENIX (1-866-964-3649). We formed a wholly-owned subsidiary, Zogenix Europe Limited, in June 2010, a companyorganized under the laws of England and Wales and which is located in the United Kingdom, and whose principal operations are to support the manufactureof the DosePro technology.37Table of ContentsFinancial Information about SegmentsWe operate only in one business segment, which is the commercialization and development of pharmaceutical products. See note 2 to our consolidatedfinancial statements included in this Annual Report on Form 10-K. For financial information regarding our business, see “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and those financial statements and related notes.Available InformationWe file electronically with the Securities and Exchange Commission, or SEC, our annual reports on Form 10-K, quarterly reports on Form 10-Q andcurrent reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. We make available on our website atwww.zogenix.com, free of charge, copies of these reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, theSEC. The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549.The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet sitethat contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that siteis http://www.sec.gov. The information in or accessible through the SEC and our website are not incorporated into, and are not considered part of, this filing.Further, our references to the URLs for these websites are intended to be inactive textual references only.Item 1A. Risk FactorsWe operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. Certain factors may have a materialadverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them. Accordingly, inevaluating our business, we encourage you to consider the following discussion of risk factors, in its entirety, in addition to other informationcontained in this Annual Report on Form 10-K and our other public filings with the Securities and Exchange Commission, or SEC. Other events thatwe do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results ofoperations.Risks Related to Our Business and IndustryWe have a history of significant net losses and negative cash flow from operations. We cannot predict if or when we will become profitable andanticipate that our net losses and negative cash flow from operations will continue for at least the next year.We were organized in 2006, began commercialization of Sumavel DosePro in January 2010 and launched the commercial sale of Zohydro ER in theUnited States on March 3, 2014. Our business and prospects must be considered in light of the risks and uncertainties frequently encountered bypharmaceutical companies commercializing new products.We have generated substantial net losses and negative cash flow from operations since our inception in 2006. For example, for the years ended December 31,2013, 2012 and 2011, we incurred net losses of $80.9 million, $47.4 million and $83.9 million, respectively, our net cash used in operating activities was$44.9 million, $52.2 million and $80.5 million, respectively, and, at December 31, 2013, our accumulated deficit was $410.2 million. We expect to continueto incur net losses and negative cash flow from operating activities for at least the next year primarily as a result of the expenses incurred in connection withour efforts to commercialize Zohydro ER, the clinical development for Relday, required post-market testing for Zohydro ER, additional development activitieswith respect to Zohydro ER, including the development of an abuse deterrent formulation of Zohydro ER, and the cost of the sales and marketing expenseassociated with Sumavel DosePro and Zohydro ER. Our ability to generate revenues from Sumavel DosePro, Zohydro ER or any of our product candidateswill depend on a number of factors including, in the case of Sumavel DosePro and Zohydro ER, the factors described in risk factors below and, in the case ofour product candidates, including Relday and an abuse deterrent formulation of Zohydro ER, our ability to successfully complete clinical trials, obtainnecessary regulatory approvals and negotiate arrangements with third parties to help finance the development of, and market and distribute, any productcandidates that receive regulatory approval. In addition, we will be subject to the risk that the marketplace will not accept our products.Because of the numerous risks and uncertainties associated with our commercialization and product development efforts, we are unable to predict theextent of our future losses or when or if we will become profitable and it is possible we will never become profitable. If we do not increase sales of SumavelDosePro or successfully commercialize Zohydro ER or any of our product candidates that may receive regulatory approval, there would likely be a materialadverse effect on our business, results of operations, financial condition and prospects and could result in our inability to continue operations.38Table of ContentsWe will require additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate ourproduct development programs or commercialization efforts.Our operations have consumed substantial amounts of cash since inception. To date, our operations have been primarily financed through the proceedsfrom the issuance of our common and preferred stock, including the proceeds from our initial public offering completed in November 2010, our follow-onpublic offerings completed in September 2011, July 2012 and November 2013, and borrowings under financing agreements. In addition, we have funded ouroperations through the proceeds from sales and issuances of our common stock pursuant to a controlled equity offering program that we established on March27, 2013 with Cantor Fitzgerald & Co., or Cantor, as sales agent, under which we issued 6.8 million shares of our common stock at an average stockissuance price of $1.66 per share, resulting in net proceeds of approximately $10.8 million. Our controlled equity offering sales agreement with Cantorterminated on November 16, 2013.Although it is difficult to predict future liquidity requirements, we believe that our cash and cash equivalents as of December 31, 2013, and ourprojected product revenues from Sumavel DosePro and Zohydro ER, will be sufficient to fund our operations through 2014. We will need to obtain additionalfunds to finance our operations beyond that point, or possibly earlier, in order to:•maintain our sales and marketing activities for Zohydro ER and Sumavel DosePro;•fund our operations and fund required post-market testing of Zohydro ER and additional development activities with respect to Zohydro ER, includingthe development of an abuse deterrent formulation of Zohydro ER, as well as further development of Relday and development of any other productcandidate to support potential regulatory approval;•commercialize any of our product candidates or any products or product candidates that we may develop, in-license or otherwise acquire, if any suchproduct candidates receive regulatory approval; and•qualify secondary sources for the manufacturing of Sumavel DosePro.In addition, our estimates of the amount of cash necessary to fund our business and development and commercialization activities may prove to bewrong, and we could spend our available financial resources much faster than we currently expect. Our future funding requirements will depend on manyfactors, including, but not limited to:•the commercial success of Sumavel DosePro and Zohydro ER;•the costs of maintaining our sales and marketing infrastructure or establishing distribution capabilities;•the timing of regulatory approval, if granted, of any product candidates and the commercial success of any approved products;•the rate of progress and cost of our clinical trials and other product development programs for Relday and our other product candidates and any otherproduct candidates that we may develop, in-license or acquire;•the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights associated with Sumavel DosePro,Zohydro ER, Relday and any of our other product candidates;•the costs and timing of completion of outsourced commercial manufacturing supply arrangements for any product candidate;•the effect of competing technological and market developments; and•the terms and timing of any additional collaborative, licensing, co-promotion or other arrangements that we may establish.In its report on our consolidated financial statements for the year ended December 31, 2013, our independent registered public accounting firm includedan explanatory paragraph expressing substantial doubt regarding our ability to continue as a going concern. A “going concern” opinion means, in general, thatour independent registered public accounting firm has substantial doubt about our ability to continue our operations without continuing infusions of capitalfrom external sources and this opinion could impair our ability to finance our operations through the sale of debt or equity securities or commercial bankloans.Until we can generate a sufficient amount of product revenue and cash flow from operations and achieve profitability, we expect to finance future cashneeds through public or private equity offerings, debt financings, receivables financings or corporate collaboration and licensing arrangements. We cannot becertain that additional funding will be available on acceptable terms, or at all. If we are unsuccessful in raising additional required funds, we may be requiredto significantly delay, reduce the scope of or eliminate one or more of our development programs or our commercialization efforts, or cease operating as a goingconcern. We also may be required to relinquish, license or otherwise dispose of rights to product candidates or products that we would otherwise seek todevelop or commercialize ourselves on terms that are less favorable than might otherwise be available. If we raise additional funds by issuing equity securities,substantial dilution to existing stockholders would result. If we raise additional funds by incurring debt financing, the terms of the debt may involvesignificant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate39Table of Contentsour business. If we are unable to maintain sufficient financial resources, including by raising additional funds when needed, our business, financial conditionand results of operations will be materially and adversely affected and we may be unable to continue as a going concern.Our independent registered public accounting firm has expressed substantial doubt as to our ability to continue as a going concern.In its report accompanying our audited consolidated financial statements for the year ended December 31, 2013, our independent registered publicaccounting firm included an explanatory paragraph stating that our recurring losses from operations and lack of sufficient working capital raise substantialdoubt as to our ability to continue as a going concern. A “going concern” opinion could impair our ability to finance our operations through the sale of debt orequity securities or commercial bank loans. Our ability to continue as a going concern will depend, in large part, on our ability to generate positive cash flowfrom operations and obtain additional financing, neither of which is certain. If we are unable to achieve these goals, our business would be jeopardized and wemay not be able to continue operations and may have to liquidate our assets and may receive less than the value at which those assets are carried on ourconsolidated financial statements, and it is likely that investors will lose all or a part of their investment.We are largely dependent on the commercial success of Sumavel DosePro and Zohydro ER, and although we have generated revenue from salesof Sumavel DosePro, we may never significantly increase these sales or become profitable.Our ability to generate revenues and become profitable will depend in large part on the commercial success of our approved products, Sumavel DoseProand Zohydro ER. We launched the commercial sale of Sumavel DosePro in the United States in January 2010 and Zohydro ER in the United States on March3, 2014. The commercial success of our products depends on several factors, including our ability to:•successfully maintain and increase market demand for, and sales of, Sumavel DosePro through our sales and marketing efforts;•successfully launch and educate prescribers on safe use initiatives for Zohydro ER through our own marketing and sales activities;•obtain greater acceptance of Sumavel DosePro by physicians and patients;•create market demand for Zohydro ER through our own marketing and sales activities, and any other arrangements to promote this product that we maylater establish;•establish and maintain adequate levels of coverage and reimbursement for Zohydro ER and Sumavel DosePro, respectively, from commercial health plansand government health programs, which we refer to collectively as third-party payors, particularly in light of the availability of other branded and genericcompetitive products;•maintain compliance with regulatory requirements;•establish and maintain agreements with wholesalers and distributors on commercially reasonable terms;•maintain commercial manufacturing arrangements with third-party manufacturers as necessary to meet commercial demand for Sumavel DosePro andZohydro ER and manufacture commercial quantities at acceptable cost levels; and•successfully maintain intellectual property protection for Sumavel DosePro and Zohydro ER.We cannot be certain that our continued marketing of Sumavel DosePro will result in increased demand for, and sales of, the product. For example, wehave at certain times experienced a reduction in total and new prescriptions month over month. If we are unable to successfully maintain and increase sales ofSumavel DosePro, or we are unable to successfully commercialize Zohydro ER, we may be unable to generate sufficient revenues to grow or sustain ourbusiness and we may never become profitable, and our business, financial condition and results of operations will be materially adversely affected.Our efforts to successfully commercialize Zohydro ER are subject to many internal and external challenges, and if we cannot overcome thesechallenges in a timely manner, our future revenues and profits could be materially and adversely impacted.As Zohydro ER is a newly marketed drug, none of the members of our sales force had ever promoted Zohydro ER prior to its launch on March 3, 2014.As a result, we are required to expend significant time and resources to train our sales force to in promoting Zohydro ER with pain specialists and othercustomers. In addition, we also must train our sales force to ensure that a consistent and appropriate message about Zohydro ER is being delivered to potentialcustomers. If we are unable to40Table of Contentseffectively train our sales force and equip them with effective materials, including medical and sales literature to help them inform and educate potentialcustomers about the benefits and risks of Zohydro ER and its proper administration, our efforts to successfully commercialize Zohydro ER could be put injeopardy, which could have a material adverse effect on our business, financial condition and results of operations.In addition to extensive internal efforts, the successful commercialization of Zohydro ER will require pain specialists and other customers, over whomwe have no control, to decide to utilize Zohydro ER. Because Zohydro ER is a new drug with no track record of sales in the United States prior to March 3,2014, any inability to timely supply Zohydro ER to our customers, or any unexpected side effects that develop from use of the drug, particularly early inproduct launch, may lead pain specialists and other customers to not accept Zohydro ER as a viable treatment alternative.If Sumavel DosePro, Zohydro ER, and, if approved, Relday, or any other product candidate for which we receive regulatory approval does notachieve broad market acceptance or coverage by third-party payors, the revenues that we generate will be limited.The commercial success of Sumavel DosePro, Zohydro ER, and, if approved, Relday, or any other product candidates for which we obtain marketingapproval from the FDA or other regulatory authorities will depend upon the acceptance of these products by physicians, patients, healthcare payors and themedical community. Coverage and reimbursement of our approved products by third-party payors are also necessary for commercial success. The degree ofmarket acceptance of Sumavel DosePro, Zohydro ER and any product candidates for which we may receive regulatory approval will depend on a number offactors, including:•our ability to provide acceptable evidence of safety and efficacy;•acceptance by physicians and patients of the product as a safe and effective treatment;•the relative convenience and ease of administration;•the prevalence and severity of adverse side effects;•limitations or warnings contained in a product’s FDA-approved labeling;•the clinical indications for which a product is approved;•in the case of Zohydro ER and product candidates that are controlled substances, the U.S. Drug Enforcement Administration, or DEA, schedulingclassification;•availability and perceived advantages of alternative treatments;•any negative publicity related to our or our competitors’ products;•the effectiveness of our or any current or future collaborators’ sales, marketing and distribution strategies;•pricing and cost effectiveness;•our ability to obtain sufficient third-party payor coverage and reimbursement; and•the willingness of patients to pay out of pocket in the absence of third-party payor coverage.For example, while we believe the needle-free nature of our DosePro technology will appeal to patients, some patients may not react favorably to thesubcutaneous delivery of drug products by DosePro. Our experience indicates that some patients will experience pain upon injection with the DoseProtechnology and/or reactions at the site of injection. Any undesirable side effects have the potential to limit market acceptance of our product candidates.In addition, products used to treat and manage pain, especially in the case of opioids like Zohydro ER, are from time to time subject to negativepublicity, including political influences, illegal use, overdoses, abuse, diversion, serious injury and death. For example, in November 2013, eight members ofCongress submitted a letter to Department of Health and Human Services Secretary, Kathleen Sebelius, urging reconsideration of the FDA approval ofZohydro ER, and in December 2013, a bipartisan coalition of attorneys general from 29 states and territories submitted a letter to FDA Commissioner,Margaret Hamburg, with the same request. While we do not believe that the FDA will revoke its Zohydro ER approval, and in any event, would have toprovide us with notice and opportunity for a hearing first, such negative publicity could negatively affect our ability to market Zohydro ER and any opioidanalgesic product candidates for which we may seek approval in the future. Moreover, as part of its own initiatives to address the safety risks associated withopioid analgesics, in September 2013, the FDA announced class-wide safety labeling changes, including required new boxed warnings, and new post-marketstudy requirements for all ER/LA opioid analgesics intended to treat pain. Because of the risks of addiction, abuse, and misuse, even at recommended doses,and because of the greater risks of overdose and death, the FDA determined that these drugs should be reserved for management of pain severe enough torequire daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. In addition, the FDA required the drugcompanies that make these drugs to conduct further studies and clinical trials to assess the known serious risks of misuse, abuse, increased sensitivity topain (hyperalgesia), addiction, overdose and death. The scope and design of these required additional studies and clinical trials are under development and therelated cost is currently unknown, which could negatively affect our business.41Table of ContentsControlled substances are classified by the DEA as Schedule I through V substances, with Schedule I substances being prohibited for sale in the UnitedStates, Schedule II substances considered to present the highest risk of abuse and Schedule V substances being considered to present the lowest relative risk ofabuse. Zohydro ER contains hydrocodone, and is regulated as a Schedule II controlled substance, and despite the strict regulations on the marketing,prescribing and dispensing of such substances, illicit use and abuse of hydrocodone is well-documented. Thus, the marketing of Zohydro ER may generatepublic controversy that may adversely affect market acceptance of Zohydro ER. Due to the concerns regarding abuse of opioids like Zohydro ER, we aredeveloping an abuse deterrent formulation of Zohydro ER.Our efforts to educate the medical community and third-party payors on the benefits of Sumavel DosePro, Zohydro ER and, if approved, Relday or anyof our other product candidates for which we obtain marketing approval from the FDA or other regulatory authorities and gain broad market acceptance mayrequire significant resources and may never be successful. If our products do not achieve an adequate level of acceptance by physicians, third-party payorsand patients, we may not generate sufficient revenue from these products to become or remain profitable.Our business and operations would suffer in the event of system failures.Despite the implementation of security measures, our internal computer systems and those of our current and any future partners, contractors andconsultants are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunicationand electrical failures. For example, we have in the past experienced failures in our information systems and computer servers, which may have been the resultof a cyber-attack. These failures resulted in an interruption of our normal business operations and required substantial expenditure of financial andadministrative resources to remedy. We cannot be sure that similar failures will not occur in the future. System failures, accidents or security breaches cancause interruptions in our operations, and can result in a material disruption of our commercialization activities, drug development programs and our businessoperations. The loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval and post-market studycompliance efforts and significantly increase our costs to recover or reproduce the data. Similarly, we rely on a large number of third parties to supplycomponents for and manufacture our products and product candidates, warehouse and distribute Sumavel DosePro and Zohydro ER, and conduct clinicaltrials, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption orsecurity breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, wecould incur liability and the commercialization of Sumavel DosePro and Zohydro ER and development of Relday or any of our other product candidates couldbe delayed.Our short operating history makes it difficult to evaluate our business and prospects.We commenced our operations on August 25, 2006. Our operations to date have been limited to organizing and staffing our company, scaling upmanufacturing operations with our third-party contract manufacturers, building a sales and marketing organization, conducting product developmentactivities for our products and product candidates, in-licensing rights to Zohydro ER and Relday, commercializing Sumavel DosePro and preparing tocommercialize Zohydro ER. In January 2010, we launched Sumavel DosePro and began generating revenues. We recently launched Zohydro ER on March 3,2014. Consequently, any predictions about our future performance may not be as accurate as they could be if we had a history of successfully developing andcommercializing pharmaceutical products.We depend on wholesale pharmaceutical distributors for retail distribution of Sumavel DosePro and Zohydro ER, and if we lose any of oursignificant wholesale pharmaceutical distributors, our business could be harmed.The majority of our sales of Sumavel DosePro and Zohydro ER are to wholesale pharmaceutical distributors who, in turn, sell the products topharmacies, hospitals and other customers. Three wholesale pharmaceutical distributors, McKesson Corporation, Cardinal Health, Inc. andAmerisourceBergen Corporation, individually comprised 30.5%, 30.3% and 16.6%, respectively, of our total gross sales of Sumavel DosePro for the yearended December 31, 2013. Sales to these wholesale pharmaceutical distributors may result in substantial fluctuations in our results of operations from periodto period and the loss of any of these wholesale pharmaceutical distributors' accounts or a material reduction in their purchases could have a material adverseeffect on our business, results of operations, financial condition and prospects.In addition, these wholesale customers comprise a significant part of the distribution network for pharmaceutical products in the United States. Thisdistribution network has undergone, and may continue to undergo, significant consolidation marked by mergers and acquisitions. As a result, a smallnumber of large wholesale distributors control a significant share of the market. Consolidation of drug wholesalers has increased, and may continue toincrease, competitive and pricing pressures on pharmaceutical products. In addition, at times, wholesaler purchases may exceed customer demand, resultingin reduced wholesaler purchases in later quarters, which may result in substantial fluctuations in our results of operations from period to42Table of Contentsperiod. We cannot assure you that we can manage these pricing pressures or that wholesaler purchases will not decrease as a result of this potential excessbuying.Our sales can be greatly affected by the inventory levels our wholesalers carry. We monitor wholesaler inventory of Sumavel DosePro and Zohydro ERusing a combination of methods. Pursuant to distribution service agreements with our three largest wholesale customers, we receive inventory level reports. Formost other wholesalers where we do not receive inventory level reports, however, our estimates of wholesaler inventories may differ significantly from actualinventory levels. Significant differences between actual and estimated inventory levels may result in excessive production (requiring us to hold substantialquantities of unsold inventory), inadequate supplies of products in distribution channels, insufficient product available at the retail level, and unexpectedincreases or decreases in orders from our wholesalers. These changes may cause our revenues to fluctuate significantly from quarter to quarter, and in somecases may cause our operating results for a particular quarter to be below our expectations or the expectations of securities analysts or investors. If our financialresults are below expectations for a particular period, the market price of our common stock may drop significantly.We face intense competition, including from generic products, and if our competitors market and/or develop treatments for migraine, pain orpsychotic disorders that are marketed more effectively, approved more quickly than our product candidates or demonstrated to be safer or moreeffective than our products, our commercial opportunities will be reduced or eliminated.The pharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary therapeutics.We face competition from a number of sources, some of which may target the same indications as our products or product candidates, including largepharmaceutical companies, smaller pharmaceutical companies, biotechnology companies, academic institutions, government agencies and private and publicresearch institutions, many of which have greater financial resources, sales and marketing capabilities, including larger, well-established sales forces,manufacturing capabilities, experience in obtaining regulatory approvals for product candidates and other resources than us. Many large, well-capitalizedcompanies offer products in the United States that compete with Sumavel DosePro. Sumavel DosePro currently competes with branded products in the triptanclass such as Imitrex and Treximet marketed by GlaxoSmithKline, or GSK, as well as six other branded triptan therapies being sold by AstraZeneca plc,Endo Pharmaceuticals Holdings Inc., Johnson & Johnson, Merck & Co., Inc., and Pfizer Inc. In addition to those migraine therapeutics, there are othermarketed non-triptan migraine therapeutics such as Cambia sold by DepoMed, Inc. In addition, Allergan, Inc., is now marketing BOTOX botulinum toxinfor the treatment of chronic migraine. We also face competition from generic sumatriptan oral tablets and sumatriptan injection, now marketed in the UnitedStates as an authorized generic of the Imitrex STATdose System, or Imitrex STATdose, by Par Pharmaceutical Companies, Inc. In addition, in June 2010, theFDA approved Alsuma (sumatriptan injection), a needle-based autoinjector which was developed and is manufactured and marketed by Pfizer and itssubsidiary, Meridian Medical Technologies. Finally, generic injectable sumatriptan in the form of vials and prefilled syringes is available from a number ofpharmaceutical companies, and most recently, the FDA granted approval for a needle-based generic sumatriptan auto-injector from Sun PharmaceuticalIndustries Limited in June 2011 and from Dr. Reddy's Laboratories Ltd. in January 2014. Although these products may not be directly substituted forSumavel DosePro, generic versions of sumatriptan injection and alternative autoinjector forms of sumatriptan injection may reduce the future adoption ofSumavel DosePro by third-party payors and consumers, as financial pressure to use generic products may encourage the use of a generic product overSumavel DosePro. Sumavel DosePro is currently more expensive on a per dose basis than most of the competing branded and all of the generic triptanproducts for migraine, which may also limit the coverage and reimbursement by third-party payors, which could adversely affect adoption by physicians andpatients.Zohydro ER competes against other marketed branded and generic pain therapeutics. Opioid therapeutics generally fall into two classes: codeines,which include oxycodones and hydrocodones, and morphines. Zohydro ER is a hydrocodone, the most commonly prescribed opioid in the United States,and Zohydro ER competes with therapeutics within both the codeine and morphine classes. These therapeutics include both Schedule II and Schedule IIIproducts (meaning that they are considered controlled substances by the DEA) being marketed by companies such as Endo Pharmaceuticals Holdings Inc.,Johnson & Johnson, Mallinckrodt Inc., Pfizer, Purdue Pharma L.P., Teva Pharmaceutical Industries Limited and Actavis, Inc. On February 27, 2014, theDEA issued a notice of proposed rulemaking to reschedule hydrocodone combination products from Schedule III to Schedule II, but we cannot predict thetimeframe in which the rule may become final and when, if ever, these products will be required to comply with Schedule II requirements. Zohydro ER isalready a Schedule II product.In addition to already marketed therapeutics, we also face competition from product candidates that are or could be under development by many of theabove-mentioned entities and others. For example, there are several products for the treatment of migraine under development by large pharmaceuticalcompanies such as GSK, Merck & Co. and Avanir Pharmaceuticals, Inc. In addition, Teva Pharmaceuticals Industries Limited intends to launch its migrainepatch, Zecuity, in 2014. Zohydro ER will also compete with a significant number of opioid product candidates under development, including abuse deterrentand tamper resistant formulations of currently available opioids, novel opioids and alternative delivery forms of various opioids under43Table of Contentsdevelopment at other pharmaceutical companies, including single-entity extended-release hydrocodone product candidates, which include abuse deterrent andtamper resistant formulations, being developed by Egalet A/S, Pfizer, Purdue Pharma L.P. and Teva Pharmaceutical Industries Limited. Zohydro ER may alsoface competition from non-opioid product candidates including new chemical entities, as well as alternative delivery forms of non-steroidal anti-inflammatorydrugs. These new opioid and non-opioid product candidates are being developed by companies such as Acura Pharmaceuticals, Inc., CollegiumPharmaceutical, Inc., Eli Lilly and Company, Elite Pharmaceuticals, Inc., Hospira Inc., Inspirion Delivery Technologies, LLC, IntellipharmaceuticsInternational, Inc., Nektar Therapeutics, Pfizer and QRxPharma Ltd.If approved for the treatment of schizophrenia, we anticipate that Relday will compete against other marketed, branded and generic, typical and atypicalantipsychotics, including both long-acting injectable and oral products. Currently marketed long-acting injectable atypical antipsychotic products includeRisperdal Consta, and Invega Sustenna marketed by Johnson & Johnson, Zyprexa Relprevv marketed by Eli Lilly & Company, and Abilify Maintena(apripiprazole) marketed by Otsuka Pharmaceutical Co., Ltd. and H. Lundbeck A/S. Currently approved and marketed oral atypical antipsychotics includeRisperdal (risperidone) and Invega (paliperidone) marketed by Johnson & Johnson, generic risperidone, Zyprexa (olanzapine) marketed by Eli Lilly andCompany, Seroquel (quetiapine) marketed by AstraZeneca plc, Abilify (aripiprazole) marketed by BMS/Otsuka Pharmaceutical Co., Ltd., Geodon(ziprasidone) marketed by Pfizer, Fanapt (iloperidone) marketed by Novartis AG, Saphris (asenapine) marketed by Merck & Co., Latuda (lurasidone)marketed by Dainippon Sumitomo Pharma, and generic clozapine. Finally, in addition to these currently marketed products, we may also face competitionfrom additional long-acting injectable product candidates that could be developed by the large companies listed above, as well and by other pharmaceuticalcompanies such as Alkermes, Endo Health Solutions Inc., Laboratorios Farmaceuticos Rovi SA, Novartis AG, and Reckitt Benckiser Group plc, each ofwhich has announced they are developing long-acting antipsychotic product candidates.We expect Sumavel DosePro, Zohydro ER and, if approved, Relday and any of our other product candidates to compete on the basis of, among otherthings, product efficacy and safety, time to market, price, patient reimbursement by third-party payors, extent of adverse side effects and convenience oftreatment procedures. One or more of our competitors may develop needle-free injectable products, products to address chronic pain or other products thatcompete with ours, obtain necessary approvals for such products from the FDA, or other agencies, if required, more rapidly than us or develop alternativeproducts or therapies that are safer, more effective and/or more cost effective than any products developed by us. The competition that we will encounter withrespect to Zohydro ER and any of our product candidates that receive the requisite regulatory approval and classification and are marketed will have, and thecompetition we are currently encountering with our Sumavel DosePro product has had and will continue to have, an effect on our product prices, market shareand results of operations. We may not be able to differentiate any products that we are able to market from those of our competitors, successfully develop orintroduce new products that are less costly or offer better results than those of our competitors, or offer purchasers of our products payment and othercommercial terms as favorable as those offered by our competitors.In addition, competitors may seek to develop alternative formulations of our product candidates and/or alternative drug delivery technologies thataddress our targeted indications. The commercial opportunity for Sumavel DosePro, Zohydro ER and our product candidates could be significantly harmed ifcompetitors are able to develop alternative formulations and/or drug delivery technologies outside the scope of our products. Compared to us, many of ourpotential competitors have substantially greater:•capital resources;•research and development resources and experience, including personnel and technology;•drug development, clinical trial and regulatory resources and experience•sales and marketing resources and experience;•manufacturing and distribution resources and experience;•name recognition; and•resources, experience and expertise in prosecution and enforcement of intellectual property rights.As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than we are able to or may obtain patentprotection or other intellectual property rights that limit or block us from developing or commercializing our product candidates. Our competitors may alsodevelop drugs that are more effective, more useful, better tolerated, subject to fewer or less severe side effects, more widely prescribed or accepted or less costlythan ours and may also be more successful than us in manufacturing and marketing their products. If we are unable to compete effectively with the marketedtherapeutics of our competitors or if such competitors are successful in developing products that compete with Sumavel DosePro, Zohydro ER or any of ourproduct candidates that are approved, our business, results of operations, financial condition and prospects may be materially adversely affected.44Table of ContentsWe have been granted three-year Hatch-Waxman exclusivity for Zohydro ER, but can offer no assurance that such exclusivity will effectivelyprevent or otherwise limit competition from other hydrocodone products, either generic or otherwise.In addition to patent protection, we will rely, in part, on Hatch-Waxman marketing exclusivity for the commercialization of Zohydro ER in the UnitedStates. Under the Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Amendments, newly approved drugs maybenefit from certain statutory periods of non-patent marketing exclusivity in the United States. Exclusivity provides the holder of an approved applicationlimited protection from new competition in the marketplace for the innovation represented by its approved drug product.A three-year period of exclusivity is available for a drug product that contains an active ingredient that has been previously approved and the applicationcontains reports of new clinical investigations (other than bioavailability studies) conducted or sponsored by the applicant that were essential to approval of theapplication. Changes to an approved drug product that may qualify for this exclusivity include changes that affect the product’s active ingredient(s), strength,dosage form, route of administration, or conditions of use, so long as clinical investigations were essential to approval of the application containing thosechanges. The exclusivity prevents FDA from approving other applications for the same change for three years from the date of the new product’s approval.While Zohydro ER has been granted three-year Hatch-Waxman exclusivity as the first single-entity hydrocodone product approved for the treatment ofchronic pain on the basis of a comprehensive Phase 3 safety and efficacy program, there can be no assurance that such exclusivity will effectively prevent orotherwise limit competition from other hydrocodone products, either generic or otherwise. Such competition by other hydrocodone products, including other505(b)(2) applications for different conditions of use or other changes to the hydrocodone products that would not be restricted by the three-year exclusivity,could have a significantly negative impact on our future revenues from Zohydro ER.We are dependent on numerous third parties in our supply chain, all of which are currently single source suppliers, for the commercial supply ofSumavel DosePro and Zohydro ER and for the clinical supply of Relday, and if we experience problems with any of these suppliers, themanufacturing of Sumavel DosePro, Zohydro ER and Relday could be delayed.While we own most of the specialized equipment used to manufacture critical components of Sumavel DosePro, we do not own or operate manufacturingfacilities and currently lack the in-house capability to manufacture Sumavel DosePro, Zohydro ER, Relday or any other product candidates. Our DoseProsystem and Sumavel DosePro are manufactured by contract manufacturers, component fabricators and secondary service providers. Aseptic fill, finish,assembly and packaging of Sumavel DosePro are performed at Patheon UK Limited, Swindon, United Kingdom, or Patheon, a specialist in the asepticfill/finish of injectables and other sterile pharmaceutical products. In May 2012, Patheon announced plans to wind down or transfer its commercial productioncapacity for a number of products at this facility over a period of 24 to 36 months. We have identified alternative suppliers for these services and are currentlyworking on a plan to transfer the manufacturing processes that are presently handled by Patheon to a new supplier in advance of the expected closure date ofthe Swindon, United Kingdom facility. In addition, Nypro Limited, located in Bray, Ireland, manufactures the actuator assemblies and injection moldedcomponents for our DosePro system and Nipro Glass, Germany AG (formerly MGlas AG), located in Münnerstadt, Germany, manufactures the specializedglass capsule (cartridge) that houses the sumatriptan active pharmaceutical ingredient, or API, in our DosePro system. Each of these manufacturers and eachother company that supplies, fabricates or manufactures any component used in our DosePro system is currently the only qualified source of their respectivecomponents. We currently rely on Dr. Reddy's Laboratories as the only supplier of sumatriptan API for use in Sumavel DosePro. An affiliate of Alkermes,Alkermes Pharma Ireland Limited, or APIL, is the exclusive manufacturer and supplier (subject to certain exceptions) for Zohydro ER. We also outsource allmanufacturing and packaging of the clinical trial materials for Relday to third parties.Although we plan to qualify additional manufacturers and suppliers of some of the components used in Sumavel DosePro, there can be no assurancethat we will be able to do so and the current manufacturers and suppliers of these components will likely be single source suppliers to us for a significantperiod of time. Similarly, APIL is the exclusive manufacturer of Zohydro ER and Durect is the exclusive manufacturer of the risperidone formulation usingDurect's SABER™ controlled-release technology for all Relday clinical trials through Phase 2 and has the option to supply the same formulation for Phase 3clinical trials and, if approved, commercial production. We have restrictions on establishing a second source of supply under our agreement with APIL, andwe may never be able to establish additional sources of supply for Zohydro ER or Relday's risperidone formulation.Manufacturers and suppliers are subject to regulatory requirements covering, among other things, manufacturing, testing, quality control and recordkeeping relating to our products and product candidates, and are subject to ongoing inspections by regulatory agencies. Failure by any of our manufacturers orsuppliers to comply with applicable regulations may result in long delays and interruptions to our manufacturing supply, and increase our costs, while weseek to secure another supplier who45Table of Contentsmeets all regulatory requirements, including obtaining regulatory approval to utilize the new manufacturer or supplier. Accordingly, the loss of any of ourcurrent third-party manufacturers or suppliers could have a material adverse effect on our business, results of operations, financial condition and prospects.Reliance on third-party manufacturers and suppliers entails risks to which we would not be subject if we manufactured Sumavel DosePro, Zohydro ERor our product candidates ourselves, including:•reliance on the third parties for regulatory compliance and quality assurance;•the possible breach of the manufacturing agreements by the third parties because of factors beyond our control or the insolvency of any of these thirdparties or other financial difficulties, labor unrest, natural disasters or other factors adversely affecting their ability to conduct their business; and•the possibility of termination or non-renewal of the agreements by the third parties, at a time that is costly or inconvenient for us, because of our breach ofthe manufacturing agreement or based on their own business priorities.Production capacity to support launch and initial forecast demand for Zohydro ER is installed and has received final packaging qualification. In orderto meet future anticipated growth in demand for Zohydro ER, APIL has initiated activities to qualify additional production lines and expand the manufacturingcapacity for Zohydro ER. However, if APIL or our other contract manufacturers or suppliers are unable to deliver the required commercial quantities of ourproducts and their various components, the quantities of our product candidates required for our clinical trials and, if approved, for commercial sale, on atimely basis and at commercially reasonable prices, and we are unable to find one or more replacement manufacturers or suppliers capable of production at asubstantially equivalent cost, in substantially equivalent volumes and quality, and on a timely basis, we would likely be unable to meet demand for ourproducts and would have to delay or terminate our pre-clinical or clinical trials, and we would lose potential revenue. It may also take a significant period oftime to establish an alternative source of supply for our products, product candidates and components and to have any such new source approved by the FDAor any applicable foreign regulatory authorities. Furthermore, any of the above factors could cause the delay or suspension of initiation or completion ofclinical trials, regulatory submissions or required approvals of our product candidates, cause us to incur higher costs and could prevent us fromcommercializing our product candidates successfully.We may encounter delays in the manufacturing of Sumavel DosePro or fail to generate revenue if our supply of the components of our DoseProdrug delivery system is interrupted.Our DosePro drug delivery system is sourced, manufactured and assembled by multiple third parties across different geographic locations in Europe,including the United Kingdom, Germany and Ireland. All contract manufacturers and component suppliers have been selected for their specific competenciesin the manufacturing processes and materials that make up the DosePro system. The components of DosePro include the actuator subassembly, capsulesubassembly, and the setting mechanism. The actuator subassembly is comprised of nine individual components which are collectively supplied by sixdifferent third-party manufacturers. The capsule subassembly that houses the sterile drug formulation sumatriptan is comprised of five different componentsalso supplied by four third-party manufacturers. Each of these third-party manufacturers is currently the single source of their respective components. If anyof these manufacturers is unable to supply its respective component for any reason, including due to violations of the FDA’s Quality System Regulation, orQSR, requirements, our ability to manufacture the finished DosePro system will be adversely affected and our ability to meet the distribution requirements forany product sales of Sumavel DosePro and the resulting revenue therefrom will be negatively affected. Accordingly, there can be no assurance that any failurein any part of our supply chain will not have a material adverse effect on our ability to generate revenue from Sumavel DosePro, which in turn could have amaterial adverse effect on our business, results of operations, financial condition and prospects.We rely on third parties to perform many necessary services for our commercial products, including services related to the distribution, invoicing,storage and transportation of our products, as well as the performance of services to support our safe use initiatives for Zohydro ER.We have retained third-party service providers to perform a variety of functions related to the sale and distribution of our products, key aspects of whichare out of our direct control. For example, we rely on Cardinal Health 105, Inc. (a/k/a Specialty Pharmaceutical Services) to provide key services related tologistics, warehousing and inventory management, distribution, contract administration and chargeback processing, accounts receivable management and callcenter management, and, as a result, most of our inventory is stored at a single warehouse maintained by the service provider. We also rely on GENCO andInmar Inc. to process our product returns. We place substantial reliance on these providers as well as other third-party providers that perform services for us,including entrusting our inventories of products to their care and handling. If these third-party service providers are unable to comply with applicable laws andregulations, are unable to meet expected deadlines, or otherwise do not carry out their contractual duties to us, or encounter physical damage or natural disasterat their facilities, our ability to deliver product to meet commercial demand would be significantly impaired.46Table of ContentsIn addition, we utilize other third parties to perform various other services for us relating to drug safety monitoring and surveillance, sampleaccountability and regulatory monitoring, including adverse event reporting, education regarding the safe use of our products, safety database managementand other product maintenance services. If the quality or accuracy of the data maintained by these service providers is insufficient, our ability to continue tomarket our products could be jeopardized or we could be subject to regulatory sanctions. We do not currently have the internal capacity to perform theseimportant commercial functions, and we may not be able to maintain commercial arrangements for these services on reasonable terms.We have increased the size of our organization, and we may experience difficulties in managing and financing such growth.We recently expanded our managerial, operational and other resources in order to grow, manage and fund our existing business and support thecommercialization of Zohydro ER. We expanded resources for all commercial functions to approximately 190 employees prior to launch, including salesmarketing, managed markets, commercial analytics and trade teams. Our management, systems and facilities currently in place may not be adequate tosupport this and any additional future growth, and we may be unable to fund the costs and expenses required to increase our necessary headcount andinfrastructure. Our need to effectively manage our operations, any additional future growth and various projects requires that we:•manage our internal and external commercialization efforts for Sumavel DosePro and Zohydro ER effectively while carrying out our contractualobligations to third parties and complying with all applicable laws, rules and regulations;•manage our internal development efforts for Relday and our other product candidates effectively while carrying out our contractual obligations tolicensors, collaborators and other third parties and complying with all applicable laws, rules and regulations;•continue to improve our operational, financial and management controls, reporting systems and procedures; and•attract and retain sufficient numbers of talented employees.We may be unable to successfully implement or fund these tasks on a larger scale and, accordingly, may not achieve our commercialization anddevelopment goals. In addition, our management may have to divert a disproportionate amount of its attention away from day-to-day activities and towardsmanaging these growth-related activities. Our future financial performance and our ability to execute on our business plan will depend, in part, on our abilityto effectively manage any future growth and our inability to effectively manage any growth could have a material adverse effect on our business, results ofoperations, financial condition and prospects.If we are unable to attract and retain key personnel, we may not be able to manage our business effectively or develop our product candidates orcommercialize our products.Our success depends on our continued ability to attract, retain and motivate highly qualified management and key clinical development, regulatory, salesand marketing and other personnel. In May 2013, we commenced a restructuring of our workforce, resulting in a reduction in force of approximately 37%, or55 employees, across all functional areas of our company. We took this step as part of our initiative to extend our cash runway to reach key businessmilestones that occurred over the last half of 2013, which included the approval of our NDA for Zohydro ER in October 2013. In June 2013, we implementeda company-wide retention program pursuant to which restricted stock units were granted to our executives and all other full time personnel. As of June 30,2013, we employed approximately 105 full-time employees.Prior to the launch of Zohydro ER on March 3, 2014, we expanded our resources across all functional areas of the company to employ approximately235 full-time employees. This expansion focused on increasing our commercial functions to approximately 190 professionals, including sales, marketing,managed markets, commercial analytics and trade teams. This expansion included an increase in our field sales personnel to approximately 165 employees tosupport broader reach to pain specialists. If we are not able to retain our expanded employee base, we may not be able to effectively manage our business or besuccessful in commercializing our products.We are highly dependent on the development, regulatory, commercial and financial expertise of our senior management team. We may not be able toattract or retain qualified management and scientific and clinical personnel in the future due to the intense competition for qualified personnel amongbiotechnology, pharmaceutical and other businesses, particularly in the areas in Southern and Northern California, where we currently operate. Our industryhas experienced a high rate of turnover of management personnel in recent years. If we are not able to attract, retain and motivate necessary personnel toaccomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development and commercializationobjectives, our ability to raise additional capital, our ability to implement our business strategy and our ability to maintain effective internal controls forfinancial reporting and disclosure controls and procedures as required by the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. The loss of the servicesof any members of our senior management team, especially our Chief Executive Officer, Roger L. Hawley, and President, Stephen J. Farr, Ph.D., couldnegatively impact the commercialization of Sumavel DosePro and Zohydro ER and could delay or prevent the development and commercialization of any ofour product candidates, including Relday. Further, if we lose any members of our senior47Table of Contentsmanagement team, we may not be able to find suitable replacements, and our business may be harmed as a result. In addition to the competition for personnel,our locations in California in particular are characterized by a high cost of living. As such, we could have difficulty attracting experienced personnel to ourcompany and may be required to expend significant financial resources in our employee recruitment and retention efforts.Although we have employment agreements with each of our executive officers, these agreements are terminable by them at will at any time with or withoutnotice and, therefore, do not provide any assurance that we will be able to retain their services. We do not maintain “key man” insurance policies on the livesof our senior management team or the lives of any of our other employees. In addition, we have clinical advisors who assist us in formulating our clinicalstrategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit theiravailability to us, or may have arrangements with other companies to assist in the development of products that may compete with ours. If we are unable toattract and retain key personnel, our business, results of operations, financial condition and prospects will be adversely affected.Our product candidates are subject to extensive regulation, and we cannot give any assurance that Relday or any of our other product candidateswill receive regulatory approval or be successfully commercialized.We currently are developing Relday for the treatment of the symptoms of schizophrenia as well an abuse deterrent formulation of Zohydro ER. Theresearch, testing, manufacturing, labeling, approval, sale, marketing and distribution of drug products, among other things, are subject to extensive regulationby the FDA and other regulatory authorities in the United States. We are not permitted to market Relday or any of our other product candidates in the UnitedStates unless and until we receive regulatory approval from the FDA. We cannot provide any assurance that we will obtain regulatory approval for Relday orany of our other product candidates, or that any such product candidates will be successfully commercialized.Under the policies agreed to by the FDA under the Prescription Drug User Fee Act, or PDUFA, as renewed in 2012 by the Food and DrugAdministration Safety and Innovation Act, or FDASIA, the FDA is subject to a two-tiered system of review times for new drugs - Standard Review andPriority Review. For drugs subject to standard review that do not contain a new molecular entity, such as Relday, the FDA has a goal to complete its review ofthe NDA and respond to the applicant within ten months from the date of receipt of an NDA. The review process and the PDUFA target action date may beextended if the FDA requests or the NDA sponsor otherwise provides additional information or clarification regarding information already provided in thesubmission. The FDA's review goals are subject to change, and the duration of the FDA's review may depend on the number and type of other NDAs that aresubmitted to the FDA around the same time period. For example, in February 2013, the FDA informed us that we were unlikely to receive an action letter forour NDA for Zohydro ER by the PDUFA target action date of March 1, 2013. Subsequently, we did not receive NDA approval until October 25, 2013.The FDA may also refer applications for novel products or products which present difficult questions of safety or efficacy to an advisory committee,typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved.Although the FDA is not bound by the recommendation of an advisory committee, the matters discussed at the advisory committee meeting, and in particularany concerns regarding safety, could limit our ability to successfully commercialize our product candidates subject to advisory committee review.As part of its review of an NDA, the FDA may inspect the facility or facilities where the drug is manufactured. If the FDA's evaluations of the NDAand the clinical and manufacturing procedures and facilities are favorable, the FDA will issue an action letter, which will be either an approval letter,authorizing commercial marketing of the drug for a specified indication, or a Complete Response Letter, or CRL, containing the conditions that must be met inorder to secure approval of the NDA. These conditions may include deficiencies identified in connection with the FDA's evaluation of the NDA submission orthe clinical and manufacturing procedures and facilities. Until any such conditions or deficiencies have been resolved, the FDA may refuse to approve theNDA. If and when those conditions have been met to the FDA's satisfaction, the FDA will issue an approval letter. The FDA has substantial discretion in thedrug approval process, including the ability to delay, limit or deny approval of a product candidate for many reasons. For example:•the FDA may not deem a product candidate safe and effective;•the FDA may not find the data from pre-clinical studies and clinical trials sufficient to support approval;•the FDA may require additional pre-clinical studies or clinical trials;•the FDA may not approve of our third-party manufacturers' processes and facilities; or•the FDA may change its approval policies or adopt new regulations.Product candidates such as Relday may not be approved even if they achieve their specified endpoints in clinical trials. The FDA may disagree withour trial design and our interpretation of data from clinical trials, or may change the requirements for approval even after it has reviewed and commented onthe design for our clinical trials. The FDA may also approve a product candidate for fewer or more limited indications than we request, or may grant approvalcontingent on the performance48Table of Contentsof costly post-approval clinical trials. In addition, the FDA may not approve the labeling claims that we believe are necessary or desirable for the successfulcommercialization of our product candidates. Approval may be contingent on a Risk Evaluation and Mitigation Strategy, or REMS, which limits the labeling,distribution or promotion of a drug product. For example, the approval of our NDA for Zohydro ER was associated with post-market study and REMSrequirements due to the risks of misuse, abuse, addiction, overdose and death associated with the active ingredient hydrocodone.Relday and any of our other product candidates may not achieve their specified endpoints in clinical trials. We initiated a Phase 1 safety andpharmacokinetic clinical trial for Relday in July 2012 and announced positive single-dose pharmacokinetic results from this trial in January 2013. Based onthe favorable safety and pharmacokinetic profile demonstrated with the 25 mg and 50 mg once-monthly doses tested in the Phase 1 trial, we extended thestudy to include an additional cohort of 10 patients at a 100 mg dose of the same formulation and announced positive top-line results from the extended Phase 1clinical trial in May 2013. The positive results from this study extension position us to begin a multi-dose clinical trial, which would provide the requiredsteady-state pharmacokinetic and safety data prior to initiating Phase 3 development studies. We plan to commence this multi-dose clinical trial in the secondhalf of 2014.If we are unable to obtain regulatory approval for Relday, an abuse deterrent formulation of Zohydro ER or any other product candidates on the timelinewe anticipate, we may not be able to execute our business strategy effectively and our ability to generate additional revenues beyond Sumavel DosePro andZohydro ER may be limited.Our clinical trials may fail to demonstrate acceptable levels of safety and efficacy for Relday or any of our other product candidates, which couldprevent or significantly delay their regulatory approval.Relday and any of our other product candidates are prone to the risks of failure inherent in drug development. Before obtaining U.S. regulatory approvalfor the commercial sale of Relday or any other product candidate, we must gather substantial evidence from well-controlled clinical trials that demonstrate tothe satisfaction of the FDA that the product candidate is safe and effective, and similar regulatory approvals would be necessary to commercialize our productcandidates in other countries.In light of widely publicized events concerning the safety risk of certain drug products, particularly opioid drug products, regulatory authorities,members of Congress, the Government Accountability Office, medical professionals and the general public have raised concerns about potential drug safetyissues. These events have resulted in the withdrawal of drug products, revisions to drug labeling that further limit use of the drug products and establishmentof risk management programs that may, for instance, restrict distribution of drug products after approval. For example, in November 2013, eight members ofCongress submitted a letter to Department of Health and Human Services Secretary, Kathleen Sebelius, urging reconsideration of the FDA approval ofZohydro ER, and in December 2013, a bipartisan coalition of attorneys general from 29 states and territories submitted a letter to FDA Commissioner,Margaret Hamburg, with the same request. We do not believe that the FDA will revoke its Zohydro ER approval, and in any event, would have to provide uswith notice and opportunity for a hearing first. In addition, recent amendments to the FFDCA over the past several years have granted significant expandedauthority to the FDA, much of which is aimed at improving the safety of drug products before and after approval. In particular, the FFDCA authorizes theFDA to, among other things, require post-approval studies and clinical trials, mandate changes to drug labeling to reflect new safety information and require aREMS for certain drugs, including certain currently approved drugs. Under the FFDCA, companies that violate these and other provisions of the law aresubject to substantial civil monetary penalties, among other regulatory, civil and criminal penalties.The increased attention to drug safety issues may result in a more cautious approach by the FDA in its review of our clinical trials. Data from clinicaltrials may receive greater scrutiny with respect to safety, which may make the FDA or other regulatory authorities more likely to terminate clinical trials beforecompletion, or require longer or additional clinical trials that may result in a delay or failure in obtaining approval or approval for a more limited indicationthan originally sought. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinicaltrials, even after promising results in earlier trials. If Relday or any of our other product candidates are not shown to be safe and effective in clinical trials, theprograms could be delayed or terminated, which could have a material adverse effect on our business, results of operations, financial condition and prospects.Delays in the commencement or completion of clinical testing for Relday or pre-clinical or clinical testing for any of our other product candidatescould result in increased costs to us and delay or limit our ability to pursue regulatory approval for, or generate revenues from, such productcandidates.Clinical trials are very expensive, time consuming and difficult to design and implement. Delays in the commencement or completion of clinical testingfor Relday or pre-clinical or clinical testing for any of our other product candidates could significantly affect our product development costs and businessplan. We initiated clinical testing for Relday in patients with schizophrenia in July 2012 and announced positive single-dose pharmacokinetic results from thePhase 1 clinical trial in49Table of ContentsJanuary 2013. Based on the favorable safety and pharmacokinetic profile demonstrated in the Phase 1 trial, we extended the study to include an additionaldose of the same formulation and announced positive top-line results in May 2013. The positive results from this study extension position us to begin a multi-dose clinical trial, which will provide the required steady-state pharmacokinetic and safety data prior to initiating Phase 3 development studies. We plan tocommence this multi-dose clinical trial in the second half of 2014. We do not know whether any of our other pre-clinical or clinical trials will begin on time orbe completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to:•obtaining regulatory authorization to commence a clinical trial;•reaching agreement on acceptable terms with prospective clinical research organizations, or CROs, clinical investigators and trial sites, the terms of whichcan be subject to extensive negotiation and may vary significantly among different CROs, clinical investigators and trial sites;•manufacturing or obtaining sufficient quantities of a product candidate for use in clinical trials;•obtaining institutional review board, or IRB, approval to initiate and conduct a clinical trial at a prospective site;•identifying, recruiting and training suitable clinical investigators;•identifying, recruiting and enrolling subjects to participate in clinical trials for a variety of reasons, including competition from other clinical trialprograms for the treatment of similar indications;•retaining patients who have initiated a clinical trial but may be prone to withdraw due to side effects from the therapy, lack of efficacy, personal issues, orfor any other reason they choose, or who are lost to further follow-up;•uncertainty regarding proper dosing; and•scheduling conflicts with participating clinicians and clinical institutions.In addition, if a significant number of patients fail to stay enrolled in any of our current or future clinical trials of Relday or any of our other productcandidates and such failure is not adequately accounted for in our trial design and enrollment assumptions, our clinical development program could bedelayed. Clinical trials may also be delayed or repeated as a result of ambiguous or negative interim results or unforeseen complications in testing. In addition,a clinical trial may be suspended or terminated by us, the FDA, the IRB overseeing the clinical trial at issue, any of our clinical trial sites with respect to thatsite, or other regulatory authorities due to a number of factors, including:•inability to design appropriate clinical trial protocols;•inability by us, our employees, our CROs or their employees to conduct the clinical trial in accordance with all applicable FDA, DEA or other regulatoryrequirements or our clinical protocols;•inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;•discovery of serious or unexpected toxicities or side effects experienced by study participants or other unforeseen safety issues;•lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conductadditional trials and studies and increased expenses associated with the services of our CROs and other third parties;•lack of effectiveness of any product candidate during clinical trials;•slower than expected rates of subject recruitment and enrollment rates in clinical trials;•inability of our CROs or other third-party contractors to comply with all contractual requirements or to perform their services in a timely or acceptablemanner;•inability or unwillingness of medical investigators to follow our clinical protocols; and•unfavorable results from on-going clinical trials and pre-clinical studies.Additionally, changes in applicable regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect thesechanges. Amendments may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successfulcompletion of a clinical trial. If we experience delays in completion of, or if we terminate, any of our clinical trials, the commercial prospects for Relday andour other product candidates may be harmed, which may have a material adverse effect on our business, results of operations, financial condition andprospects.We rely on third parties to conduct our pre-clinical and clinical trials. If these third parties do not successfully carry out their contractual duties ormeet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could besubstantially harmed.We conducted prior clinical trials under agreements with third-party CROs, and we anticipate that we may enter into agreements with third-party CROsin the future regarding Relday or any of our other product candidates. We rely heavily on these parties for the execution of our clinical and pre-clinical studies,and control only certain aspects of their activities.50Table of ContentsNevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol and regulatory requirements. Weand our CROs are required to comply with current good clinical practices, or GCP. The FDA enforces these GCP regulations through periodic inspections oftrial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable GCP regulations, the data generated in our clinical trialsmay be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our marketing applications. We cannot assure youthat, upon inspection, the FDA and similar foreign regulators will determine that any of our clinical trials comply or complied with GCP regulations. Inaddition, our clinical trials must be conducted with product produced under current good manufacturing practices, or cGMP, regulations, and require a largenumber of test subjects. Our inability to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approvalprocess.If any of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs on commerciallyreasonable terms, or at all. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replacedor if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements orfor other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfullycommercialize our product candidates. As a result, our results of operations and the commercial prospects for our product candidates would be harmed, ourcosts could increase and our ability to generate additional revenues could be delayed.Switching or adding additional CROs can involve substantial cost and require extensive management time and focus. In addition, there is a naturaltransition period when a new CRO commences work. As a result, delays may occur, which can materially impact our ability to meet our desired clinicaldevelopment timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter similar challengesor delays in the future or that these delays or challenges will not have a material adverse impact on our business, results of operations, financial condition andprospects.The implementation of a REMS for Zohydro ER has resulted in additional regulatory requirements, including the requirement for a MedicationGuide and educational requirements for prescribers and patients, which could significantly impact our ability to commercialize Zohydro ER anddramatically reduce its market potential.The Food and Drug Administration Amendments Act, or FDAAA, added Section 505-1 to the FFDCA. Section 505-1 permits FDA to require a REMSfor a drug product to ensure the safe use of the drug. A REMS is a strategic safety program that the FDA requires to ensure that the benefits of a drug outweighits risks. In determining whether a REMS is necessary, the FDA will consider the size of the population likely to use the drug, the seriousness of the disease orcondition to be treated, the expected benefit of the drug, the duration of treatment, the seriousness of known or potential adverse events, and whether the drug isa new molecular entity. If the FDA determines a REMS is necessary, the drug sponsor must agree to the REMS plan at the time of approval. A REMS may berequired to include various elements, such as a medication guide or patient package insert, a communication plan to educate health care providers of the drug'srisks, limitations on who may prescribe or dispense the drug, requirements that patients enroll in a registry or undergo certain health evaluations or othermeasures that the FDA deems necessary to assure the safe use of the drug. In addition, the REMS must include a timetable to assess the strategy minimally at18 months, three years and seven years after the strategy's approval.In February 2009, the FDA informed opioid analgesic drug manufacturers that it would require a class-wide REMS for all long-acting and sustained-release opioid drug products, and as an extended release formulation of hydrocodone, Zohydro ER became subject to the ER/LA opioid REMS upon approval.Pursuant to the FFDCA, the manufacturers subject to this class-wide REMS must work together to implement the REMS as part of a single shared system toreduce the burden of the REMS on the healthcare system. The central component of the ER/LA opioid REMS program is an education program for prescribersand patients. Specifically, the REMS for these products includes a Medication Guide available for distribution to patients who are dispensed the drug, as wellas a number of elements to assure safe use. These elements include training for healthcare professionals who prescribe the drug; information provided toprescribers that they can use to educate patients in the safe use, storage, and disposal of opioids; and information provided to prescribers of the existence of theREMS and the need to successfully complete the necessary training. The prescriber training required as part of the REMS is conducted by accredited,independent continuing education providers, without cost to the healthcare professionals, under unrestricted grants funded by the opioid analgesicmanufacturers. Moreover, REMS assessments must be submitted to the FDA on an annual basis to assess the extent to which the elements to assure safe useare meeting the goals of the REMS and whether the goals or elements should be modified.In addition to the REMS, on September 10, 2013 the FDA announced post-marketing requirements for all ER/LA opioid analgesic NDA holders, whichwe are required to comply with. We are currently participating with eight other NDA holders to address these post-marketing requirements. These requirementsand the REMS could significantly impact our ability to commercialize Zohydro ER and dramatically reduce its market potential.51Table of ContentsOur inability to successfully establish new partnerships with pharmaceutical companies or contract sales organizations to co-promote SumavelDosePro, Zohydro ER and any additional product candidates that may receive regulatory approval may impair our ability to effectively market andsell such product candidates.Major pharmaceutical companies usually employ groups of sales representatives numbering in the thousands to call on the large number of primary carephysicians. In connection with the launch of Sumavel DosePro in January 2010, we built a sales and marketing organization to promote Sumavel DosePro inthe United States, including a focused sales force, which as of December 31, 2013 was comprised of approximately 54 field sales personnel, primarilytargeting neurologists and other prescribers of migraine medications, including headache clinics and headache specialists. In June 2012, in order to maintainand expand the market opportunity for Sumavel DosePro into the broader primary care physician audiences, we entered into a co-exclusive (with us) co-promotion agreement with Mallinckrodt under which in August 2012 Mallinckrodt began promoting Sumavel DosePro to its customer base of prescribers. Theco-promotion agreement with Mallinckrodt terminated at the end of January 2014. Although we expanded our commercial team prior to the launch of ZohydroER in March 2014, including the expansion of our field sales personnel to approximately 165 employees, we may seek another co-promotion partner forSumavel DosePro in the future. Further, if combination hydrocodone products are rescheduled from Schedule III to Schedule II, we may seek a co-promotionor other partnering opportunity for Zohydro ER, or may further expand our sales force.In addition, in order to promote any product candidates that receive regulatory approval, we may need to further expand our sales and marketingpersonnel and commercial infrastructure and/or establish partnerships with pharmaceutical companies or contract sales organizations to co-promote suchadditional products. We currently, and on an ongoing basis will have to, compete with other pharmaceutical and biotechnology companies to recruit, hire, trainand retain sales and marketing personnel. We also face competition in our search for collaborators and potential co-promoters. To the extent we rely onadditional third parties to co-promote or otherwise commercialize any products and/or product candidates that may receive regulatory approval, we are likely toreceive less revenue than if we commercialized these products ourselves. Further, by entering into strategic partnerships or similar arrangements, we may relyin part on such third parties for financial and commercialization resources. Even if we are able to identify suitable partners to assist in the commercializationof our products and/or product candidates, they may be unable to devote the resources necessary to realize the full commercial potential of our products.Further, we may lack the financial and managerial resources to maintain and potentially increase the size of our sales and marketing organization toadequately promote and commercialize Sumavel DosePro, Zohydro ER and any product candidates that may be approved. Any increase in our sales force willresult in an increase in our expenses, which could be significant before we generate revenues from any newly approved product candidate. Even though wewere able to recently expand our sales and marketing personnel, and may be successful in establishing future partnership arrangements, such sales force andmarketing teams may not be successful in commercializing our products, which would adversely affect our ability to generate revenue for such products, andcould have a material adverse effect on our business, results of operations, financial condition and prospects.Our inability to successfully acquire, develop and market additional product candidates or approved products would impair our ability to grow ourbusiness.We intend to in-license, acquire, develop and/or market additional products and product candidates in the areas of pain and central nervous system, orCNS, disorders. Because our internal research and development capabilities are limited, we may be dependent upon other pharmaceutical and biotechnologycompanies, academic scientists and other researchers to sell or license products or technology to us. The success of this strategy depends partly upon ourability to identify and select promising pharmaceutical product candidates and products, negotiate licensing or acquisition agreements with their currentowners and finance these arrangements.The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex.Other companies, including some with substantially greater financial, marketing, sales and other resources, may compete with us for the license or acquisitionof product candidates and approved products. We have limited resources to identify and execute the acquisition or in-licensing of third-party products,businesses and technologies and integrate them into our current infrastructure. Moreover, we may devote resources to potential acquisitions or licensingopportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts.52Table of ContentsFurther, any product candidate that we acquire may require additional development efforts prior to commercial sale, including pre-clinical or clinicaltesting and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceuticalproduct development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatoryauthorities. In addition, we cannot provide assurance that any products that we develop or approved products that we acquire will be manufactured or soldprofitably or achieve market acceptance.Additionally, as part of our growth strategy, we intend to seek to expand our product pipeline by exploring acquisition or in-licensing opportunities ofproven drugs that can be paired with our DosePro needle-free drug delivery system. If we are not able to identify additional drug compounds that can bedelivered via the current version of our DosePro technology, or if we are unable to successfully develop higher dose versions of this technology, our ability todevelop additional product candidates and grow our business would be adversely affected. We and Battelle Memorial Institute, or Battelle, our technology co-marketing partner, are also seeking opportunities to out-license the DosePro technology to partners seeking to enhance, differentiate, or extend the life-cycle oftheir injectable products. However, there can be no assurance that our or Battelle's efforts to secure such a partnership will be successful. If we are unable tosecure partnerships with companies that have compounds that can be delivered via the current version of our DosePro technology, or if we are unable tosuccessfully develop higher dose versions of this technology, we will not be able to generate revenues from out-licensing our DosePro technology.If we are unable to license or acquire additional product candidates or approved products and successfully develop and commercialize them, or if we areotherwise unable to pair our DosePro delivery system with other drugs or out-license the DosePro technology to others, it may have a material adverse effect onour business, results of operations, financial condition and prospects.We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to ourmanagement.From time to time we may consider strategic transactions, such as acquisitions of companies, asset purchases and out-licensing or in-licensing ofproducts, product candidates or technologies. Additional potential transactions that we may consider include a variety of different business arrangements,including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any such transaction mayrequire us to incur non-recurring or other charges, may increase our near and long-term expenditures and may pose significant integration challenges or disruptour management or business, which could adversely affect our operations and financial results. For example, these transactions may entail numerousoperational and financial risks, including:•exposure to unknown liabilities;•disruption of our business and diversion of our management’s time and attention in order to develop acquired products, product candidates ortechnologies;•incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions;•higher than expected acquisition and integration costs;•write-downs of assets or goodwill or impairment charges;•increased amortization expenses;•difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;•impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and•inability to retain key employees of any acquired businesses.Accordingly, although there can be no assurance that we will undertake or successfully complete any transactions of the nature described above, anytransactions that we do complete could have a material adverse effect on our business, results of operations, financial condition and prospects.If we are unable to further amend our license agreement with Alkermes or obtain its consent, we will be unable to license, market and sell anabuse deterrent formulation of Zohydro ER that makes use of another party's formulation technology.We entered into a development and option agreement with Altus Formulation Inc., or Altus, to develop abuse deterrent formulations of hydrocodone.Pursuant to the agreement, we have been granted an option to obtain an exclusive, royalty-bearing license, with the right to sublicense, to certain Altusintellectual property rights to make, have made, import, use, sell, have sold, offer for sale and import an abuse deterrent formulation of hydrocodone for thetreatment or relief of pain in the United States. However, during the term of our license agreement with Alkermes for Zohydro ER, we are precluded fromlicensing, marketing or selling in the United States any oral controlled release capsule or tablet formulation whose sole active53Table of Contentsingredient is hydrocodone, other than Zohydro ER. Accordingly, we will need Alkermes’ cooperation in order to exercise our option with Altus and ultimatelycommercialize an abuse deterrent formulation of hydrocodone. If we are unable to obtain this consent or otherwise amend our license agreement withAlkermes, we will not be able to license or commercialize any abuse deterrent formulation under development with Altus or any other abuse deterrentformulation of hydrocodone, unless we pursue the development or commercialization of such abuse deterrent formulation with Alkermes. We believe it is inthe mutual interest of Alkermes and our company to proceed with the abuse deterrent formulation from Altus and that we can ultimately come to an agreementwith Alkermes to do so. However, we can provide no assurance that we will reach such an agreement. Our inability to obtain Alkermes’ consent could have anegative impact on the long term opportunity for Zohydro ER, and even if we are successful, we may need to compensate Alkermes for its consent, which mayinclude increased compensation in the form of royalties or other payments and other concessions compared to our existing license terms.If we are unable to achieve and maintain adequate levels of coverage and reimbursement for Sumavel DosePro, Zohydro ER, or any of our otherproduct candidates for which we may receive regulatory approval on reasonable pricing terms, their commercial success may be severely hindered.Successful sales of our products depend on the availability of adequate coverage and reimbursement from third-party payors. Patients who areprescribed medicine for the treatment of their conditions generally rely on third-party payors to reimburse all or part of the costs associated with theirprescription drugs. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payorsare critical to new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new drug products when moreestablished or lower cost therapeutic alternatives are already available or subsequently become available. Assuming coverage is approved, the resultingreimbursement payment rates might not be adequate or may require co-payments that patients find unacceptably high. Patients are unlikely to use our productsunless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products.In addition, the market for our products will depend significantly on access to third-party payors' drug formularies, or lists of medications for whichthird-party payors provide coverage and reimbursement. The industry competition to be included in such formularies often leads to downward pricingpressures on pharmaceutical companies. Also, third-party payors may refuse to include a particular branded drug in their formularies or otherwise restrictpatient access to a branded drug when a less costly generic equivalent or other alternative is available.In addition, regional healthcare authorities and individual hospitals are increasingly using competitive bidding procedures to determine whatpharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. This can reduce demand for ourproducts or put pressure on our product pricing, which could negatively affect our business, results of operations, financial condition and prospects.Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controllinghealthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for drug products exists among third-party payors.Therefore, coverage and reimbursement for drug products can differ significantly from payor to payor.Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the United States and in internationalmarkets. Third-party coverage and reimbursement for Sumavel DosePro, Zohydro ER or any of our product candidates for which we may receive regulatoryapproval may not be available or adequate in either the United States or international markets, which could have a material adverse effect on our business,results of operations, financial condition and prospects.We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability if our insurancecoverage for those claims is inadequate.The commercial use of our products and clinical use of our products and product candidates expose us to the risk of product liability claims. This riskexists even if a product is approved for commercial sale by the FDA and manufactured in facilities regulated by the FDA, such as the case with SumavelDosePro and Zohydro ER, or an applicable foreign regulatory authority. Our products and product candidates are designed to affect important bodilyfunctions and processes. Any side effects, manufacturing defects, misuse or abuse associated with Sumavel DosePro, Zohydro ER or our product candidatescould result in injury to a patient or even death. For example, because our DosePro technology is designed to be self-administered by patients, it is possible thata patient could fail to follow instructions and as a result apply a dose in a manner that results in injury. In addition, Zohydro ER is an opioid pain reliever thatcontains hydrocodone, which is a regulated “controlled substance” under the Controlled Substances Act of 1970, or CSA, and could result in harm topatients relating to its potential for abuse. In addition, a liability claim may be brought against us even if our products or product candidates merely appear tohave caused an injury.54Table of ContentsProduct liability claims may be brought against us by consumers, health care providers, pharmaceutical companies or others selling or otherwisecoming into contact with our products or product candidates, among others. If we cannot successfully defend ourselves against product liability claims wewill incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in:•the inability to commercialize our products or product candidates;•decreased demand for our products or, if approved, product candidates;•impairment of our business reputation;•product recall or withdrawal from the market;•withdrawal of clinical trial participants;•costs of related litigation;•distraction of management’s attention from our primary business;•substantial monetary awards to patients or other claimants; or•loss of revenues.We have obtained product liability insurance coverage for commercial product sales and clinical trials with a $10 million per occurrence coverage limitand a $15 million annual aggregate coverage limit. In connection with the launch of Zohydro ER, the annual aggregate coverage limit increased to $20 millionbeginning in March 2014. Our insurance coverage may not be sufficient to cover all of our product liability related expenses or losses and may not cover us forany expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintaininsurance coverage at a reasonable cost, in sufficient amounts or upon adequate terms to protect us against losses due to product liability. If we determine thatit is prudent to increase our product liability coverage based on sales of Sumavel DosePro and Zohydro ER, approval of Relday or otherwise, we may beunable to obtain this increased product liability insurance on commercially reasonable terms or at all. Large judgments have been awarded in class action orindividual lawsuits based on drugs that had unanticipated side effects, including side effects that are less severe than those of Sumavel DosePro, Zohydro ERand our product candidates. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, ifjudgments exceed our insurance coverage, could decrease our cash and have a material adverse effect on our business, results of operations, financialcondition and prospects.Our business involves the use of hazardous materials and we and our third-party manufacturers and suppliers must comply with environmentallaws and regulations, which can be expensive and restrict how we do business.Our research and development activities and our third-party manufacturers' and suppliers' activities involve the controlled storage, use and disposal ofhazardous materials owned by us, including the components of our product and product candidates and other hazardous compounds. We and ourmanufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials.In some cases, these hazardous materials and various wastes resulting from their use are stored at our and our manufacturers' facilities pending use anddisposal. We cannot completely eliminate the risk of contamination, which could cause an interruption of our commercialization efforts, research anddevelopment efforts and business operations, injury to our employees and others, environmental damage resulting in costly clean-up and liabilities underapplicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that thesafety procedures utilized by our third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed bythese laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such anevent, we may be held liable for any resulting damages and such liability could exceed our resources. We do not currently carry biological or hazardous wasteinsurance coverage.In connection with the reporting of our financial condition and results of operations, we are required to make estimates and judgments whichinvolve uncertainties, and any significant differences between our estimates and actual results could have an adverse impact on our financialposition, results of operations and cash flows.Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have beenprepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these consolidated financialstatements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure ofcontingent assets and liabilities. In particular, as part of our revenue recognition policy, our estimates of product returns, rebates and chargebacks require ourmost subjective and complex judgment due to the need to make estimates about matters that are inherently uncertain. Any significant differences between ouractual results and our estimates and assumptions could negatively impact our financial position, results of operations and cash flows.55Table of ContentsChanges in accounting standards and their interpretations could adversely affect our operating results.GAAP are subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the SEC, andvarious other bodies that promulgate and interpret appropriate accounting principles. These principles and related implementation guidelines andinterpretations can be highly complex and involve subjective judgments. A change in these principles or interpretations could have a significant effect on ourreported financial results, and could affect the reporting of transactions completed before the announcement of a change.Fluctuations in the value of the Euro or U.K. pound sterling could negatively impact our results of operations and increase our costs.Payments to our material suppliers and contract manufacturers are denominated in the Euro and U.K. pound sterling. Our reporting currency is theU.S. dollar and to date all of the revenues generated by sales of Sumavel DosePro have been in U.S. dollars. For the year ended December 31, 2013, $18.9million (based on exchange rates as of December 31, 2013) of our materials, contract manufacturing costs and other manufacturing-related costs weredenominated in foreign currencies. As a result, we are exposed to foreign exchange risk, and our results of operations may be negatively impacted byfluctuations in the exchange rate between the U.S. dollar and the Euro or U.K. pound sterling. A significant appreciation in the Euro or U.K. pound sterlingrelative to the U.S. dollar will result in higher expenses and cause increases in our net losses. Likewise, to the extent that we generate any revenues denominatedin foreign currencies, or become required to make payments in other foreign currencies, fluctuations in the exchange rate between the U.S. dollar and thoseforeign currencies could also negatively impact our results of operations. We currently have not entered into any foreign currency hedging contracts to reducethe effect of changes in foreign currency exchange rates, and foreign currency hedging is inherently risky and may result in unanticipated losses.Risks Related to Our Financial Position and Capital RequirementsWe have never generated net income or positive cash flow from operations and are dependent upon external sources of financing to fund ourbusiness and development.We launched our first approved product, Sumavel DosePro, in January 2010 and our recently approved product, Zohydro ER, on March 3, 2014.Given on our limited sales history for Sumavel DosePro and our lack of sales history for Zohydro ER, we may not accurately predict future sales, and wemay never be able to significantly increase sales. We have financed our operations primarily through the proceeds from the issuance of our common andpreferred stock, including the proceeds from our initial public offering completed in November 2010, our follow-on public offerings completed in September2011, July 2012 and November 2013, our controlled equity offering program, and debt, and have incurred losses and negative cash flow from operations ineach year since our inception. Our net loss was $80.9 million in 2013, $47.4 million in 2012 and $83.9 million in 2011, and our cash used in operatingactivities was $44.9 million in 2013, $52.2 million in 2012 and $80.5 million in 2011. As of December 31, 2013, we had an accumulated deficit of $410.2million. These losses and negative cash flow from operations have had a material adverse effect on our stockholders' equity and working capital. Further,despite the revenues from Sumavel DosePro and any future revenue from Zohydro ER, we expect our losses to continue for at least the next year primarily as aresult of the expenses incurred in connection with our efforts to commercialize Zohydro ER, the additional clinical development of Relday, the required post-market testing for Zohydro ER, additional activities with respect to Zohydro ER, including the development of an abuse deterrent formulation of Zohydro ERand the cost of the sales and marketing expense associated with Sumavel DosePro and Zohydro ER. As a result, we may remain dependent upon externalsources of financing to finance our business and the development and commercialization of our approved products and product candidates. To the extent weneed to raise additional capital in the future, we cannot ensure that debt or equity financing will be available to us in amounts, at times or on terms that will beacceptable to us, or at all. Any shortfall in our cash resources could require that we delay or abandon certain development and commercialization activities andcould otherwise have a material adverse effect on our business, results of operations, financial condition and prospects.56Table of ContentsOur level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes inthe economy or our industry and prevent us from meeting our obligations.As of December 31, 2013, we had $30.0 million of outstanding indebtedness under a financing agreement with Healthcare Royalty Partners, or theHealthcare Royalty financing agreement. Our outstanding debt and related debt service obligations could have important adverse consequences to us,including:•heightening our vulnerability to downturns in our business or our industry or the general economy and restricting us from making improvements oracquisitions, or exploring business opportunities;•requiring a significant amount of interest payments and fixed payments on our indebtedness, therefore reducing our ability to use our available cashto fund our operations, capital expenditures and future business opportunities;•limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and generalcorporate or other purposes;•limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who havegreater capital resources; and•subjecting us to financial and other restrictive covenants in our debt instruments, the failure with which to comply could result in an event of defaultunder the applicable debt instrument that allows the lender to demand immediate repayment of the related debt.If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay product development,sales and marketing, capital and other expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measuresmay not be successful and may not permit us to meet our scheduled debt service obligations.Our debt instrument with Healthcare Royalty contains a number of provisions which, if violated, could result in the immediate acceleration of ouroutstanding indebtedness.Pursuant to the terms of our $30.0 million Healthcare Royalty financing agreement, we are required to make payments to Healthcare Royalty of $10.0million on each of January 31, 2015, 2016 and 2017, as well as fixed percentages of amounts received (in the case of co-promotion revenues and license fees)or recorded (in the case of net products sales).Our obligations under the Healthcare Royalty financing agreement are secured by a security interest in substantially all of our personal property(including, among other things, accounts receivable, equipment, inventory, contract rights or rights to payment of money, license agreements, generalintangibles, including all intellectual property, and cash), to the extent necessary or used to commercialize our products. The security interest will beextinguished once the aggregate payments made by us to Healthcare Royalty equals $75.0 million. If we are unable to repay the indebtedness or other amountswhen due, whether at maturity, upon termination or if declared due and payable by the lender following a default, Healthcare Royalty generally has the right toseize and sell the collateral securing the indebtedness, and other amounts owing to it thereunder.We have the option to terminate the Healthcare Royalty financing agreement at our election prior to the termination date in connection with a change ofcontrol of our company, as defined in the Healthcare Royalty financing agreement, upon the payment of a base amount of $52.5 million, or, if higher, anamount that generates a 19% internal rate of return on the borrowed amount as of the date of prepayment, in each case reduced by the interest and fixedpayments received by Healthcare Royalty up to the date of such prepayment. In addition, Healthcare Royalty has the option to terminate the Healthcare Royaltyfinancing agreement at its election in connection with a change of control of our company, as defined in the Healthcare Royalty financing agreement, the sale ofall or substantially all of our assets (which includes the sale, transfer, assignment or licensing of our rights in the United States to either Sumavel DosePro orZohydro ER), or an event of default (which includes the occurrence of a bankruptcy event or other material adverse change in our business), as defined in theHealthcare Royalty financing agreement, occurring thereunder. Upon such a termination by Healthcare Royalty prior to the maturity date specified in theHealthcare Royalty financing agreement, we are obligated to make a payment of a base amount of $45.0 million, or, if higher, an amount that generates a 17%internal rate of return on the borrowed amount as of the date of prepayment, in each case reduced by the interests and fixed payments received by HealthcareRoyalty up to the date of prepayment. If we were required to accelerate the payment of these amounts upon a default, we would be required to find an alternatesource of capital from which to draw funds and there can be no assurances that we would be able to do so on terms acceptable to us, or at all.There can be no assurance that we will not breach the terms of, or that an event of default or termination event will not occur under, our HealthcareRoyalty financing agreement and, if a breach or event of default or termination event occurs, there can be no assurance that we will be able to obtain necessarywaivers or amendments from Healthcare Royalty or refinance the related indebtedness or other amounts due and payable on terms we find acceptable, or at all.57Table of ContentsAs a result, any failure to pay our debt service obligations when due, any breach or default of our obligations under our Healthcare Royalty financingagreement, or any other event that allows Healthcare Royalty to demand immediate repayment of borrowings or termination payments, could have a materialadverse effect on our business, results of operations, financial condition and prospects. Furthermore, the arrangement under the Healthcare Royalty financingagreement may make us significantly less attractive to potential acquirers, and in the event that we exercised our change of control pay-off option in order tocarry out a change of control, the payment of such funds out of our available cash or acquisition proceeds would reduce acquisition proceeds for ourstockholders.Our results of operations and liquidity needs could be materially negatively affected by market fluctuations and economic downturn.Our results of operations and liquidity could be materially negatively affected by economic conditions generally, both in the United States and elsewherearound the world. Domestic and international equity and debt markets have experienced and may continue to experience heightened volatility and turmoil basedon domestic and international economic conditions and concerns. In the event these economic conditions and concerns continue or worsen and the marketscontinue to remain volatile, our results of operations and liquidity could be adversely affected by those factors in many ways, including making it moredifficult for us to raise funds if necessary, and our stock price may decline. In addition, we maintain significant amounts of cash and cash equivalents at oneor more financial institutions that are not federally insured. If economic instability continues, we cannot provide assurance that we will not experience losses onthese investments.Raising additional funds by issuing securities may cause dilution to existing stockholders and raising funds through lending and licensingarrangements may restrict our operations or require us to relinquish proprietary rights.We may need to raise additional funds through public or private equity offerings, debt financings, receivables or royalty financings or corporatecollaboration and licensing arrangements. To the extent that we raise additional capital by issuing equity securities or convertible debt, your ownership interestin us will be diluted. Debt financing typically contains covenants that restrict operating activities. Our obligations under the Healthcare Royalty financingagreement are secured by a security interest in substantially all of our personal property (including, among other things, accounts receivable, equipment,inventory, contract rights or rights to payment of money, license agreements, general intangibles, including all intellectual property, and cash). The securityinterest will be extinguished once the aggregate payments made by us to Healthcare Royalty equals $75.0 million.The Healthcare Royalty financing agreement contains provisions which allows Healthcare Royalty to accelerate the debt and seize and sell the collateralif, among other things, we fail to pay interest payments and fixed payments when due or breach our obligations under the agreement or if a material adversechange in our business or any other event of default occurs. Any future debt financing we enter into may involve more onerous covenants that restrict ouroperations, may be secured by some or all of our assets, and will likely allow the lenders to accelerate the debt and seize and sell any collateral following adefault. Our obligations under our outstanding Healthcare Royalty financing agreement or any future debt financing will need to be repaid, which createsadditional financial risk for our company, particularly if our business or prevailing financial market conditions are not conducive to paying-off or refinancingour outstanding debt obligations.If we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish potentially valuable rightsto our current product or product candidates or proprietary technologies, or grant licenses on terms that are not favorable to us. If adequate funds are notavailable, our ability to achieve profitability or to respond to competitive pressures would be significantly limited and we may be required to delay,significantly curtail or eliminate the commercialization and development of our product or product candidates.Our ability to utilize our net operating loss and research and development income tax credit carryforwards may be limited.Under Section 382 of the Internal Revenue Code of 1986, as amended, or the IRC, substantial changes in our ownership may limit the amount of netoperating loss and research and development income tax credit carryforwards (collectively, tax attributes) that could be utilized annually in the future to offsettaxable income, if any. Specifically, this limitation may arise in the event of a cumulative change in ownership of our company of more than 50% within athree-year period as determined under the IRC, which we refer to as an ownership change. Any such annual limitation may significantly reduce the utilizationof these tax attributes before they expire. Prior to our initial public offering in November 2010, we performed an IRC Section 382 and 383 analysis anddetermined that we had one ownership change, which occurred in August 2006 upon the issuance of convertible preferred stock. We performed an additionalIRC Section 382 and 383 analysis upon the issuance of common stock in our follow-on public offering in September 2011, and together with the issuance ofcommon stock in our initial public offering and certain other transactions involving our common stock, resulted in an additional ownership change. As aresult of these ownership changes, our ability to use our then existing tax attributes to offset future taxable income, if any,58Table of Contentswas limited. We are currently in the process of completing a Section 382 and 383 study to determine the impact that ownership changes during the year endedDecember 31, 2013 have had on our carryforwards and expect to complete the analysis within the next twelve months. As a result of this analysis, we mayhave an adjustment in the net operating losses that are recorded at December 31, 2013. In addition, any future equity financing transactions, privateplacements and other transactions that occur within the specified three-year period may trigger additional ownership changes, which could further limit our useof such tax attributes. Any such limitations, whether as the result of prior or future offerings of our common stock or sales of common stock by our existingstockholders, could have an adverse effect on our consolidated results of operations in future years.Risks Related to Regulation of our Product and Product CandidatesOur currently approved products, Sumavel DosePro and Zohydro ER, are, and any of our other product candidates that receive regulatoryapproval will be, subject to ongoing and continued regulatory review, which may result in significant expense and limit our ability tocommercialize such products.Even after we achieve U.S. regulatory approval for a product, the FDA may still impose significant restrictions on the approved indicated uses forwhich the product may be marketed or on the conditions of approval. For example, a product's approval may contain requirements for potentially costly post-approval studies and surveillance, including Phase 4 clinical trials, to monitor the safety and efficacy of the product, or the implementation of a REMSprogram. The Zohydro ER approval requires us to conduct post-marketing studies and implement the ER/LA opioid class-wide REMS with respect to ourproduct. We are also subject to ongoing FDA obligations and continued regulatory review with respect to the manufacturing, processing, labeling, packaging,distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for our product. These requirements include submissions of safetyand other post-marketing information and reports, establishment registration and drug listing, as well as continued compliance with cGMP for our marketedand investigational products, and with GCP and good laboratory practices, which are regulations and guidelines enforced by the FDA for all of our productsin clinical and pre-clinical development, and for any clinical trials that we conduct post-approval. To the extent that a product is approved for sale in othercountries, we may be subject to similar restrictions and requirements imposed by laws and government regulators in those countries.In the case of Zohydro ER and any product candidates containing controlled substances, we and our contract manufacturers will also be subject toongoing DEA regulatory obligations, including, among other things, annual registration renewal, security, recordkeeping, theft and loss reporting, periodicinspection and annual quota allotments for the raw material for commercial production of our products. In addition, manufacturers of drug products and theirfacilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP regulations, QSRrequirements for medical device components or similar requirements, if applicable. If we or a regulatory agency discovers previously unknown problems witha product, such as adverse events of unanticipated severity or frequency, or problems with the facility where, or processes by which, the product ismanufactured, a regulatory agency may impose restrictions on that product, the manufacturer or us, including requiring product recall, notice to physicians,withdrawal of the product from the market or suspension of manufacturing. In addition, because all of our contract manufacturers for Sumavel DosePro arelocated outside the United States, they may also be subject to foreign laws and regulations governing the manufacture of drugs and devices, and any failure bythem to comply with those laws and regulations may delay or interrupt supplies of our product.If we, our products or product candidates or the manufacturing facilities for our products or product candidates fail to comply with applicableregulatory requirements, a regulatory agency may:•impose restrictions on the marketing or manufacturing of a product, suspend or withdraw product approvals or revoke necessary licenses;•issue warning letters, show cause notices or untitled letters describing alleged violations, which may be publicly available;•commence criminal investigations and prosecutions;•impose injunctions, suspensions or revocations of necessary approvals or other licenses;•impose fines or other civil or criminal penalties;•suspend any ongoing clinical trials;•deny or reduce quota allotments for the raw material for commercial production of our controlled substance products;•delay or refuse to approve pending applications or supplements to approved applications filed by us;•refuse to permit drugs or precursor chemicals to be imported or exported to or from the United States;•suspend or impose restrictions on operations, including costly new manufacturing requirements; or•seize or detain products or require us to initiate a product recall.59Table of ContentsIn addition, our product labeling, advertising and promotion are subject to regulatory requirements and continuing regulatory review. The FDA strictlyregulates the promotional claims that may be made about prescription drug products. In particular, a drug may not be promoted for uses that are not approvedby the FDA as reflected in the product's approved labeling, although the FDA does not regulate the prescribing practices of physicians. The FDA and otheragencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability, including substantial monetary penalties and criminal prosecution.The FDA's regulations, policies or guidance may change and new or additional statutes or government regulations may be enacted that could prevent ordelay regulatory approval of our product candidates or further restrict or regulate post-approval activities. For example, the FDASIA requires the FDA to issuenew guidance describing its policy regarding internet and social media promotion of regulated medical products, and the FDA may soon specify newrestrictions on this type of promotion. In January 2014, the FDA released draft guidance on how drug companies can fulfill their regulatory requirements forpostmarketing submission of interactive promotional media, and though the guidance provided insight into how the FDA views a company's responsibility forcertain types of social media promotion, there remains a substantial amount of uncertainty. We cannot predict the likelihood, nature or extent of adversegovernment regulation that may arise from pending or future legislation or administrative action, either in the United States or abroad. If we are not able toachieve and maintain regulatory compliance, we may not be permitted to market our drugs, which would adversely affect our ability to generate revenue andachieve or maintain profitability.Sumavel DosePro, Zohydro ER, Relday and our other product candidates may cause undesirable side effects or have other unexpected propertiesthat could result in post-approval regulatory action.If we or others identify undesirable side effects, or other previously unknown problems, caused by our products, other products or our productcandidates with the same or related active ingredients, after obtaining U.S. regulatory approval, a number of potentially significant negative consequencescould result, including:•regulatory authorities may withdraw their approval of the product;•regulatory authorities may require us to recall the product;•regulatory authorities may require the addition of warnings in the product label or narrowing of the indication in the product label;•we may be required to create a Medication Guide outlining the risks of such side effects for distribution to patients;•we may be required to change the way the product is administered or modify the product in some other way;•the FDA may require us to conduct additional clinical trials or costly post-marketing testing and surveillance to monitor the safety or efficacy of theproduct;•we could be sued and held liable for harm caused to patients; and•our reputation may suffer.The most common treatment-emergent adverse reactions (reported by at least 5% of patients) for sumatriptan injection as described in the SumavelDosePro Prescribing Information summarizing two large placebo-controlled clinical trials were injection site reaction (59%), atypical sensations (42%),dizziness (12%), flushing (7%), chest discomfort (5%), weakness (5%), and neck pain/stiffness (5%).The incidence of adverse events was 33.7% and 28.8% in the open label titration and double blind treatment periods of our Phase 3 efficacy trial forZohydro ER, respectively. Overall, the most commonly reported adverse events (>2%) in this trial were constipation, nausea, somnolence, vomiting, diarrhea,insomnia, fatigue, headache, dizziness and dry mouth. These are typical adverse events associated with chronic opioid therapy.Any of the above events resulting from undesirable side effects or other previously unknown problems could prevent us from achieving or maintainingmarket acceptance of the affected product and could substantially increase the costs of commercializing our product candidates.Our development strategy for Relday depends upon the FDA’s prior findings of safety and effectiveness of risperidone based on data notdeveloped by us, but which the FDA may rely upon in reviewing any future NDA.The Hatch-Waxman Amendments added Section 505(b)(2) to the FFDCA. Section 505(b)(2) permits the filing of an NDA where at least some of theinformation required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference.Under this statutory provision, the FDA may rely, for purposes of approving an NDA, on safety and effectiveness data not developed by the filer of the NDA.Similar to Sumavel DosePro and Zohydro ER, we plan to submit an NDA for Relday under Section 505(b)(2), and as such, the NDA will rely, in part, onthe60Table of ContentsFDA's previous findings of safety and effectiveness for risperidone. Even though we may be able to take advantage of Section 505(b)(2) to support potentialU.S. approval for Relday, the FDA may require us, and did require us with respect to Sumavel DosePro and Zohydro ER, to perform additional studies ormeasurements to support approval. In addition, the FDA's interpretation and use of Section 505(b)(2) has been controversial and has previously beenchallenged in court, but without a definitive ruling on the propriety of the FDA's approach. Future challenges, including a direct challenge to the approval ofour products and product candidates, may be possible and, if successful, could limit or eliminate our ability to rely on the Section 505(b)(2) pathway for theapproval of Relday and our other product candidates. Such a result could require us to conduct additional testing and costly clinical trials, which couldsubstantially delay or prevent the approval and launch of Relday and our other product candidates.Zohydro ER is a controlled substance subject to DEA regulations and failure to comply with these regulations, or the cost of compliance withthese regulations, may adversely affect our business.Zohydro ER contains hydrocodone, a regulated “controlled substance” under the CSA, which establishes, among other things, certain registration,production quotas, security, recordkeeping, reporting, import, export and other requirements administered by the DEA. The DEA regulates controlledsubstances as Schedule I, II, III, IV or V substances. Schedule I substances by definition have no established medicinal use and may not be marketed or soldin the United States. A pharmaceutical product may be listed as Schedule II, III, IV or V, with Schedule II substances considered to present the highest risk ofabuse and Schedule V substances the lowest relative risk of abuse among such substances. Zohydro ER, because it is a single-entity hydrocodone product, isregulated by the DEA as a Schedule II controlled substance under the CSA. All Schedule II substance prescriptions, such as prescriptions for Zohydro ER,must be in writing and signed by a physician, physically presented to a pharmacist and may not be refilled without a new prescription.The manufacture, shipment, storage, sale and use, among other things, of controlled substances that are pharmaceutical products are subject to a highdegree of regulation, including security, record-keeping and reporting obligations enforced by the DEA. Our failure to comply with these requirements couldresult in the loss of our ability to supply Zohydro ER, significant restrictions on Zohydro ER, civil penalties or criminal prosecution.The DEA, and some states, also conduct periodic inspections of registered establishments that handle controlled substances. Facilities that conductresearch, manufacture, store, distribute, import or export controlled substances must be registered to perform these activities and have the security, control andinventory mechanisms required by the DEA to prevent drug loss and diversion. Failure to maintain compliance, particularly non-compliance resulting in lossor diversion, can result in regulatory action that could have a material adverse effect on our business, results of operations, financial condition and prospects.The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to revoke those registrations. In certain circumstances,violations could lead to criminal proceedings.Individual states also have controlled substances laws. Though state controlled substances laws often mirror federal law, because the states are separatejurisdictions, they may separately schedule drugs, as well. While some states automatically schedule a drug when the DEA does so, in other states there has tobe rulemaking or a legislative action. State scheduling may delay commercial sale of any controlled substance drug product for which we obtain federalregulatory approval and adverse scheduling could have a material adverse effect on the commercial attractiveness of such product. We or our partners mustalso obtain separate state registrations in order to be able to obtain, handle, and distribute controlled substances for clinical trials or commercial sale, andfailure to meet applicable regulatory requirements could lead to enforcement and sanctions from the states in addition to those from the DEA or otherwisearising under federal law.The FDA, in consultation with the DEA, required us to develop a comprehensive REMS containing the elements of the class-wide ER/LA opioid REMSto reduce the inappropriate use of Zohydro ER, including restrictions on the manner in which it is marketed and sold, so as to reduce the risk of improperpatient selection and diversion or abuse of the product. The restrictions of this program could limit market acceptance of the product.Pursuant to the terms of our license agreement with Alkermes, we entered into a commercial manufacturing and supply agreement for Zohydro ER withAPIL. APIL has the exclusive right to manufacture and supply both clinical and commercial supplies of Zohydro ER (subject to certain exceptions). WhileAPIL is required to comply with applicable laws and regulations regarding controlled substances, we do not have any direct control over APIL's compliance inthese regards, and any failure by APIL to comply with those laws and regulations could result in a reduction or cessation of production of Zohydro ER.Annual DEA quotas on the amount of hydrocodone allowed to be produced in the United States and our specific allocation of hydrocodone by theDEA could significantly limit the production or sale of Zohydro ER.The DEA limits the availability and production of all Schedule II substances through a quota system which includes a national aggregate quota andindividual procurement quotas. Because hydrocodone is subject to the DEA's production and61Table of Contentsprocurement quota scheme, the DEA establishes annually an aggregate quota for how much hydrocodone may be produced in total in the United States basedon the DEA's estimate of the quantity needed to meet legitimate scientific and medicinal needs. This limited aggregate amount of hydrocodone that the DEAallows to be produced in the United States each year is allocated among individual companies, who must submit applications annually to the DEA forindividual production and procurement quotas. The DEA requires substantial evidence and documentation of expected legitimate medical and scientific needsbefore assigning procurement quotas to manufacturers. The DEA may adjust aggregate production quotas and individual production and procurement quotasfrom time to time during the year, although the DEA has substantial discretion in whether or not to make such adjustments. Alkermes, which has licensed usthe right to sell Zohydro ER in the United States, was allocated a sufficient quantity of hydrocodone to meet our planned launch requirements through themajority of 2014. However, we anticipate requesting an additional allocation to support expected growth by the end of 2014.Moreover, we do not know what amounts of hydrocodone other companies developing product candidates containing hydrocodone may request forfuture years. The DEA, in assessing factors such as medical need, abuse and diversion potential and other policy considerations, may choose to set theaggregate hydrocodone quota lower than the total amount requested by the companies. Alkermes is permitted to petition the DEA to increase the annualaggregate quota after it is initially established, but there is no guarantee that the DEA would act favorably upon such a petition. Alkermes procurement quota ofhydrocodone may not be sufficient to meet any future clinical development needs or commercial demand for Zohydro ER. Any delay or refusal by the DEA inestablishing the procurement quota or a reduction in Alkermes quota for hydrocodone or a failure to increase it over time as we anticipate could delay or stopcommercial sale of Zohydro ER or cause us not to achieve our expected operating results, which could have a material adverse effect on our business, resultsof operations, financial condition and prospects.Even though Sumavel DosePro has received regulatory approval in a limited number of foreign countries, we or any other potential partners maynever receive approval in additional countries or for additional products outside of the United States.In March 2008, we established an exclusive commercial partnership for Sumavel DosePro with Desitin in the European Union, Norway, Switzerlandand Turkey, in order to seek to accelerate the development and regulatory approvals in those territories. However, on August 5, 2013, we agreed with Desitin toterminate the licensing and distribution agreement effective October 1, 2013. Following the termination of the licensing and distribution agreement, themarketing authorizations for Sweden, Norway, France and the United Kingdom were withdrawn. We may seek to establish commercial partnerships forSumavel DosePro in other foreign countries, and we may also seek to establish a new commercial partnership in the European Union, Norway, Switzerlandand Turkey.In order to market our products outside of the United States, we, or any potential partner, must obtain separate regulatory approvals and comply withnumerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials andcommercial sales, pricing and distribution of our products. The time required to obtain approval in other countries might differ from and be longer than thatrequired to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailed in these “Risk Factors” regardingFDA approval in the United States, as well as other risks. For example, in the European Economic Area, or EEA (comprised of the 27 European Union, orEU, member states plus Iceland, Liechtenstein, and Norway), we can take advantage of the hybrid application pathway of the EU Centralized Procedure,which is similar to the FDA’s 505(b)(2) pathway. Hybrid applications may rely in part on the results of pre-clinical tests and clinical trials contained in theauthorization dossier of the reference product, but must be supplemented with additional data. In territories where data is not freely available, we or ourpartners may not have the ability to commercialize our products without negotiating rights from third parties to refer to their clinical data in our regulatoryapplications, which could require the expenditure of significant additional funds. We, or any potential partner, may be unable to obtain rights to the necessaryclinical data and may be required to develop our own proprietary safety effectiveness dossiers. Desitin submitted a Marketing Authorization Application forSumavel DosePro to the Federal Institute for Drugs and Medical Devices (Bundesinstitut für Arzneimittel und Medizinprodukte (BfArM)) in Germany, thereference member state, through the Decentralized Procedure in October 2009, following completion of a European pivotal bioequivalence trial comparingneedle-free Sumavel DosePro to a traditional needle-based autoinjector, Imigran-Inject, the European brand of Imitrex STATdose. However, regulatory approvalin one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effecton the regulatory process in others.Inability to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailedin these “Risk Factors” regarding FDA approval in the United States. As described above, such effects include the risks that our product and productcandidates may not be approved at all or for all requested indications, which could limit the uses of our product and product candidates and have an adverseeffect on their commercial potential or require costly, post-marketing studies. In addition, we, or any potential partner, may be subject to fines, suspension orwithdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution if we are unable to comply withapplicable foreign regulatory requirements.62Table of ContentsHealth care reform measures and changes in policies, funding, staffing and leadership at the FDA and other agencies could hinder or preventthe commercial success of Sumavel DosePro, Zohydro ER and any of our product candidates that may be approved by the FDA.In the United States, there have been a number of legislative and regulatory changes to the healthcare system in ways that could affect our future resultsof operations and the future results of operations of our customers. For example, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003established a new Part D prescription drug benefit, which became effective January 1, 2006. Under the prescription drug benefit, Medicare beneficiaries canobtain prescription drug coverage from private sector plans that are permitted to limit the number of prescription drugs that are covered in each therapeuticcategory and class on their formularies. If Sumavel DosePro, Zohydro ER or any of our product candidates that are approved by the FDA are not widelyincluded on the formularies of these plans, our ability to market our products to the Medicare population could suffer.Furthermore, there have been and continue to be a number of initiatives at the federal and state levels that seek to reduce healthcare costs. In March 2010,the Patient Protection and Affordable Health Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the PPACA, wassigned into law, which includes measures to significantly change the way health care is financed by both governmental and private insurers. Among theprovisions of the PPACA of greatest importance to the pharmaceutical industry are the following:•an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among theseentities according to their market share in certain government healthcare programs;•an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23% and 13% of the averagemanufacturer price for most branded and generic drugs, respectively;•a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused,instilled, implanted or injected;•a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices ofapplicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered underMedicare Part D;•extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;•expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individualsbeginning in April 2010 and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the Federal PovertyLevel beginning in 2014, thereby potentially increasing both the volume of sales and manufacturers’ Medicaid rebate liability;•expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;•new requirements to report certain financial arrangements with physicians and others, including reporting any “transfer of value” made or distributed toprescribers and other healthcare providers and reporting any investment interests held by physicians and their immediate family members during eachcalendar year. Manufacturers were required to begin data collection on August 1, 2013 and report such data to the Centers for Medicare & MedicaidServices, or CMS, by March 31, 2014 and the 90th day of each subsequent calendar year;•a new requirement to annually report drug samples that manufacturers and distributors provide to physicians, effective April 1, 2012;•a licensure framework for follow-on biologic products;•a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along withfunding for such research;•creation of the Independent Payment Advisory Board which, beginning in 2014, has authority to recommend certain changes to the Medicare program thatcould result in reduced payments for prescription drugs and those recommendations could have the effect of law even if Congress does not act on therecommendations; and•establishment of a Center for Medicare Innovation at CMS to test innovative payment and service delivery models to lower Medicare and Medicaidspending.Other legislative changes have also been proposed and adopted in the United States since the PPACA was enacted. On August 2, 2011, the BudgetControl Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked withrecommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering thelegislation's automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscalyear, which went into effect on April 1, 2013. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA,which, among other things, further reduced Medicare payments to several providers,63Table of Contentsincluding hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments toproviders from three to five years. These new laws may result in additional reductions in Medicare and other health care funding, which could have a materialadverse effect on our customers and accordingly, our financial operations.Given recent federal and state government initiatives directed at lowering the total cost of healthcare, Congress and state legislatures will likely continue tofocus on healthcare reform, the cost of prescription drugs and the reform of the Medicare and Medicaid programs. While we cannot predict the full outcome ofany such legislation, it may result in decreased reimbursement for prescription drugs, which may further exacerbate industry-wide pressure to reduceprescription drug prices. This could harm our ability to market our products and generate revenues. In addition, legislation has been introduced in Congressthat, if enacted, would permit more widespread importation or re-importation of pharmaceutical products from foreign countries into the United States,including from countries where the products are sold at lower prices than in the United States. Such legislation, or similar regulatory changes, could lead to adecision to decrease our prices to better compete, which, in turn, could adversely affect our business, results of operations, financial condition and prospects.Alternatively, in response to legislation such as this, we might elect not to seek approval for or market our products in foreign jurisdictions in order tominimize the risk of re-importation, which could also reduce the revenue we generate from our product sales. It is also possible that other legislative proposalshaving similar effects will be adopted.Furthermore, regulatory authorities' assessment of the data and results required to demonstrate safety and efficacy can change over time and can beaffected by many factors, such as the emergence of new information, including on other products, changing policies and agency funding, staffing andleadership. We cannot be sure whether future changes to the regulatory environment will be favorable or unfavorable to our business prospects. For example,average review times at the FDA for marketing approval applications have fluctuated over the last ten years, and we cannot predict the review time for any ofour submissions with any regulatory authorities. In addition, review times can be affected by a variety of factors, including budget and funding levels andstatutory, regulatory and policy changes.We may incur liability if our continuing medical or health education programs and/or product promotions are determined, or are perceived, to beinconsistent with regulatory guidelines.The FDA provides guidelines with respect to appropriate promotion and continuing medical and health education activities. Although we endeavor tofollow these guidelines, the FDA or the Office of the Inspector General: U.S. Department of Health and Human Services may disagree, and we may be subjectto significant liability, including civil and administrative remedies as well as criminal sanctions. In addition, management’s attention could be diverted andour reputation could be damaged.If we fail to comply with federal and state healthcare laws, including fraud and abuse and health information privacy and security laws, we couldface substantial penalties and our business, results of operations, financial condition and prospects could be adversely affected.As a pharmaceutical company, even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or otherthird-party payors, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are applicable to our business.We could be subject to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct ourbusiness. The laws that may affect our ability to operate include:•the federal Anti-Kickback Statute, which constrains our marketing practices, educational programs, pricing policies, and relationships with healthcareproviders or other entities, by prohibiting, among other things, soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, orin return for, the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaidprograms;•federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowinglypresenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, and whichmay apply to entities like us which provide coding and billing advice to customers;•the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, and its implementing regulations, which prohibit executing a schemeto defraud any healthcare benefit program or making false statements relating to healthcare matters;•HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and its implementing regulations, which impose certainrequirements relating to the privacy, security and transmission of individually identifiable health information; and64Table of Contents•federal “sunshine” requirements that require drug manufacturers to report and disclose any “transfer of value” made or distributed to physicians andteaching hospitals. Drug manufacturers were required to begin collecting data on August 1, 2013 and will be required to submit reports to CMS by March31, 2014 (and the 90th day of each subsequent calendar year);•state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed byany third-party payor, including commercial insurers, and state laws governing the privacy and security of health information in certain circumstances,many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under the U.S. federal Anti-KickbackStatute, it is possible that some of our business activities could be subject to challenge under one or more of such laws. In addition, recent health care reformlegislation has strengthened these laws. For example, the PPACA, among other things, amends the intent requirement of the federal anti-kickback and criminalhealthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. Moreover, the PPACAprovides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes afalse or fraudulent claim for purposes of the False Claims Act.In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians, including the tracking and reportingof gifts, compensation and other remuneration to physicians. Certain states mandate implementation of commercial compliance programs to ensure compliancewith these laws and impose restrictions on drug manufacturer marketing practices and tracking and reporting of gifts, compensation and other remuneration tophysicians. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with multiplejurisdictions with different compliance and/or reporting requirements increases the possibility that a healthcare company may be found out of compliance ofone or more of the requirements.To the extent that any product we make is sold in a foreign country, we may be subject to similar foreign laws and regulations. If we or our operationsare found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties,including civil and criminal penalties, damages, fines, exclusion from participation in U.S. federal or state health care programs, and the curtailment orrestructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could materially adversely affect our ability tooperate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of theselaws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us toincur significant legal expenses and divert our management's attention from the operation of our business. Moreover, achieving and sustaining compliance withapplicable federal and state privacy, security and fraud laws may prove costly.Import/export regulations and tariffs may change and increase our costs.We are subject to risks associated with the regulations relating to the import and export of products and materials. We cannot predict whether the importand/or export of our products will be adversely affected by changes in, or enactment of, new quotas, duties, taxes or other charges or restrictions imposed byIndia (where our supplier of the sumatriptan used in Sumavel DosePro is located), the United Kingdom (where the assembly of Sumavel DosePro takes place)or any other country in the future. Any of these factors could adversely affect our business, results of operations, financial condition and prospects.Risks Related to Intellectual PropertyOur success depends in part on our ability to protect our intellectual property. It is difficult and costly to protect our proprietary rights andtechnology, and we may not be able to ensure their protection.Our commercial success depends in large part on obtaining and maintaining patent, trademark and trade secret protection of our products, SumavelDosePro and Zohydro ER, our current product candidate, Relday, and any future product candidates, their respective components, formulations, methodsused to manufacture them and methods of treatment, as well as successfully defending these patents against third-party challenges. Our ability to stopunauthorized third parties from making, using, selling, offering to sell or importing Sumavel DosePro, Zohydro ER or our product candidates is dependentupon the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities.We in-license certain intellectual property for Zohydro ER from Alkermes, and certain intellectual property for Relday from Durect. We rely on theselicensors to file and prosecute patent applications and maintain patents and otherwise protect certain of the intellectual property we license from them. We havenot had and do not have primary control over these activities or any other intellectual property that may be related to our in-licensed intellectual property. Forexample, with respect to our65Table of Contentslicense agreements with Alkermes and Durect, we cannot be certain that such activities by Alkermes and Durect have been or will be conducted in compliancewith applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights. Alkermes has retained the first right,but not the obligation, to initiate an infringement proceeding against a third-party infringer of the intellectual property rights that Alkermes has licensed to us,and enforcement of our licensed patents or defense of any claims asserting the non-infringement, invalidity or unenforceability of these patents would also besubject to the control or cooperation of Alkermes. Similarly, Durect has retained the first right, but not the obligation, to initiate an infringement proceedingagainst a third-party infringer of certain of the intellectual property rights that Durect has licensed to us, and enforcement of certain of our licensed patents ordefense of any claims asserting the non-infringement, invalidity or unenforceability of these patents would also be subject to the control or cooperation ofDurect. We are not entitled to control the manner in which Alkermes or Durect may defend certain of the intellectual property that is licensed to us and it ispossible that their defense activities may be less vigorous than had we conducted the defense ourselves.Most of our patents related to DosePro were acquired from Aradigm, who acquired those patents from a predecessor owner. Our patents related toZohydro ER are licensed from Alkermes. Thus, most of our patents, as well as many of our pending patent applications, were not written by us or ourattorneys, and we did not have control over the drafting and prosecution of these patents. Further, the former patent owners and our licensors might not havegiven the same attention to the drafting and prosecution of these patents and applications as we would have if we had been the owners of the patents andapplications and had control over the drafting and prosecution. In addition, the former patent owners and Alkermes may not have been completely familiarwith U.S. patent law, possibly resulting in inadequate disclosure and/or claims. This could possibly result in findings of invalidity or unenforceability of thepatents we own and in-license, patents issuing with reduced claim scope, or in pending applications not issuing as patents.In addition, as part of the agreement where we acquired patents related to DosePro from Aradigm, Aradigm retained, and we granted to Aradigm, a non-exclusive, worldwide, royalty free license to the acquired patents solely for purposes of the delivery of one or more aerosolized APIs directly into the bronchia orlungs. The agreement with Aradigm also includes a covenant not to compete with us regarding technologies or products for the delivery of one or more APIs vianeedle free injection. That covenant expired on August 26, 2010, giving Aradigm or its licensees the right to develop and sell other needle-free injectiontechnologies and products.The patent positions of pharmaceutical, biopharmaceutical and medical device companies can be highly uncertain and involve complex legal and factualquestions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in patents in these fields hasemerged to date in the United States. There have been recent changes regarding how patent laws are interpreted, and both the PTO and Congress have recentlymade significant changes to the patent system. We cannot accurately predict future changes in the interpretation of patent laws or changes to patent laws whichmight be enacted into law. Those changes may materially affect our patents, our ability to obtain patents and/or the patents and applications of ourcollaborators and licensors. The patent situation in these fields outside the United States is even more uncertain. Changes in either the patent laws or ininterpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patentprotection. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in the patents we own or to which we have a license or third-party patents.The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protectour rights or permit us to gain or keep our competitive advantage. For example:•others may be able to make or use compounds that are similar to the pharmaceutical compounds used in Sumavel DosePro, Zohydro ER and our productcandidates but that are not covered by the claims of our patents or our in-licensed patents;•the APIs in Sumavel DosePro, Zohydro ER and Relday are, or will soon become, commercially available in generic drug products, and no patentprotection will be available without regard to formulation or method of use;•we or our licensors, as the case may be, may not be able to detect infringement against our in-licensed patents, which may be especially difficult formanufacturing processes or formulation patents;•we or our licensors, as the case may be, might not have been the first to make the inventions covered by our owned or in-licensed issued patents orpending patent applications;•we or our licensors, as the case may be, might not have been the first to file patent applications for these inventions;•others may independently develop similar or alternative technologies or duplicate any of our technologies;•it is possible that our pending patent applications will not result in issued patents;•it is possible that our owned or in-licensed U.S. patents or patent applications are not Orange-Book eligible;•it is possible that there are dominating patents to Sumavel DosePro, Zohydro ER or Relday of which we are not aware;•it is possible that there are prior public disclosures that could invalidate our or our licensors' inventions, as the case may be, or parts of our or theirinventions of which we or they are not aware;•it is possible that others may circumvent our owned or in-licensed patents;66Table of Contents•it is possible that there are unpublished applications or patent applications maintained in secrecy that may later issue with claims covering our productsor technology similar to ours;•it is possible that the U.S. government may exercise any of its statutory rights to our owned or in-licensed patents or applications that were developedwithout government funding;•the laws of foreign countries may not protect our or our licensors', as the case may be, proprietary rights to the same extent as the laws of the UnitedStates;•the claims of our owned or in-licensed issued patents or patent applications, if and when issued, may not cover our system or products or our system orproduct candidates;•our owned or in-licensed issued patents may not provide us with any competitive advantages, or may be narrowed in scope, be held invalid orunenforceable as a result of legal administrative challenges by third parties;•we may not develop additional proprietary technologies for which we can obtain patent protection; or•the patents of others may have an adverse effect on our business.We also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However,trade secrets are difficult to protect, and we have limited control over the protection of trade secrets used by our licensors, collaborators and suppliers.Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisorsmay unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our tradesecrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protecttrade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. If our confidential or proprietaryinformation is divulged to or acquired by third parties, including our competitors, our competitive position in the marketplace will be harmed and our abilityto successfully penetrate our target markets could be severely compromised.If any of our owned or in-licensed patents are found to be invalid or unenforceable, or if we are otherwise unable to adequately protect our rights, it couldhave a material adverse impact on our business and our ability to commercialize or license our technology and products. Likewise, our patents covering certaintechnology used in our DosePro system are expected to expire on various dates from 2014 through 2026 and the patents and patent applications licensed to usby Alkermes are expected to expire in 2019.As of February 1, 2014, our patent portfolio included 22 issued U.S. patents, 12 pending U.S. patent applications, 61 issued foreign patents and 35pending foreign patent applications relating to various aspects of Sumavel DosePro, our DosePro technology and Zohydro ER. Eleven of our U.S. patentsrelating to our DosePro technology, U.S. Patent Nos. 5,891,086, 5,957,886, 6,135,979, 7,776,007, 7,901,385, 8,267,903, 8,118,771, 8,241,243,8,241,244, 8,287,489 and 8,343,130 are expected to expire in 2014, 2016, 2017, 2026, 2026, 2023, 2023, 2025, 2022, and 2024. and 2022, respectively.U.S. Patent No. 5,891,086 covers a particular actuator mechanism forming a part of the needleless injector system; U.S. Patent No. 5,957,886 claims aneedleless injector system using a viscous damping medium; U.S. Patent No. 6,135,979 covers the needleless injector with particular safety mechanisms;U.S. Patent Nos. 7,776,007 and 8,287,489 cover systems with a cap and latch mechanism; U.S. Patent Nos. 7,901,385 and 8,267,903 encompassvarious embodiments of the casing for enclosing the injection systems; U.S. Patent Nos. 8,118,771, 8,241,243 and 8,241,244 cover a method of reducingbreakage of glass capsules; 8,491,524 relates to a drug capsule filled with a formulation purged with an inert gas; and 8,343,130 covers a method of reducingthe propensity to create a shock wave on firing the system as used in the Sumavel DosePro system. U.S. Patent Nos. 6,902,742 and 6,228,398 relating toZohydro ER covers a modified release composition containing hydrocodone and are expected to expire in November 2019. Upon the expiration of thesepatents, we or Alkermes, as applicable, will lose the right to exclude others from practicing the claimed inventions. Additionally, since these eleven patents arethe only patents currently listed in the FDA Orange Book for Sumavel DosePro, or the two patents listed for Zohydro ER, their expiration will mean that welose certain advantages that come with Orange Book listing of patents. The expiration of these patents could also have a similar material adverse effect on ourbusiness, results of operations, financial condition and prospects. Moreover, if Alkermes or Durect decides not to commence or continue any action relating tothe defense of the patents they have licensed to us, they are required to notify us and we have the right to initiate proceedings after receiving their notice. Suchproceedings will require the assistance of Alkermes or Durect, as applicable, and we have limited control over the amount or timing of resources Alkermes orDurect devotes on our behalf or the priority they place on enforcing these patent rights.The patent rights that we have in-licensed covering Zohydro ER are limited to a modified release composition containing hydrocodone. As a result,our market opportunity for this product may be limited by the lack of patent protection for the active ingredient itself and other formulations ofhydrocodone.The active ingredient in Zohydro ER is hydrocodone. Patent protection is not available for the hydrocodone molecule itself in the United States. As aresult, competitors who obtain the requisite regulatory approval can offer products with the same active ingredient as Zohydro ER so long as the competitors donot infringe any patents that we have in-licensed from67Table of ContentsAlkermes. We are the exclusive licensee in the United States and its territories of two U.S. patents and one U.S. patent application owned by Alkermes fororal, controlled-release hydrocodone products for the treatment or relief of pain, pain syndromes or pain associated with medical conditions or procedures.U.S. Patent Nos. 6,228,398 and 6,902,742 cover a modified release composition containing hydrocodone. These patents both expire in November 2019.Third parties may challenge the patents covering Zohydro ER, which could result in the invalidation or unenforceability of some or all of the relevantpatent claims. For example, invalidity claims have been filed against U.S. Patent No. 6,228,398 for products unrelated to Zohydro ER or hydrocodone.Moreover, if a third party files an NDA or abbreviated new drug application, or ANDA, for a generic drug product containing hydrocodone and reliesin whole or in part on studies conducted by or for us, the third party will be required to certify to the FDA that, in the opinion of that third party, the patentslisted in the Orange Book for Zohydro ER are invalid, unenforceable, or will not be infringed by the manufacture, use or sale of the third party’s generic drugproduct. A third party certification that the new product will not infringe the Orange Book-listed patent for Zohydro ER, or that such patents are invalid, iscalled a Paragraph IV patent certification. If the third party submits a Paragraph IV patent certification to the FDA, a notice of the Paragraph IV patentcertification must also be sent to us and Alkermes once the third-party’s NDA or ANDA is accepted for filing by the FDA. A lawsuit may then be initiated todefend the patents identified in the notice. The filing of a patent infringement lawsuit within 45 days of the receipt of notice of a Paragraph IV patentcertification automatically prevents the FDA from approving the NDA or ANDA until the earlier of the expiration of a 30-month period, the expiration of thepatents, the entry of a settlement order stating that the patents are invalid or not infringed, a decision in the infringement case that is favorable to the NDA orANDA applicant, or such shorter or longer period as the court may order. If a patent infringement lawsuit is not initiated within the required 45-day period, thethird-party’s NDA or ANDA will not be subject to the 30-month stay.Alkermes has retained the first right, but not the obligation, to enforce our licensed patent or defend any claims asserting the invalidity orunenforceability of these patents. We are not entitled to control the manner in which Alkermes may defend certain of the intellectual property that is licensed tous and it is possible that Alkermes’ defense activities may be less vigorous than had we conducted the defense ourselves. If Alkermes decides not to initiate apatent infringement lawsuit following the receipt of notice of a Paragraph IV patent certification and we decide to do so, such litigation would be very complexin nature and may be very expensive and time-consuming, may divert our management’s attention from our core business, and may result in unfavorableresults that could adversely impact our ability to prevent third parties from competing with our products. Any adverse outcome of such litigation could resultin one or more generic versions of Zohydro ER being launched before the expiration of the patents we have in-licensed from Alkermes, which could adverselyaffect our ability to successfully execute our business strategy to commercialize Zohydro ER and negatively impact our financial condition and results ofoperations.If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important toour business.We are a party to a license agreement with Alkermes, pursuant to which we license key intellectual property for Zohydro ER. We also recently enteredinto a license agreement with Durect, pursuant to which we license key intellectual property for Relday. These existing licenses imposes various diligence,milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, our licensors may have the right to terminate thelicense, in which event we would not be able to develop or market the affected products. If we lose such license rights, our business, results of operations,financial condition and prospects may be materially adversely affected. We may enter into additional licenses in the future and if we fail to comply withobligations under those agreements, we could suffer similar consequences.We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights, and we may beunable to protect our rights to our products and technology.If we or our collaborators or licensors choose to go to court to stop a third party from using the inventions claimed in our owned or in-licensed patents,that third party may ask the court to rule that the patents are not infringed, invalid and/or should not be enforced against that third party. These lawsuits areexpensive and would consume time and other resources even if we or they, as the case may be, were successful in stopping the infringement of these patents. Inaddition, there is a risk that the court will decide that these patents are not valid and that we or they, as the case may be, do not have the right to stop othersfrom using the inventions.There is also the risk that, even if the validity of these patents is upheld, the court will refuse to stop the third party on the ground that such third-party's activities do not infringe our owned or in-licensed patents. In addition, the U.S. Supreme Court has recently changed some tests regarding grantingpatents and assessing the validity of patents. As a consequence, issued patents may be found to contain invalid claims according to the newly revisedstandards. Some of our own or in-licensed68Table of Contentspatents may be subject to challenge and subsequent invalidation or significant narrowing of claim scope in a reexamination or other post-grant proceedingbefore the PTO, or during litigation, under the revised criteria which make it more difficult to obtain patents. We are not entitled to control the manner in whichAlkermes or Durect may defend certain of the intellectual property that is licensed to us, either in a reexamination or other post-grant proceeding before thePTO, or during the litigation, and it is possible that their defense activities may be less vigorous than had we conducted the defense ourselves.We may also not be able to detect infringement of our own or in-licensed patents, which may be especially difficult for methods of manufacturing orformulation products. While we intend to take actions reasonably necessary to enforce our patent rights, we depend, in part, on our licensors and collaboratorsto protect a substantial portion of our proprietary rights. For example, Alkermes, our licensor, is primarily responsible for the enforcement of the intellectualproperty rights related to Zohydro ER. Under the agreement, Alkermes has the first right, but not the obligation, to initiate an infringement proceeding against athird-party infringer. If Alkermes decides not to commence or continue any action, they are required to notify us and grant us step in rights to enforce the in-licensed intellectual property. Such enforcement will require the cooperation of Alkermes, and we will be responsible for Alkermes' reasonable expenses andattorney's fees incurred as a result of that cooperation. We have limited control over the amount or timing of resources Alkermes devotes on our behalf or thepriority they place on enforcing these patent rights to our advantage. Similarly, Durect, our licensor, is primarily responsible for the enforcement of certain ofthe intellectual property rights it licenses to us related to Relday. Under the agreement, Durect has the first right, but not the obligation, to initiate aninfringement proceeding against a third-party infringer of those intellectual property rights through the use, marketing, sale or import of a product that iscompetitive to Relday. If Durect decides not to commence or continue any such action, we have the right, but not the duty, to do so and such enforcement willrequire the cooperation of Durect. We have limited control over the amount or timing of resources Durect devotes on our behalf or the priority it places onenforcing these patent rights to our advantage.If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in thatlitigation would have a material adverse effect on our business.Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our products andproduct candidates and use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patentsand pending patent applications, which are owned by third parties, exist in the fields relating to Sumavel DosePro, Zohydro ER and Relday. As the medicaldevice, biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that others may assert that our products orproduct candidates infringe the patent rights of others. Moreover, it is not always clear to industry participants, including us, which patents cover varioustypes of medical devices, drugs, products or their methods of use. Thus, because of the large number of patents issued and patent applications filed in ourfields, there may be a risk that third parties may allege they have patent rights encompassing our products, product candidates, technology or methods.In addition, there may be issued patents of third parties of which we are currently unaware, that are infringed or are alleged to be infringed by ourproducts, product candidate or proprietary technologies. Because some patent applications in the United States may be maintained in secrecy until the patentsare issued, patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing, andpublications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technologycovered by our owned and in-licensed issued patents or our pending applications, or that we or, if applicable, a licensor were the first to invent the technology.Our competitors may have filed, and may in the future file, patent applications covering our products or technology similar to ours. Any such patentapplication may have priority over our owned and in-licensed patent applications or patents, which could further require us to obtain rights to issued patentscovering such technologies. If another party has filed a U.S. patent application on inventions similar to those owned or in-licensed to us, we or, in the case ofin-licensed technology, the licensor may have to participate in an interference proceeding declared by the PTO to determine priority of invention in the UnitedStates. The costs of these proceedings could be substantial, and it is possible that such proceedings may be decided against us if the other party hadindependently arrived at the same or similar invention prior to our own or, if applicable, our licensor's invention, resulting in a loss of our U.S. patent positionwith respect to such inventions. In addition, if another party has reason to assert a substantial new question of patentability against any of our claims in ourowned and in-licensed U.S. patents, the third party can request that the PTO reexamine the patent claims, which may result in a loss of scope of some claimsor a loss of the entire patent. In addition to potential infringement claims, interference and reexamination proceedings, we may become a party to patentopposition proceedings in the European Patent Office, Australian Patent Office or other jurisdictions where either our patents are challenged, or we arechallenging the patents of others. The costs of these proceedings could be substantial, and it is possible that our efforts would be unsuccessful. We may beexposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that our products and/or productcandidates and/or proprietary technologies infringe their intellectual property rights. These lawsuits are costly and could adversely affect our results ofoperations and divert the attention of managerial and technical personnel. There is a risk that a court would decide that we or our commercialization partnersare infringing the third party's patents and would order us or our partners to stop the69Table of Contentsactivities covered by the patents. In addition, there is a risk that a court will order us or our partners to pay the other party damages for having violated theother party's patents.If a third-party's patent was found to cover our products and/or product candidates, proprietary technologies or their uses, we or our collaborators couldbe enjoined by a court and required to pay damages and could be unable to commercialize Sumavel DosePro, Zohydro ER or our product candidates or use ourproprietary technologies unless we or they obtained a license to the patent. A license may not be available to us or our collaborators on acceptable terms, if atall. In addition, during litigation, the patent holder could obtain a preliminary injunction or other equitable relief which could prohibit us from making, usingor selling our products, technologies or methods pending a trial on the merits, which could be years away.There is a substantial amount of litigation involving patent and other intellectual property rights in the device, biotechnology and pharmaceuticalindustries generally. If a third party claims that we or our collaborators infringe its intellectual property rights, we may face a number of issues, including, butnot limited to:•infringement and other intellectual property claims which, regardless of merit, may be expensive and time-consuming to litigate and maydivert our management’s attention from our core business;•substantial damages for infringement, which we may have to pay if a court decides that the product at issue infringes on or violates thethird party’s rights, and if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patentowner’s attorneys’ fees;•a court order prohibiting us from selling or licensing the product unless the third party licenses its patent rights to us, which it is notrequired to do;•if a license is available from a third party, we may have to pay substantial royalties, upfront fees and/or grant cross-licenses to intellectualproperty rights for our products; and•redesigning our products or processes so they do not infringe, which may not be possible or may require substantial monetary expendituresand time.Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greaterresources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability toraise the funds necessary to continue our operations or otherwise have a material adverse effect on our business, results of operations, financial condition andprospects.Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and otherrequirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with theserequirements.Periodic maintenance fees on our owned and in-licensed patents are due to be paid to the PTO in several stages over the lifetime of the patents. Futuremaintenance fees will also need to be paid on other patents which may be issued to us. We have systems in place to remind us to pay these fees, and weemploy outside firms to remind us or our in-licensor to pay annuity fees due to foreign patent agencies on our pending foreign patent applications. The PTOand various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisionsduring the patent application process. In many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with theapplicable rules. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting inpartial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstancewould have a material adverse effect on our business. For the patents and patent applications related to Zohydro ER, Alkermes is obligated to maintain our in-licensed patents in the United States under our license agreement. Should Alkermes fail to pursue maintenance of our licensed patents and patent applications,Alkermes is obligated to notify us and, at that time, we will be granted an opportunity to maintain the prosecution and avoid withdrawal, cancellation,expiration or abandonment of the licensed U.S. patents and applications. For the patents and patent applications related to Relday, Durect is obligated tomaintain certain of our in-licensed patents on a worldwide basis, using commercially reasonable efforts, under our license agreement. Should Durect fail topursue maintenance of certain of those licensed patents and patent applications, Durect is obligated to notify us and, at that time, we will be granted anopportunity to maintain the prosecution and avoid withdrawal, cancellation, expiration or abandonment of those licensed patents and applications.We also may rely on trade secrets and confidentiality agreements to protect our technology and know-how, especially where we do not believe patentprotection is appropriate or obtainable. However, trade secrets are difficult to protect, and we have limited control over the protection of trade secrets used byour licensors, collaborators and suppliers. Although we use70Table of Contentsreasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionallyor willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensiveand time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets.Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. If our confidential or proprietary information isdivulged to or acquired by third parties, including our competitors, our competitive position in the marketplace will be harmed and our ability to successfullygenerate revenues from Sumavel DosePro, Zohydro ER, and, if approved by the FDA or other regulatory authorities, our product candidates could beadversely affected.We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.As is common in the device, biotechnology and pharmaceutical industries, we employ individuals who were previously employed at other device,biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we maybe subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their formeremployers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result insubstantial costs and be a distraction to management, which would adversely affect our financial condition.71Table of ContentsRisks Relating to the Securities Markets and an Investment in Our StockThe market price of our common stock has fluctuated and is likely to continue to fluctuate substantially.The market prices for securities of biotechnology and pharmaceutical companies have historically been highly volatile, and the market has recentlyexperienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Since the commencement oftrading in connection with our initial public offering in November 2010, the publicly traded shares of our common stock have themselves experiencedsignificant price and volume fluctuations. During the year ended December 31, 2013, the price per share for our common stock on the Nasdaq Global Markethas ranged from a low sale price of $1.16 to a high sale price of $3.50. This market volatility is likely to continue. These and other factors could reduce themarket price of our common stock, regardless of our operating performance. In addition, the trading price of our common stock could change significantly,both over short periods of time and the longer term, due to many factors, including those described elsewhere in this “Risk Factors” section and the following:•announcements concerning our commercial progress in promoting and selling Sumavel DosePro and Zohydro ER, including sales and revenue trends;•FDA or international regulatory actions and whether and when we receive regulatory approval for any of our product candidates;•the development status of Relday or any of our other product candidates, including the results from our clinical trials;•announcements of the introduction of new products by us or our competitors;•announcements concerning product development results or intellectual property rights of others;•announcements relating to litigation, intellectual property or our business, and the public's response to press releases or other public announcements by usor third parties;•variations in the level of expenses related to Relday or any of our other product candidates or clinical development programs, including relating to thetiming of invoices from, and other billing practices of, our CROs and clinical trial sites;•market conditions or trends in the pharmaceutical sector or the economy as a whole;•changes in operating performance and stock market valuations of other pharmaceutical companies and price and volume fluctuations in the overall stockmarket;•litigation or public concern about the safety of Sumavel DosePro, Zohydro ER or our product candidates;•actual and anticipated fluctuations in our quarterly operating results;•the financial projections we may provide to the public, any changes in these projections or our inability to meet these projections;•deviations from securities analysts' estimates or the impact of other analyst comments;•ratings downgrades by any securities analysts who follow our common stock;•additions or departures of key personnel;•third-party payor coverage and reimbursement policies;•developments concerning current or future strategic collaborations, and the timing of payments we may make or receive under these arrangements;•developments affecting our contract manufacturers, component fabricators and service providers;•the development and sustainability of an active trading market for our common stock;•future sales of our common stock by our officers, directors and significant stockholders;•other events or factors, including those resulting from war, incidents of terrorism, natural disasters, security breaches, system failures or responses tothese events;•changes in accounting principles; and•discussion of us or our stock price by the financial and scientific press and in online investor communities.In addition, the stock markets, and in particular the Nasdaq Global Market, have experienced extreme price and volume fluctuations that have affectedand continue to affect the market prices of equity securities of many pharmaceutical companies. Stock prices of many pharmaceutical companies havefluctuated in a manner unrelated or disproportionate to the operating performance of those companies. The realization of any of the above risks or any of abroad range of other risks, including those described in these “Risk Factors” could have a dramatic and material adverse impact on the market price of ourcommon stock.There may not be a viable public market for our common stock.Our common stock had not been publicly traded prior to our initial public offering in November 2010, the trading volume of our common stock on theNasdaq Global Market has been limited and an active trading market may not be developed or sustained. We cannot predict the extent to which investorinterest in our company will lead to the development of an active trading market on the Nasdaq Global Market or otherwise or how liquid that market mightbecome. If an active public market72Table of Contentsdoes not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all. Further, aninactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategicpartnerships or acquire companies or products, product candidates or technologies by using our shares of common stock as consideration.We may invest or spend our cash in ways with which you may not agree or in ways which may not yield a significant return.Our management has considerable discretion in the use of our cash. Our cash may be used for purposes that do not increase our operating results ormarket value. Until the cash is used, it may be placed in investments that do not produce significant income or that may lose value. The failure of ourmanagement to invest or spend our cash effectively could result in unfavorable returns and uncertainty about our prospects, each of which could cause theprice of our common stock to decline.Our quarterly operating results may fluctuate significantly.Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period, particularly because the commercialsuccess of, and demand for, Sumavel DosePro and Zohydro ER, as well as the success and costs of our Relday and other product candidate developmentprograms are uncertain and therefore our future prospects are uncertain. Our net loss and other operating results will be affected by numerous factors,including:•fluctuations in the quarterly revenues of Sumavel DosePro, including fluctuations resulting from our distributors' inventory management practices andbuying patterns;•the level of underlying demand for Sumavel DosePro, Zohydro ER or any of our product candidates that may receive regulatory approval;•our ability to successfully market and sell Zohydro ER;•our ability to control production spending and underutilization of production capacity;•variations in the level of development and/or regulatory expenses related to Relday or other development programs;•results of clinical trials for Relday or any other of our product candidates;•any intellectual property infringement lawsuit in which we may become involved;•regulatory developments and legislative changes, including healthcare reform, affecting our products and product candidates or those of our competitors;and•our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements.If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could declinesubstantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.We may become involved in securities class action litigation that could divert management’s attention and adversely affect our business and couldsubject us to significant liabilities.The stock markets have experienced significant price and volume fluctuations that have affected the market prices for the common stock ofpharmaceutical companies. These broad market fluctuations as well a broad range of other factors, including the realization of any of the risks described inthese “Risk Factors,” may cause the market price of our common stock to decline. In the past, securities class action litigation has often been brought against acompany following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and pharmaceutical companiesgenerally experience significant stock price volatility. We may become involved in this type of litigation in the future. Litigation often is expensive and divertsmanagement's attention and resources, which could adversely affect our business. Any adverse determination in any such litigation or any amounts paid tosettle any such actual or threatened litigation could require that we make significant payments.If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price andtrading volume could decline.The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or ourbusiness. As of December 31, 2013, we had research coverage by only four securities analysts. If these securities analysts cease coverage of our company, thetrading price for our stock would be negatively impacted. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate orunfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reportson us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.73Table of ContentsFuture sales of our common stock or securities convertible or exchangeable for our common stock may depress our stock price.Persons who were our stockholders prior to the sale of shares in our initial public offering in November 2010 continue to hold a substantial number ofshares of our common stock that they are able to sell in the public market, subject in some cases to certain legal restrictions. Significant portions of theseshares are held by a small number of stockholders. Further there is one stockholder If these stockholders sell, or indicate an intention to sell, substantialamounts of our common stock in the public market, the trading price of our common stock could decline. The perception in the market that these sales mayoccur could also cause the trading price of our common stock to decline. As of December 31, 2013, we had 138,927,014 shares of common stockoutstanding. Of these shares, approximately 96,265,000 are freely tradeable, without restriction, in the public market.In addition, shares of common stock that are either subject to outstanding options or reserved for future issuance under our employee benefit plans areeligible for sale in the public market to the extent permitted by the provisions of various vesting schedules and Rule 144 and Rule 701 under the Securities Actof 1933, as amended, or the Securities Act, and, in any event, we have filed a registration statement permitting shares of common stock issued on exercise ofoptions to be freely sold in the public market. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the publicmarket, the trading price of our common stock could decline.We have registered under the Securities Act 15,784,200 shares of our common stock issuable upon the exercise of the warrants we issued in July 2012,which warrants became exercisable on July 27, 2013 at an exercise price of $2.50 per share (subject to restrictions on exercise set forth in such warrants). Asof December 31, 2013, warrants were still outstanding to exercise 15,680,700 shares of this registered common stock, which means that upon exercise ofwarrants, such shares will be freely tradeable without restriction under the Securities Act, except for shares held by our affiliates. Further, certain holders ofshares of our common stock are entitled to rights with respect to the registration of their shares under the Securities Act, which, if registered, would alsobecome freely tradeable without restriction under the Securities Act, except for shares held by our affiliates. In addition, our directors and executive officersmay establish programmed selling plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for the purpose ofeffecting sales of our common stock. Any sales of securities by these stockholders, warrantholders or executive officers and directors, or the perception thatthose sales may occur, could have a material adverse effect on the trading price of our common stock.Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control which could limit the marketprice of our common stock and may prevent or frustrate attempts by our stockholders to replace or remove our current management.Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change ofcontrol of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions include:•a board of directors divided into three classes serving staggered three-year terms, such that not all members of the board will be elected at one time;•a prohibition on stockholder action through written consent, which requires that all stockholder actions be taken at a meeting of our stockholders;•a requirement that special meetings of stockholders be called only by the chairman of the board of directors, the chief executive officer, the presidentor by a majority of the total number of authorized directors;•advance notice requirements for stockholder proposals and nominations for election to our board of directors;•a requirement that no member of our board of directors may be removed from office by our stockholders except for cause and, in addition to anyother vote required by law, upon the approval of not less than 66 2/3% of all outstanding shares of our voting stock then entitled to vote in the electionof directors;•a requirement of approval of not less than 66 2/3% of all outstanding shares of our voting stock to amend any bylaws by stockholder action or toamend specific provisions of our certificate of incorporation; and•the authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval and whichpreferred stock may include rights superior to the rights of the holders of common stock.In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, whichmay prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These anti-takeover provisions andother provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for stockholders orpotential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors and could also delay orimpede a merger, tender offer or proxy contest involving our company. These provisions could also discourage proxy74Table of Contentscontests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions you desire.Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.The continued operation and expansion of our business will require substantial funding. Investors seeking cash dividends in the foreseeable futureshould not purchase our common stock. We have paid no cash dividends on any of our classes of capital stock to date and we currently intend to retain ouravailable cash to fund the development and growth of our business. Any determination to pay dividends in the future will be at the discretion of our board ofdirectors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors ourboard of directors deems relevant. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any return to stockholderswill therefore be limited to the appreciation in the market price of their stock, which may never occur.We have incurred and will continue to incur significant increased costs as a result of operating as a public company, and our management isrequired to devote substantial time to meet compliance obligations.As a public company, we have incurred and will continue to incur significant legal, accounting and other expenses. We are subject to the reportingrequirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and theNasdaq Stock Market, or Nasdaq, that impose significant requirements on public companies, including requiring establishment and maintenance of effectivedisclosure and financial controls and changes in corporate governance practices. The Exchange Act requires, among other things, that we file annual, quarterlyand current reports with respect to our business and financial condition. In addition, on July 21, 2010, the Dodd-Frank Wall Street Reform and ProtectionAct, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Actthat require the SEC to adopt additional rules and regulations in these areas. The requirements of these rules and regulations have increased and will continueto increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place considerable strain onour personnel, systems and resources. Our management and other personnel have devoted and will continue to devote a substantial amount of time to these newcompliance initiatives. In addition, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officerliability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similarcoverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or asexecutive officers.The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls andprocedures. Ensuring that we have adequate internal financial and accounting controls and procedures in place is a costly and time-consuming effort thatneeds to be re-evaluated frequently. In particular, commencing in fiscal 2011, we performed system and process evaluation and testing of our internal controlsover financial reporting which allowed management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 ofthe Sarbanes-Oxley Act, or Section 404. Our future testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be materialweaknesses or that may require prospective or retroactive changes to our consolidated financial statements or identify other areas for further attention orimprovement. We expect to incur significant expense and devote substantial management effort toward ensuring compliance with Section 404. Pursuant toSection 404(c) of the Sarbanes-Oxley Act, our independent registered public accounting firm is required to deliver an attestation report on the effectiveness ofour internal control over financial reporting. We currently do not have an internal audit function, and we may need to hire additional accounting and financialstaff with appropriate public company experience and technical accounting knowledge. Implementing any appropriate changes to our internal controls mayrequire specific compliance training for our directors, officers and employees, entail substantial costs to modify our existing accounting systems, and take asignificant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure tomaintain that adequacy, or consequent inability to produce accurate consolidated financial statements or other reports on a timely basis, could increase ouroperating costs and could materially impair our ability to operate our business. Moreover, effective internal controls are necessary for us to produce reliablefinancial reports and are important to help prevent fraud. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or ourindependent registered public accounting firm identifies deficiencies in our internal controls that are deemed to be material weaknesses, the market price of ourstock could decline and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities, which would entail expenditureof additional financial and management resources.75Table of ContentsItem 1B. Unresolved Staff CommentsNot applicable.Item 2. PropertiesOur facilities are located in San Diego and Emeryville, California. Our general and administrative and sales and marketing personnel are located at ourSan Diego facility. Our manufacturing operations, product development, quality assurance and clinical and regulatory personnel are primarily located in ourEmeryville facility.We occupy 13,124 square feet of office space in San Diego under a lease that we entered in April 2012, which expires in November 2014. Prior to April2012, we occupied 12,929 square feet of office space in San Diego under a lease that expired in April 2012.We occupy 12,128 square feet of office and laboratory space in Emeryville under a lease which expires in 2015.We believe that the space in San Diego and Emeryville is currently adequate to meet our needs in those locations, and that, if necessary, additional spacecan be leased to accommodate any future growth.The manufacturing equipment used to produce our DosePro technology is currently located at our contract manufacturers’ and component suppliers’facilities in Europe where we occupy an aggregate of more than 20,000 square feet of space that is used to manufacture Sumavel DosePro.Item 3. Legal ProceedingsWe are not currently a party to any legal proceedings.Item 4. Mine Safety DisclosuresNot Applicable.76Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket InformationOur common stock has been traded on the Nasdaq Global Market since November 23, 2010 under the symbol “ZGNX.” Prior to such time, there wasno public market for our common stock. The following table sets forth the high and low sales price of our common stock, as reported by the Nasdaq GlobalMarket for the period indicated: High LowYear Ended December 31, 2013 Fourth Quarter3.50 1.85Third Quarter2.24 1.50Second Quarter2.10 1.25First Quarter2.12 1.16Year Ended December 31, 2012 Fourth Quarter3.16 1.11Third Quarter2.86 1.99Second Quarter2.58 1.55First Quarter2.94 1.76Holders of Common StockAs of March 3, 2014, there were approximately 36 holders of record of our common stock. Certain shares are held in “street” name and, accordingly,the number of beneficial owners of such shares is not known or included in the foregoing number.77Table of ContentsPerformance GraphThe following stock performance graph illustrates a comparison of the total cumulative stockholder return on our common stock since November 23,2010, which is the date our common stock first began trading on the NASDAQ Global Market, to two indices: the NASDAQ Composite Index and theNASDAQ Biotechnology Index. The graph assumes an initial investment of $100 on November 23, 2010, and that all dividends were reinvested. Thecomparisons in the graph are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible futureperformance of our common stock.Dividend PolicyWe have never declared or paid any cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future. Weexpect to retain available cash to finance ongoing operations and the potential growth of our business. Any future determination to pay dividends on ourcommon stock will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition,capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant.Equity Compensation Plan InformationThe following table summarizes securities available under our equity compensation plans as of December 31, 2013 (in thousands, except per sharedata). 78Table of Contents Weightedaverage pershareexercise priceof stockoptions Sharesissuable uponexercise ofoutstandingstock options Sharesissuable uponvesting ofoutstandingrestrictedstock units Total sharesissuableundercurrentoutstandingawards Number ofsecuritiesavailable forfutureissuanceEquity compensation plans approved by securityholders: 2006 Equity Incentive Plan$3.46 1,112 — 1,112 —2010 Equity Incentive Plan (1)$2.31 11,445 1,331 12,776 457Total Equity Incentive Plans 12,557 1,331 13,888 4572010 Employee Stock Purchase Plan — — — 410Total Equity compensation plans approved bysecurity holders 12,557 1,331 13,888 867Equity compensation plans not approved bysecurity holders: Employment Inducement Equity Incentive Award Plan(2)$3.08 972 — 972 1,728(1)The material features of our 2010 Equity Incentive Plan, including the evergreen provision under the 2010 Equity Incentive Plan, are described in note 9 toour consolidated financial statements included in this Annual Report on Form 10-K.(2)The material features of our Employment Inducement Equity Incentive Award Plan are described in note 9 to our consolidated financial statementsincluded in this Annual Report on Form 10-K.Recent Sales of Unregistered SecuritiesNone.Issuer Repurchases of Equity SecuritiesNone.79Table of ContentsItem 6. Selected Financial Data.The following table summarizes certain of our selected financial data. The selected financial data for the years ended December 31, 2013, 2012, 2011,2010 and 2009 have been derived from our audited financial statements, of which the consolidated statement of operations and comprehensive loss data for thethree fiscal years ending December 31, 2013, 2012 and 2011 and consolidated balance sheet data as of December 31, 2013 and 2012 are included elsewhere inthis Annual Report on Form 10-K. Our historical results and financial condition are not necessarily indicative of the results or financial condition that may beexpected in the future. The selected financial data set forth below should be read together with our financial statements and related notes thereto and Item 7,“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. Year Ended December 31, 2013 2012 2011 2010 2009 (In Thousands, Except Per Share Amounts)Statement of Operations and Comprehensive Loss Data Revenue: Net product revenue$31,699 $35,826 $30,411 $19,069 $—Contract revenue— 8,462 7,165 4,373 —Service and other revenue1,313 38 — — —Total revenue33,012 44,326 37,576 23,442 —Operating expenses: Cost of sales21,241 19,496 19,293 12,846 —Royalty expense1,242 1,353 1,205 843 —Research and development12,805 21,414 33,043 28,643 21,438Selling, general and administrative50,040 49,494 60,459 51,270 14,102Restructuring costs876 — — — —Total operating expenses86,204 91,757 114,000 93,602 35,540Loss from operations(53,192) (47,431) (76,424) (70,160) (35,540)Other income (expense): Interest income18 53 37 5 10Interest expense(6,610) (10,313) (7,644) (10,013) (9,188)Change in fair value of warrant liability(21,927) 11,811 445 6,725 (755)Change in fair value of embedded derivatives759 (147) (240) — —Other income (expense)96 (1,354) (86) (111) (416)Total other income (expense)(27,664) 50 (7,488) (3,394) (10,349)Loss before income taxes(80,856) (47,381) (83,912) (73,554) (45,889)Provision for income taxes— (5) 9 (10) —Net loss$(80,856) $(47,386) $(83,903) $(73,564) $(45,889)Net loss per share, basic and diluted (1)$(0.74) $(0.59) $(1.96) $(17.63) $(40.97)Weighted-average shares outstanding, basic and diluted (1)108,568 80,558 42,712 4,173 1,120Comprehensive loss$(80,856) $(47,386) $(83,903) $(73,564) $(45,889) (1)See Note 2 of Notes to Consolidated Financial Statements for an explanation of the method used to calculate net loss per share and the number of sharesused in the computation of the net per share amounts.80Table of Contents As of December 31, 2013 2012 2011 2010 2009 (In Thousands)Balance Sheet Data: Cash and cash equivalents and investment securities, available for sale$72,021 $41,228 $56,525 $49,172 $44,911Working capital34,099 29,071 37,057 38,626 42,102Total assets112,504 80,686 100,640 94,268 74,568Long-term debt, less current portion28,802 28,481 42,070 19,934 8,778Convertible preferred stock warrant liability— — — — 5,041Convertible preferred stock— — — — 149,312Accumulated deficit(410,247) (329,391) (282,005) (198,102) (124,538)Total stockholders’ equity (deficit)18,426 14,473 9,312 28,734 (122,300)81Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONSThe following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected FinancialData” and our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historicalinformation, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual resultsmay differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited, to those setforth under “Item 1A — Risk Factors” and elsewhere in this Annual Report on Form 10-K.OverviewBackgroundWe are a pharmaceutical company committed to developing and commercializing therapies that address specific clinical needs for people living withpain-related conditions and central nervous system disorders who need innovative treatment alternatives to help them return to normal daily functioning. OnOctober 25, 2013, we received marketing approval from the U.S. Food and Drug Administration, or FDA, for Zohydro™ ER (hydrocodone bitartrate)extended-release capsules, an opioid agonist, extended-release oral formulation of hydrocodone without acetaminophen, for the management of pain severeenough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. Zohydro ER is the firstextended-release oral formulation of hydrocodone without acetaminophen. Zohydro ER was launched on March 3, 2014. In addition, we are commercializingSumavel® DosePro® (sumatriptan injection) Needle-free Delivery System, which was launched in January 2010. Sumavel DosePro offers fast-acting, easy-to-use, needle-free subcutaneous administration of sumatriptan for the acute treatment of migraine and cluster headache in a pre-filled, single-use deliverysystem. Sumavel DosePro is the first drug product approved by the FDA that allows for the needle-free, subcutaneous delivery of medication.Sumavel DosePro and Zohydro ER each have the potential to address significant unmet medical needs and become important and widely-used additionsto the treatment options available to patients and physicians in the United States’ multi-billion dollar migraine and chronic pain markets, respectively.We are also developing Relday™, a proprietary, long-acting injectable formulation of risperidone using Durect Corporation's SABER™ controlled-release formulation technology through a development and license agreement with Durect. Risperidone is used to treat the symptoms of schizophrenia andbipolar disorder in adults and teenagers 13 years of age and older. If successfully developed and approved, we believe Relday may be the first subcutaneousantipsychotic product that allows for once-monthly dosing. In May 2012, we filed an investigational new drug, or IND, application with the FDA. In July2012, we initiated our first clinical trial for Relday. This Phase 1 clinical trial was a single-center, open-label, safety and pharmacokinetic trial of 30 patientswith chronic, stable schizophrenia or schizoaffective disorder. We announced positive single-dose pharmacokinetic results from the Phase 1 clinical trial inJanuary 2013. Based on the favorable safety and pharmacokinetic profile demonstrated with the 25 mg and 50 mg once-monthly doses tested in the Phase 1trial, we extended the study to include an additional cohort of 10 patients at a 100 mg dose of the same formulation. We announced positive top-line resultsfrom the extended Phase 1 clinical trial in May 2013. The positive results from this study extension position us to begin a multi-dose clinical trial, which webelieve will provide the required steady-state pharmacokinetic and safety data prior to initiating Phase 3 development studies. We plan to commence this multi-dose clinical trial in the second half of 2014.The development of Relday will first focus on its delivery by conventional needle and syringe in order to allow the administration of different volumes ofthe same formulation of Relday by a healthcare professional. We anticipate that the introduction of our DosePro needle-free technology for administration ofRelday can occur later in development or as part of life cycle management after further work involving formulation development, technology enhancements,and applicable regulatory approvals.We have experienced net losses and negative cash flow from operating activities since inception, and as of December 31, 2013, had an accumulateddeficit of $410.2 million. We expect to continue to incur net losses and negative cash flow from operating activities for at least the next year primarily as aresult of our efforts to commercialize Zohydro ER, the clinical development for Relday, required post-market testing for Zohydro ER, additional developmentactivities with respect to Zohydro ER, including the development of an abuse deterrent formulation of Zohydro ER, and the cost of the sales and marketingexpenses associated with Sumavel DosePro and Zohydro ER. As of December 31, 2013, we had cash and cash equivalents of $72.0 million.82Table of ContentsOn March 27, 2013, we entered into a controlled equity offering sales agreement, or the sales agreement, with Cantor Fitzgerald & Co., or Cantor, assales agent, under which we issued and sold shares of our common stock from time to time through Cantor. The sales of common stock made under the salesagreement were made in “at-the-market” offerings as defined in Rule 415 of the Securities Act of 1933, as amended, or the Securities Act. Under the salesagreement, we issued 6.8 million shares of our common stock during 2013 at an average stock issuance price of $1.66 per share, resulting in net proceeds ofapproximately $10.8 million. The sales agreement with Cantor terminated on November 16, 2013.On November 12, 2013, we completed a public offering of common stock for net proceeds of approximately $64.5 million (including over-allotmentpurchase), after deducting underwriting discounts and commissions of $4.1 million and offering expenses of approximately $0.4 million, or the November2013 Offering. We sold a total of 30,666,667 shares of our common stock (including the underwriters' over-allotment purchase of 4,000,000 shares) at apurchase price of $2.25 per share.Although it is difficult to predict future liquidity requirements, we believe that our cash and cash equivalents as of December 31, 2013, and ourprojected product revenues from Sumavel DosePro and Zohydro ER, will be sufficient to fund our operations through 2014. We will need to obtain additionalfunds to finance our operations beyond that point, or possibly earlier. We intend to raise additional capital, if necessary, through public or private equityofferings, debt financings, receivables financings or through collaborations or partnerships with other companies. If we are unsuccessful in raising additionalrequired funds, we may be required to significantly delay, reduce the scope of or eliminate one or more of our development programs or our commercializationefforts, or cease operating as a going concern. We also may be required to relinquish, license or otherwise dispose of rights to product candidates or productsthat we would otherwise seek to develop or commercialize ourselves on terms that are less favorable than might otherwise be available. In its report on ourconsolidated financial statements for the year ended December 31, 2013, our independent registered public accounting firm included an explanatory paragraphexpressing substantial doubt regarding our ability to continue as a going concern.Mallinckrodt LLC Co-Promotion AgreementIn June 2012, we entered into a co-promotion agreement with Mallinckrodt LLC, or Mallinckrodt. Under the terms of the co-promotion agreement,Mallinckrodt was granted a co-exclusive right (with us) to promote Sumavel DosePro in the United States. Mallinckrodt's sales team began selling SumavelDosePro in August 2012. The initial term of the agreement was to run through June 30, 2014. In January 2014, we entered into an amendment to the co-promotion agreement, whereby the agreement terminated on January 31, 2014. We assumed full responsibility for the commercialization of Sumavel DoseProin February 2014.In partial consideration of Mallinckrodt's sales efforts, we paid Mallinckrodt a service fee on a quarterly basis through January 31, 2014 thatrepresented a specified fixed percentage of net sales of prescriptions generated from Mallinckrodt's prescriber audience over a baseline amount of net sales. Inaddition, in connection with the termination of the co-promotion agreement, we are required to make a one-time tail payment to Mallinckrodt, calculated as afixed percentage of net sales from the Mallinckrodt targeted prescriber audience during the 12-month period ending on January 31, 2015. A liability for thistail-payment will be recorded in the first quarter of 2014 once it is reasonably estimable. For the twelve months ended December 31, 2013 and 2012, weincurred service fee expenses of $1.0 million and $0.2 million, respectively.Altus Formulation Inc. Development and Option AgreementIn November 2013, we entered into a development and option agreement with Altus Formulation Inc., or Altus. Under the agreement, Altus is responsiblefor the development of abuse deterrent formulations of hydrocodone using Altus’ Intellitab™ drug delivery platform and will be reimbursed by us for itsdevelopment efforts on the product. We are responsible for the conduct of the clinical development of the product. We paid a non-refundable upfront fee toAltus of $0.8 million and we are also obligated to pay Altus up to $3.5 million in total future milestone payments upon the achievement of variousdevelopment and regulatory milestones. The term of the development agreement will end upon expiration of the earlier of (1) the date upon which an NDA orsimilar application for regulatory approval is submitted by us for an Altus abuse deterrent formulation of hydrocodone, or (2) November 1, 2016.Pursuant to the development agreement, we were granted an option to obtain an exclusive, royalty-bearing license, with the right to sublicense, to certainAltus intellectual property rights to make, have made, use, sell, have sold, offer for sale and import an abuse deterrent formulation of hydrocodone for thetreatment or relief of pain in the United States. However, we will need to obtain the consent of Alkermes or otherwise amend our license agreement withAlkermes for Zohydro ER in order to exercise the option and ultimately commercialize an Altus abuse deterrent formulation of hydrocodone. If we exercise thisoption, Altus will be eligible to receive additional regulatory and sales milestones and a royalty based on net sales of the licensed product.83Table of ContentsValeant Co-Promotion AgreementIn June 2013, we entered into a co-promotion agreement, or the Valeant agreement, with Valeant Pharmaceuticals North America LLC, or Valeant. Underthe terms of the Valeant agreement, we were granted the exclusive right (with Valeant or any of its affiliates) to promote Migranal® (dihydroergotaminemesylate) Nasal Spray, or Migranal, to a prescriber audience of physicians and other health care practitioners in the United States. Our sales team beganpromoting Migranal to prescribers in August 2013. The term of the Valeant agreement will run through December 31, 2015 (unless otherwise terminated), andcan be extended by mutual agreement of the parties in additional twelve-month increments. Valeant remains responsible for the manufacture, supply anddistribution of Migranal for sale in the United States. In addition, Valeant will supply us with a specified amount of product samples every six months, andwe will reimburse Valeant for the cost of additional samples and any promotional materials ordered by us. The cost of any additional samples and anypromotional materials ordered by us will be recognized as selling, general and administrative expenses.In partial consideration of our sales efforts, Valeant pays us a co-promotion fee on a quarterly basis that represents specified percentages of net salesgenerated by us over defined baseline amounts of net sales, or the Baseline Forecast and Adjusted Baseline Forecast. In addition, upon completion of the co-promotion term, and only if the Valeant agreement is not terminated by Valeant due to a bankruptcy event (as defined in the Valeant agreement) or a materialfailure by us to comply with our material obligations under the Valeant agreement, Valeant will be required to pay us an additional tail payment calculated as afixed percentage of our net sales over the Baseline Forecast (or Adjusted Baseline Forecast) during the first full six months following the last day of the term.For the twelve months ended December 31, 2013, we recognized service revenue of $1.1 million under the Valeant Agreement.Astellas Pharma US, Inc. Co-Promotion AgreementIn July 2009, we entered into a co-promotion agreement, or the Astellas co-promotion agreement, with Astellas Pharma U.S., Inc., or Astellas. Under theterms of the Astellas co-promotion agreement, we granted Astellas the co-exclusive right, with us, to market and sell Sumavel DosePro in the United States(excluding Puerto Rico and the other territories and possessions of the United States) until June 30, 2013. Under the Astellas co-promotion agreement, bothAstellas and we were obligated to collaborate and fund the marketing of Sumavel DosePro and to provide annual minimum levels of sales effort directed atSumavel DosePro during the term. In December 2011, we entered into an amendment to the Astellas co-promotion agreement, or the amended Astellas co-promotion agreement, whereby the agreement terminated on March 31, 2012.In connection with the execution of the Astellas co-promotion agreement, Astellas made a non-refundable up-front payment of $2.0 million and madeadditional payments of $18.0 million to us upon the achievement of a series of milestones. In consideration for Astellas’ performance of its commercial efforts,we paid Astellas a service fee on a quarterly basis that represented a fixed percentage of between 45% and 55% of Sumavel DosePro net sales to primary carephysicians, OB/GYNs, emergency medicine physicians, and urologists in the United States, or the Astellas Segment.In accordance with accounting guidance for revenue arrangements with multiple deliverables, we initially recorded the $20.0 million in upfront andmilestone payments received from Astellas as deferred revenue. Beginning with the launch of Sumavel DosePro in January 2010, we began amortizing theupfront and milestone payments as contract revenue in the consolidated statement of operations and comprehensive loss over the term of the agreement. Upontermination of the Astellas co-promotion agreement, we concluded that the remaining deferred revenue balance should be recognized ratably through theamended term of the agreement, and consequently, all deferred contract revenues were recognized through March 31, 2012. For the years ended December 31,2013, 2012 and 2011 we recognized $0, $8.5 million and $7.2 million, respectively, of contract revenue.In addition, following completion of the co-promotion term in March 2012, we were required to pay Astellas one tail payment in July 2013 and arerequired to pay Astellas another tail payment in July 2014, calculated as decreasing fixed percentages (ranging from mid-twenties down to a mid-teenpercentage) of net sales in the Astellas Segment during the 12 months ended March 31, 2012. The value of such tail payments was estimated at a total of $5.3million based upon the agreement termination date of March 31, 2012, and recorded as a long-term liability on the amendment date of December 20, 2011. Thefair value of the tail payments will be accreted through interest expense through the dates of payment in July 2013 and July 2014. The first tail payment of$2.0 million was made in July 2013. As of December 31, 2013 and 2012, the tail payment liability, after considering the August 2012 service fee reductiondiscussed below, was $1.1 million and $2.8 million, respectively. We recognized $0.4 million and $0.6 million of related interest expense during the yearsended December 31, 2013 and 2012, and did not recognize any related interest expense during the year ended December 31, 2011.Further, under the terms of the amended Astellas co-promotion agreement, Astellas contributed its agreed upon portion of marketing expenses throughMarch 31, 2012, and continued to earn a service fee based on product sales to the Astellas Segment during that period. As of April 1, 2012, we were no longerrequired to pay service fees to Astellas for sales of Sumavel84Table of ContentsDosePro. Additionally, beginning in the second quarter of 2012, our sales force assumed full responsibility for the commercialization and the continuedmarketing of Sumavel DosePro, expanding their focus to include headache specialists, neurologists and primary care physicians in the United States.Amounts received from Astellas for shared marketing costs and sample product are reflected as a reduction of selling, general and administrative expenses,and amounts payable to Astellas for shared marketing expenses and service fees are reflected as selling, general and administrative expenses, inclusive of theestimated cost of the tail payments owed upon the termination of the agreement.In August 2012, we and Astellas completed a final reconciliation under the terms of the Astellas co-promotion agreement and agreed to adjust the servicefees paid to Astellas over the term of the agreement, resulting in a service fee reduction of $1.5 million, which offsets the two annual tail payments, and areduction to the annual tail payment liability of $0.7 million. The present value of the service fee receivable and tail payment reduction of $1.9 million wasrecorded as a reduction in selling, general and administrative expenses during the year ended December 31, 2012, and an offset to the tail payment liability.The fair value of the service fee receivable and tail payment reduction will be accreted through interest income through the dates of the two tail payments inJuly 2013 and July 2014.For the years ended December 31, 2013, 2012 and 2011, we recognized shared marketing expense of $0, $0.3 million and $1.7 million, respectively,under the Astellas co-promotion agreement. For the years ended December 31, 2013, 2012 and 2011, we incurred $0, $1.8 million (excluding the $1.9 millionservice fee adjustment discussed above) and $6.7 million (excluding the $2.8 million expense recognized when the tail payments were initially recorded) inservice fee expenses, respectively.Alkermes License Agreement (formerly Elan Pharma International Limited)In 2007, we entered into a license agreement with Alkermes, which was amended in 2009. Under the terms of this agreement, Alkermes granted us anexclusive license in the United States and its possessions and territories, with defined sub-license rights to third parties other than certain technologicalcompetitors of Alkermes, to certain Alkermes intellectual property rights related to our Zohydro ER product candidate. The license agreement grants us theexclusive right under certain Alkermes patents and patent applications to import, use, offer for sale and sell oral controlled-release capsule or tabletformulations of hydrocodone, where hydrocodone is the sole active ingredient, for oral prescriptions in the treatment or relief of pain, pain syndromes or painassociated with medical conditions or procedures in the United States. This right enables us to exclusively develop and sell Zohydro ER in the United States.Alkermes has retained the exclusive right to take action in the event of infringement or threatened infringement by a third party of Alkermes’ intellectualproperty rights under the license agreement. We have the right to pursue an infringement claim against the alleged infringer should Alkermes decline to take orcontinue an action.Under the terms of the license agreement, we and Alkermes agreed that, subject to the negotiation of a supply agreement, Alkermes, or an affiliate ofAlkermes, would have the sole and exclusive right to manufacture and supply finished commercial product of Zohydro ER to us under agreed upon financialterms. In November 2012, we entered into a commercial manufacturing and supply agreement for Zohydro ER finished commercial product with AlkermesPharma Limited, or APIL, an affiliate of Alkermes, under which APIL is the exclusive manufacturer and supplier to us, subject to certain exceptions, ofZohydro ER.Alkermes also granted to us, in the event that Alkermes is unwilling or unable to manufacture or supply commercial product to us, a non-exclusivelicense to make product under Alkermes’ intellectual property rights. This non-exclusive license also includes the right to sublicense product manufacturing toa third party, other than certain technological competitors of Alkermes.Under the license agreement, we paid an upfront fee of $0.5 million to Alkermes, which was recorded as research and development expense. We paidadditional milestone payments in the amount of $0.8 million to Alkermes in August 2011 in connection with the completion of the treatment phase of ourpivotal efficacy Phase 3 clinical trial, Study 801, and $1.0 million upon submission of the first Zohydro ER NDA to the FDA in May 2012, which wererecorded as research and development expense. Lastly, we paid a milestone payment of $2.8 million upon the FDA's approval of Zohydro ER in October 2013,which was recorded as other assets in the consolidated balance sheet and will be amortized over the estimated life of the technology, through November 2019.In addition, we will be required to pay a mid single-digit percentage royalty on net sales of the product for an initial royalty term equal to the longer of theexpiration of Alkermes’ patents covering the product in the United States, or 15 years after commercial launch, if Alkermes does not have patents covering theproduct in the United States. After the initial royalty term, the license agreement will continue automatically for three-year rolling periods during which we willcontinue to pay royalties to Alkermes on net sales of the product at a reduced low single-digit percentage rate in accordance with the terms of the agreement.85Table of ContentsEither party may terminate the license agreement, upon a material, uncured default or certain insolvency events of the other party or upon 12 monthswritten notice prior to the end of the initial royalty term or any additional three-year rolling period. We may also terminate the license agreement, with or withoutcause, at any time upon 12 months' prior written notice, or if the sale of Zohydro ER is prohibited by regulatory authorities.Critical Accounting Policies and EstimatesOur management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, whichhave been prepared in conformity with generally accepted accounting principles in the United States, or GAAP. The preparation of these consolidated financialstatements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. Actualresults could differ from those estimates.While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this AnnualReport on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidatedfinancial statements.Revenue RecognitionWe recognize revenue from the sale of Sumavel DosePro and from license fees, milestones and service fees earned on collaborative arrangements. Revenueis recognized when: (i) persuasive evidence that an arrangement exists, (ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable and(iv) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of saleonly if (i) our price to the buyer is substantially fixed or determinable at the date of sale, (ii) the buyer has paid us, or the buyer is obligated to pay us and theobligation is not contingent on resale of the product, (iii) the buyer’s obligation to us would not be changed in the event of theft or physical destruction ordamage of the product, (iv) the buyer acquiring the product for resale has economic substance apart from that provided by us, (v) we do not have significantobligations for future performance to directly bring about resale of the product by the buyer, and (vi) the amount of future returns can be reasonably estimated.Product Revenue, NetWe sell Sumavel DosePro product in the United States to wholesale pharmaceutical distributors and retail pharmacies, or collectively our customers,subject to rights of return. We recognize product sales at the time title transfers to our customer, and we reduce product sales for estimated future productreturns and sales allowances in the same period the related revenue is recognized. Product sales allowances include wholesaler and retail pharmacy distributionfees, prompt pay discounts, chargebacks, rebates and patient discount programs, and are based on amounts owed or to be claimed on the related sales. Theseestimates take into consideration the terms of our agreements with customers and third-party payors and the levels of inventory within the distribution andretail channels that may result in future rebates or discounts taken. In certain cases, such as patient support programs, we recognize the cost of patientdiscounts as a reduction of revenue based on estimated utilization. If actual future results vary, we may need to adjust these estimates, which could have aneffect on product revenue in the period of adjustment.Prior to the third quarter of 2011, Sumavel DosePro had a limited sales history, and we could not reliably estimate expected returns of the product at thetime of shipment. Accordingly, we deferred recognition of revenue on product shipments of Sumavel DosePro until the right of return no longer existed, whichoccurred at the earlier of the time Sumavel DosePro units were dispensed through patient prescriptions or expiration of the right of return. Units dispensed aregenerally not subject to return, except in the rare cases where the product malfunctions or the product is damaged in transit. We estimate patient prescriptionsdispensed using an analysis of third-party information, including third-party market research data.Product Returns. Our estimated product return allowances for Sumavel DosePro require a high degree of judgment and are subject to change based onour experience and certain quantitative and qualitative factors. Sumavel DosePro's shelf life is determined by the shorter expiry date of its two subassemblies,which is currently approximately 30 months from the date of manufacture. Our return policy allows for the customer to return unused product six monthsbefore and up to one year after its expiration date for a credit at the then-current wholesaler acquisition cost, or WAC, reduced by a nominal fee for processingthe return.We have monitored and analyzed actual return history since product launch. Our analysis of actual product return history considers actual productreturns on an individual product lot basis since product launch, the dating of the product at the time of shipment into the distribution channel, prescriptiontrends, trends in customer purchases and their inventory management practices, and changes in the estimated levels of inventory within the distributionchannel to estimate our exposure for returned product. Because of the shelf life of Sumavel DosePro and the duration of time under which our customers mayreturn product86Table of Contentsthrough our return policy, there may be a significant period of time between when the product is shipped and when we issue credits on returned product.Accordingly, we may have to adjust these estimates, which could have a significant effect on product sales and earnings in the period of adjustments. Basedon our analysis of actual product return history, we increased our estimate for product returns, resulting in adjustments of $1.2 million in the first quarter of2013 and $2.4 million in the third quarter of 2013, which led to decreases in net product revenue and earnings for the year ended December 31, 2013. Further,as a result of our third quarter 2013 product returns analysis, we began utilizing a higher product returns rate for Sumavel DosePro sales.A 1% increase or decrease in our returns reserve as a percentage of product shipped in the years ended December 31, 2013 and 2012 would have afinancial statement impact of approximately $0.5 million for each of the years ended December 31, 2013 and 2012.We permit certain wholesale pharmaceutical distributors to purchase limited quantities of product after the announcement of an increase to the WAC ofour product and prior to the effectiveness of the increase. In turn, WAC price increases can result in accelerated purchases by wholesalers relative toanticipated retail and prescription demand. The timing of purchases made by wholesale distributors and retail pharmacies are subject to fluctuations for thesereasons among others. Absent accelerated purchasing by wholesalers or other periodic changes in buying patterns, the wholesale channel has historicallycontained approximately three to four weeks of product on hand.Wholesaler and Retail Pharmacy Distribution Fees. We offer distribution fees to certain wholesale distributors and retail pharmacies based oncontractually determined rates. We accrue the distribution fees on shipment to the respective wholesale distributors and retail pharmacies and recognize thedistribution fees as a reduction of revenue in the same period the related revenue is recognized.Prompt Pay Discounts. We offer cash discounts to our customers, generally 2% of the sales price, as an incentive for prompt payment. We account forcash discounts by reducing accounts receivable by the full amount and recognizing the discount as a reduction of revenue in the same period the relatedrevenue is recognized.Chargebacks. We provide discounts primarily to authorized users of the Federal Supply Schedule, or FSS, of the General Services Administrationunder an FSS contract negotiated by the Department of Veterans Affairs and various organizations under Medicaid contracts and regulations. These entitiespurchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to us the difference between thecurrent retail price and the price the federal entity paid for the product. We estimate and accrue chargebacks based on estimated wholesaler inventory levels,current contract prices and historical chargeback activity. Chargebacks are recognized as a reduction of revenue in the period the related revenue is recognized.Rebates. We participate in certain rebate programs, which provide discounted prescriptions to qualified insured patients. Under these rebate programs,we pay a rebate to the third-party administrator of the program, generally two to three months after the quarter in which prescriptions subject to the rebate arefilled. We estimate and accrue these rebates based on current contract prices, historical and estimated future percentages of product sold to qualified patientsand estimated levels of inventory in the distribution channel. Rebates are recognized as a reduction of revenue in the period the related revenue is recognized.Patient Discount Programs. We offer discount card programs to patients for Sumavel DosePro in which patients receive discounts on theirprescriptions that are reimbursed by us. We estimate the total amount that will be redeemed based on levels of inventory in the distribution and retail channelsand recognize the discount as a reduction of revenue in the same period the related revenue is recognized.Our procedures for estimating amounts accrued for rebates, chargebacks and other incentive programs at the end of any period are based on availablequantitative data and are supplemented by management's judgment with respect to many factors, including but not limited to, current market dynamics,changes in contract terms, impact of new contractual arrangements and changes in sales trends. Quantitatively, we use historical sales, inventory movementthrough commercial channels, product utilization and rebate data and apply forecasting techniques in order to estimate our liability amounts. Qualitatively,management's judgment is applied to these items to modify, if appropriate, the estimated liability amounts. There are inherent risks in this process. Forexample, patients may not achieve assumed utilization levels; third parties may misreport their utilization to us; and discounts determined under federalguidelines, which affect our rebate programs with U.S. federal government agencies, may differ from those estimated.On a quarterly basis, we analyze our estimates against actual rebate, chargeback and incentive program activity and adjust our estimates as necessary.Given our limited history with the commercialization of Sumavel DosePro, we may experience variability in our provisions for these sales allowances as wecontinue to initiate new sales initiatives and/or managed care87Table of Contentsprograms in connection with the commercialization of our product. An adjustment to our estimated liabilities for rebates, chargebacks and other incentiveprograms of 1% of product sales, based on operating results for the year ended December 31, 2013 and 2012, would have resulted in an increase or decrease tonet product sales for each period of approximately $0.5 million. The sensitivity of our estimates can vary by program and type of customer. Additionally,there is a time lag between the date we determine the estimated liability and when we actually pay the liability. Due to this time lag, we may record adjustmentsto our estimated liabilities over several reporting periods, which can result in a net increase to net revenues or a net decrease to net revenues in those periods.Material differences may result in the amount of revenue we recognize from product sales if the actual amount of rebates, chargebacks and incentives differmaterially from the amounts estimated by management. To date, there have been no material differences between the amount recorded in a period and actualcharges incurred.Contract RevenueContract revenue consists of the amortization of license fees and milestone payments received under our co-promotion agreements, which have multipledeliverables. Revenue arrangements with multiple deliverables are divided into separate units of accounting if criteria are met, including whether the deliverablehas stand-alone value to the customer and the customer has a general right of return relative to the delivered item and delivery or performance of the undelivereditem is probable and substantially within the vendor's control. Arrangement consideration is allocated at the inception of the arrangement to all deliverables onthe basis of their relative selling price. The selling price for each deliverable is determined using: (i) vendor-specific objective evidence of selling price, orVSOE, if it exists, (ii) third-party evidence of selling price, or TPE, if VSOE does not exist, and (iii) our best estimate of the selling price if neither VSOE norTPE exists. For transactions entered into prior to January 1, 2011, revenue is recognized for each deliverable based upon the applicable revenue recognitioncriteria discussed above and upon acceptance of goods or performance of service. Effective January 1, 2011, for new or significantly modified transactions,we allocate revenue consideration, excluding contingent consideration, based on the relative selling prices of the separate units of accounting contained withinan arrangement containing multiple deliverables.Service and Other RevenueService and other revenue primarily consists of payments received for our sales efforts under the Valeant agreement. We recognize service and otherrevenue at the time services have been rendered.Inventories and Related ReservesInventories are stated at the lower of cost ( on a first in, first out, or FIFO, basis) or market and consist of finished goods, work in progress and rawmaterials used in the manufacture of Sumavel DosePro. We have significant lead times for the procurement and manufacture of our finished goods and wetherefore order goods from our suppliers and manufacturers based on our forecasts of future demand. To the extent we procure component materials or producefinished goods in excess of actual future demand, we may be required to provide reserves for potentially excess or dated inventories. We provide such reservesbased on an analysis of inventory on hand and on firm purchase commitments compared to forecasts of future sales.Warrants for Common StockWe classify common stock warrants that contain covenants where compliance with such covenants may be outside of our control as short-termliabilities on the consolidated balance sheet. We record the warrant liability at fair value and adjust the carrying value of these common stock warrants to theirestimated fair value at each reporting date with the increases or decreases in the fair value of such warrants recorded as change in fair value of warrant liabilityin the consolidated statement of operations and comprehensive loss. The significant unobservable inputs used in measuring the fair value of the common stockwarrant liabilities is expected volatility, as well as the probability of the occurrence of an extraordinary event for the warrants associated with our July 2012public offering. Significant increases in volatility would result in a higher fair value measurement and significant increases in the probability of anextraordinary event occurring would result in a significantly lower fair value measurement.Embedded DerivativesEmbedded derivatives are recorded in the consolidated balance sheet at fair value. We adjust the carrying value of the embedded derivatives to theirestimated fair value at each reporting date with the increases or decreases in the fair value of such embedded derivatives recorded as change in fair value ofembedded derivatives in the consolidated statement of operations and comprehensive loss. We measure the fair value of the embedded derivatives using variousdiscounted cash flow valuation models. The significant unobservable inputs used in measuring the fair value of the embedded derivatives are management’srevenue projections. Significant decreases in these significant inputs would result in a higher fair value measurement of the derivative liability. Management'srevenue projections used in the December 31, 2013 valuation model significantly increased from prior periods as they included an increase in projectedZohydro ER revenues based on the October 2013 Zohydro ER88Table of ContentsNDA approval date. This significant increase in management's revenue projections led to a significant decrease in the fair value of embedded derivativeliability as of December 31, 2013.Fair Value MeasurementsGAAP requires us to estimate the fair value of certain assets and liabilities as of the date of their acquisition or incurrence, on an ongoing basis, or both.Determining the fair value of an asset or liability, such as our warrants for common stock and embedded derivatives, requires the use of accounting estimatesand assumptions which are judgmental in nature and could have a significant impact on the determination of the amount of the fair value ascribed to the assetor liability.Clinical Trial ExpensesOur expense accruals for clinical trials are based on estimates of the services received from clinical trial investigational sites and contract researchorganizations, or CROs. Payments under some of the contracts we have with such parties depend on factors such as the milestones accomplished, successfulenrollment of certain numbers of patients, site initiation and the completion of clinical trial milestones. In accruing service fees, we estimate the time period overwhich services will be performed and the level of effort to be expended in each period. If possible, we obtain information regarding unbilled services directlyfrom these service providers. However, we may be required to estimate these services based on information available to our product development oradministrative staff. If we underestimate or overestimate the activity associated with a study or service at a given point in time, adjustments to research anddevelopment expenses may be necessary in future periods. Historically, our estimated accrued liabilities have approximated actual expense incurred.Subsequent changes in estimates may result in a material change in our accruals.Stock-Based CompensationStock-based compensation expense is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over theemployee’s requisite service period, or vesting period, on a straight-line basis. Equity awards issued to non-employees are recorded at their fair value on thegrant date and are periodically re-measured as the underlying awards vest unless the instruments are fully vested, immediately exercisable and nonforfeitableon the date of grant.Results of OperationsComparison of Years Ended December 31, 2013, 2012 and 2011Revenue. We recognize net product sales upon the shipment of product to wholesale pharmaceutical distributors and retail pharmacies. Prior to the thirdquarter of 2011, we recognized product revenue based on product dispensed to patients as estimated by independent third party data providers, whichamounts were recorded net of estimated wholesaler and retail pharmacy distribution fees, stocking allowances, prompt pay discounts, chargebacks, rebatesand patient discount programs, as applicable. As a result, product revenue for the first six months of 2011 represents product revenue based on productdispensed to patients net of product-related discounts and allowances, as applicable, with the six months ended December 31, 2011 and years ended December31, 2013 and 2012 consisting of Sumavel DosePro shipped to wholesale distributors and retail pharmacies, net of product-related discounts, allowances andproduct returns, as applicable.Revenue for the years ended December 31, 2013, 2012 and 2011 was $33.0 million, $44.3 million and $37.6 million, respectively. Net product revenuefor the years ended December 31, 2013, 2012 and 2011 was $31.7 million, $35.8 million and $30.4 million, respectively.The aggregate $4.1 million, or 12%, decrease in net product revenue during 2013 compared to 2012 was primarily due to decreases in unit volume of7% and our average net selling price of 4%. The decrease in our average net selling price was primarily due to an increase in our estimate for Sumavel DoseProproduct returns. Based on our analysis of actual product return history, which considers actual product returns on an individual product lot basis sinceproduct launch, and factors such as the dating of our product at the time of shipment into the distribution channel, prescription trends, trends in customerpurchases and their inventory management practices and changes in the estimated levels of inventory within the distribution channel, we increased ourestimate for product returns, resulting in an adjustment of $3.6 million, which decreased our net product sales during the twelve months ended December 31,2013.The aggregate $5.5 million, or 18%, increase in net product revenue during 2012 compared to 2011 was primarily due to an increase in unit volume of16% and an increase in our average selling price of approximately 1%. This decrease in our average selling price per unit was driven by charges related toestimated product returns and a 13% increase in sales allowances as a percentage of gross U.S. product revenue through increased third-party payorcontracting/rebates and patient incentives.89Table of ContentsContract revenue for the years ended December 31, 2013, 2012 and 2011 was $0, $8.5 million and $7.2 million, respectively. Contract revenuerepresents amortization of license fee payments and milestone payments we received in connection with the Astellas co-promotion agreement we entered into inJuly 2009 and which we began recognizing upon the commencement of sales of Sumavel DosePro in January 2010. In December 2011, we amended theAstellas co-promotion agreement whereby the agreement terminated on March 31, 2012, rather than the initial termination date of June 30, 2013. Based uponthis revised termination date, all deferred contract revenue was recognized on an accelerated basis, from the date of amendment through March 31, 2012.Service and other revenue for the years ended December 31, 2013 and 2012 was $1.3 million and $38,000, respectively. We did not recognize anyservice and other revenue during the year ended December 31, 2011. Service and other revenue is primarily comprised of the co-promotion fee that is earned forour Migranal sales efforts under the Valeant Agreement.Cost of Sales. Cost of sales consists primarily of materials, third-party manufacturing costs, freight and indirect personnel and other overhead costsassociated with sales of Sumavel DosePro based on units sold to wholesale pharmaceutical distributors and retail pharmacies, as well as reserves for excess,dated or obsolete commercial inventories and production manufacturing variances. It represents the cost of Sumavel DosePro units recognized as net productrevenues in the period and the impact of underutilized production capacity and other manufacturing variances.Cost of sales for the years ended December 31, 2013, 2012 and 2011 was $21.2 million, $19.5 million and $19.3 million, respectively. Product grossmargin for the year ended December 31, 2013 was 33.0% compared to 45.6% for the year ended December 31, 2012 and 36.6% for the year ended December31, 2011. The decline in product gross margin of 12.6% in 2013 compared to 2012 was primarily due to a one-time scrap charge and excess capacity charge.The improvement in product gross margin of 9.1% in 2012 compared to 2011 was primarily a result of a decrease in excess capacity charges relating to ourcontract manufacturing organizations.Royalty Expense. Royalty expense consists of royalties payable to Aradigm based on net sales of Sumavel DosePro by us or one of our licensees and theamortization of the $4.0 million milestone payment paid by us to Aradigm upon the first commercial sale of Sumavel DosePro in the United States (whichoccurred in January 2010). We are not required to make any further milestone payments to Aradigm. We are required to pay to Aradigm a 3% royalty on globalnet sales of Sumavel DosePro, by us or one of our licensees, if any, until the expiration of the last valid claim of the transferred patents covering themanufacture, use, or sale of the product. During the years ended December 31, 2013, 2012 and 2011, we recorded $1.2 million, $1.4 million and $1.2million, respectively, in royalty expense.Research and Development Expenses. Research and development expenses consist of expenses incurred in developing, testing and seeking marketingapproval of our product candidates, including: license and milestone payments; payments made to third-party clinical research organizations, or CROs, andinvestigational sites, which conduct our trials on our behalf, and consultants; expenses associated with regulatory submissions, pre-clinical development andclinical trials; payments to third-party manufacturers, which produce our active pharmaceutical ingredient and finished product; personnel related expenses,such as salaries, benefits, travel and other related expenses, including stock-based compensation; and facility, maintenance, depreciation and other relatedexpenses. We expense all research and development costs as incurred.We utilize CROs, contract laboratories and independent contractors for the conduct of pre-clinical studies and clinical trials. We track third-party costsby type of study being conducted. We recognize the expenses associated with the services provided by CROs based on the percentage of each study completedat the end of each reporting period. We coordinate clinical trials through a number of contracted investigational sites and recognize the associated expense basedon a number of factors, including actual and estimated subject enrollment and visits, direct pass-through costs and other clinical site fees.The table below sets forth information regarding our research and development costs for our major development programs. The period over periodvariances for our major development programs are explained in the narrative beneath the table. Year Ended December 31, 2013 2012 2011 (In Thousands)Research and development expenses: Zohydro ER$4,535 $11,544 $20,461Relday1,456 3,358 5,066Sumavel DosePro1,200 757 1,129Other (1)5,614 5,755 6,387Total$12,805 $21,414 $33,04390Table of Contents(1) Other research and development expenses include development costs incurred for the DosePro technology sound enhancement and other product candidatedevelopment, as well as employee and infrastructure resources that are not tracked on a program-by-program basis.Research and development costs decreased by $8.6 million for the year ended December 31, 2013 compared to the year ended December 31, 2012primarily due to a decrease in development expenses for Zohydro ER and Relday. The decrease in Zohydro ER development expenses was the result of feespaid in connection with our Zohydro ER NDA submission to the FDA in May 2012 and costs related to preparation for and participation in the December2012 FDA advisory committee meeting for Zohydro ER. We incurred greater research and development expenses for Relday for the year ended December 31,2012 as we filed our IND application with the FDA in July 2012 and initiated our first clinical trial in July 2012.Research and development costs decreased by $11.6 million for the year ended December 31, 2012 compared to the year ended December 31, 2011primarily due to a decrease in development expenses for Zohydro ER and Relday. The decrease in Zohydro ER development expenses was the result of Phase 3clinical trials that were initiated in March 2010 and were completed in December 2011 and a milestone payment made to Alkermes in 2011 upon completion ofthe Phase 3 clinical trials for Zohydro ER. These cost decreases were partially offset by increased expenses related to fees paid in connection with our ZohydroER NDA submission to the FDA in May 2012 and costs related to preparation for and participation in the December 2012 FDA advisory committee meetingfor Zohydro ER. The decrease in Relday development expenses was primarily due to an upfront fee paid to Durect in July 2011 upon execution of the Reldaylicense agreement.We use our employee and infrastructure resources across our product and product candidate development programs. Therefore, we have not trackedsalaries, other personnel related expenses, facilities or other related costs to our product development activities on a program-by-program basis.We expect our research and development costs for 2014 to increase over amounts incurred in 2013 as we prepare for our multi-dose clinical trial forRelday and continue development of an abuse deterrent formulation of Zohydro ER.Selling, General and Administrative Expenses. Selling expenses, which include sales and marketing costs, consists primarily of salaries andbenefits of sales and marketing management and sales representatives, marketing and advertising costs, service fees under our co-promotion agreements andsample product costs. General and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, accounting,business development and internal support functions. In addition, general and administrative expenses include facility costs and professional fees for legal,consulting and accounting services.Selling, general and administrative expenses slightly increased to $50.0 million for the year ended December 31, 2013 compared to $49.5 million for theyear ended December 31, 2012. Selling expenses were $33.5 million for the year ended December 31, 2013 compared to $35.9 million for the year endedDecember 31, 2012. General and administrative expenses were $16.5 million for the year ended December 31, 2013 compared to $13.6 million for the yearended December 31, 2012. The increase of $0.5 million in selling, general and administrative expenses was due to an increase of $2.9 million of general andadministrative expenses, which was offset by a decrease of $2.4 million in sales and marketing expenses.•The decrease in sales and marketing expenses was primarily the result of a decrease in salaries and sales incentive compensation resulting from ourrestructuring in May 2013, which was partially offset by an increase in co-promotion fees paid to Mallinckrodt, as Mallinckrodt provided co-promotion services throughout all of 2013 compared to services provided in 2012 that commenced in August.•The increase in general and administrative expenses was primarily a result of an increase in non-cash stock-based compensation charges andprofessional service related costs, such as legal, accounting and consulting services.Selling, general and administrative expenses decreased to $49.5 million for the year ended December 31, 2012 compared to $60.5 million for the yearended December 31, 2011. Selling expenses were $35.9 million for the year ended December 31, 2012 compared to $47.7 million for the year endedDecember 31, 2011. General and administrative expenses were $13.6 million for the year ended December 31, 2012 compared to $12.8 million for the yearended December 31, 2011. The decrease of $11.0 million in selling, general and administrative expenses was due to a decrease of $11.8 million of sales andmarketing expenses, offset slightly by an increase of $0.8 million of general and administrative expenses.•The decrease in sales and marketing expenses was primarily the result of a $10.8 million decrease in service fees to Astellas due to the termination ofthe co-promotion agreement on March 31, 2012 and resulting reduction of service fees paid over the life of the agreement, and a decrease in otheradvertising and promotional activities. These selling and marketing expense decreases were partially offset by an increase in sales and marketingpersonnel costs primarily due to an increase in non-cash stock compensation expense and sales incentive compensation.91Table of Contents•The increase in general and administrative expenses was primarily a result of an increase in non-cash stock-based compensation charges, salaryexpense and recruiting expenses, partially offset by a decrease in professional service related costs, such as legal and accounting and advisoryservices.We expect our sales and marketing expenses to increase significantly in 2014 due to the increase in our sales and marketing headcount in the first quarterof 2014 to commercialize Zohydro ER, and we expect general administrative expenses to increase in 2014 due to the addition of our medical affairs team, andimplementation of the FDA required extended-release long-acting opioids REMS program and our voluntary safe use initiatives..Interest Income. During the years ended December 31, 2013, 2012 and 2011, interest income was $18,000, $53,000 and $37,000, respectively. Thefluctuations in interest income were primarily driven by fluctuations in average cash and cash equivalent balances during the respective periods.Interest Expense. Interest expense consists of interest expense incurred in connection with our financing agreements and certain other arrangements,including the following:•our $30.0 million financing agreement, or the Healthcare Royalty financing agreement, with Healthcare Royalty Partners (formerly Cowen HealthcareRoyalty Partners II, LP), or Healthcare Royalty;•our $10.0 million revolving credit facility with Oxford Finance Corporation, or Oxford, and Silicon Valley Bank, or SVB;•our $25.0 million loan and security agreement with Oxford and SVB, or the amended Oxford/SVB loan agreement; and•imputed interest from the two annual tail payments to Astellas.Interest expense decreased to $6.6 million for the year ended December 31, 2013 compared to $10.3 million for the year ended December 31, 2012. Thedecrease of $3.7 million was primarily due to the termination of our amended Oxford/SVB loan agreement and revolving credit facility in July 2012.Interest expense increased to $10.3 million for the year ended December 31, 2012 compared to $7.6 million for the year ended December 31, 2011. Theincrease of $2.7 million was primarily due to:•an increase in interest payments related to the $30.0 million borrowed from Healthcare Royalty and an increase in accrued non-cash interest expensebased on our estimate of future interest payments on this facility;•an increase in the amortization of debt discount and acquisition fees related to the amended Oxford/SVB loan agreement and an increase in finalpayment and prepayment fees due to the termination of our amended Oxford/SVB loan agreement in July 2012; and•an increase in non-cash interest expense related to imputed interest from the two annual tail payments payable to Astellas; offset by•a decrease in interest expense due to the termination of our amended Oxford/SVB loan agreement in July 2012.We do not expect a significant change in interest expense in 2014 compared to 2013 levels.Change in Fair Value of Warrant Liabilities. The change in fair value of warrant liabilities relates to a fair value adjustment recorded on the warrantsto purchase common stock issued in connection with our July 2012 public offering and issued in connection with our Healthcare Royalty financing agreement.See Note 8 to the Consolidated Financial Statements.Change in Fair Value of Embedded Derivatives. The change in fair value of embedded derivatives relates to a fair value adjustment recorded on theembedded derivatives associated with the Healthcare Royalty financing agreement. See Note 7 to the Consolidated Financial Statements.Other Expense. Other expense for the years ended December 31, 2013 and 2011 consists primarily of foreign currency transaction gains and losses.Other expense for the year ended December 31, 2012 consists of expense incurred in July 2012 from the issuance of warrants in our public offering, slightlyoffset by foreign currency transaction gains.Provision for Income Tax (Expense) Benefits. Provision for income tax (expense) benefit is primarily related to the taxable income generated by ourwholly-owned subsidiary, Zogenix Europe Limited.Net Operating Loss and Tax Credit Carryforwards. As of December 31, 2013, we had available federal and state net operating loss carryforwards ofapproximately $208.1 million and $202.1 million, respectively. If not utilized, the net operating loss carryforwards will begin expiring in 2026 for federal taxpurposes and 2015 for state tax purposes. As of December 31,92Table of Contents2013, we had federal and state research and development tax credit carryforwards of approximately $1.1 million and $2.2 million, respectively. The federalresearch and development income tax credit carryforwards will begin to expire in 2026 unless previously utilized. The California research and developmentincome tax credit carryforwards will carry forward indefinitely until utilized.Under Section 382 of the Internal Revenue Code of 1986, as amended, or the IRC, substantial changes in our ownership may limit the amount of netoperating loss and research and development income tax credit carryforwards that could be utilized annually in the future to offset taxable income. Specifically,this limitation may arise in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Any such annuallimitation may significantly reduce the utilization of the net operating loss carryforwards before they expire.We completed an analysis under IRC Sections 382 and 383 to determine if our net operating loss carryforwards and research and development creditsare limited due to a change in ownership. We determined that as of December 31, 2011 we had two ownership changes. The first ownership change occurred inAugust 2006 upon the issuance of our Series A-1 convertible preferred stock. As a result of this ownership change, we reduced our net operating losscarryforwards by $1.9 million and research and development income tax credits by $8,000. We determined that, as of December 31, 2011, we had a secondownership change, as defined by IRC Section 382 and 383, which occurred in September 2011 upon the issuance of stock in our follow-on offering. As aresult of this second ownership change, we reduced our federal and state net operating loss carryforwards as of December 31, 2010 by $83.5 million and$46.2 million, respectively, and research and development income tax credits as of December 31, 2010 by $2.2 million. We are currently in the process ofcompleting a Section 382 and 383 study to determine the impact that ownership changes during the year ended December 31, 2013 have had on ourcarryforwards and expect to complete the analysis within the next twelve months. As a result of this analysis, we may have an adjustment in the net operatinglosses that are recorded at December 31, 2013.Pursuant to IRC Section 382 and 383, the use of our net operating loss and research and development income tax credit carryforwards may be limited inthe event of a future cumulative change in ownership of more than 50% within a three-year period. Any such limitations, whether as the result of prior orfuture offerings of our common stock or sales of common stock by our existing stockholders, could have an adverse effect on our consolidated results ofoperations in future years. In each period since our inception, we have recorded a valuation allowance for the full amount of our deferred tax asset, as therealization of the deferred tax asset is uncertain. As a result, we have not recorded any federal or state income tax benefit in our consolidated statement ofoperations and comprehensive loss.Liquidity and Capital ResourcesWe have experienced net losses and negative cash flow from operations since inception, and as of December 31, 2013, had an accumulated deficit of$410.2 million. We expect to continue to incur net losses and negative cash flow from operating activities for at least the next year primarily as a result of theexpenses incurred in connection with the commercialization of Zohydro ER, the clinical development for Relday, required post-market testing for Zohydro ER,additional activities with respect to Zohydro ER, including the development of an abuse deterrent formulation of Zohydro ER, and the cost of the sales andmarketing expense associated with Sumavel DosePro and Zohydro ER. As of December 31, 2013, we had cash and cash equivalents of $72.0 million.On March 27, 2013, we entered into the sales agreement with Cantor, as sales agent, under which we issued and sold shares of our common stock fromtime to time through Cantor. The sales of common stock made under the sales agreement were made in “at-the-market” offerings as defined in Rule 415 of theSecurities Act. Under the sales agreement, we issued 6.8 million shares of our common stock during 2013 at an average stock issuance price of $1.66 pershare, resulting in net proceeds of approximately $10.8 million. The sales agreement with Cantor terminated on November 16, 2013.On November 12, 2013, we completed the November 2013 Offering for net proceeds of approximately $64.5 million (including over-allotmentpurchase), after deducting underwriting discounts and commissions of $4.1 million and offering expenses of approximately $0.4 million. We sold a total of30,666,667 shares of our common stock (including the underwriters' over-allotment purchase of 4,000,000 shares) at a purchase price of $2.25 per share.Although it is difficult to predict future liquidity requirements, we believe that our cash and cash equivalents as of December 31, 2013, and ourprojected product revenues from Sumavel DosePro and Zohydro ER, will be sufficient to fund our operations through 2014. We will need to obtain additionalfunds to finance our operations beyond that point, or possibly earlier. We intend to raise additional capital, if necessary, through public or private equityofferings, debt financings, receivables financings or through collaborations or partnerships with other companies. If we are unsuccessful in raising additionalrequired funds, we may be required to significantly delay, reduce the scope of or eliminate one or more of our development programs or our commercializationefforts, or cease operating as a going concern. We also may be required to93Table of Contentsrelinquish, license or otherwise dispose of rights to product candidates or products that we would otherwise seek to develop or commercialize ourselves onterms that are less favorable than might otherwise be available.In its report on our consolidated financial statements for the year ended December 31, 2013, our independent registered public accounting firm includedan explanatory paragraph expressing substantial doubt regarding our ability to continue as a going concern. A “going concern” opinion means, in general, thatour independent registered public accounting firm has substantial doubt about our ability to continue our operations without continuing infusions of capitalfrom external sources and this opinion could impair our ability to finance our operations through the sale of debt or equity securities or commercial bankloans. Our ability to continue as a going concern depends, in large part, on our ability to generate positive cash flow from operations and obtain additionalfinancing, neither of which is certain. If we are unable to achieve these goals, our business would be jeopardized and we may not be able to continue operationsand have to liquidate our assets and may receive less than the value at which those assets were carried on our financial statements, and it is likely thatinvestors will lose all or part of their investment.Since inception, our operations have been financed primarily through equity and debt financings, the issuance of convertible notes and paymentsreceived from Astellas under our Astellas co-promotion agreement. Through December 31, 2013, we received aggregate net cash proceeds of approximately$417.5 million from the sale of shares of our preferred and common stock, including the following recent financing transactions:•in July 2011, we entered into the Healthcare Royalty financing agreement pursuant to which we sold 388,601 shares of our common stock, resulting in$1.4 million of net proceeds;•in September 2011 and October 2011, we issued and sold a total of 30,711,566 shares of common stock in a follow-on public offering, including sharesissued upon the exercise of the underwriters’ option to purchase over-allotment shares, for aggregate net proceeds of $57.9 million;•in July 2012, we issued and sold a total of 35,058,300 shares of common stock and warrants to purchase 15,784,200 shares of common stock in apublic offering, including the underwriters' over-allotment purchase, for aggregate net proceeds of $65.4 million.;•in 2013, we issued and sold a total of 6,753,104 shares of common stock under our controlled equity offering program, resulting in aggregate netproceeds of $10.8 million; and•in November 2013, we issued and sold a total of 30,666,667 shares of common stock in a follow-on public offering, including shares issued upon theexercise of the underwriters' option to purchase over-allotment shares, for aggregate net proceeds of $64.5 million.On July 30, 2012, we terminated our amended Oxford/SVB loan agreement. The amended Oxford/SVB Agreement consisted of a $25.0 million termloan and a $10.0 million revolving credit facility. The obligations under the amended Oxford/SVB loan agreement were collateralized by our intellectualproperty (including among other things, copyrights, patents, patent applications, trademarks, service marks and trade secret rights) and personal property(including, among other things, accounts receivable, equipment, inventory, contract rights, rights to payment of money, license agreements, general intangiblesand cash). The $25.0 million term loan bore an interest rate of 12.06% per annum. Under the terms of the revolving credit facility, $10.0 million wasavailable to be borrowed within a specified percentage of our eligible accounts receivable and inventory balances (as defined in the agreement). Amountsoutstanding under the revolving credit facility accrued interest payable monthly at a floating rate per annum equal to the greater of 3.29% above SVB's primerate or 7.29%. In addition, we paid a monthly fee equal to 0.5% per annum of the average unused portion of the revolving credit facility.In connection with the repayment and termination of the amended Oxford/SVB loan agreement, we repaid $19.5 million of outstanding principal andinterest under the agreement. In addition to the repayment of all principal and interest outstanding, we were also required to make a final payment of $1.2million and a prepayment premium of $0.4 million, or 2% of the then outstanding principal. We also paid a $0.1 million prepayment premium to terminate therevolving credit facility. As a result of the termination of the amended Oxford/SVB loan agreement, the lenders no longer have a security interest in ourintellectual property and personal property (including, among other things, accounts receivable, equipment, inventory, contract rights, rights to payment ofmoney, license agreements, general intangibles and cash).On July 18, 2011, we closed the Healthcare Royalty financing agreement. Under the terms of the Healthcare Royalty Financing agreement, we borrowed$30.0 million and we are obligated to repay such borrowed amount together with a specified return to Healthcare Royalty, through the payment of tieredroyalties ranging from .5% to 5% of our direct product sales, co-promotion revenues and out-license revenues, or collectively, revenue interest, that we mayrecord or receive as a result of worldwide commercialization of our products including Sumavel DosePro, Zohydro ER and other future products. Pursuant tothe terms of the Healthcare Royalty financing agreement, our royalty rate increased to 5.75% in April 2012 in connection with the early termination of theAstellas co-promotion agreement.94Table of ContentsWe are also obligated to make three fixed payments of $10.0 million on (or before at our option) each of January 31, 2015, January 31, 2016 andJanuary 31, 2017.We have the option to terminate the Healthcare Royalty financing agreement at our election in connection with a change of control of our company, uponthe payment of a base amount of $52.5 million, or, if higher, an amount that generates a 19% internal rate of return on the borrowed amount as of the date ofprepayment, in each case reduced by the Revenue Interest and principal payments received by Healthcare Royalty up to the date of prepayment.Healthcare Royalty has the option to terminate the Healthcare Royalty financing agreement at its election in connection with a change of control of ourcompany (which may include the sale, transfer, assignment or licensing of our rights in the United States to either Sumavel DosePro or Zohydro ER), or anevent of default (which includes the occurrence of a bankruptcy event or other material adverse change in our business), as defined in the Healthcare Royaltyfinancing agreement. Upon such a termination by Healthcare Royalty, we are obligated to make a payment of a base amount of $45.0 million, or, if higher, anamount that generates a 17% internal rate of return on the borrowed amount as of the date of prepayment, in each case reduced by the revenue interest andprincipal payments received by Healthcare Royalty up to the date of prepayment. Unless terminated earlier as discussed above, the Healthcare Royaltyfinancing agreement terminates on March 31, 2018.Any requirement that we repay the borrowed amount under the Healthcare Royalty financing agreement, whether as the result of our default under theapplicable agreement or otherwise, could have a material adverse effect on our business, results of operations and financial condition.Cash and Cash Equivalents. Cash and cash equivalents totaled $72.0 million and $41.2 million at December 31, 2013 and December 31, 2012,respectively.The following table summarizes our cash flows from (used in) operating, investing and financing activities for the years ended December 31, 2013,2012 and 2011: Year Ended December 31, 2013 2012 2011 (In Thousands)Statement of Cash Flows Data: Total cash provided by (used in): Operating activities$(44,920) $(52,202) $(80,471)Investing activities(810) (293) (617)Financing activities76,523 37,198 88,441Net (decrease) increase in cash and cash equivalents$30,793 $(15,297) $7,353Operating Activities. Net cash used in operating activities was $44.9 million, $52.2 million and $80.5 million for the years ended December 31, 2013,2012 and 2011, respectively. Net cash used for the year ended December 31, 2013 primarily reflects the use of cash for operations, adjusted for non-cashcharges, including a $21.9 million change in fair value of warrant liabilities and $8.2 million for stock-based compensation (which includes $0.2 million instock-based compensation from restructuring), partially offset by a $(0.8) million change in fair value of embedded derivatives. Significant working capitaluses of cash for the year ended December 31, 2013 included personnel-related costs, sales and marketing expenses for Sumavel DosePro and preparation forthe launch of Zohydro ER, research and development costs (primarily for employee and infrastructure resources) and other professional services.Net cash used for the year ended December 31, 2012 primarily reflects the use of cash for operations, adjusted for non-cash charges, including $6.2million in stock-based compensation, offset by an $11.8 million change in fair value of warrant liabilities and an $8.5 million reduction in deferred revenuerelated to the termination of the Astellas co-promotion agreement. Significant working capital uses of cash for the year ended December 31, 2012 includedpersonnel-related costs, research and development costs (primarily for Zohydro ER and Relday), sales and marketing expenses for Sumavel DosePro, andother professional services.Net cash used for the year ended December 31, 2011 primarily reflects the use of cash for operations, adjusted for non-cash charges, including $4.8million in stock-based compensation, offset by a $10.8 million reduction in deferred revenue related to the Astellas co-promotion agreement. Significantworking capital uses of cash for the year ended December 31, 2011 included personnel-related costs, research and development costs (primarily for ZohydroER, including a milestone payment made to Alkermes in 2011), sales and marketing expenses for Sumavel DosePro, and other professional services.95Table of ContentsInvesting Activities. Net cash used in investing activities was $0.8 million, $0.3 million, and $0.6 million for the years ended December 31, 2013,2012 and 2011, respectively. These amounts are the result of the purchase of property and equipment primarily for use in manufacturing Sumavel DosePro.We expect to incur capital expenditures of approximately $0.5 million to $1.0 million in 2014. These planned capital expenditures primarily relate tofurther investments in our manufacturing operations for Sumavel DosePro and toward enhancing our existing manufacturing technology and equipment.Financing Activities. Net cash provided by financing activities was $76.5 million, $37.2 million and $88.4 million for the years ended December 31,2013, 2012 and 2011, respectively. Net cash provided by financing activities for the year ended December 31, 2013 included net proceeds from the sale ofcommon stock in the November 2013 Offering and under our controlled equity offering program. Net cash provided by financing activities for the year endedDecember 31, 2012 included net proceeds from the issuance of common stock and warrants to purchase common stock during our July 2012 public offering,and net proceeds provided by our revolving credit facility with Oxford/SVB, offset by payments on our borrowed debt. Net cash provided by financingactivities for the year ended December 31, 2011 included net proceeds received from the issuance of common stock in our follow-on public offering, netproceeds received in connection with our Healthcare Royalty financing agreement, net proceeds received from our $10.0 million revolving credit facility andproceeds from the issuance of common stock purchased through our Employee Stock Purchase Plan, offset by payments on borrowings of debt.Our sources of liquidity include our cash balances and cash receipts from the sale of Sumavel DosePro. Through December 31, 2013, we receivedaggregate net cash proceeds of approximately $417.5 million from the sale of shares of our preferred and common stock. As of December 31, 2013, we had$72.0 million in cash and cash equivalents. Other potential sources of near-term liquidity include (i) equity, debt or other financing, (ii) entering into acommercialization agreement for Zohydro ER, or a licensing arrangement for Relday, or (iii) further leveraging our sales force capacity to promote Migranal oranother new product.Successful transition to profitability is dependent upon achieving a level of product revenues adequate to support our cost structure. We will continue tomonitor and evaluate our sales progress, the level of our research, development, manufacturing, sales and marketing and general and administrativeexpenditures and may adjust such expenditures based upon a variety of factors, such as our available cash, our ability to obtain additional cash, the resultsand progress of our Sumavel DosePro and Zohydro ER commercialization efforts, results and progress in our clinical program, the time and costs related toclinical trials and regulatory decisions, as well as the U.S. economic environment.As described above, we have agreed to specified positive and negative covenants under the Healthcare Royalty financing agreement and upon atermination by Healthcare Royalty, we are obligated to make a payment of a base amount of $45.0 million, or, if higher, an amount that generates a 17%internal rate of return on the borrowed amount as of the date of prepayment, in each case reduced by the payments received by Healthcare Royalty up to thedate of prepayment. If we were required to accelerate the payment of these amounts upon a default, we would be required to find an alternate source of capitalfrom which to draw funds and there can be no assurances that we would be able to do so on terms acceptable to us, or at all.If we fail to pay amounts owing under the Healthcare Royalty financing agreement when due, if we breach our other covenants or obligations under theagreement, or if other events of default under the agreement occur, Healthcare Royalty would be entitled to demand immediate repayment of all borrowings andother obligations thereunder and to seize and sell the collateral pledged as security under the agreements to satisfy those obligations. If we were to breach ourcovenants and obligations and we were unable to obtain a waiver or amendment from the lender, we would be required to seek additional equity or debtfinancing to refinance our obligations under the agreement. Additional debt or equity financing may not be available to us in amounts or on terms we consideracceptable, or at all. In that regard, we have from time to time been required to obtain waivers and amendments under our debt instruments in order to avoidbreaches or other defaults. For example, in each of 2012, 2011 and 2010 we were required to obtain amendments or waivers under our credit facilities.We cannot be certain if, when and to what extent we will generate positive cash flow from operations from the commercialization of our products and, ifapproved, product candidates. We expect our expenses to be substantial and to increase over the next few years as we continue to grow the Sumavel DoseProbrand, launch our Zohydro ER product and as we potentially advance Relday through clinical development.Contractual Obligations and CommitmentsThe following table describes our long-term contractual obligations and commitments as of December 31, 2013:96Table of Contents Payments Due by Period Total Less than1 Year 1-3 Years 4-5 Years Morethan5 Years (In Thousands)Debt obligations (1)$30,000 $— $20,000 $10,000 $—Debt interest (2)27,049 3,033 13,189 10,827 —Operating lease obligations (3)2,066 1,330 736 — —Co-Promotion tail payments (4)1,218 1,218 — — —Purchase obligations (5)28,366 17,181 11,185 — —Total$88,699 $22,762 $45,110 $20,827 $— (1)Represents annual payments under the Healthcare Royalty financing agreement, which occur on January 1 of 2015, 2016 and 2017.(2)Includes the interest on scheduled debt payments under the Healthcare Royalty financing agreement, estimated using the effective interest method andrevenue projections.(3)Includes the minimum rental payments for our San Diego, California office pursuant to a lease entered into in April 2012, which expires in November2014. Also includes the minimum rental payments for our Emeryville, California office pursuant to a lease entered into in July 2007, which expires, asextended, in September 2015. Also includes the rental payments for a fleet vehicles pursuant to a lease entered into in August 2009. Each vehicle has alease term of 36 months.(4)Represents the final annual tail payment due to Astellas for the termination of our Astellas co-promotion agreement in March 2012, which is to be paid inJuly 2014.(5)Primarily represents non-cancellable purchase orders for the production of key components of Sumavel DosePro, a minimum manufacturing fee payableto Patheon UK Limited through the remaining term of our manufacturing services agreement, and non-cancellable orders for the purchase of Zohydro ER.These purchase obligations are based on the exchange rate at December 31, 2013.Under our asset purchase agreement with Aradigm, we are required to pay a 3% royalty on global net sales of Sumavel DosePro by us or one of ourlicensees and, in the event that we or one of our future licensees, if any, commercializes a non-sumatriptan product in the DosePro delivery system, we arerequired to pay Aradigm, at our election, either a 3% royalty on net sales of each non-sumatriptan product commercialized or a fixed low-twenties percentage ofroyalty revenue received by us from the licensee.Under our development and license agreement with Alkermes we will be required to pay a mid single-digit percentage royalty on Zohydro ER net sales fora specified period of time and continue to pay royalties on net sales of the product thereafter at a reduced low single-digit percentage rate in accordance with theterms of the license agreement.Under our Relday license agreement with Durect we are obligated to pay Durect up to $103.0 million in total future milestone payments with respect tothe product subject to and upon the achievement of various development, regulatory and sales milestones. In addition, we are required to pay Durect a midsingle-digit to low double-digit percentage patent royalty on annual net sales of the product determined on a jurisdiction-by-jurisdiction basis, and we are alsorequired to pay to Durect a tiered percentage of fees received in connection with any sublicense of the licensed rights. Further, until an NDA for Relday hasbeen filed in the United States, we are obligated to spend no less than $1.0 million in external expenses on the development of Relday in any trailing twelvemonth period beginning in July 2012.Under our Healthcare Royalty financing agreement we are obligated to pay to Healthcare Royalty Revenue Interest on product sales between 5.75% and0.5%, depending upon the level of product sales made.Under our development and option agreement with Altus, we are obligated to pay Altus up to $3.5 million in total future milestone payments with respectto an abuse deterrent formulation of hydrocodone, subject to the achievement of various development and regulatory milestones. In addition, if we exercise ouroption to license certain Altus intellectual property, we will be required to pay additional regulatory and sales milestones and a royalty on net sales of thelicensed product.We also maintain agreements with third parties to manufacture our product, conduct our clinical trials, and perform data collection and analysis. Ourpayment obligations under these agreements will likely depend upon the progress of our development programs, sales of our product and commercializationefforts. Therefore, we are unable at this time to estimate with certainty the future costs we will incur under these agreements.97Table of ContentsRecent Accounting PronouncementsIn February 2013, the Financial Accounting Standards Board issued an Accounting Standards Update which requires entities to separately presentamounts reclassified out of accumulated other comprehensive income, or AOCI, for each component of AOCI and to disclose, for each affected line item in theincome statement, the amount of AOCI that has been reclassified into that line item. For AOCI reclassification items that are not reclassified in their entiretyinto net income, it is acceptable to cross reference that amount to another footnote that provides the required disclosure. The updated guidance became effectivefor fiscal and interim periods beginning after December 15, 2012. We adopted this guidance on January 1, 2013 and it did not have a material impact on ourresults of operations.Off-Balance Sheet ArrangementsWe have not engaged in any off-balance sheet activities.Item 7A. Quantitative and Qualitative Disclosures About Market RiskInterest Rate RiskOur cash and cash equivalents as of December 31, 2013 consisted of cash and money market funds. Our primary exposure to market risk is interestincome sensitivity, which is affected by changes in the general level of U.S. interest rates. The primary objective of our investment activities is to preserveprincipal. Instruments that meet this objective include commercial paper, money market funds and government and non-government debt securities. Some ofthe investment securities available-for-sale that we invest in may be subject to market risk. This means that a change in prevailing interest rates may cause thevalue of the investment securities available-for-sale to fluctuate. To minimize this risk, we intend to continue to maintain our portfolio of cash and moneymarket funds. Due to the short-term nature of our investments and our ability to hold them to maturity, we believe that there is no material exposure to interestrate risk.Foreign Exchange RiskAll of the revenues we have generated to date have been paid in U.S. dollars and we expect that our revenues will continue to be generated primarily inU.S. dollars for at least the next several years. Payments to our material suppliers and contract manufactures are denominated in the Euro and U.K. poundssterling, thereby increasing our exposure to exchange rate gains and losses on non-U.S. currency transactions. Foreign currency gains and losses associatedwith these expenditures have not been significant to date. However, fluctuations in the rate of exchange between the U.S. dollar and these or other foreigncurrencies could adversely affect our financial results in the future, particularly to the extent we increase production to support Sumavel DosePro salesdemands. For the twelve months ended December 31, 2013, approximately $18.9 million (based on exchange rates as of December 31, 2013) of our materialsand contract manufacturing costs were denominated in foreign currencies. We do not currently hedge our foreign currency exchange rate risk. As a result, weare exposed to gains and/or losses as the exchange rate of certain foreign currencies fluctuates. A 10% increase or decrease in the average rate of the Euro or theU.K. pound sterling during the twelve months ended December 31, 2013 would have resulted in approximately $0.7 million or $1.2 million in gains or losses,respectively. We intend to evaluate various options to mitigate the risk of financial exposure from transacting in foreign currencies in the future.Item 8. Financial Statements and Supplementary DataOur consolidated financial statements and the report of our independent registered public accounting firm are included in this report on pages F-1through F-31.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresConclusions Regarding the Effectiveness of Disclosure Controls and ProceduresWe maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports isrecorded, processed, summarized and reported within the timelines specified in the Securities and Exchange Commission’s rules and forms, and that suchinformation is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that anycontrols and98Table of Contentsprocedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching areasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls andprocedures.As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controlsand procedures, as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of December 31, 2013 at the reasonable assurance level.Management’s Annual Report on Internal Control Over Financial ReportingInternal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief FinancialOfficer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes thosepolicies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions ofour assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management anddirectors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’sassets that could have a material effect on the financial statements.Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations.Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdownsresulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because ofsuch limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards toreduce, though not eliminate, this risk.Management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and ChiefFinancial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting. Management has used the framework setforth in the report entitled “Internal Control — Integrated Framework (1992)” published by the Committee of Sponsoring Organizations of the TreadwayCommission to evaluate the effectiveness of our internal control over financial reporting. Based on its evaluation, management has concluded that our internalcontrol over financial reporting was effective as of December 31, 2013, the end of our most recent fiscal year. Pursuant to Section 404(c) of the Sarbanes-OxleyAct, our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting forthe year ended December 31, 2013, which is included below.99Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and Stockholders of Zogenix, Inc.We have audited Zogenix, Inc.'s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Zogenix,Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is toexpress an opinion on the company's internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.In our opinion, Zogenix, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based onthe COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets of Zogenix, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive loss, stockholders' equity,and cash flows for each of the three years in the period ended December 31, 2013 of Zogenix, Inc. and our report dated March 7, 2014 expressed anunqualified opinion thereon that included an explanatory paragraph regarding Zogenix, Inc.'s ability to continue as a going concern./s/ ERNST & YOUNG LLPSan Diego, CaliforniaMarch 7, 2014Changes in Internal Control Over Financial ReportingThere have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or arereasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNone.100Table of ContentsPART IIIItem 10. Directors, Executive Officers and Corporate GovernanceInformation required by this item will be contained in our Definitive Proxy Statement, or the Definitive Proxy Statement, to be filed with the Securitiesand Exchange Commission in connection with our 2014 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the end ofour fiscal year ended December 31, 2013, under the headings “Election of Directors,” “Corporate Governance and Other Matters ,” “Executive Officers,” and“Section 16(a) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference .We have adopted a Code of Business Conduct and Ethics that applies to our officers, directors and employees which is available on our internet websiteat www.zogenix.com. The Code of Business Conduct and Ethics contains general guidelines for conducting the business of our company consistent with thehighest standards of business ethics, and is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 andItem 406 of Regulation S-K. In addition, we intend to promptly disclose (1) the nature of any amendment to our Code of Business Conduct and Ethics thatapplies to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions and(2) the nature of any waiver, including an implicit waiver, from a provision of our code of ethics that is granted to one of these specified officers, the name ofsuch person who is granted the waiver and the date of the waiver on our website in the future.Item 11. Executive CompensationInformation required by this item will be contained in our Definitive Proxy Statement under the heading “Executive Compensation and OtherInformation” and is incorporated herein by reference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersInformation required by this item will be contained in our Definitive Proxy Statement under the headings “Security Ownership of Certain BeneficialOwners and Management” and is incorporated herein by reference.Item 13. Certain Relationships, Related Transactions and Director IndependenceInformation required by this item will be contained in our Definitive Proxy Statement under the headings “Certain Relationships and Related PartyTransactions” and “Independence of the Board of Directors” and is incorporated herein by reference.Item 14. Principal Accounting Fees and ServicesInformation required by this item will be contained in our Definitive Proxy Statement under the heading “Independent Registered Public AccountingFirm’s Fees” and is incorporated herein by reference.101Table of ContentsPART IVItem 15. Exhibits, Financial Statement Schedules(a) Documents filed as part of this report.1. Financial Statements. The following consolidated financial statements of Zogenix, Inc., together with the report thereon of Ernst & Young LLP, anindependent registered public accounting firm, are included in this Annual Report on Form 10-K: PageReport of Independent Registered Public Accounting FirmF- 2Consolidated Balance SheetsF- 3Consolidated Statements of Operations and Comprehensive LossF- 4Consolidated Statements of Stockholders’ EquityF- 5Consolidated Statements of Cash FlowsF- 6Notes to Consolidated Financial StatementsF- 72. Financial Statement Schedules.All schedules are omitted as the required information is inapplicable, or the information is presented in the consolidated financial statements or relatednotes.3. Exhibits.A list of exhibits to this Annual Report on Form 10-K is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated herein byreference.(b) See Exhibit Index.(b) See Item 15(a)(2) above.102Table of ContentsZogenix, Inc.Index to Consolidated Financial Statements Report of Independent Registered Public Accounting FirmF- 2Consolidated Balance SheetsF- 3Consolidated Statements of Operations and Comprehensive LossF- 4Consolidated Statements of Stockholders’ EquityF- 5Consolidated Statements of Cash FlowsF- 6Notes to Consolidated Financial StatementsF- 7F- 1Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and Stockholders of Zogenix, Inc.We have audited the accompanying consolidated balance sheets of Zogenix, Inc. as of December 31, 2013 and 2012, and the related consolidatedstatements of operations and comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2013.These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financialstatements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zogenix, Inc. atDecember 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,2013, in conformity with U.S. generally accepted accounting principles.The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to thefinancial statements, the Company's recurring losses from operations and lack of sufficient working capital raise substantial doubt about its ability tocontinue as a going concern. Management's plans as to these matters also are described in Note 1. The December 31, 2013 financial statements do not includeany adjustments that might result from the outcome of this uncertainty.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Zogenix, Inc.'s internalcontrol over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 7, 2014 expressed an unqualified opinion thereon./s/ ERNST & YOUNG LLPSan Diego, CaliforniaMarch 7, 2014F- 2Table of ContentsZogenix, Inc.Consolidated Balance Sheets(In Thousands, except Par Value) December 31, 2013 2012Assets Current assets: Cash and cash equivalents$72,021 $41,228Trade accounts receivable, net6,665 5,643Inventory9,936 12,886Prepaid expenses and other current assets4,257 1,968Total current assets92,879 61,725Property and equipment, net13,011 13,561Other assets6,614 5,400Total assets$112,504 $80,686Liabilities and stockholders’ equity Current liabilities: Accounts payable$4,622 $4,592Accrued expenses18,865 14,343Common stock warrant liabilities31,341 9,493Accrued compensation3,952 4,226Total current liabilities58,780 32,654Long-term debt28,802 28,481Other long-term liabilities6,496 5,078Commitments and contingencies Stockholders’ equity: Common stock, $0.001 par value; 200,000 shares authorized at December 31, 2013 and 2012; 138,927 and 100,809shares issued and outstanding at December 31, 2013 and 2012, respectively.139 101Additional paid-in capital428,534 343,763Accumulated deficit(410,247) (329,391)Total stockholders’ equity18,426 14,473Total liabilities and stockholders’ equity$112,504 $80,686See accompanying notes.F- 3Table of ContentsZogenix, Inc.Consolidated Statements of Operations and Comprehensive Loss(In Thousands, except Per Share Amounts) Year Ended December 31, 2013 2012 2011Revenue: Net product revenue$31,699 $35,826 $30,411Contract revenue— 8,462 7,165Service and other revenue1,313 38 —Total revenue33,012 44,326 37,576Operating expenses: Cost of sales21,241 19,496 19,293Royalty expense1,242 1,353 1,205Research and development12,805 21,414 33,043Selling, general and administrative50,040 49,494 60,459Restructuring876 — —Total operating expenses86,204 91,757 114,000Loss from operations(53,192) (47,431) (76,424)Other income (expense): Interest income18 53 37Interest expense(6,610) (10,313) (7,644)Change in fair value of warrant liabilities(21,927) 11,811 445Change in fair value of embedded derivatives759 (147) (240)Other income (expense)96 (1,354) (86)Total other income (expense)(27,664) 50 (7,488)Loss before income taxes(80,856) (47,381) (83,912)Provision for income tax benefit (expense)— (5) 9Net loss$(80,856) $(47,386) $(83,903)Net loss per share, basic and diluted$(0.74) $(0.59) $(1.96)Weighted average shares outstanding, basic and diluted108,568 80,558 42,712Comprehensive loss$(80,856) $(47,386) $(83,903)See accompanying notes.F- 4Table of ContentsZogenix, Inc.Consolidated Statements of Stockholders’ Equity(In Thousands, except Per Share Amounts) Common Stock AdditionalPaid-inCapital AccumulatedDeficit TotalStockholders’Equity Shares Amount Balance at December 31, 201034,017 $34 $226,802 $(198,102) $28,734Net loss— — — (83,903) (83,903)Issuance of common stock from secondary offering, net of issuancecosts of $3,56430,712 31 57,828 — 57,859Issuance of common stock from conversion of convertible notes, netof issuance costs of $18389 — 1,404 — 1,404Issuance of common stock from financing agreement at $3.86 pershare, net of issuance costs of $96389 — 1,404 — 1,404Issuance of common stock in conjunction with exercise of stockoptions67 — 92 — 92Issuance of common stock from ESPP purchase172 — 263 — 263Issuance of common stock warrants— — 39 — 39Release of restricted stock units12 — — — —Vesting of early exercised stock options— — 15 — 15Stock-based compensation— — 4,809 — 4,809Balance at December 31, 201165,369 65 291,252 (282,005) 9,312Net loss— — — (47,386) (47,386)Issuance of common stock from July 2012 offering, net of issuancecosts of $3,32835,058 35 45,774 — 45,809Issuance of common stock in conjunction with exercise of stockoptions18 — 33 — 33Issuance of common stock from ESPP purchase364 1 547 — 548Stock-based compensation— — 6,157 — 6,157Balance at December 31, 2012100,809 101 343,763 (329,391) 14,473Net loss— — — (80,856) (80,856)Issuance of common stock from November 2013 offering, net ofissuance costs of $4,52930,667 31 64,440 — 64,471Issuance of common stock from controlled equity offering, net ofissuance costs of $3716,753 7 10,827 — 10,834Issuance of common stock in conjunction with exercise of stockoptions291 — 574 — 574Issuance of common stock from ESPP purchase304 — 385 — 385Issuance of common stock in conjunction with exercise of warrants103 — 338 — 338Stock-based compensation— — 8,006 — 8,006Stock-based compensation, restructuring— — 201 — 201Balance at December 31, 2013138,927 $139 $428,534 $(410,247) $18,426See accompanying notes.F- 5Table of ContentsZogenix, Inc.Consolidated Statements of Cash Flows(In Thousands) Year Ended December 31, 2013 2012 2011Operating activities: Net loss(80,856) (47,386) (83,903)Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation8,006 6,157 4,809Stock-based compensation, restructuring201 — —Depreciation1,806 1,599 1,584Amortization of debt issuance costs and non-cash interest569 2,017 1,793Change in fair value of warrant liabilities21,927 (11,811) (445)Change in fair value of embedded derivatives(759) 147 240Loss on disposal and impairment of property and equipment— 9 —Changes in operating assets and liabilities: Trade accounts receivable(1,022) (730) (439)Inventory2,950 3,890 1,517Prepaid expenses and other current assets(2,004) 163 24Other assets(1,747) 11 338Accounts payable and accrued expenses6,142 2,194 4,898Restructuring liabilities4 — —Deferred revenue(137) (8,462) (10,887)Net cash used in operating activities(44,920) (52,202) (80,471)Investing activities: Purchases of property and equipment(810) (293) (617)Net cash used in investing activities(810) (293) (617)Financing activities: Proceeds from borrowings of debt and revolving credit facility, net of issuance costs— 9,900 39,124Payments on borrowings of debt— (25,000) (825)Payments on revolving credit facility— (15,051) (9,477)Proceeds from exercise of common stock options and warrants833 33 92Proceeds from issuance of common stock and common stock warrants, net of issuance costs75,690 67,316 59,527Net cash provided by financing activities76,523 37,198 88,441Net (decrease) increase in cash and cash equivalents30,793 (15,297) 7,353Cash and cash equivalents at beginning of period41,228 56,525 49,172Cash and cash equivalents at end of period$72,021 $41,228 $56,525Supplemental disclosure of cash flow information: Cash paid for interest$2,463 $5,284 $4,186Noncash investing and financing activities: Purchase of property and equipment in accounts payable$446 $— $123Change in common stock warrant liability associated with exercise of warrants$(79) $— $—Warrants issued in connection with public offering$— $20,959 $—Asset retirement obligation$— $286 $—Warrants issued in connection with debt$— $— $866Embedded derivatives related to debt$— $— $605Vesting of early exercised stock options$— $— $15See accompanying notes.F- 6Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements 1.Organization and Basis of PresentationZogenix, Inc. (the Company) is a pharmaceutical company committed to developing and commercializing therapies that address specific clinical needsfor people living with pain-related conditions and central nervous system disorders who need innovative treatment alternatives to help them return to normaldaily functioning. The Company’s first commercial product, Sumavel® DosePro® (sumatriptan injection) Needle-free Delivery System, was launched inJanuary 2010. Sumavel DosePro offers fast-acting, easy-to-use, needle-free subcutaneous administration of sumatriptan for the acute treatment of migraineand cluster headache in a pre-filled, single-use delivery system. Sumavel DosePro is the first drug product approved by the U.S. Food and DrugAdministration (FDA) that allows for the needle-free, subcutaneous delivery of medication. On October 25, 2013, the Company received FDA marketingapproval for Zohydro™ ER (hydrocodone bitartrate) extended-release capsules, the first extended-release oral formulation of hydrocodone withoutacetaminophen. Zohydro ER is an opioid agonist for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment andfor which alternative treatment options are inadequate. The Company launched Zohydro ER on March 3, 2014.The Company was incorporated in the state of Delaware on May 11, 2006 as SJ2 Therapeutics, Inc. and commenced operations on August 25, 2006.On August 28, 2006, the Company changed its name to Zogenix, Inc.The Company has incurred significant net losses since inception and has relied on its ability to fund its operations through equity financings, debtfinancings, revenues from the sale of its product Sumavel DosePro and proceeds from business collaborations. As the Company continues to incur losses,successful transition to profitability is dependent upon achieving a level of revenues adequate to support the Company’s cost structure. This may not occurand, unless and until it does, the Company will continue to need to raise additional cash. These conditions raise substantial doubt about the Company’sability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a goingconcern and do not include any adjustments that might result from the outcome of this uncertainty. This basis of accounting contemplates the recovery of theCompany’s assets and the satisfaction of liabilities in the normal course of business.On March 27, 2013, the Company entered into a controlled equity offering sales agreement (the sales agreement) with Cantor Fitzgerald & Co. (Cantor),as sales agent, under which the Company issued and sold shares of its common stock from time to time through Cantor, having an aggregate offering price ofup to $25.0 million. The sales of common stock made under the sales agreement were made in “at-the-market” offerings as defined in Rule 415 of theSecurities Act of 1933, as amended. Under the sales agreement, the Company issued 6,753,104 shares of its common stock during 2013 at an average stockissuance price of $1.66 per share, resulting in net proceeds of approximately $10,834,000. The sales agreement with Cantor terminated on November 16,2013.On November 12, 2013, the Company completed a public offering (the November 2013 Offering) of common stock for net proceeds of approximately$64,471,000 (including over-allotment purchase), after deducting underwriting discounts and commissions of $4,140,000 and offering expenses ofapproximately $389,000. The Company sold a total of 30,666,667 shares of its common stock (including the underwriters' over-allotment purchase of4,000,000 shares) at a purchase price of $2.25 per share.Management expects operating losses and negative cash flows to continue for at least the next year as the Company continues to incur costs related to thecontinued development of its product candidates and commercialization of its approved products. Management intends to pursue additional opportunities toraise additional capital, if required, through public or private equity offerings, including through debt financings, receivables financings or throughcollaborations or partnerships with other companies to further support its planned operations. There can be no assurance that the Company will be able toobtain any source of financing on acceptable terms, or at all. If the Company is unsuccessful in raising additional required funds, it may be required tosignificantly delay, reduce the scope of or eliminate one or more of its development programs or its commercialization efforts, or cease operating as a goingconcern. The Company also may be required to relinquish, license or otherwise dispose of rights to product candidates or products that it would otherwiseseek to develop or commercialize itself on terms that are less favorable than might otherwise be available.F- 7Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)2.Summary of Significant Accounting PoliciesUse of EstimatesThe preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requiresmanagement to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actualresults may differ materially from those estimates.Principles of ConsolidationThe consolidated financial statements include the accounts of Zogenix, Inc. and its wholly owned subsidiary Zogenix Europe Limited, which wasincorporated under the laws of England and Wales in June 2010. All intercompany transactions and investments have been eliminated in consolidation.Zogenix Europe Limited’s functional currency is the U.S. dollar, the reporting currency of its parent.Cash and Cash EquivalentsThe Company considers cash equivalents to be only those investments which are highly liquid, readily convertible to cash and have an originalmaturity of three months or less when purchased.Restricted CashIn December 2009, the Company issued a letter of credit for $200,000 in connection with another operating lease. The letter of credit is collateralized by acertificate of deposit in the same amount. Restricted cash of $200,000 at December 31, 2013 and 2012 is included in other assets on the consolidated balancesheet.Accounts ReceivableTrade accounts receivable are recorded at the invoice amount net of allowances for cash discounts for prompt payment. The Company evaluates thecollectability of its accounts receivable based on a variety of factors including the length of time the receivables are past due, the financial health of thecustomer and historical experience. Based upon the review of these factors, the Company recorded an allowance of $18,000 and $2,000 at December 31, 2013and 2012, respectively.Fair Value MeasurementsThe carrying amount of financial instruments consisting of cash, trade accounts receivable, prepaid expenses and other current assets, accountspayable, accrued expenses (excluding the tail payment due to Astellas Pharmaceutical US, Inc. (Astellas)) and accrued compensation included in theCompany’s consolidated financial statements are reasonable estimates of fair value due to their short maturities. Based on the borrowing rates currentlyavailable to the Company for loans with similar terms, management believes the fair value of long-term debt approximates its carrying value. The accruedliability for the annual tail payment due to Astellas (see Note 3) for the termination of the Company’s co-promotion agreement was measured at fair value usinga present value technique, which incorporated the Company’s own credit risk as measured by the most recent round of debt financing with Healthcare RoyaltyPartners (Healthcare Royalty) (formerly Cowen Healthcare Royalty Partners II, L.P.).Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:Level 1:Observable inputs such as quoted prices in active markets;Level 2:Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; andLevel 3:Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.The Company classifies its cash equivalents within Level 1 of the fair value hierarchy because it values its cash equivalents using quoted marketprices. The Company classifies its common stock warrant liabilities and embedded derivative liability within Level 3 of the fair value hierarchy because theyare valued using valuation models with significant unobservable inputs. Assets and liabilities measured at fair value on a recurring basis at December 31,2013 and December 31, 2012 are as follows (in thousands):F- 8Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued) Fair Value Measurements at Reporting Date UsingQuoted Pricesin ActiveMarkets forIdentical Assets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) TotalAt December 31, 2013 Assets Cash equivalents (1)$69,120 — — $69,120Liabilities Common stock warrant liabilities (2)$— — 31,341 $31,341Embedded derivative liability (3)$— — 233 $233 At December 31, 2012 Assets Cash equivalents (1)$37,605 — — $37,605Liabilities Common stock warrant liability (2)$— — 9,493 $9,493Embedded derivative liability (3)$— — 992 $992 (1)Cash equivalents are comprised of money market fund shares and are included as a component of cash and cash equivalents on the consolidated balancesheet.(2)Common stock warrant liabilities include liabilities associated with warrants issued in connection with the Company's July 2012 public offering ofcommon stock and warrants (see Note 8) and warrants issued in connection with the Healthcare Royalty financing agreement (see Note 7), which aremeasured at fair value using the Black-Scholes option pricing valuation model. The assumptions used in the Black-Scholes option pricing valuationmodel for both common stock warrant liabilities were: (a) a risk-free interest rate based on the rates for U.S. Treasury zero-coupon bonds with maturitiessimilar to those of the remaining contractual term of the warrants; (b) an assumed dividend yield of zero based on the Company’s expectation that it willnot pay dividends in the foreseeable future; (c) an expected term based on the remaining contractual term of the warrants; and (d) given the Company’slack of relevant historical data due to the Company’s limited historical experience, an expected volatility based upon the Company's historical volatility,supplemented with historical volatility of comparable companies whose share prices have been publicly available for a sufficient period of time. Thesignificant unobservable input used in measuring the fair value of the common stock warrant liabilities associated with the Healthcare Royalty financingagreement is the expected volatility. Significant increases in volatility would result in a higher fair value measurement. The following additionalassumptions were used in the Black-Scholes option pricing valuation model to measure the fair value of the warrants sold in the July 2012 publicoffering: (a) management's projections regarding the probability of the occurrence of an extraordinary event and the timing of such event; and for thevaluation scenario in which an extraordinary event occurs that is not an all cash transaction or an event whereby a public acquirer would assume thewarrants, (b) an expected volatility rate using the Company's historical volatility, supplemented with historical volatility of comparable companies,through the projected date of public announcement of an extraordinary transaction, blended with a rate equal to the lesser of 40% and the 180-day volatilityrate obtained from the HVT function on Bloomberg as of the trading day immediately following the public announcement of an extraordinary transaction.The significant unobservable inputs used in measuring the fair value of the common stock warrant liabilities associated with the July 2012 publicoffering are the expected volatility and the probability of the occurrence of an extraordinary event. Significant increases in volatility would result in ahigher fair value measurement and significant increases in the probability of an extraordinary event occurring would result in a significantly lower fairvalue measurement.(3)Embedded derivatives are measured at fair value using various discounted cash flow valuation models are included as a component of other long-termliabilities on the consolidated balance sheets. The assumptions used in the discounted cash flow valuation models include: (a) management's revenueprojections and a revenue sensitivity analysis based on possible future outcomes; (b) probability weighted net cash flows based on the likelihood ofHealthcare Royalty receiving interest payments over the term of the financing agreement; (c) probability of bankruptcy; (d) weighted average cost ofcapital that included the addition of a company specific risk premium to account for uncertainty associated with the Company achieving future cashflows; (e) the probability of a change in control occurring during the term of the Healthcare Royalty financing agreement; and (f) the probability of anexercise of the embedded derivative instruments. The significant unobservable inputs used in measuring the fair value of the embedded derivatives aremanagement’s revenue projections.F- 9Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)Significant decreases in these significant inputs would result in a higher fair value measurement of the liability. Management's revenue projections used inthe December 31, 2013 valuation model significantly increased from prior periods as they included an increase in projected Zohydro ER revenues basedon the October 2013 Zohydro ER NDA approval date. This significant increase in management's revenue projections led to a significant decrease in thefair value of embedded derivative liability as of December 31, 2013.The following table provides a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the years endedDecember 31, 2013 and 2012 (in thousands): Common StockWarrant Liabilities EmbeddedDerivativeLiabilitiesBalance at December 31, 2011 $345 $845Issuance 20,959 —Changes in fair value (11,811) 147Balance at December 31, 2012 9,493 992Exercises (79) —Changes in fair value 21,927 (759)Balance at December 31, 2013 $31,341 $233Changes in fair value of the liabilities shown in the table above are recorded through a change in fair value of warrant liabilities and change in fair valueof embedded derivatives in other income (expense) in the consolidated statements of operations and comprehensive loss.Concentration of Credit Risk, Sources of Supply and Significant CustomersFinancial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and tradeaccounts receivable. The Company maintains accounts in federally insured financial institutions in excess of federally insured limits. The Company alsomaintains investments in money market funds and that are not federally insured. However, management believes the Company is not exposed to significantcredit risk due to the financial position of the depository institutions in which these deposits are held and of the money market funds and other entities inwhich these investments are made. Additionally, the Company has established guidelines regarding the diversification of its investments and their maturities,which are designed to maintain safety and liquidity.The Company sells its products primarily to established wholesale distributors and retailers in the pharmaceutical industry. Three wholesalepharmaceutical distributors individually comprised 30.5%, 30.3% and 16.6% of the Company’s total gross sales of Sumavel DosePro for the year endedDecember 31, 2013. In addition, one retail company that purchases from the Company directly, individually comprised 14.6% of the Company's total grosssales of Sumavel DosePro for the year ended December 31, 2013. Approximately 84.9% and 10.3% of the trade accounts receivable balance as of December 31,2013 represents amounts due from these three wholesale distributors and one retail customer, respectively. Credit is extended based on an evaluation of thecustomer’s financial condition, and collateral is not required. The Company evaluates the collectability of its accounts receivable based on a variety of factorsincluding the length of time the receivables are past due, the financial health of the customer and historical experience. Based upon the review of these factors,the Company recorded an allowance of doubtful accounts of $18,000 and $2,000 at December 31, 2013 and December 31, 2012, respectively.The Company relies on third-party manufacturers for the production of Sumavel DosePro and single source third-party suppliers to manufacture severalkey components of Sumavel DosePro. The Company also relies on a third-party manufacturer and supplier of Zohydro ER. If the Company’s third-partymanufacturers are unable to continue manufacturing Sumavel DosePro or Zohydro ER, or if the Company lost one or more of its single source suppliers usedin the manufacturing process, the Company may not be able to meet market demand for its products.InventoryInventory is stated at the lower of cost or market. Cost includes amounts related to materials, labor and overhead, and is determined in a manner whichapproximates the first-in, first-out (FIFO) method. The Company provides reserves for potentially excess, dated or obsolete inventories based on an analysis ofinventory on hand and on firm purchase commitments compared to forecasts of future sales.F- 10Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)Property and Equipment, NetProperty and equipment is recorded at cost, net of accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over theestimated useful lives of the respective assets, as follows:Computer equipment and software 3 yearsFurniture and fixtures 3-7 yearsManufacturing equipment and tooling 3-15 yearsLeasehold improvements Shorter of estimated useful life or lease termImpairment of Long-Lived AssetsThe Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset maynot be recoverable. There were immaterial charges as a result of impairment losses through December 31, 2013.Warrants for Common StockIn accordance with accounting guidance for warrants for shares in redeemable securities or warrants that could be settled for cash, the Companyclassifies warrants for common stock as current liabilities on the consolidated balance sheet. The Company adjusts the carrying value of these warrants forcommon stock that can be settled in cash to their estimated fair value at each reporting date with the increases or decreases in the fair value of such warrantsrecorded as change in fair value of warrant liabilities in the consolidated statement of operations and comprehensive loss.Embedded DerivativesThe Company records embedded derivatives in the consolidated balance sheet at fair value. The carrying value of the embedded derivatives are adjustedto their estimated fair value at each reporting date with the increases or decreases in the fair value of such embedded derivatives recorded as change in fair valueof embedded derivatives in the consolidated statement of operations and comprehensive loss.Revenue RecognitionThe Company recognizes revenue from the sale of Sumavel DosePro, and from license fees, milestones and service fees earned on collaborativearrangements. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title has passed, (iii) the price isfixed or determinable and (iv) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product isrecognized at the time of sale only if (i) the Company’s price to the buyer is substantially fixed or determinable at the date of sale, (ii) the buyer has paid theCompany, or the buyer is obligated to pay the Company and the obligation is not contingent on resale of the product, (iii) the buyer’s obligation to theCompany would not be changed in the event of theft or physical destruction or damage of the product, (iv) the buyer acquiring the product for resale haseconomic substance apart from that provided by the Company, (v) the Company does not have significant obligations for future performance to directly bringabout resale of the product by the buyer, and (vi) the amount of future returns can be reasonably estimated.Product Revenue, NetThe Company sells Sumavel DosePro product in the United States to wholesale pharmaceutical distributors and retail pharmacies, or collectively theCompany's customers, subject to rights of return. The Company recognizes product sales at the time title transfers to its customer, and reduces product salesfor estimated future product returns and sales allowances in the same period the related revenue is recognized. Product sales allowances include wholesaler andretail pharmacy distribution fees, prompt pay discounts, chargebacks, rebates and patient discount programs, and are based on amounts owed or to beclaimed on the related sales. These estimates take into consideration the terms of the Company's agreements with its customers and third-party payors and thelevels of inventory within the distribution and retail channels that may result in future rebates or discounts taken. In certain cases, such as patient supportprograms, the Company recognizes the cost of patient discounts as a reduction of revenue based on estimated utilization. If actual future results vary, theCompany may need to adjust these estimates, which could have an effect on product revenue in the period of adjustment.Prior to the third quarter of 2011, Sumavel DosePro had a limited sales history, and the Company could not reliably estimate expected returns of theproduct at the time of shipment. Accordingly, the Company deferred recognition of revenue on product shipments of Sumavel DosePro until the right of returnno longer existed, which occurred at the earlier of the timeF- 11Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)Sumavel DosePro units were dispensed through patient prescriptions or expiration of the right of return. Units dispensed are generally not subject to return,except in the rare cases where the product malfunctions or the product is damaged in transit. The Company estimates patient prescriptions dispensed using ananalysis of third-party information, including third-party market research data.Product Returns. The Company's estimated product return allowances for Sumavel DosePro require a high degree of judgment and are subject to changebased on the Company's experience and certain quantitative and qualitative factors. Sumavel DosePro's shelf life is determined by the shorter expiry date of itstwo subassemblies, which is currently approximately 30 months from the date of manufacture. The Company's return policy allows for customers to returnunused product that is within six months before and up to one year after its expiration date for a credit at the then-current wholesaler acquisition cost, or WAC,reduced by a nominal fee for processing the return.The Company has monitored and analyzed actual return history since product launch. The Company's analysis of actual product return historyconsiders actual product returns on an individual product lot basis since product launch, the dating of the product at the time of shipment into the distributionchannel, prescription trends, trends in customer purchases and their inventory management practices, and changes in the estimated levels of inventory withinthe distribution channel to estimate its exposure for returned product. Because of the shelf life of Sumavel DosePro and the duration of time under which theCompany's customers may return product through the Company's return policy, there may be a significant period of time between when the product isshipped and when the Company issues credits on returned product. Based on the Company's analysis of actual product return history, the Companyincreased its estimate for product returns, resulting in adjustments of $1,226,000 in the first quarter of 2013 and $2,408,000 in the third quarter of 2013,which led to decreases in net product revenue and earnings for the year ended December 31, 2013 and increased net loss by $0.03 per share for the year endedDecember 31, 2013. Further, as a result of the Company’s third quarter 2013 product returns analysis, the Company began to utilize a higher product returnsrate for Sumavel DosePro sales.The Company permits certain wholesale pharmaceutical distributors to purchase limited quantities of product after the announcement of an increase tothe WAC of the Company’s product and prior to the effectiveness of the increase. In turn, WAC price increases can result in accelerated purchases bywholesalers relative to anticipated retail and prescription demand. The timing of purchases made by wholesale distributors and retail pharmacies are subject tofluctuations for these reasons among others.Wholesaler and Retail Pharmacy Distribution Fees. The Company offers distribution fees to certain wholesale distributors and retail pharmaciesbased on contractually determined rates. The Company accrues the distribution fees on shipment to the respective wholesale distributors and retail pharmaciesand recognizes the distribution fees as a reduction of revenue in the same period the related revenue is recognized.Prompt Pay Discounts. The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. TheCompany accounts for cash discounts by reducing accounts receivable by the prompt pay discount amount and recognizes the discount as a reduction ofrevenue in the same period the related revenue is recognized.Chargebacks. The Company provides discounts primarily to authorized users of the Federal Supply Schedule (FSS) of the General ServicesAdministration under an FSS contract negotiated by the Department of Veterans Affairs and various organizations under Medicaid contracts and regulations.These entities purchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to the Company thedifference between the current retail price and the price the federal entity paid for the product. The Company estimates and accrues chargebacks based onestimated wholesaler inventory levels, current contract prices and historical chargeback activity. Chargebacks are recognized as a reduction of revenue in theperiod the related revenue is recognized.Rebates. The Company participates in certain rebate programs, which provide discounted prescriptions to qualified insured patients. Under these rebateprograms, the Company pays a rebate to the third-party administrator of the program, generally two to three months after the quarter in which prescriptionssubject to the rebate are filled. The Company estimates and accrues these rebates based on current contract prices, historical and estimated future percentagesof product sold to qualified patients and estimated levels of inventory in the distribution channel. Rebates are recognized as a reduction of revenue in the periodthe related revenue is recognized.Patient Discount Programs. The Company offers discount card programs to patients for Sumavel DosePro in which patients receive discounts on theirprescriptions that are reimbursed by the Company. The Company estimates the total amount that will be redeemed based on levels of inventory in thedistribution and retail channels and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized.F- 12Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)Contract RevenueContract revenue consists of the amortization of license fees and milestone payments received under co-promotion agreements, which have multipledeliverables. Revenue arrangements with multiple deliverables are divided into separate units of accounting if criteria are met, including whether the deliverablehas stand-alone value to the customer and the customer has a general right of return relative to the delivered item and delivery or performance of the undelivereditem is probable and substantially within the vendor's control. Arrangement consideration is allocated at the inception of the arrangement to all deliverables onthe basis of their relative selling price. The selling price for each deliverable is determined using: (i) vendor-specific objective evidence of selling price (VSOE),if it exists, (ii) third-party evidence of selling price (TPE) if VSOE does not exist, and (iii) the Company's best estimate of the selling price if neither VSOE norTPE exists. For transactions entered into prior to January 1, 2011, revenue was recognized for each deliverable based upon the applicable revenue recognitioncriteria discussed above and upon acceptance of goods or performance of service. Effective January 1, 2011, for new or significantly modified transactions,the Company allocates revenue consideration, excluding contingent consideration, based on the relative selling prices of the separate units of accountingcontained within an arrangement containing multiple deliverables.Service and Other RevenueService and other revenue primarily consists of payments received for the Company's sales efforts under the co-promotion agreement with ValeantPharmaceuticals North America LLC (Valeant). The Company recognizes service and other revenue at the time services have been rendered.Collaborative ArrangementsThe Company records certain transactions between collaborators in the consolidated statement of operations and comprehensive loss on either a gross ornet basis within revenues or operating expenses, depending on the characteristics of the collaboration relationship, and provides for enhanced disclosure ofcollaborative relationships. The Company evaluates its collaborative agreements for proper classification of shared expenses, license fees, milestone paymentsand any reimbursed costs within the consolidated statement of operations and comprehensive loss based on the nature of the underlying activity. If paymentsto and from collaborative partners are not within the scope of other authoritative accounting literature, the statement of operations and comprehensive lossclassification for the payments is based on a reasonable, rational analogy to authoritative accounting literature that is applied in a consistent manner. Forcollaborations relating to commercialized products, if the Company acts as the principal in the sale of goods or services, the Company records revenue and thecorresponding operating costs in its respective line items within the consolidated statement of operations and comprehensive loss based on the nature of theshared expenses. Per authoritative accounting guidance, the principal is the party who is responsible for delivering the product to the customer, has latitudewith establishing price and has the risks and rewards of providing product to the customer, including inventory and credit risk.Research and Development ExpensesAll costs of research and development are expensed in the period incurred. Research and development costs primarily consist of salaries and relatedexpenses for personnel, stock-based compensation expense, outside service providers, facilities costs, fees paid to consultants, milestone payments prior toFDA approval, license fees prior to FDA approval, professional services, travel costs, dues and subscriptions, depreciation and materials used in clinicaltrials and research and development. The Company expenses costs relating to the purchase and production of pre-approval inventories as research anddevelopment expense in the period incurred until FDA approval is received.The Company reviews and accrues expenses related to clinical trials based on work performed, which relies on estimates of total costs incurred based oncompletion of patient studies and other events. The Company follows this method since reasonably dependable estimates of the costs applicable to variousstages of a research agreement or clinical trial can be made. Accrued clinical development costs are subject to revisions as trials progress to completion.Revisions are charged to expense in the period in which the facts that give rise to the revision become known.Advertising ExpenseThe Company records the cost of its advertising efforts when services are performed or goods are delivered. The Company incurred approximately$597,000, $522,000 and $1,180,000 in advertising costs for the years ended December 31, 2013, 2012 and 2011, respectively. At December 31, 2013 and2012, the Company capitalized advertising costs of $2,000 and $159,000 in prepaid expenses and other current assets, respectively.F- 13Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)Income TaxesDeferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities usingenacted tax rates which will be in effect when the differences reverse. The Company provides a valuation allowance against net deferred tax assets unless,based upon the available evidence, it is more likely than not that the deferred tax asset will be realized. The Company recognizes the tax benefit from anuncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technicalmerits of the position.Foreign Currency TransactionsGains or losses resulting from transactions denominated in foreign currencies are included in other expense in the consolidated statements of operationsand comprehensive loss. The Company recorded losses from foreign currency transactions in other income (expense) of $(95,000), $(68,000) and $86,000for the years ended December 31, 2013, 2012 and 2011, respectively.Stock-Based CompensationStock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over theemployee’s requisite service period on a straight-line basis. As of December 31, 2013, there were no outstanding equity awards with market or performanceconditions. Equity awards issued to non-employees are recorded at their fair value on the measurement date and are re-measured at each reporting date as theunderlying awards vest unless the instruments are fully vested, immediately exercisable and nonforfeitable on the date of grant.Net Loss per ShareBasic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding for the period reduced byweighted average shares subject to repurchase, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the netloss by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method and as-if convertedmethod, as applicable. For purposes of this calculation, stock options, restricted stock units, warrants and common stock subject to repurchase areconsidered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.The following table presents the computation of basic and diluted net loss per share (in thousands, except per share amounts): Year Ended December 31, 2013 2012 2011Numerator Net loss$(80,856) $(47,386) $(83,903)Denominator Weighted average common shares outstanding108,568 80,558 42,715Weighted average shares subject to repurchase— — (3)Weighted average shares outstanding, basic and diluted108,568 80,558 42,712Basic and diluted net loss per share$(0.74) $(0.59) $(1.96)Potentially dilutive securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive are as follows (inthousands, of common equivalent shares): Year Ended December 31, 2013 2012 2011Common stock options and restricted stock units11,027 47 184Common stock warrants15,681 — — 26,708 47 184F- 14Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)Segment ReportingManagement has determined that the Company operates in one business segment, which is the development and commercialization of pharmaceuticalproducts for people living with pain-related conditions and central nervous system disorders.Recent Accounting PronouncementsIn February 2013, the Financial Accounting Standards Board issued an Accounting Standards Update which requires entities to separately presentamounts reclassified out of accumulated other comprehensive income (AOCI) for each component of AOCI and to disclose, for each affected line item in theincome statement, the amount of AOCI that has been reclassified into that line item. For AOCI reclassification items that are not reclassified in their entiretyinto net income, it is acceptable to cross reference that amount to another footnote that provides the required disclosure. The updated guidance became effectivefor fiscal and interim periods beginning after December 15, 2012. The Company adopted this guidance on January 1, 2013 and it did not have a materialimpact on the Company's results of operations.3.Collaboration, License and Purchase AgreementsMallinckrodt LLC Co-Promotion AgreementOn June 6, 2012, the Company and Mallinckrodt LLC (Mallinckrodt) entered into a co-promotion agreement (the Co-Promotion Agreement). Under theterms of the Co-Promotion Agreement, Mallinckrodt was granted a co-exclusive right (with the Company) to promote Sumavel DosePro in the United States.Mallinckrodt's sales team began selling Sumavel DosePro to its customer base of prescribers in August 2012. Mallinckrodt committed to a minimum numberof sales representatives for the initial term of the agreement, which ran through June 30, 2014.In partial consideration of Mallinckrodt's sales efforts, the Company paid Mallinckrodt a service fee on a quarterly basis through January 31, 2014 thatrepresented a specified fixed percentage of net sales of prescriptions generated from Mallinckrodt's prescriber audience over a baseline amount of net sales to thesame prescriber audience. For the years ended December 31, 2013 and 2012, the Company incurred $1,035,000 and $161,000 in service fee expenses underthe Co-Promotion Agreement.In January 2014, the Company entered into an amendment to the Co-Promotion Agreement (Amended Co-Promotion Agreement), whereby the Co-Promotion Agreement terminated on January 31, 2014. The Company assumed full responsibility for the commercialization of Sumavel DosePro in February2014. In connection with the termination of the Co-Promotion Agreement, the Company is required to make a one-time tail payment to Mallinckrodt, calculatedas a fixed percentage of net sales from the Mallinckrodt targeted prescriber audience during the 12 month period ending on January 31, 2015. A liability forthis tail-payment will be recorded in the first quarter of 2014, once its reasonably estimable.Altus Formulation Inc. Development and Option AgreementOn November 1, 2013, the Company entered into a Development and Option Agreement (the Development Agreement) with Altus Formulation Inc.(Altus). Under the Development Agreement, Altus is responsible for the development of abuse deterrent formulations of hydrocodone using Altus’ Intellitab™drug delivery platform and will be reimbursed by the Company for its development efforts on the product, and the Company is responsible for the conduct ofthe clinical development of the product. The Company paid a non-refundable upfront fee to Altus of $750,000 which was recorded as research anddevelopment expense during the twelve months ended December 31, 2013. The Company is also obligated to pay Altus up to $3,500,000 in total futuremilestone payments upon the achievement of various development and regulatory milestones.Pursuant to the Development Agreement, the Company was granted an option to obtain an exclusive, royalty-bearing license, with the right to sublicense,to certain Altus intellectual property rights to make, have made, import, use, sell, have sold and offer for sale an abuse deterrent formulation of hydrocodonefor the treatment or relief of pain in the United States. However, the Company will need to obtain the consent of Alkermes or otherwise amend its licenseagreement with Alkermes for Zohydro ER in order to exercise the option and ultimately commercialize the Altus abuse deterrent formulation of hydrocodone. Ifthe Company exercises this option, Altus will be eligible to receive additional regulatory and sales milestones and a royalty based on net sales of the licensedproduct.The term of the Development Agreement will end upon expiration of the earlier of (1) the date upon which an NDA or similar application for regulatoryapproval is submitted by the Company for the Altus abuse resistant formulation of hydrocodone, or (2) November 1, 2016. The Company may terminate theDevelopment Agreement upon 30 days’ written noticeF- 15Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)or upon written notice of a material uncured breach by Altus. In addition, the Company may terminate any work plan under the Development Agreement uponwritten notice. Altus may only terminate the Development Agreement upon the occurrence of certain bankruptcy events with respect to the Company. Altus mayalso terminate a work plan under the Development Agreement upon written notice of the Company’s material uncured breach.Valeant Pharmaceuticals North America LLC Co-Promotion AgreementOn June 27, 2013, the Company entered into a co-promotion agreement with Valeant (the Valeant Agreement). Under the terms of the Valeant Agreement,the Company was granted the exclusive right (with Valeant or any of its affiliates) to promote Migranal® (dihydroergotamine mesylate) Nasal Spray(Migranal) to a prescriber audience of physicians and other health care practitioners in the United States. The Company's sales team began promotingMigranal to prescribers in August 2013. The term of the Valeant Agreement will run through December 31, 2015 (unless otherwise terminated), and can beextended by mutual agreement of the parties in additional twelve month increments. Valeant remains responsible for the manufacture, supply and distributionof Migranal for sale in the United States. In addition, Valeant will supply the Company with a specified amount of product samples every six months, and theCompany will reimburse Valeant for the cost of additional samples and any promotional materials ordered by the Company. The cost of any additionalsamples and any promotional materials ordered by the Company will be recognized as selling, general and administrative expenses.In partial consideration of the Company's sales efforts, Valeant will pay the Company a co-promotion fee on a quarterly basis that represents specifiedpercentages of net sales generated by the Company over defined baseline amounts of net sales (Baseline Forecast or Adjusted Baseline Forecast). In addition,upon completion of the co-promotion term, and only if the Valeant Agreement is not terminated by Valeant due to a bankruptcy event (as defined in the ValeantAgreement) or a material failure by the Company to comply with its material obligations under the Valeant Agreement, Valeant will be required to pay theCompany an additional tail payment calculated as a fixed percentage of the Company's net sales over the Baseline Forecast (or Adjusted Baseline Forecast)during the first full six months following the last day of the term.The Company may terminate the Valeant Agreement in the event of a Valeant supply failure (as defined in the Valeant Agreement) or material productrecall, or if the net sales price in a fiscal quarter is less than a specified percentage of the net sales price in the immediately preceding quarter, if the reduction insuch net sales price would have a material adverse effect on the Company's financial return as a result of performance of its obligation under the ValeantAgreement.Either party may terminate the Valeant Agreement with six months' notice. Either party may terminate the Valeant Agreement with 30 days' prior notice ifthe Company's net sales within a fiscal quarter fall below the Baseline Forecast (or Adjusted Baseline Forecast) for one or more fiscal quarters, or following thecommercial introduction of a generic product to Migranal promoted or otherwise commercialized by a third party in the United States. In addition, either partymay terminate the Valeant Agreement in the event of a change of control of itself or the other party (upon 90 days' prior written notice), upon any action takenor objection raised by governmental authority that prevents either party from performing its obligations under the Valeant Agreement, upon the filing of anaction alleging patent infringement, in connection with the material breach of the other party's material obligations, or if a bankruptcy event of the other partyoccurs.The Company recognizes co-promotion fees received under the Valeant Agreement as service revenue in the period in which its promotional activitiesgenerate net sales over the Baseline Forecast or Adjusted Baseline Forecast. For the year ended December 31, 2013, the Company recognized service revenue of$1,109,000 under the Valeant Agreement.Alkermes Commercial Manufacturing and Supply AgreementOn November 2, 2012, the Company entered into a commercial manufacturing and supply agreement for Zohydro ER finished commercial product (theSupply Agreement) with Alkermes Pharma Ireland Limited (APIL). Under the Supply Agreement, APIL is the exclusive manufacturer and supplier to theCompany (subject to certain exceptions) of Zohydro ER. The Company must purchase all of its requirements of Zohydro ER, subject to certain exceptions,from APIL.Under the Supply Agreement, the Company will provide APIL with an eighteen-month forecast on a monthly basis and with a three-year forecast on anannual basis for commercial supply requirements of Zohydro ER. In each of the four months following the submission of the eighteen-month forecast, theCompany is obligated to order the quantity of Zohydro ER specified in the forecast. APIL will use commercially reasonable efforts to supply the orders ofZohydro ER subject to the availability of the United States Drug Enforcement Administration quota for hydrocodone. APIL is not obligated to supply theCompany with quantities of Zohydro ER in excess of forecasted amounts, but has agreed to use commercially reasonable efforts to do so. Further, theCompany is obligated to purchase at least 75% of forecasted quarterly quantities of Zohydro ER from APIL, and is required to make compensatory paymentsif it does not purchase 100% of its requirements from APIL, subject to certain exceptions.F- 16Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)If a failure to supply occurs under the Supply Agreement, other than a force majeure event, APIL must use commercially reasonable efforts to assist theCompany in transferring production of Zohydro ER to either the Company or a third-party manufacturer, provided that such third party is not a technologicalcompetitor of APIL. In a failure to supply circumstance, the Company would be able to utilize (or sublicense to a third party who is not a technologicalcompetitor of APIL) the manufacturing license rights granted to it under the license agreement with Alkermes, an affiliate of APIL, until such time as APIL canresume supply of Zohydro ER.Either party may terminate the Supply Agreement by written notice if the other party commits a material breach of its obligations which is eitherincapable of remedy or is not remedied within a specified period following receipt of written notice of such breach. Unless otherwise terminated due to amaterial breach, the Supply Agreement will continue until the expiry or termination of the license agreement with Alkermes.Astellas Pharma US, Inc. Co-Promotion AgreementIn July 2009, the Company entered into the Co-Promotion Agreement with Astellas (the Astellas Co-Promotion Agreement). Under the terms of theagreement, the Company granted Astellas the co-exclusive right (with the Company) to market and sell Sumavel DosePro in the United States (excluding PuertoRico and the other territories and possessions of the United States) until June 30, 2013. Under the Astellas Co-Promotion Agreement, both Astellas and theCompany were obligated to collaborate and fund the marketing of Sumavel DosePro and to provide annual minimum levels of sales effort directed at SumavelDosePro during the term. In December 2011, the Company entered into an amendment to the Astellas Co-Promotion Agreement, or the amended Astellas Co-Promotion Agreement, whereby the agreement terminated on March 31, 2012.In connection with the execution of the Astellas Co-Promotion Agreement, Astellas made a non-refundable up-front payment of $2,000,000 and made anadditional $18,000,000 of payments to the Company upon the achievement of a series of milestones. In consideration for Astellas’ performance of itscommercial efforts, the Company paid Astellas a service fee on a quarterly basis that represented a fixed percentage of between 45% and 55% of SumavelDosePro net sales to primary care physicians, OB/GYNs, emergency medicine physicians, and urologists in the United States (the Astellas Segment).In accordance with accounting guidance for revenue arrangements with multiple deliverables, the Company initially recorded the $20,000,000 in upfrontand milestone payments received from Astellas as deferred revenue. Beginning with the launch of Sumavel DosePro in January 2010, the Company beganamortizing the upfront and milestone payments as contract revenue in the consolidated statement of operations and comprehensive loss over the term of theAstellas Co-Promotion Agreement. Upon termination of the Astellas Co-Promotion Agreement, the Company concluded that the remaining deferred revenuebalance should be recognized ratably through the amended term of the agreement, and consequently, all deferred contract revenues were recognized throughMarch 31, 2012. For the years ended December 31, 2013, 2012 and 2011 the Company recognized $0, $8,462,000 and $7,165,000, respectively, of contractrevenue.In addition, following completion of the co-promotion term in March 2012, the Company was required to pay Astellas one tail payment in July 2013 andis required to pay Astellas another tail payment in July 2014, calculated as decreasing fixed percentages (ranging from mid-twenties down to a mid-teenpercentage) of net sales in the Astellas Segment during the 12 months ended March 31, 2012. The value of such tail payments was estimated at a total of$5,291,000 based upon the agreement termination date of March 31, 2012, and recorded as a long-term liability on the amendment date of December 20,2011. The fair value of the tail payments will be accreted through interest expense through the dates of payment in July 2013 and July 2014. The first tailpayment of $2,032,000 was made in July 2013. As of December 31, 2013 and 2012, the tail payment liability, after considering the August 2012 service feereduction discussed below, was $1,131,000 and $2,795,000, respectively. The Company recognized $368,000 and $550,000 of related interest expenseduring the years ended December 31, 2013 and 2012, and did not recognize any related interest expense during the year ended December 31, 2011.Further, under the terms of the amended Astellas Co-Promotion Agreement, Astellas contributed its agreed upon portion of marketing expenses throughMarch 31, 2012, and continued to earn a service fee based on product sales to the Astellas Segment during that period. As of April 1, 2012, the Company wasno longer required to pay service fees to Astellas for sales of Sumavel DosePro. Additionally, beginning in the second quarter of 2012, the Company's salesforce assumed full responsibility for the commercialization and the continued marketing of Sumavel DosePro, expanding their focus to include headachespecialists, neurologists and primary care physicians in the United States. Amounts received from Astellas for shared marketing costs and sample product arereflected as a reduction of selling, general and administrative expenses, and amounts payable to Astellas for shared marketing expenses and service fees arereflected as selling, general and administrative expenses, inclusive of the estimated cost of the tail payments owed upon the termination of the agreement.F- 17Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)In August 2012, the Company and Astellas completed a final reconciliation under the terms of the Astellas Co-Promotion Agreement and agreed to adjustthe service fees paid to Astellas over the term of the Astellas Co-Promotion Agreement, resulting in a service fee reduction of $1,500,000, which offsets the twoannual tail payments, and a reduction to the annual tail payment liability of $742,000. The present value of the service fee receivable and tail paymentreduction of $1,924,000 was recorded as a reduction in selling, general and administrative expenses during the year ended December 31, 2012, and an offsetto the tail payment liability. The fair value of the service fee receivable and tail payment reduction will be accreted through interest income through the dates ofthe two tail payments in July 2013 and July 2014.For the years ended December 31, 2013, 2012 and 2011, the Company recognized shared marketing expense of $0, $253,000 and $1,663,000,respectively, under the Astellas Co-Promotion Agreement. For the years ended December 31, 2013, 2012 and 2011, the Company incurred $0, $1,756,000(excluding the $1,924,000 service fee adjustment discussed above) and $6,657,000 (excluding the $2,795,000 expense recognized when the tail paymentswere initially recorded) in service fee expenses, respectively.Durect Development and License AgreementOn July 11, 2011, the Company entered into a development and license agreement with Durect Corporation (the License Agreement). Under the LicenseAgreement, the Company is responsible for the clinical development and commercialization of Relday, a proprietary, long-acting injectable formulation ofrisperidone using Durect’s SABER™ controlled-release formulation technology in combination with the Company’s DosePro® needle-free, subcutaneous drugdelivery system. Durect is responsible for non-clinical, formulation and chemistry, manufacturing and controls development. Durect will be reimbursed by theCompany for its research and development efforts on the product.The Company paid a non-refundable upfront fee to Durect of $2,250,000, which was recorded as research and development expenses in theconsolidated statement of operations and comprehensive loss during the year ended December 31, 2011. The Company is obligated to pay Durect up to$103,000,000 in total future milestone payments with respect to the product subject to and upon the achievement of various development, regulatory and salesmilestones. The Company is also required to pay a mid single-digit to low double-digit percentage patent royalty on annual net sales of the product determinedon a jurisdiction-by-jurisdiction basis. Further, until a New Drug Application (NDA) for Relday has been filed in the United States, the Company is obligatedto spend no less than $1,000,000 in external expenses on the development of Relday in any trailing twelve months period beginning in July 2012. The patentroyalty term is equal to the later of the expiration of all Durect technology patents or joint patent rights in a particular jurisdiction, the expiration of marketingexclusivity rights in such jurisdiction, or 15 years from first commercial sale in such jurisdiction. After the patent royalty term, the Company will continue topay royalties on annual net sales of the product at a reduced rate for so long as the Company continues to sell the product in the jurisdiction. The Company isalso required to pay to Durect a tiered percentage of fees received in connection with any sublicense of the licensed rights.Durect granted the Company an exclusive worldwide license, with sub-license rights, to Durect intellectual property rights related to Durect’s proprietarypolymeric and non-polymeric controlled-release formulation technology to make and have made, use, offer for sale, sell and import risperidone products,where risperidone is the sole active agent, for administration by injection in the treatment of schizophrenia, bipolar disorder or other psychiatric relateddisorders in humans. Durect retains the right to supply the Company’s Phase 3 clinical trial and commercial product requirements on the terms set forth in theLicense Agreement.Durect retains the right to terminate the License Agreement with respect to specific countries if the Company fails to advance the development of theproduct in such country within a specified period, either directly or through a sublicensee. In addition, either party may terminate the License Agreement uponinsolvency or bankruptcy of the other party, upon written notice of a material uncured breach or if the other party takes any act impairing such other party’srelevant intellectual property rights. The Company may terminate the License Agreement upon written notice if during the development or commercialization ofthe product, the product becomes subject to one or more serious adverse drug experiences or if either party receives notice from a regulatory authority,independent review committee, data safety monitoring board or other similar body alleging significant concern regarding a patient safety issue and, as a result,the Company believes the long-term viability of the product would be seriously impacted. The Company may also terminate the License Agreement with orwithout cause, at any time upon prior written notice.F- 18Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)Desitin Arzneimittel GmbH Licensing and Distribution AgreementIn 2008, the Company entered into a licensing and distribution agreement (the Distribution Agreement) with Desitin Arzneimittel GmbH (Desitin), aprivate German pharmaceutical company focused on the development, manufacturing and distribution of products for the treatment of central nervous systemdisorders. Under the terms of the Distribution Agreement, the Company licensed to Desitin the exclusive development and commercialization rights to SumavelDosePro for the European Union, Norway, Switzerland and Turkey. On August 5, 2013, the Company agreed with Desitin to terminate the DistributionAgreement effective October 1, 2013.Under the Distribution Agreement, Desitin oversaw, and was responsible for the expenses related to, all clinical development, regulatory approval andcommercialization efforts required to market Sumavel DosePro in the territories in which Desitin elected to develop and market Sumavel DosePro. TheCompany manufactured and supplied the product to Desitin for commercial sale. Desitin paid the Company a specified transfer price for commercial productand a low single-digit percentage royalty on net sales of the product. In November 2010, Desitin received regulatory approval for the commercialization ofSumavel DosePro in Denmark. It received subsequent approvals in Germany, Sweden, the United Kingdom, Norway and France; however, the marketingauthorizations for Sweden, Norway, France and the United Kingdom were withdrawn as of December 31, 2013. The Company did not recognize any revenuefor sales to Desitin for the years ended December 31, 2013 and 2011, and recognized $397,000 in revenue for sales to Desitin for the year ended December 31,2012. Under the terms of the Distribution Agreement, Desitin does not have the right to return product that it has purchased.Alkermes License Agreement (formerly Elan Pharma International Limited)In 2007, the Company entered into a License Agreement with Alkermes, which was amended in 2009. Under the terms of this License Agreement,Alkermes granted the Company an exclusive license in the United States and its possessions and territories, with defined sub-license rights to third partiesother than certain technological competitors of Alkermes, to certain Alkermes intellectual property rights related to the Company’s Zohydro ER productcandidate. The License Agreement grants the Company the exclusive right under certain Alkermes patents and patent applications to import, use, offer for saleand sell oral controlled-release capsule or tablet formulations of hydrocodone, where hydrocodone is the sole active ingredient, for oral prescriptions in thetreatment or relief of pain, pain syndromes or pain associated with medical conditions or procedures in the United States. This right enables the Company toexclusively develop and sell Zohydro ER in the United States. Alkermes has retained the exclusive right to take action in the event of infringement or threatenedinfringement by a third party of Alkermes’ intellectual property rights under the License Agreement. The Company has the right to pursue an infringementclaim against the alleged infringer should Alkermes decline to take or continue an action.Under the terms of the License Agreement, the Company and Alkermes agreed that, subject to the negotiation of the Supply Agreement, Alkermes, or anaffiliate of Alkermes, would have the sole and exclusive right to manufacture and supply finished commercial product of Zohydro ER to the Company underagreed upon financial terms. The Company entered into the Supply Agreement with APIL in November 2012.Alkermes also granted to the Company, in the event that Alkermes is unwilling or unable to manufacture or supply commercial product to theCompany, a non-exclusive license to make product under Alkermes’ intellectual property rights. This non-exclusive license also includes the right tosublicense product manufacturing to a third party, other than certain technological competitors of Alkermes.Under the License Agreement, the Company paid an upfront fee of $500,000 to Alkermes, which was recorded as research and development expense.The Company paid additional milestone payments in the amount of $750,000 to Alkermes in August 2011 in connection with the completion of the treatmentphase of the Company’s pivotal efficacy Phase 3 clinical trial, Study 801, and $1,000,000 upon submission of the first Zohydro ER NDA to the FDA in May2012, which were recorded as research and development expense. Lastly, the Company paid a milestone payment of $2,750,000 upon the first NDA approvalof Zohydro ER in October 2013, which was recorded as other assets in the consolidated balance sheet and will be amortized over the estimated life of thetechnology, through November 2019.In addition, the Company will be required to pay a mid single-digit percentage royalty on net sales of the product for an initial royalty term equal to thelonger of the expiration of Alkermes’ patents covering the product in the United States, or 15 years after commercial launch, if Alkermes does not have patentscovering the product in the United States. After the initial royalty term, the License Agreement will continue automatically for three-year rolling periods duringwhich the Company will continue to pay royalties to Alkermes on net sales of the product at a reduced low single-digit percentage rate in accordance with theterms of the License Agreement.F- 19Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)Either party may terminate the License Agreement upon a material, uncured default or certain insolvency events of the other party or upon 12 monthswritten notice prior to the end of the initial royalty term or any additional three-year rolling period. The Company may also terminate the License Agreement,with or without cause, at any point in time upon 12 months' prior written notice, or if the sale of Zohydro ER is prohibited by regulatory authorities.Aradigm Corporation Asset Purchase AgreementIn 2006, the Company entered into an asset purchase agreement with Aradigm Corporation (Aradigm). Under the terms of the agreement, Aradigmassigned and transferred to the Company all of its right, title and interest to tangible assets and intellectual property related to the DosePro needle-free drugdelivery system. Aradigm also granted to the Company a non-exclusive, fully paid, worldwide, perpetual, irrevocable, transferable, sublicensable licenseunder all other intellectual property of Aradigm that was owned, controlled or employed by Aradigm prior to the closing of the asset purchase and that isnecessary or useful to the development, manufacture or commercialization of the DosePro delivery system. Aradigm also retained a worldwide, royalty-free,non-exclusive license, with a right to sublicense, under all transferred intellectual property rights solely for purposes of the pulmonary field, and the Companygranted Aradigm a license under other intellectual property rights solely for use in the pulmonary field.The Company paid Aradigm $4,000,000 at the closing of the asset purchase and was required to make an additional $4,000,000 milestone payment toAradigm upon the U.S. commercialization of Sumavel DosePro (which payment was made in 2010). The Company is also required to pay a 3% royalty onglobal net sales of Sumavel DosePro, by the Company or one of the Company’s future licensees, if any, until the later of January 2020 or the expiration of thelast valid claim of the transferred patents covering the manufacture, use, or sale of the product. The Company recorded the second milestone payment as otherassets in the consolidated balance sheet and is amortizing the milestone over the estimated life of the technology, through December 2023. For the years endedDecember 31, 2013, 2012 and 2011, the Company recorded $1,242,000, $1,353,000 and $1,205,000, respectively, of expense related to the amortization ofthe milestone and royalties from net sales of Sumavel DosePro. The Company expects to record annual amortization expense of approximately $286,000during the years ended December 2014 through 2018, and $2,571,000 in amortization expense thereafter related to the amortization of the milestone.In addition, in the event the Company or one of its future licensees, if any, commercializes a non-sumatriptan product in the DosePro delivery system,the Company will be required to pay Aradigm, at the Company’s election, either a 3% royalty on net sales of each non-sumatriptan product commercialized,or a fixed low-twenties percentage of the royalty revenues received by the Company from the licensee, if any, until the later of the ten year anniversary of thefirst commercial sale of the product in the United States or the expiration of the last valid claim of the transferred patents covering the manufacture, use or saleof the product. Royalty revenues under this agreement include, if applicable, running royalties on the net sales of non-sumatriptan products, license ormilestone fees not allocable to development or other related costs incurred by the Company, payments in consideration of goods or products in excess of theircost, or payments in consideration for equity in excess of the then fair market value of the equity.4.Consolidated Balance Sheet DetailsInventory (in thousands) December 31, 2013 2012Raw materials$2,770 $4,867Work in process6,054 6,134Finished goods1,112 1,885 $9,936 $12,886F- 20Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)Property and Equipment, Net (in thousands) December 31, 2013 2012Machinery, equipment and tooling$12,479 $12,325Construction in progress6,222 5,068Computer equipment and software951 961Leasehold improvements783 783Furniture and fixtures628 685Property and equipment, at cost21,063 19,822Less accumulated depreciation(8,052) (6,261) $13,011 $13,561Depreciation expense for the years ended December 31, 2013, 2012 and 2011 was $1,806,000, $1,599,000 and $1,584,000, respectively.Other Assets (in thousands) December 31, 2013 2012Prepaid Aradigm royalty expense$2,571 $3,143Prepaid Alkermes royalty expense2,318 —Debt acquisition costs969 1,217Deposits431 840Restricted cash200 200Other assets125 — $6,614 $5,400Accrued Expenses (in thousands) December 31, 2013 2012Accrued product returns$5,445 $3,034Accrued discounts and allowances4,239 4,088Accrued interest expense, current portion3,033 2,526Accrued clinical trial costs1,238 1,012Accrued sales and marketing costs1,161 304Astellas tail payment, current portion1,131 1,820Other accrued expenses2,618 1,559 $18,865 $14,343Other Long-Term Liabilities (in thousands) December 31, 2013 2012Interest expense payable, less current portion$5,901 $2,607Deferred rent77 214Embedded derivatives233 992Astellas tail payment, less current portion— 975Other long-term liabilities285 290 $6,496 $5,078 F- 21Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)5.RestructuringIn May 2013, the Company commenced a restructuring of its workforce, resulting in a reduction in force of 55 employees across all functional areas ofthe Company. During the year ended December 31, 2013, the Company recorded restructuring charges of $876,000 consisting primarily of employee-relatedcompensation charges. The following table summarizes the components of the restructuring charges for the year ended December 31, 2013 (in thousands): Twelve Months Ended December 31, 2013 Accruals Non-cash items TotalEmployee-related charges$663 $201 $864Other restructuring charges12 — 12 $675 $201 $876 The following table sets forth activity in the restructuring liability for the twelve months ended December 31, 2013, which is primarily comprised ofemployee severance costs (in thousands): Employee severance costs Other restructuring charges TotalBalance at December 31, 2012$— $— $—Accruals663 12 675Payments(659) (12) (671)Balance at December 31, 2013$4 $— $4The balance of the restructuring liability at December 31, 2013 is anticipated to be fully distributed by June 2014.6.CommitmentsOperating LeasesThe Company had an operating lease for office facilities in San Diego, California, which commenced in September 2008 and expired in April 2012. InApril 2012, prior to the expiration of this lease, the Company entered into a new operating lease for office facilities located in San Diego, California, whichcommenced on April 23, 2012 and will expire on November 27, 2014. The Company received free rent for the second, third and fourth months of the leaseterm. The base rent will increase approximately 3% on an annual basis throughout the term. The lease also requires the Company to pay, following the first 12lease months, additional rent consisting of a portion of common area and pass-through expenses in excess of base year amounts. This space is used for generaland administrative and sales and marketing operations and personnel.The Company also leases office space for its supply chain and inventory management and research and product development operations in Emeryville,California under a non-cancelable operating lease that expires, as extended, in September 2015. The base rent is subject to a 3% increase each year for theduration of the lease. Under the terms of the lease, as amended, the Company received an option to expand into additional space. The Company also receivedfree rent for two months and a tenant improvement allowance of $305,000.In August 2009, the Company entered an operating lease agreement to lease vehicles for the Company's field sales force. Each vehicle has a lease term of36 months with a fixed monthly rental payment. As security for the vehicle leases, the lessor required a letter of credit for $200,000, which is collateralized bya certificate of deposit in the same amount.The Company recognizes rent expense on a straight-line basis over the non-cancelable term of its operating leases. Rent expense for the years endedDecember 31, 2013, 2012 and 2011 was $829,000, $828,000 and $826,000, respectively.Future minimum lease payments as of December 31, 2013 are as follows (in thousands):F- 22Table of Contents2014$1,33020156932016432017 and thereafter—Total$2,066Manufacturing and Supply AgreementsThe Company has a manufacturing services agreement with Patheon UK Limited (Patheon) for the aseptic capsule assembly, filling and inspection,final system assembly and purchasing of Sumavel DosePro, as well as other manufacturing and support services. In August 2013, the Company entered intoan amended manufacturing services agreement (the Amended Services Agreement), with Patheon which replaced the Company's original manufacturingservices agreement upon its expiration on October 31, 2013. The Amended Services Agreement has similar terms to the original agreement and will expire onApril 30, 2016. The parties may mutually agree in writing to renew the term for additional terms prior to the expiration of the then-current term.The Company has manufacturing and supply agreements with several third-party suppliers for the production of key components of Sumavel DosePro,which expire on various dates between 2012 and 2020. As of December 31, 2013, the Company has non-cancellable purchase orders for 2014 totalingapproximately $5,218,000 (based on the exchange rate as of December 31, 2013) under these arrangements. In addition, the Company is required to payPatheon a monthly manufacturing fee of £311,000, or approximately $513,000 (based on the exchange rate as of December 31, 2013), through October 2013,and a monthly manufacturing fee of £409,000, or approximately $674,000 (based on the exchange rate as of December 31, 2013), from November 1, 2013through the term of the Amended Services Agreement. As of December 31, 2013, the Company was committed to pay Patheon a total manufacturing fee of£11,452,000, or approximately $18,882,000 (based on the exchange rate as of December 31, 2013), which is payable monthly over the remaining term of theAmended Services Agreement.The Company also has a Supply Agreement for Zohydro ER finished commercial product with APIL (see Note 3). Under the Supply Agreement, APILis the exclusive manufacturer and supplier to the Company (subject to certain exceptions) of Zohydro ER. The Company must purchase all of its requirementsof Zohydro ER, subject to certain exceptions, from APIL. As of December 31, 2013, the Company has non-cancellable purchase orders for 2014 totalingapproximately $3,246,000 under the Supply Agreement.7.DebtMaturities of long-term debt as of December 31, 2013, are as follows (in thousands):20143,033201515,930201617,259201716,66820184,159Total minimum payments57,049Less amount representing interest(27,049)Total long-term debt30,000Less current portion—Long-term portion$30,000Interest expense related to long-term debt for the years ended December 31, 2013, 2012 and 2011 was $5,672,000, $6,708,000 and $5,562,000,respectively.Healthcare Royalty Financing AgreementOn July 18, 2011, the Company closed the royalty financing agreement (the Financing Agreement) with Healthcare Royalty. Under the terms of theFinancing Agreement, the Company borrowed $30,000,000 from Healthcare Royalty (the Borrowed Amount) and the Company agreed to repay such BorrowedAmount together with a return to Healthcare Royalty, as described below, out of the Company’s direct product sales, co-promotion revenues and out-licenserevenues (collectively,F- 23Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)Revenue Interest) that the Company may record or receive as a result of worldwide commercialization of the Company’s products including Sumavel DosePro,Zohydro ER and other future products.In addition, upon the closing of and in connection with the Financing Agreement, the Company issued and sold to Healthcare Royalty $1,500,000 of theCompany’s common stock, or 388,601 shares, at a price of $3.86 per share. The Company also issued to Healthcare Royalty a warrant exercisable for up to225,000 shares of the Company’s common stock. The warrant is exercisable at $9.00 per share and has a term of 10 years. As the warrant contains covenantswhere compliance with such covenants may be outside the control of the Company, the warrant was recorded as a current liability and marked to market ateach reporting date using the Black-Scholes option pricing valuation model (see Note 2).Under the Financing Agreement, the Company is obligated to pay to Healthcare Royalty:•5% to 5.75% of the first $75,000,000 of Revenue Interest recorded (in the case of net product sales) or received (in the case of co-promotionrevenues and license fees) by the Company in a calendar year (initially 5% and then 5.75% after the Astellas Co-Promotion Agreement terminatedon March 31, 2012);•2.5% of the next $75,000,000 of Revenue Interest recorded (in the case of net product sales) or received (in the case of co-promotion revenues andlicense fees) by the Company in a calendar year; and•0.5% of Revenue Interest over and above $150,000,000 recorded (in the case of net product sales) or received (in the case of co-promotion revenuesand license fees) by the Company in a calendar year.Net sales of Sumavel DosePro outside the United States are only included in the Revenue Interest if such net sales exceed $10,000,000. Once the aggregatepayments, including the fixed payments described below, made by the Company to Healthcare Royalty equal $75,000,000, the percentage of Revenue Interestowed to Healthcare Royalty is reduced to 0.5% for the remainder of the term of the Financing Agreement, with only Sumavel DosePro and Zohydro ER subjectto the Revenue Interest payments thereafter. The Company is also obligated to make three fixed payments of $10,000,000 on (or before at the option of theCompany) each of January 31, 2015, January 31, 2016 and January 31, 2017. Unless terminated as discussed below, the Financing Agreement terminates onMarch 31, 2018.As security for the payment of the Company's obligations under the Financing Agreement, the Company also entered into a security agreement wherebythe Company granted to Healthcare Royalty a security interest in all assets of the Company, including intellectual property and other rights of the Company tothe extent necessary or used to commercialize the Company products. Healthcare Royalty entered into an intercreditor agreement under which its securityinterest was junior to the security interest of the lenders under the Company's $25.0 million loan and security agreement with Oxford Finance LLC (Oxford)and Silicon Valley Bank (SVB). The intercreditor agreement terminated on July 30, 2012 when the Company terminated its $25.0 million loan and securityagreement. Healthcare Royalty's security interest will be extinguished at the end of the term or once the aggregate payments made by the Company to HealthcareRoyalty equal $75,000,000, whichever is sooner. The Company has agreed to specified positive and negative covenants in connection with the FinancingAgreement.The Company has the option to terminate the Financing Agreement at the Company's election in connection with a change of control of the Company,upon the payment of a base amount of $52,500,000, or, if higher, an amount that generates a 19% internal rate of return on the Borrowed Amount as of thedate of prepayment, in each case reduced by the Revenue Interest and principal payments received by Healthcare Royalty up to the date of prepayment.Healthcare Royalty has the option to terminate the Financing Agreement at its election in connection with a change of control of the Company (whichincludes the sale, transfer, assignment or licensing of the Company's rights in the United States to either Sumavel DosePro or Zohydro ER), or an event ofdefault (which includes the occurrence of a bankruptcy event or other material adverse change in the Company's business), as defined in the FinancingAgreement. Upon such a termination by Healthcare Royalty, the Company is obligated to make a payment of a base amount of $45,000,000, or, if higher, anamount that generates a 17% internal rate of return on the Borrowed Amount as of the date of prepayment, in each case reduced by the Revenue Interest andprincipal payments received by Healthcare Royalty up to the date of prepayment.The rights of the Company and Healthcare Royalty to terminate the Financing Agreement early, as well the change in the Revenue Interest rate from 5% to5.75% in connection with the early termination of the Astellas co-promotion agreement, meet the definition of an embedded derivative. As a result, theCompany carved out these embedded derivatives from the Financing Agreement and determined the fair value of each derivative using various discounted cashflow valuation models taking into account the probability of these events occurring and various scenarios surrounding the potential Revenue Interest paymentsthat would be made if these events occurred (see Note 2). The aggregate fair value of the embedded derivatives as of December 31, 2013 and 2012 was$233,000 and $992,000, respectively, and is included in other long-term liabilities. As the Company agreed to early terminate the Astellas Co-PromotionAgreement in December 2011, the related embedded derivative wasF- 24Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)derecognized, resulting in a $417,000 adjustment to the fair value of embedded derivatives for the year ended December 31, 2011.The Company received aggregate net proceeds of $29,485,000 from the Financing Agreement (including the purchase of common stock). The discounts,which are being amortized using the effective interest method over the term of the arrangement within interest expense, include the fair value of the commonstock warrants issued to Healthcare Royalty of $790,000 upon the closing of the Financing Agreement, fees payable to Healthcare Royalty in connection withthe execution of the arrangement of $476,000 and the fair value of embedded derivatives of $605,000 upon the closing of the Financing Agreement. TheCompany has recognized other income (expense) in relation to the change in the fair value of the Healthcare Royalty common stock warrant of $(307,000) and$160,000 for the years ended December 31, 2013 and 2012, respectively, in the statement of operations and comprehensive loss. The Company has recognizedother income (expense) in relation to the change in the fair value of the embedded derivatives of $759,000 and $(147,000) for the years ended December 31,2013 and 2012, respectively, in the statements of operations and comprehensive loss.Term DebtIn June 2008, the Company entered into a Loan and Security Agreement with Oxford and CIT Healthcare LLC (the Oxford Agreement) under which itborrowed $18,000,000. The obligations under the Oxford Agreement were collateralized by personal property excluding certain intellectual property and allequipment pledged to secure the equipment financing described below. In July and October 2010, the Company amended and restated the Oxford Agreement,and Oxford and SVB became party to the amended agreement. In June 2011, the Company entered into an amendment to the second amended and restatedOxford Agreement (the Amended Oxford/SVB Agreement), which provided among other things, the addition of intellectual property to the collateral securing theOxford/SVB loan and the deferral of principal repayment to commence on February 1, 2012. In connection with entering into the Amended Oxford/SVBAgreement, the Company issued to Oxford and SVB warrants exercisable into an aggregate of 26,455 shares of the Company’s common stock. The warrantsare exercisable at $3.78 per share of common stock and have a term of 7 years. The value of the warrants of approximately $76,000 was recorded as debtdiscount and additional paid in capital in the consolidated balance sheet as of December 31, 2011.The Amended Oxford/SVB Agreement consisted of a $25,000,000 term loan and a $10,000,000 revolving credit facility. The obligations under theAmended Oxford/SVB Agreement were collateralized by the Company's intellectual property (including among other things, copyrights, patents, patentapplications, trademarks, service marks and trade secret rights) and personal property (including, among other things, accounts receivable, equipment,inventory, contract rights, rights to payment of money, license agreements, general intangibles and cash). The $25,000,000 term loan bore an interest rate of12.06% per annum. Under the terms of the revolving credit facility, $10,000,000 was available to be borrowed within a specified percentage of the Company'seligible accounts receivable and inventory balances (as defined in the Amended Oxford/SVB Agreement). Amounts outstanding under the revolving creditfacility accrued interest payable monthly at a floating rate per annum equal to the greater of 3.29% above SVB's prime rate or 7.29%. In addition, theCompany paid a monthly fee equal to 0.5% per annum of the average unused portion of the revolving credit facility. The outstanding principal balance of theterm loan and the revolving credit facility as of December 31, 2011 was $25,000,000 and $5,151,000, respectively.On July 30, 2012, the Company exercised its right to terminate the Amended Oxford/SVB Agreement prior to the loan maturity date of January 2, 2014and repaid $19,492,000 of outstanding principal and interest under the agreement. In addition to the repayment of all principal and interest outstanding, theCompany was also required to make a final payment of $1,200,000 and a prepayment premium of $400,000, or 2% of the then outstanding principal. TheCompany also paid a $100,000 prepayment premium to terminate the revolving credit facility. As a result of the termination of the Amended Oxford/SVBAgreement, the lenders no longer have a security interest in the Company's intellectual property and personal property.Equipment FinancingIn March 2007, the Company entered into a $10,000,000 master loan and security agreement (GE Agreement) with GE Capital Corporation (GE Capital)for the purpose of financing capital equipment purchases. Each borrowing was under a promissory note repayable in 48 monthly installments based upon amonthly repayment schedule bearing interest at an annual rate determined on the date of borrowing. The first promissory note was executed in March 2007 for$3,500,000 with an interest rate of 10.08%. A second promissory note was executed in December 2007 for $1,000,000 with an interest rate of 9.91%. TheCompany’s ability to make further borrowing under the GE Agreement expired on December 21, 2007.The Company had the option to prepay the outstanding balance of the promissory notes in full, subject to a prepayment fee as defined in the GEAgreement. The outstanding principal balance of the GE Agreement was repaid in full on June 30, 2011.F- 25Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)8.Preferred Stock and Stockholders’ EquityPreferred StockUnder the Company’s amended and restated certificate of incorporation, as of December 31, 2013 and 2012, the Company is authorized to issue10,000,000 shares of preferred stock with a $0.001 par value. As of December 31, 2013 and 2012, there were no shares of preferred stock issued oroutstanding.Common StockUnder the Company’s amended and restated certificate of incorporation, as of December 31, 2013 and 2012, the Company was authorized to issue200,000,000 shares of common stock with a $0.001 par value. Each share of common stock is entitled to one vote. The holders of common stock are alsoentitled to receive dividends whenever funds are legally available, when declared by the board of directors, subject to the prior rights of holders of convertiblepreferred stock.Common stock reserved for future issuance is as follows (in thousands): December 31, 2013 2012Stock options and restricted stock units outstanding14,859 9,901Warrants to purchase common stock16,189 16,292Shares authorized for future issuance under equity and purchase plans2,595 1,166 33,643 27,359Common Stock WarrantsIn July 2012, in connection with a public offering of common stock and warrants, the Company sold warrants to purchase 15,784,200 shares ofcommon stock (including over-allotment purchase). The warrants are exercisable at an exercise price of $2.50 per share and will expire on July 27, 2017,which is five years from the date of issuance. As the warrants contain a cash settlement feature upon the occurrence of certain events that may be outside of theCompany's control, the warrants are recorded as a current liability and are marked to market at each reporting date (see Note 2). During the year endedDecember 31, 2013, warrants to purchase 103,500 shares of common stock were exercised. The fair value of the warrants outstanding was approximately$30,849,000 and $9,308,000 as of December 31, 2013 and 2012, respectively.In July 2011, upon the closing of and in connection with the Financing Agreement (see Note 7), the Company issued to Healthcare Royalty a warrantexercisable into 225,000 shares of common stock. The warrant is exercisable at $9.00 per share of common stock and has a term of 10 years. As the warrantcontains covenants where compliance with such covenants may be outside of the Company’s control, the warrant was recorded as a current liability and ismarked to market at each reporting date (see Note 2). The fair value of the warrant was approximately $492,000 and $185,000 as of December 31, 2013 and2012, respectively.In June 2011, and in connection with entering into the Amended Oxford/SVB Agreement (see Note 7), the Company issued to Oxford and SVB warrantsexercisable into an aggregate of 26,455 shares of common stock. The warrants are exercisable at $3.78 per share of common stock and have a term of 7 years.The value of the warrants of approximately $76,000 was recorded as debt discount and additional paid in capital in the consolidated balance sheet as ofDecember 31, 2011.Convertible Preferred Stock WarrantsIn connection with the execution of the amended Oxford Agreement in July 2010, the Company issued warrants to Oxford and SVB to purchase1,145,455 and 445,455 shares, respectively, of Series B convertible preferred stock at an exercise price of $1.10 per share. The warrants expire in November2015. In connection with the Company’s initial public offering (IPO) in November 2010, these warrants were converted to 159,090 warrants for commonstock at an exercise price of $11.00 per share.In accordance with accounting guidance for warrants for shares in redeemable securities, the Company classified warrants for convertible preferredstock as liabilities on the consolidated balance sheet based on fair value and increases or decreases in the fair value of such warrants were recorded as otherincome (expense) in the consolidated statement ofF- 26Table of Contentsoperations and comprehensive loss. Upon the closing of the Company's IPO on November 29, 2010, all preferred stock converted into common stock. Thewarrants were converted into warrants to purchase common stock and reclassed from a liability to equity. 9.Stock-Based CompensationStock Option PlansDuring 2006, the Company adopted the 2006 Equity Incentive Award Plan (as amended, the 2006 Plan) under which 1,134,000 shares of commonstock were reserved for issuance to employees, directors and consultants of the Company at December 31, 2011 and 2010. The 2006 Plan provides for thegrant of incentive stock options, non-qualified stock options and rights to purchase restricted stock to eligible recipients. Recipients of stock options areeligible to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair market value of such stock on the dateof grant. The maximum term of options granted under the 2006 Plan is ten years.Options granted pursuant to the 2006 Plan generally vest over four years at a rate of 25% upon the first anniversary of the vesting commencement dateand 1/48th per month thereafter. The 2006 Plan allows the option holders to exercise their options early and acquire option shares, which are then subject torepurchase by the Company at the original exercise price of such options. At December 31, 2013 and 2012 there were zero unvested shares of common stockissued to employees of the Company in connection with the early exercise of stock option grants.During 2010, the Company adopted the 2010 Equity Incentive Award Plan (the 2010 Plan), which became effective immediately prior to the completionof the IPO. An initial 2,243,668 shares were reserved for issuance to employees, directors and consultants of the Company under the 2010 plan. The numberof shares initially reserved were subsequently increased by the number of shares of common stock related to awards granted under the 2006 Plan that arerepurchased, forfeited, expired or are cancelled on or after the effective date of the 2010 Plan, as well as an annual increase pursuant to an evergreen provision.The 2010 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units and rights topurchase restricted stock to eligible recipients. Recipients of stock options are eligible to purchase shares of the Company’s common stock at an exercise priceequal to no less than the estimated fair market value of such stock on the date of grant. The maximum term of options granted under the 2010 Plan is tenyears.Options granted pursuant to the 2010 Plan generally vest over four years and vest at a rate of 25% upon the first anniversary of the vestingcommencement date and 1/48th per month thereafter. Restricted stock units granted pursuant to the 2010 Plan vest on the first anniversary of the vestingcommencement date.In June 2012, the Company amended and restated the 2010 Plan (the Restated 2010 Plan). Pursuant to the Restated 2010 Plan, the number of shares thatare reserved for issuance under the 2010 Plan was increased to 9,300,000, plus any shares related to outstanding options granted under the 2006 Plan that arerepurchased, forfeited, expire or are canceled on or after the effective date of the Restated 2010 Plan. Further, the 2010 Plan's evergreen provision was amendedsuch that, commencing on January 1, 2013, and on each January 1 thereafter during the term of the Restated 2010 Plan, the aggregate number of sharesavailable for issuance under the Restated 2010 Plan shall be increased by that number of shares of the Company's common stock equal to the lower of:•4% of the Company’s outstanding common stock on the applicable January 1; or•an amount determined by the board of directors.At December 31, 2013 and 2012, 456,854 and 701,976 shares of common stock were available for future issuance under the Restated 2010 Plan,respectively.On December 4, 2013, the Company adopted the Employment Inducement Equity Incentive Award Plan (the Inducement Plan). The terms of theInducement Plan are substantially similar to the terms of the Company’s 2010 Equity Incentive Award Plan with two principal exceptions: (1) incentive stockoptions may not be granted under the Inducement Plan; and (2) the annual compensation paid by the Company to specified executives will be deductible onlyto the extent that it does not exceed $1,000,000, as the conditions of Section 162(m) of the Internal Revenue Code will not be met. The Inducement Plan wasadopted by the board of directors without stockholder approval pursuant to Rule 5635(c)(4) of the NASDAQ Listing Rules.The Company has initially reserved 2,700,000 shares of the Company’s common stock for issuance pursuant to awards granted under the InducementPlan. In accordance with Rule 5635(c)(4) of the NASDAQ Listing Rules, awards under the Inducement Plan may only be made to an employee who has notpreviously been an employee or member of the board of directors of the Company or any parent or subsidiary, or following a bona fide period of non-employment by the Company or aF- 27Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)parent or subsidiary, if he or she is granted such award in connection with his or her commencement of employment with the Company or a subsidiary andsuch grant is an inducement material to his or her entering into employment with the Company or such subsidiary. At December 31, 2013, 1,728,000 sharesof common stock were available for future issuance under the Inducement Plan.The 2006 Plan, Restated 2010 Plan and Inducement Plan are intended to encourage ownership of stock by employees, consultants and non-employeedirectors of the Company, as applicable, and with respect to the 2006 Plan and Restated 2010 Plan, to provide additional incentives for them to promote thesuccess of the Company’s business. The board of directors is responsible for determining the individuals to receive equity grants, the number of sharessubject to each grant, the exercise price per share and the exercise period of each option. The Company satisfies option exercises through issuance of newshares.Information with respect to the number and weighted average exercise price of stock options under the 2006 Plan, 2010 Restated Plan and InducementPlan is summarized as follows: Shares(in thousands) WeightedAverageExercisePrice WeightedAverageRemainingContractualTerm (years) AggregateIntrinsicValue(in thousands)Outstanding at December 31, 20129,901 $2.64 Granted5,257 $2.16 Exercised(291) $1.97 Canceled/Forfeited(1,338) $2.70 Outstanding at December 31, 201313,529 $2.46 8.3 $15,266Exercisable at December 31, 20135,617 $2.73 7.6 $5,484Vested and unvested expected to vest at December 31, 201312,997 $2.47 8.3 $14,622At December 31, 2013, 1,331,000 restricted stock units were outstanding with a weighted average remaining contractual term of 0.4 years and anaggregate intrinsic value of $4,577,000. All restricted stock units outstanding were granted during the year ended December 31, 2013. No restricted stock unitswere exercisable at December 31, 2013, but 1,301,000 unvested restricted stock units are expected to vest at December 31, 2013.The intrinsic values for stock options and restricted stock units above represent the aggregate value of the total pre-tax intrinsic value based upon acommon stock price of $3.44 at December 31, 2013, and the contractual exercise prices. Years Ended December 31, 2013 2012 2011Stock Options and Restricted Stock Units Weighted-average grant date fair value$1.58 $1.35 $2.88Aggregate intrinsic value of options exercised$370,000 $9,000 $226,000Total fair value of shares vested$4,895,000 $3,564,000 $2,340,000Employee Stock Purchase PlanDuring 2010, the Company adopted the 2010 Employee Stock Purchase Plan (the Purchase Plan), which allows employees to purchase shares of theCompany’s common stock during a specified offering period. The purchase price is 85% of the lower of the closing price of the stock on the first day of theoffering period or the closing price of the stock on the date of purchase. Eligible employees may elect to withhold up to 20% of their compensation during anyoffering period for the purchase of stock up to a maximum of 20,000 shares per purchase period. At December 31, 2013 and 2012, a total of 409,646 and463,973 shares of common stock were reserved for issuance under the Purchase Plan, respectively. The length of the offering period is determined by thecompensation committee and may be up to 27 months long. The first offering period under the Purchase Plan was from June 1, 2011 through May 31, 2012with two purchase periods of six months each. A total of 99,024, 205,303, 138,826 and 225,053 shares were purchased under the Purchase Plan inNovember 2013, May 2013, November 2012 and May 2012, respectively.F- 28Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)Stock-Based CompensationThe Company uses the Black-Scholes option-pricing model for determining the estimated fair value and stock-based compensation for stock-basedawards to employees and the board of directors. The assumptions used in the Black-Scholes option-pricing model are as follows: Year Ended December 31, 2013 2012 2011Stock Options Risk free interest rate0.8% to 1.8% 0.2% to 1.2% 1.2% to 2.6%Expected term5.0 to 6.1 years 5.0 to 6.1 years 5.1 to 6.1 yearsExpected volatility82.8 to 87.9% 80.1% to 86.8% 72.3% to 89.7%Expected dividend yield—% —% —%Employee Stock Purchase Plan Risk free interest rate0.1% 0.1% 0.1%Expected term0.5 to 1.0 years 0.5 to 1.0 years 0.5 to 1.0 yearsExpected volatility74.3% to 125.6% 81.5% to 85.7% 75.2% to 77.1%Expected dividend yield—% —% —%The risk-free interest rate assumption was based on the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected termof the award being valued. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. Theweighted average expected term of options was calculated using the simplified method as prescribed by accounting guidance for stock-based compensation.This decision was based on the lack of relevant historical data due to the Company’s limited historical experience. In addition, due to the Company’s limitedhistorical data, when necessary, the estimated volatility was calculated based upon the Company's historical volatility, supplemented with historical volatilityof comparable companies whose share prices are publicly available for a sufficient period of time.The Company recognized stock-based compensation expense as follows (in thousands): Year Ended December 31, 2013 2012 2012Cost of sales$333 $181 $137Research and development1,138 921 768Selling, general and administrative6,535 5,055 3,904Total$8,006 $6,157 $4,809As of December 31, 2013, there was approximately $12,647,000 of total unrecognized compensation costs related to outstanding employee and board ofdirector options and restricted stock units, which is expected to be recognized over a weighted average period of 2.7 years.At December 31, 2013, there were 182,000 unvested stock options and 25,000 restricted stock units outstanding to consultants, with approximately$574,000 of related unrecognized compensation expense based on a December 31, 2013 measurement date. These unvested stock options outstanding toconsultants are expected to vest over approximately 3.3 years, and the restricted stock units outstanding to consultants are expected to vest over approximately0.4 years. In accordance with accounting guidance for stock-based compensation, the Company re-measures the fair value of stock option grants to non-employees at each reporting date and recognizes the related income or expense during their vesting period. Expense recognized for stock options and restrictedstock units to consultants was $323,000 for the year ended December 31, 2013 and was immaterial for the years ended December 31, 2012 and 2011. Stockoption expense for awards issued to consultants is included in the consolidated statement of operations and comprehensive loss within selling, general andadministrative expense in the year ended December 31, 2013 and 2012, and within research and development expense in the year ended December 31, 2011. F- 29Table of Contents10.Employee Benefit PlanEffective February 1, 2007, the Company has established a defined contribution 401(k) plan (the Plan) for all employees who are at least 21 years ofage. Employees are eligible to participate in the Plan beginning on the first day of the month following one month of employment. Under the terms of the Plan,employees may make voluntary contributions as a percentage of compensation. The Company’s contributions to the Plan are discretionary, and nocontributions have been made by the Company to date.11.Income TaxesThe Company only recognizes tax benefits if it is more-likely-than-not to be sustained upon audit by the relevant taxing authority based upon itstechnical merits. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The balance of unrecognizedtax benefits at December 31, 2013 of $899,000 are tax benefits that, if we recognize them, would not impact our effective tax rate as long as they remainsubject to a full valuation allowance.The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands): December 31, 2013 2012Beginning balance of unrecognized tax benefits$714 $678Gross increases based on tax positions related to current year185 36Gross increases based on tax positions related to prior year— —Settlements with taxing authorities— —Expiration of statute of limitations— —Ending balance of unrecognized tax benefits$899 $714The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrued interestor penalties on the consolidated balance sheets at December 31, 2013 and 2012 and has recognized no interest and/or penalties in the consolidated statements ofoperations and comprehensive loss through the year ended December 31, 2013.The Company is subject to taxation in the U.S. and state jurisdictions. The Company’s tax years for 2006 and forward can be subject to examinationby the United States and state tax authorities due to the carry forward of net operating losses.At December 31, 2013, the Company had available federal and state income tax net operating loss carryforwards of approximately $208,131,000 and$202,100,000, respectively. The federal tax loss carryforwards will begin expiring in 2026 unless previously utilized, and the state tax loss carryforwards willbegin expiring in 2015 unless previously utilized. In addition, the Company has federal and California research and development income tax creditcarryforwards of $1,088,000 and $2,217,000, respectively. The federal research and development income tax credit carryforwards will begin to expire in2026 unless previously utilized. The California research and development income tax credit carryforwards will carry forward indefinitely until utilized.In January 2013, the American Taxpayer Relief Act of 2012 (the “Act”) was signed into law. The Act retroactively restored several expired business taxprovisions, including the research and experimentation credit. The additional credits that were reported within the 2013 consolidated financial statements haveno impact on operations due to the existence of a full valuation allowance on all deferred tax assets.The Company has completed an analysis under Internal Revenue Service Code (IRC) Sections 382 and 383 to determine if the Company’s net operatingloss carryforwards and research and development credits are limited due to a change in ownership. The Company has determined that as of December 31,2011 the Company had two ownership changes. The first ownership change occurred in August 2006 upon the issuance of the Series A-1 convertiblepreferred. As a result of this ownership change, the Company has reduced its net operating loss carryforwards by $1,900,000 and research and developmentincome tax credits by $8,000. The Company had a second ownership change as defined by IRC Sections 382 and 383, which occurred in September 2011upon the issuance of common stock in its follow-on offering. As a result of the second ownership change, the Company has reduced its federal net operatingloss carryforwards as of December 31, 2010 by $83,503,000 and research and development income tax credits as of December 31, 2010 by $2,203,000. TheCompany also reduced its California net operating loss carryforwards as of December 31, 2010 by $46,243,000 as a result of the second ownershipF- 30Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)change. Pursuant to IRC Section 382 and 383, use of the Company’s net operating loss and research and development income tax credit carryforwards may belimited in the event of a future cumulative change in ownership of more than 50% within a three-year period. The Company is currently in the process ofcompleting a Section 382 and 383 study to determine the impact that ownership changes during the year ended December 31, 2013 have had on itscarryforwards and expects to complete the analysis within the next twelve months. As a result of this analysis, the Company may have an adjustment in thenet operating losses that are recorded at December 31, 2013.The reconciliation of income tax computed at the Federal statutory tax rate to the expense (benefit) for income taxes is as follows (in thousands): December 31, 2013 2012 2011Tax at statutory rate$(27,491) $(16,109) $(28,530)State taxes, net of federal benefit(1,821) (1,580) (2,780)Change in valuation allowance22,602 21,990 (16,807)Section 382 limitation— — 45,728Permanent Interest Disallowed7,197 (4,466) (70)Credits and other(487) 170 2,450 $— $5 $(9)Significant components of the Company’s deferred tax assets as of December 31, 2013 and 2012 are listed below. A valuation allowance of$102,949,000 and $80,347,000 for the years ended December 31, 2013 and 2012, respectively, has been established to offset the deferred tax assets asrealization of such assets is uncertain. The components of the deferred tax assets are as follows (in thousands): December 31, 2013 2012Deferred tax assets: Net operating losses$80,388 $61,739Capitalized research and development8,172 8,903Accrued expenses3,263 3,707Research and development credits2,010 1,237Accrued product returns2,029 1,087Inventory reserve and UNICAP660 688Depreciation and amortization1,691 645Other, net4,736 2,341Total deferred tax assets102,949 80,347Less valuation allowance(102,949) (80,347)Net deferred tax assets$— $—The Company did not incur any income tax expense for the year ended December 31, 2013 and incurred $5,000 in income tax expense for the year endedDecember 31, 2012 related to taxable income generated by its wholly-owned subsidiary Zogenix Europe Limited. F- 31Table of ContentsZogenix, Inc.Notes to Consolidated Financial Statements (continued)12.Summarized Quarterly Data (Unaudited)The following financial information reflects all adjustments, which include only normal recurring adjustments, which are, in the opinion ofmanagement, necessary for a fair statement of the consolidated financial results of the interim periods. Summarized quarterly data for the years endedDecember 31, 2013 and 2012 is as follows: 2013 Quarter Ended March 31, June 30, September 30, December 31, (in thousands, except per share amounts)Revenue$6,981 $8,942 $7,168 $9,921Cost of Sales$4,158 $4,630 $5,354 $7,099Gross Profit (1)$2,823 $4,312 $1,814 $2,822Net loss$(21,055) $(13,332) $(10,852) $(35,617)Net loss per share, basic and diluted$(0.21) $(0.13) $(0.10) $(0.28)Weighted-average shares outstanding, basic and diluted100,809 100,876 104,682 127,869 2012 Quarter Ended March 31, June 30, September 30, December 31, (in thousands, except per share amounts)Revenue$18,347 $8,030 $8,453 $9,496Cost of Sales$5,062 $4,167 $4,249 $6,018Gross Profit (1)$13,285 $3,863 $4,204 $3,478Net loss$(10,292) $(17,169) $(19,282) $(643)Net loss per share, basic and diluted$(0.16) $(0.26) $(0.21) $(0.01)Weighted-average shares outstanding, basic and diluted65,369 65,449 90,370 100,714(1) Gross Profit is calculated as Total Revenues less Cost of Sales.F- 32Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized. ZOGENIX, INC. Date: March 7, 2014 By:/s/ Roger L. Hawley Chief Executive Officer Date: March 7, 2014 By:/s/ Ann D. Rhoads Executive Vice President, Chief FinancialOfficer, Treasurer and SecretaryPursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated. Signature Title Date/S/ ROGER L. HAWLEY Chief Executive Officer and Director (Principal Executive Officer) March 7, 2014Roger L. Hawley /S/ ANN D. RHOADS Executive Vice President, Chief Financial Officer, Treasurer andSecretary (Principal Financial and Accounting Officer) March 7, 2014Ann D. Rhoads /S/ CAM L. GARNER Chairman of the Board March 7, 2014Cam L. Garner /S/ JAMES C. BLAIR, PH.D. Director March 7, 2014James C. Blair, Ph.D. /S/ LOUIS C. BOCK Director March 7, 2014Louis C. Bock /S/ STEPHEN J. FARR, PH.D. President and Director March 7, 2014Stephen J. Farr, Ph.D. /S/ MARK WIGGINS Director March 7, 2014Mark Wiggins /S/ ERLE T. MAST Director March 7, 2014Erle T. Mast Table of ContentsEXHIBIT INDEX ExhibitNumber Description3.1(3) Fifth Amended and Restated Certificate of Incorporation of the Registrant 3.2(7) Certificate of Amendment of Fifth Amended and Restated Certificate of Incorporation of the Registrant 3.3(3) Amended and Restated Bylaws of the Registrant 4.1(4) Form of the Registrant’s Common Stock Certificate 4.2(1) Third Amended and Restated Investors’ Rights Agreement dated December 2, 2009 4.3(1) Amendment to Third Amended and Restated Investors’ Rights Agreement dated July 1, 2010 4.4(5) Second Amendment to Third Amended and Restated Investors’ Rights Agreement dated June 30, 2011 4.5(1) Warrant dated March 5, 2007 issued by the Registrant to General Electric Capital Corporation 4.6(1) Warrant dated June 30, 2008 issued by the Registrant to Oxford Finance Corporation 4.7(1) Warrant dated June 30, 2008 issued by the Registrant to CIT Healthcare LLC (subsequently transferred to The CIT Group/EquityInvestments, Inc.) 4.8(1) Transfer of Warrant dated March 24, 2009 from CIT Healthcare LLC to The CIT Group/Equity Investments, Inc. 4.9(1) Warrant dated July 1, 2010 issued by the Registrant to Oxford Finance Corporation 4.10(1) Warrant dated July 1, 2010 issued by the Registrant to Silicon Valley Bank 4.11(5) Warrant dated June 30, 2011 issued by the Registrant to Oxford Finance LLC 4.12(5) Warrant dated June 30, 2011 issued by the Registrant to Silicon Valley Bank 4.13(5) Warrant dated July 18, 2011 issued by the Registrant to Cowen Healthcare Royalty Partners II, L.P. 10.1(3) Form of Director and Executive Officer Indemnification Agreement 10.2#(1) Form of Executive Officer Employment Agreement 10.3#(1) 2006 Equity Incentive Plan, as amended, and forms of option agreements thereunder 10.4#(3) 2010 Equity Incentive Award Plan and forms of option and restricted stock agreements thereunder 10.5#(3) 2010 Employee Stock Purchase Plan and form of Offering document thereunder 10.6#(1) Executive Officer Employment Agreement dated March 1, 2010 by and between the Registrant and Ann D. Rhoads 10.7†(1) Supply Agreement dated September 29, 2004 by and between the Registrant and Dr. Reddy’s Laboratories, Inc. 10.8†(1) Asset Purchase Agreement dated August 25, 2006 by and between the Registrant and Aradigm Corporation 10.9(1) Lease dated October 31, 2006 by and between the Registrant and Emery Station Joint Venture, LLC 10.10(1) First Amendment to Lease dated July 10, 2007 by and between the Registrant and Emery Station Joint Venture, LLC 10.11(1) Second Amendment to Lease dated October 20, 2009 by and between the Registrant and Emery Station Joint Venture, LLC 10.12(1) Consent to Assignment Agreement dated August 29, 2008 by and among the Registrant, R.B. Income Properties and VerusPharmaceuticals, Inc. and related Lease dated February 2, 2005 by and between R.B. Income Properties and Verus Pharmaceuticals, Inc. 10.13†(1) License Agreement dated November 27, 2007 by and between the Registrant and Elan Pharma International Limited Table of Contents10.14†(1) First Amendment to License Agreement dated September 28, 2009 by and between the Registrant and Elan Pharma International Limited 10.15†(3) Licensing and Distribution Agreement dated March 14, 2008 by and between the Registrant and Desitin Arzneimittel GmbH 10.16†(3) Manufacturing Services Agreement dated November 1, 2008 by and between the Registrant and Patheon U.K. Ltd. 10.17†(1) Commercial Manufacturing and Supply Agreement dated April 1, 2009 by and between the Registrant and MGlas AG 10.18†(3) Co-Promotion Agreement dated July 31, 2009 by and between the Registrant and Astellas Pharma US, Inc. 10.19#(1) General Release of Claims dated August 13, 2010 by and between the Registrant and Jennifer D. Haldeman 10.20†(5) Financing Agreement dated June 30, 2011 by and between the Registrant and Cowen Royalty Healthcare Partners II, L.P. 10.21(5) Stock and Warrant Purchase Agreement dated June 30, 2011 by and between the Registrant and Cowen Royalty Healthcare Partners II,L.P. 10.22†(5) Development and License Agreement dated July 11, 2011 by and between the Registrant and Durect Corporation 10.23#(5) 2011 Annual Incentive Plan 10.24(8)†† Amendment to Co-Promotion Agreement dated December 20, 2011 by and between the Registrant and Astellas Pharma US, Inc. 10.25(9)† Co-Marketing and Option Agreement dated March 29, 2012 by and between the Registrant and Battelle Memorial Institute 10.26(9)† Sublease dated April 12, 2012 by and between the Registrant and Relational Investors, LLC 10.27(10)† Co-Promotion Agreement dated June 6, 2012 by and between the Registrant and Mallinckrodt, LLC 10.28(11)† Commercial Manufacturing and Supply Agreement dated November 2, 2012 by and between the Registrant and Alkermes PharmaIreland Ltd. 10.29(11) Employment Agreement dated November 26, 2012 by and between the Registrant and Richard Scott Shively 10.30(12)† Manufacturing Services Agreement dated February 28, 2013 by and between the Registrant and Patheon UK Limited 10.31(12)† Second Amendment to the License Agreement dated March 12, 2013 by and between the Registrant and Alkermes Pharma Ireland Limited 10.32(12) Independent Director Compensation Policy as amended and restated effective March 15, 2013 10.33(12) Annual Incentive Plan as amended and restated effective March 15, 2013 10.34(12)† Amendment No. 1 to the Development and License Agreement dated March 18, 2013 and made retroactive to January 1, 2013 by andbetween the Registrant and Durect Corporation 10.35(12)† First Amendment to the Co-marketing and Option Agreement dated March 29, 2012 entered into as of March 21, 2013 by and betweenthe Registrant and Battelle Memorial Institute 10.36(13) Controlled Equity OfferingSM Sales Agreement, dated March 27, 2013, by and between the Registrant and Cantor Fitzgerald & Co. 10.37(14) Form of Restricted Stock Unit Award Agreement under the 2010 Equity Incentive Award Plan 10.38(15)† Co-promotion Agreement dated June 27, 2013, by and between the Registrant and Valeant Pharmaceuticals North America LLC 10.39(14) Agreement on Termination of Agreements dated August 5, 2013, by and between the Registrant and Desitin Arzneimittel GmbH 10.40(16)† Amendment #1 to the Manufacturing Services Agreement, dated February 28, 2013 with an effective date of November 1, 2013, by andbetween the Registrant and Patheon UK Limited Table of Contents10.41† Co-Marketing and Development Services Agreement dated November 26, 2013, by and between the Registrant and Battelle MemorialInstitute 10.42#(17) Employment Inducement Equity Incentive Award Plan and form of stock option agreement thereunder 10.43#(18) Annual Incentive Plan as amended and restated effective, December 4, 2013 10.44 Employment Agreement dated December 17, 2013 by and between the Registrant and Bradley S. Galer, M.D. 10.45† Development and Option Agreement dated November 1, 2013 by and between the Registrant and Altus Formulation, Inc. 10.46 Employment Transition Agreement dated November 1, 2013 by and between the Registrant and Cynthia Y. Robinson, Ph.D. 21.1(6) Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, independent registered public accounting firm 24.1 Power of Attorney (reference is made to the signature page of this report) 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Public Company Accounting Reform and Investor Protection Act of2002 (18 U.S.C. §1350, as adopted) 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Public Company Accounting Reform and Investor Protection Act of2002 (18 U.S.C. §1350, as adopted) 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Actof 2002 (18 U.S.C. §1350, as adopted) 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Actof 2002 (18 U.S.C. §1350, as adopted) 101 The following financial statements from Zogenix, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013, filed onMarch 7, 2014, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations and ComprehensiveLoss, (iii) Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.(1)Filed with the Registrant’s Registration Statement on Form S-1 on September 3, 2010 (Registration No. 333-169210).(2)Filed with Amendment No. 1 to Registrant’s Registration Statement on Form S-1 on October 12, 2010 (Registration No. 333-169210).(3)Filed with Amendment No. 2 to Registrant’s Registration Statement on Form S-1 on October 27, 2010 (Registration No. 333-169210).(4)Filed with Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 on November 4, 2010 (Registration No. 333-169210).(5)Filed with the Registrant’s Quarterly Report on Form 10-Q on August 11, 2011.(6)Filed with the Registrant’s Annual Report on Form 10-K on March 4, 2011.(7)Filed with the Registrant's Quarterly Report on Form 10-Q on November 8, 2012.(8)Filed with the Registrant's Quarterly Report on Form 10-K on March 12, 2012.(9)Filed with the Registrant's Quarterly Report on Form 10-Q on May 15, 2012.(10)Filed with the Registrant's Quarterly Report on Form 10-Q on August 9, 2012.(11)Filed with the Registrant's Annual report on Form 10-K on March 15, 2013(12)Filed with the Registrant's Quarterly Report on Form 10-Q on May 9, 2013(13)Filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K on March 27, 2013(14)Filed with the Registrant's Quarterly Report on Form 10-Q on August 8, 2013(15)Filed with the Registrant's amendment to its Quarterly Report on Form 10-Q on January 14, 2014(16)Filed with the Registrant's Quarterly Report on Form 10-Q on November 4, 2013(17)Filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K on December 5, 2013(18)Filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K on December 5, 2013† Confidential treatment has been granted or requested, as applicable, for portions of this exhibit. These portions have been omitted from the RegistrationStatement and filed separately with the Securities and Exchange Commission# Indicates management contract or compensatory plan.Exhibit 10.41CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIALTREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.BATTELLE/ZOGENIX CO-MARKETING AND DEVELOPMENT SERVICES AGREEMENTThis Co-Marketing and Development Services Agreement (“Agreement”) is made and entered into as of the 26th day of November,2013 and is by and between Battelle Memorial Institute (“Battelle”) and Zogenix, Inc. (“Zogenix”). Battelle and Zogenix are individuallyreferred to as a “Party” and collectively referred to as the “Parties”.RECITALS:WHEREAS, Battelle is based in Columbus, OH and is the world’s largest private research and development corporation; andWHEREAS, Battelle delivers a comprehensive set of R&D services to solve the most complex challenges in human health throughsignificant advances in medical devices, pharmaceuticals, public health, and next-generation diagnostics and therapeutics; andWHEREAS, Zogenix is a pharmaceutical company developing and commercializing products for the treatment of central nervoussystem disorders and pain; andWHEREAS, Zogenix has developed a pre-filled, single-use disposable, needle-free drug delivery system called DosePro®; andWHEREAS, Zogenix has developed a [***] collectively referred to as “DosePro”); andWHEREAS, the Parties desire to supersede the Battelle/Zogenix Co-Marketing and Option Agreement between the Parties datedMarch 22, 2012 (as amended on March 21, 2013) (the “Prior Agreement”) to provide for, among other things, Battelle having the role asprimary DosePro development services provider, on the terms and subject to the conditions set forth in this Agreement.NOW THEREFORE, in consideration of the mutual promises and covenants set forth below, and other good and valuableconsideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:1.Definitions.“Affiliate or Affiliates” means with respect to a Party, any entity that, at the time of determination, directly or indirectly through one ormore intermediaries, controls, is ***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.controlled by or is under common control with such specified Party. For purposes of this definition only, “control” means (i)to possess, directly or indirectly, the power to direct the management or policies of a Party, whether through ownership ofvoting securities, by contract relating to votingrights or corporate governance, or (ii) to own, directly or indirectly, fiftypercent (50%) or more of the outstanding voting securities or other ownership interest of such Party. .b.“Applicable Laws” means the applicable laws, rules and regulations, including any rules, regulations, guidelines or otherrequirements of regulatory authorities or other governmental entities, that may be in effect from time to time.c. “Battelle Clients” means those organizations listed on Exhibit A, as may be amended from time to time hereunder.d. “Battelle DosePro Transaction” or “Transaction” means a transaction (or proposed transaction, as the case may be) with aBattelle Client relating to use of DosePro Technology in the development and/or commercialization of a DosePro product in theBattelle Field by the Battelle Client pursuant to which Battelle may provide Battelle DosePro Development Services. Forclarity, a Battelle DosePro Transaction may include either a [***] product or a [***] product.e. “Battelle Field” means [***]; provided that the Battelle Field shall not include any such pharmaceutical drugs within theZogenix Field.f. “Battelle Invention” means an invention [***].g. “Battelle Technology” means (i) any and all Know-How controlled by Battelle during the Term other than Know-How withinthe DosePro Technology; and (ii) those Patents controlled by Battelle during the Term other than Patents within the DoseProTechnology.h. “Battelle DosePro Development Services” means those research and development services performed by Battelle pursuantto a Transaction Document relating to pharmaceutical research and development activities for DosePro undertaken by Battelleat the request of Zogenix and/or the Battelle Client in order to design or modify DosePro to meet the desired clinical orcommercial product profile desired by a Battelle Client. Attached hereto as Exhibit C is an illustrative description of BattelleDosePro Development Services anticipated to be undertaken by Battelle with respect to a [***] Battelle Development WorkPlan; the parties will mutually agree on any Battelle DosePro Development Services to be undertaken with respect to any [***]Battelle Development Work Plan. For clarity, the Battelle DosePro Development Services to be provided pursuant to eachTransaction Document must be mutually agreed by Battelle and Zogenix.***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.i. “Designated Executives” has the meaning set forth in Section 8(d).j. “Battelle Development Work Plan” has the meaning set forth in Section 3(b).k. “DosePro Invention” means an invention [***].l. “DosePro Technology” means: (i) any and all Know-How controlled by Zogenix or any of its Affiliates during the Termrelating in whole or in part to DosePro; and (ii) those Patents controlled by Zogenix or any of its Affiliates during the Term withclaims covering DosePro, including as set forth in Exhibit D, as such list shall be updated from time to time by Zogenix.m. “License Related Revenue” means [***]. For clarity, [***] will not be considered “License Related Revenue” until [***].n. "Know-How" means all technical information and other technical subject matter, proprietary methods, ideas, concepts,formulations, discoveries, inventions, devices, technology, trade secrets, compositions, designs, formulae, know-how, show-how, specifications, drawings, techniques, results, processes, methods, procedures and/or designs, whether or not patentable.o. “Patent(s)” means issued patents and patent applications, including any and all provisionals, continuations, divisionals,continuation-in-part applications, foreign counterparts, substitutions, reissues, renewals, re-examinations, supplementaryprotection certificates, patent term extensions, adjustments or restoration rights, registrations, confirmations, successorprotective rights or subsequently issued protective rights of similar nature of any of the above.p. “Revenue” means, in connection with any given Transaction, [***], less only: (i) [***]; and (ii) [***]; and (iii) [***].For avoidance of doubt, “Revenue” shall not include:(i)[***];(ii)[***]; and(iii)[***].q. “Term” has the meaning set forth in Section 10(a).r. “Third Party Payments” has the meaning set forth in Section 1(p).s. “Transaction Document” means a binding written agreement between a Battelle Client and Zogenix for a Battelle DoseProTransaction entered into during the Term, including but not limited to a written binding term sheet, written license agreement,***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.written binding memorandum of understanding or written binding option agreement.t. “Work Related Costs” means amounts incurred or paid by Zogenix and/or actually received by Zogenix, in each case which areallocable to incurring, paying, recovering or reimbursing of product development, preclinical or clinical development(including, without limitation, Battelle DosePro Development Services), manufacturing, capital equipment, product supply orother pass-through costs, in each case directly related to DosePro product development for the Battelle Client incurred, orscheduled to be incurred, after the Effective Date by or on behalf of Zogenix.u. “Zogenix Clients” means those organizations listed on Exhibit B, as may be amended from time to time hereunder.v. “Zogenix Field” means all human pharmaceutical drugs which include [***] from within the following list, subject to Section2(b):i.[***];ii.[***];iii.[***];iv.[***];v.[***]; andvi.[***]. 2.Battelle Co-Marketing Activities; Battelle Field and Zogenix Field.a.Subject to the terms and conditions of this Agreement, during the Term, Battelle will be the exclusive co-marketer of DosePro and BattelleDosePro Development Services to Battelle Clients in the Battelle Field. As the exclusive co-marketer of DosePro to BattelleClients, [***] unless otherwise agreed by the Parties, Battelle shall during the Term:i.Use commercially reasonable efforts to fulfill its assigned responsibilities pursuant to the annual co-marketing plan prepared andapproved by the Joint Development Services Committee;ii.Introduce DosePro development and/or business proposals to the Battelle Clients;iii.Market DosePro to Battelle government clients when deemed appropriate by Battelle and in conformance with all applicable laws,including but not limited to the current Federal Acquisition Regulation (FAR);iv.Review its current project portfolio for opportunities for DosePro to add value to Battelle Clients and market DosePro and BattelleDosePro Development Services to the identified Battelle Clients;***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.v.Subject to Section 11, include where deemed appropriate by Battelle descriptions of DosePro in general marketingcommunications to Battelle Clients, presentations at relevant industry conferences, scientific papers and tradepublications prepared by Battelle and invite Zogenix participation in each;vi.Keep Zogenix informed of all technology opportunities and offerings to Battelle Clients relating to or incorporating DosePro and inviteZogenix participation in each; andvii.Use commercially reasonable efforts to ensure that all relevant Battelle business development representatives are trained in DosePro to acompetency level approved by the Joint Development Services Committee.b.Should Zogenix intend to initiate development of additional DosePro products with certain human pharmaceutical drugs (e.g., Zogenix iscontemplating or actually performing formulation work involving such drugs), it shall provide Battelle with written notice ofsuch intention specifying the details of the proposed product(s) (“Zogenix Field Notice”). If (i) Battelle has not conductedsubstantive negotiations with a Battelle Client under written obligations of confidentiality within [***] with respectto a Transaction granting rights to such Battelle Client to a drug in the class of drugs that includes the drug specifiedin the Zogenix Field Notice (“Battelle Client Negotiations”), or (ii) neither Battelle nor Zogenix is then inconfidential or substantive negotiations with a Battelle Client with respect to a Transaction granting rights to suchBattelle Client to a drug in the class of drugs that includes the drug specified in the Zogenix Field Notice, in each of(i) and (ii) the drug(s) identified in the Zogenix Field Notice shall automatically be included in the Zogenix Field. Inall other instances, Battelle’s written consent shall be required to add the drug(s) identified in the Zogenix FieldNotice to the Zogenix Field, which consent shall not be unreasonably withheld, conditioned or delayed.Notwithstanding the foregoing, if Battelle has conducted Battelle Client Negotiations and a Transaction Document isnot executed within [***] of receipt by Battelle of the Zogenix Field Notice, Battelle shall promptly thereafter giveits written consent to add the drug(s) identified in the Zogenix Field Notice.3.Battelle: Battelle DosePro Development Services.a.Subject to the terms and conditions of this Agreement, during the Term, Battelle shall be the preferred supplier of Battelle DoseProDevelopment Services for a Battelle DosePro Transaction. [***]b.On a Transaction-by-Transaction basis, the Parties shall mutually agree in writing upon a written work plan pursuant towhich Battelle shall provide the Battelle DosePro ***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.Development Services for the applicable Battelle Client (each, a “Battelle Development Work Plan”). Zogenix shall includethe activities, budget and timeline set forth in the applicable Battelle Development Work Plan in any work plan related toeach Transaction (the “Battelle Client Work Plan”). Battelle shall have the right to approve each Battelle Client Work Plan inwriting before it is presented to the Battelle Client. Battelle shall use its commercially reasonable efforts to perform theactivities contemplated under each Battelle Development Work Plan in accordance with such Battelle Development WorkPlan (including the associated budget and timelines).c.Any change in the details of a Battelle Client Work Plan or Battelle Development Work Plan or the assumptions upon which the Battelle Client WorkPlan or Battelle Development Work Plan is based may require changes in the associated budget, payment schedule or schedule for theBattelle DosePro Development Services. The change control process for the applicable Battelle Development Work Plan shall becoordinated with the change control process for the associated Battelle Client Work Plan and the JDSC shall coordinate the changecontrol processes so that they are compatible, potentially on a Transaction-by-Transaction basis. The change control process for theBattelle Development Work Plan will also set forth the conditions upon which a written amendment to the Battelle Development WorkPlan is necessary (e.g., material changes to such work plan) (a "Battelle Work Plan Amendment") as well as those circumstances inwhich the prior approval of the JDSC will be required for a Battelle Work Plan Amendment. Each Battelle Work PlanAmendment shall detail the requested changes to the applicable task, responsibility, duty, budget, timeline or other matter. NoBattelle Work Plan Amendment shall become effective unless and until it is signed by both Parties. Any such changes that resultin additional Work Related Costs or other charges shall be reflected in the Battelle Work Plan Amendment to the affected BattelleDevelopment Work Plan.d.On a Transaction-by-Transaction basis, Zogenix shall grant to Battelle a non-exclusive license to DosePro Technology for use solely in theperformance of the Battelle DosePro Development Services if the Parties mutually agree that a specific license is necessary toperform such Battelle DosePro Development Services for the applicable Transaction.e.Battelle may perform Battelle DosePro Development Services through third party contractors approved in writing byZogenix prior to their use; provided, however, that each such third party contractor must agree in a legally binding writing, towhich Zogenix is a named third party beneficiary, to be bound by the terms of this Agreement, including, without limitation,limitations on use and confidentiality as protective of and beneficial to Zogenix as those set forth herein or in the applicableTransaction Document, whichever is more restrictive, and ownership of all inventions resulting from Battelle DoseProDevelopment Services as set forth in this Agreement (including the assignment of ownership provisions set forth in Section9(a)). Battelle will remain responsible for all Battelle DosePro Development Services carried out by such third partycontractors.f.Unless otherwise agreed in writing by Battelle and Zogenix, Zogenix will use commercially reasonable efforts to enter into a Transaction Documentwith the applicable Battelle Client, on terms and conditions reasonably acceptable to Zogenix.g.In connection with each Battelle DosePro Transaction for which Battelle is providing Battelle DosePro Development Services, the Parties anticipatethat: i.Battelle will invoice Zogenix for Battelle DosePro Development Services using [***] (the “Battelle Invoice”). EachBattelle Invoice must be accompanied by appropriate documentary evidence, such as [***].ii.Zogenix will invoice the Battelle Client [***] for the undisputed amounts set forth in the Battelle Invoice as set forth in the applicableTransaction Document [***]. Battelle shall have the right to approve the payment schedule in each Transaction Document,such approval not to be unreasonably withheld, conditioned or delayed. Zogenix will not accept ‘payment in arrears’ termsfrom a Battelle Client unless the arrearage period does not exceed one calendar quarter.iii.Within [***] days following Zogenix’s [***] of payment from the Battelle Client, Zogenix shall remit payment for the Battelle DoseProDevelopment Services to Battelle to an account specified by Battelle in writing. iv.Should Zogenix not pay Battelle in a timely manner as set forth in subsection (iii) above for the Battelle DosePro Development Servicesperformed under a Battelle Development Work Plan, in addition to other remedies available to it in law and equity, Battellemay provide written notice to Zogenix of its intention to cease work on the subject matter under dispute under such BattelleDevelopment Work Plan. If Zogenix has not paid Battelle within an additional [***] following Zogenix’s receipt ofBattelle’s written notice hereunder, Battelle shall have the right to cease only such work as to which the subject matter isunder dispute under such Battelle Development Work Plan until such payment has been made.For clarity, a Transaction Document will contain other financial and customary terms related to the rights of theBattelle Client to use the DosePro Technology in connection with the product of the Battelle Client.h.For every Transaction Document entered into by Zogenix during [***] or at any time during a period of [***]:i.Zogenix shall pay to Battelle a cash fee equal to [***] of the Revenue [***] in connection with the applicable Battelle DosePro Transaction,including amounts received after the Term (the “Battelle Fees”).***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions. ii.Battelle Fees payable by Zogenix to Battelle hereunder shall be paid within [***] business days of Zogenix’s [***] of the Revenue. Uponpayment of the Battelle Fees, Zogenix shall concurrently provide to Battelle a report setting forth the elements used incalculating the Battelle Fees (e.g., License Related Revenue, Third Party Payments, other deductions from Revenue, andRevenue). Should Zogenix determine that Revenue deductions for Third Party Payments need to increase due to Third PartyAgreements other than the Aradigm Agreement, or due to increases in payments due under the Aradigm Agreement, or inconnection with other permitted deductions from Revenue, Zogenix will notify Battelle in writing of the details of suchproposed deductions in advance of taking such deductions; Battelle shall have the right to approve such proposeddeductions related to Third Party Agreements in advance with such approval not to be unreasonably withheld, conditionedor delayed.iii.Zogenix’s obligation to make payments of Battelle Fees to Battelle under this Agreement: (i) with respect to [***] Transactions shall terminateat such time as Zogenix has made payments to Battelle totaling [***] Dollars ($[***]) in the aggregate with respect to all[***] Transactions; (ii) with respect to a [***] Transaction shall terminate on a per Transaction basis at such time asZogenix has made payments to Battelle totaling [***] Dollars ($[***]) for any single [***] Transaction. Notwithstandingthe foregoing, Zogenix’s obligation to make payments of Battelle Fees to Battelle under this Agreement shall terminate withrespect to all Transactions (for clarity, all [***] Transactions and [***] Transactions) at such time as Zogenix has madepayments to Battelle totaling [***] Dollars ($[***]) in the aggregate under this Agreement.i.All payments by Zogenix to Battelle under this Agreement (Battelle Fees and amounts payable with respect to Battelle DosePro Development Services)shall be calculated and made in U.S. dollars. Any currency conversion shall be made using the rate of exchange for the conversion of thecurrency in which sales were made to U.S. dollars as of the [***]. Battelle Fees not paid to Battelle within such [***] business dayperiod shall accrue interest at the rate of [***] per month; provided, however, that in no event shall such rate exceed themaximum legal annual interest rate.j.Each Party shall keep complete, true and accurate books of account and records for the purpose of determining the payments to be madeunder this Agreement or any Transaction Document. Such books and records shall be kept at the principal place of business ofthe applicable Party. Such records will be open for inspection by the other Party solely for the purpose of verifying Battelle Feesdue or payment statements hereunder. Such inspections may be made during normal business hours upon reasonable prior writtennotice to a Party no more than [***] and shall not cover a period prior to the Term or in any event cover a period greater than a[***]. Further, [***], a Party may only inspect the records related to***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.any given time period on [***]. Inspections conducted under this Section 3(j) shall be at the expense of the auditing Party,unless a variation or error producing an increase exceeding [***] of the amount stated for the amounts owed for any periodcovered by the inspection is established in the course of any such inspection, whereupon all costs relating to the inspection forsuch period and any unpaid amounts that are discovered will be paid promptly by the audited Party. If a variance or errorproducing an increase of [***] or less of the amount stated for the amounts owed for any period covered by the audit isestablished, the audited Party shall promptly pay to the auditing Party the unpaid amount.4.Zogenix Co-Marketing Activities and Support. The Parties agree that Zogenix shall be exclusively responsible for marketingDosePro and Battelle DosePro Development Services to the Zogenix Clients, unless otherwise agreed upon by theParties. Subject to the terms and conditions of this Agreement, during the Term, at its own cost unless otherwise agreedby the Parties, Zogenix shall support the Battelle co-marketing activities provided for in this Agreement by:a.Providing DosePro training to all relevant Battelle business development representatives;b.Providing Battelle, subject to Zogenix’ obligations of confidentiality to third parties, all relevant information regarding DoseProassessments with biopharmaceutical companies;c.Providing support for all industry and targeted Battelle Client marketing initiatives; andd.Supplying Battelle or Battelle Clients at [***] ([***]) expense with demonstration saline-filled sample DosePro devices and components,such sample DosePro devices and components to be supplied at [***].In the event that a Battelle Client or a Zogenix Client desires to technically assess the DosePro Technology during the Term, theParties will jointly develop and offer a DosePro Technology technical assessment proposal and execute upon acceptance by theBattelle Client or Zogenix Client, as applicable, upon terms and conditions to be agreed, including whether or not the [***] of theParties in connection with such assessments would [***]. In addition, Zogenix shall transfer to Battelle all DosePro Technologythat is required to perform DosePro Technology technical assessments for Battelle Clients at Battelle or at a Battelle Client site,with the near term objective of establishing a self-sufficient capability and expertise within Battelle and a longer term objectiveof establishing a center of excellence for DosePro Technology product development at Battelle (“DosePro Center ofExcellence”). The cost of establishing the DosePro Center of Excellence shall be borne by [***].5.Unassigned Clients. In the event that a Party identifies a potential client (“Unassigned Client”) not identified on Exhibit A orExhibit B, the Unassigned Client will [***] be added to Exhibit A (as a Battelle Client) [***]. The Representatives, asdefined in Section 7, will update Exhibit A and Exhibit B on a quarterly basis during the Term. ***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.6.Co-Marketing Materials. Any information (written or oral) that is used in the co-marketing effort under this Agreement (“Co-Marketing Information”) shall be deemed to be the Confidential Information of Zogenix and may only be used and/ordisclosed by Battelle in compliance with the confidentiality and non-use restrictions set forth in Section 11, subject to theadditional approval by Zogenix in writing prior to its use and/or disclosure. Once the content of any such Co-MarketingInformation has been approved by Zogenix, Battelle may make subsequent disclosures of the content of such Co-Marketing Information without the subsequent approval of Zogenix, but at all times subject to the restrictions set forth inSection 11 of this Agreement.7.Representatives. Each Party will designate a staff member (individually referred to as a “Representative” and collectivelyreferred to as “Representatives”) to be the intermediaries between the Parties for the activities contemplated by thisAgreement or any Transaction Document. Each Party’s Representative shall be available on a reasonable basis to discussactivities under this Agreement or any Transaction Document with the other Party’s Representative. Meetings betweenthe Representatives and such other persons as the Representatives deem necessary shall be as needed on either Party’sRepresentative’s reasonable request. The Representatives shall be responsible for transmitting to the other Party throughits Representative all necessary documents and correspondence relating to this Agreement.8.Joint Development Services Committee.a.Promptly following the execution of the first Transaction Document, but in any event within fifteen (15) days thereafter, the Parties willestablish a joint development services committee (the "Joint Development Services Committee" or "JDSC"),which shall consist of up to six (6) members with an equal number of members nominated by each ofBattelle and Zogenix. Such members of the JDSC shall be employees or consultants (so long as they areunder confidentiality obligations as stringent as those contained in this Agreement) of each such Party or itsAffiliates, and those representatives of each such Party shall, individually or collectively, have expertisein pharmaceutical drug development, regulatory matters, manufacturing, clinical trials, non-clinicalstudies and/or other expertise to the extent relevant. A Party may replace any or all of its representativeson the JDSC at any time upon written notice to the other Party. A Party may, in its discretion, invite non-member representatives that are employees of such Party (or such Party's Affiliates) and consultants(who are under confidentiality obligations as stringent as those contained in this Agreement) to attendmeetings of the JDSC. The JDSC shall be chaired by an employee of Zogenix (or its Affiliates), as suchrepresentative may be changed by Zogenix at any time. The chairperson shall appoint a secretary of theJDSC, and such secretary shall serve for such term as designated by the chairperson.***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.b.The JDSC shall perform the following functions:i.prepare and approve an annual co-marketing plan which shall include specifics for the co-marketing activities of each of Battelle and Zogenix for the ensuingyear (consistent with the co-marketing obligations of each set forth in this Agreement), to be available by December 15th of theprior year;ii.develop and approve a change control process for Battelle Development Work Plans and Battelle Client Work Plans;iii.review and approve each initial Battelle Development Work Plan and any related Battelle Work Plan Amendment (including any proposedchanges in scope to the timeline or budget of each initial Battelle Development Work Plan);iv.oversee the interactions of the Parties pursuant to the terms of this Agreement or any applicable Battelle Development Work Planand related Transaction Document;v.review the timeline, progress and activities performed as the Battelle DosePro Development Services under any applicable BattelleDevelopment Work Plan and related Transaction Document;vi.facilitate the exchange of information and coordinate between the Parties as necessary or useful for the Battelle DosePro DevelopmentServices; andvii.have such other responsibilities as may be mutually agreed upon by the Parties from time to time.For clarity, any exchange of information at JDSC meetings shall be subject to any confidentiality obligations imposed bythird party agreements, including, without limitation, any Transaction Document.c.The JDSC shall meet in person, by video teleconference or by telephone at least once every three (3) months and more frequently as Battelleand Zogenix deem appropriate or on such dates, and at such places and times, as the Parties shall agree. From time to time,each Party may request a JDSC meeting upon notice to the other Party specifying the subject matters to be discussed, andthe Parties shall convene such JDSC meeting within twenty (20) business days of the date of the notice. Meetings of theJDSC that are held in person shall alternate between the offices of Battelle and Zogenix (or the offices of their Affiliatesdesignated by such Parties), or such other place as the Parties may agree.d.The JDSC may make decisions with respect to any subject matter that is subject to the JDSC's decision-making authority as set forth inSection 8(b); provided that as of the Effective Date, the JDSC’s only decision-making authority is toapprove the annual co-marketing plan and each initial Battelle Development Work Plan and any relatedBattelle Work Plan Amendment (including any proposed changes in scope to the timeline or budget ofeach initial Battelle Development Work Plan). All decisions of***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.the JDSC shall be made by unanimous vote or written consent, with each Party having one vote in all decisions. TheJDSC shall use good faith and reasonable efforts to resolve the matters within its roles and functions or otherwisereferred to it, however, if the JDSC cannot reach consensus within [***] after it has met and attempted to reach suchconsensus, the matter shall be referred on the [***] to the designated executive officers ("Designated Executives")who shall meet to resolve the dispute as set forth in Section 15.e.The JDSC's existence shall terminate upon and coincident with the completion of all Battelle Development Work Plans under all TransactionDocuments.f.Each Party shall be responsible for all travel and related costs and expenses for its members and other representatives to attend meetings of,and otherwise participate on, the JDSC.g.Nothing in this Section 8 shall be deemed to modify or supersede any term or condition set forth in this Agreement, or any decision ordecision-making authority expressly provided to a Party in this Agreement. For clarity, the JDSC shall not have theauthority to amend or waive any provision of this Agreement or to make any determination that any Party is in breach ofthis Agreement.9.Intellectual Property; Non-Exclusive Licenses.a.As between Battelle and Zogenix, (i) Zogenix shall own all DosePro Inventions and (ii) [***].b.If Zogenix and Battelle jointly make an invention under this Agreement, other than a DosePro Invention or a Battelle Invention, then, asbetween Battelle and Zogenix, [***].c.Subject to the terms and conditions of this Agreement and any applicable Transaction Document, Battelle hereby grants Zogenix [***], to allBattelle Inventions, for [***].d.To the extent that the [***] in a DosePro Invention or Battelle Invention made above may require modification in connection with a BattelleDosePro Transaction, the Parties will meet and discuss modification of the grant with the intent for [***].e.In the event a Party wishes to pursue patent protection of an invention solely owned by the other Party and [***], the Parties will meet anddiscuss the manner and costs of pursuing such protection.f.Each Party hereby agrees to [***] as may be necessary to effect the ownership provisions of this Section 9.***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.g.Except as may be otherwise agreed by the Parties or set forth in any applicable Transaction Document, [***].9.Term and Termination of Agreement.a.This Agreement shall be effective as of the Effective Date and shall remain in effect for five (5) years, unless sooner terminated pursuant to theterms of this Section 10 (the “Term”).b.This Agreement may be terminated at any time by mutual written agreement of the Parties.c.At any time after eighteen (18) months from the Effective Date either Party, in its sole discretion, may terminate this Agreement effectiveimmediately if no Transaction Document has yet been signed by Zogenix and a Battelle Client.d.Either Party may terminate this Agreement for cause in the event that the other Party is in material breach under this Agreement by giving [***]days prior written notice of such material breach to the other Party and this Agreement shall terminate at the end of such[***] day period unless the material breach has been cured by the other Party within said [***] day period, or in the caseof a material breach that cannot be cured within [***] days, within a reasonable period not exceeding [***] days so long asthe breaching Party is diligently proceeding to cure such material breach.e.Either Party may terminate this Agreement effective immediately upon written notice to the other party in the event (i) a court of competentjurisdiction enters a decree or order of relief appointing a receiver, liquidator, assignee, trustee or similar official of the otherparty or any substantial part of the other party’s assets and such decree or order is consented to by the other party orcontinues unstayed and in effect for a period of [***] days, (ii) the other party files a voluntary petition under anybankruptcy, insolvency or similar law, (iii) an insolvency petition is filed against the other party under any bankruptcy,insolvency or similar law and is not dismissed within [***] days, or (iv) the other party makes a general assignment forthe benefit of its creditors.f.Battelle Development Work Plans may only be terminated as set forth in the applicable Battelle Development Work Plan or related TransactionDocument. Any expiration or termination of this Agreement shall not affect either Party’s obligations under the BattelleDevelopment Work Plans then in effect.g.The rights and obligations set forth in this Agreement shall extend beyond the expiration or termination of this Agreement only to the extentexpressly provided for***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.herein, or to the extent that the survival of such rights or obligations are necessary to permit their complete fulfillmentor discharge. In the event of expiration or termination of this Agreement for any reason, the following provisions shallsurvive in addition to others specified in this Agreement to survive in such event: Sections 3(b) through (e) (withrespect to any Battelle Development Work Plans then in effect), 3(g) through (j) (to the extent required to makepayments of Battelle Fees or amounts due for Battelle Development Services), 10(f), 10(g) and Articles 1 (to theextent necessary to interpret other surviving sections), 9, 11, 12 (with respect to any Battelle DosePro DevelopmentServices performed after expiration or termination of this Agreement), 13, 15 (with respect to any dispute resolutionprocess begun before the termination of this Agreement), and 16 through 21. All provisions not surviving in accordancewith the foregoing shall terminate upon expiration or termination of this Agreement and be of no further force andeffect.11.Publications; Publicity; Confidentiality.a.Battelle will not submit any publications regarding DosePro without the prior written consent of Zogenix. Zogenix may submit publicationsregarding DosePro at any time in its sole discretion.b.Neither Party shall make any public announcement, including press releases, announcements at investor conferences, reports to anygovernmental entities regulating securities such as the SEC, concerning the existence of or the terms of this Agreement norregarding any Transaction Document, without the prior written consent of the other Party with regard to the form, contentand precise timing of such announcement, except such as may be required to be made by either Party in order to complywith Applicable Laws. Such consent will not be unreasonably withheld or delayed by such other Party. Prior to any suchpublic announcement requiring the other Party's prior written consent, the Party wishing to make the announcement willsubmit a draft of the proposed announcement to the other Party not less than [***] in advance to enable the other Party toconsider and comment thereon. Failure to respond with comments in writing prior to [***] before scheduled release shall bedeemed approval of such release. Notwithstanding anything to the contrary in this Agreement, nothing in this Section 11(b)is intended to prohibit either Party from republishing or restating information that has already been approved by the otherParty for use in a prior press release or public announcement. c.Except to the extent expressly authorized by this Agreement or otherwise agreed in writing, the Parties agree that, during the Term and for [***]thereafter, the receiving Party, its Affiliates and its designees shall, and shall ensure that their respective employees,officers, directors and other representatives shall, keep confidential and not publish or otherwise disclose and not use forany purpose, other than the performance***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.of activities under this Agreement or any Transaction Document, any information furnished to it by the other Party, itsAffiliates or its designees pursuant to the Prior Agreement, this Agreement or a Transaction Document, except to theextent that it can be established by the receiving Party by competent proof that such information: (i) was already knownto the receiving Party, other than under an obligation of confidentiality, at the time of disclosure by the disclosing Party;(ii) was generally available to the public or otherwise part of the public domain at the time of its disclosure to thereceiving Party; (iii) became generally available to the public or was otherwise part of the public domain after itsdisclosure and other than through any act or omission of the receiving Party in breach of this Agreement; (iv) wasdisclosed to the receiving Party, other than under an obligation of confidentiality, by a Third Party who had, to thereceiving Party's knowledge, no legal obligation not to disclose such information to others; or (v) was independentlygenerated by the receiving Party without reference to Confidential Information of the disclosing Party (all suchinformation to which none of the foregoing exceptions applies, and the terms of this Agreement, shall be deemed"Confidential Information"). Any and all information, data and materials, including any and all intellectual propertyrights therein and thereto, owned by a Party shall constitute Confidential Information of such Party which shall bedeemed the disclosing Party with respect to such Confidential Information for the purposes of this Section 11.Notwithstanding the foregoing, the obligations of confidentiality under this Section 11(c) regarding any ConfidentialInformation relating to or containing a Party's trade secret that has been suitably identified to the other Party as suchshall continue beyond the period set forth in this Section 11(c) (i.e., the Term plus [***]) so long as the subject matterremains a trade secret.d.The restrictions contained in Section 11(c) shall not apply to Confidential Information that: (i) is submitted by the receiving Party to aregulatory authority to obtain regulatory approval for a DosePro product; (ii) is provided by the receiving Party to thirdparties under confidentiality provisions at least as stringent as those in this Agreement, in connection with a BattelleDosePro Transaction, any Battelle Development Work Plan or related Transaction Document or in connection with aproposed financing transaction or proposed change of control transaction of a Party; or (iii) is otherwise required to bedisclosed in compliance with Applicable Laws or by a governmental entity; provided that, if a Party is required tomake any such disclosure of the disclosing Party's Confidential Information, such Party will, exceptwhere impracticable for necessary disclosures (for example, to physicians conducting studies or to healthauthorities), give reasonable advance notice to the disclosing Party of such disclosure requirement andreasonably cooperate with the disclosing Party to secure confidential treatment of such ConfidentialInformation required to be disclosed.e.Each Party shall use, and cause each of its Affiliates to use and use its commercially reasonable efforts to cause each of its licensees to use,any Confidential Information***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.obtained by such Party from the disclosing Party, its Affiliates or its licensees, pursuant to this Agreement or otherwise,solely in connection with the activities or transactions contemplated by this Agreement or any Transaction Document.f.Each Party shall be entitled, in addition to any other right or remedy it may have, at law or in equity, to seek an injunction, without the postingof any bond or other security, enjoining or restraining the other Party, its Affiliates and/or its licensees from any violation orthreatened violation of this Section 11.12.Compliance with Laws. Each Party agrees to comply with all Applicable Laws when carrying out activities contemplated bythis Agreement, including, without limitation, the Battelle DosePro Development Services.13.Limitation of Liability; Indemnification; Insurance.a.Battelle DosePro Development Services; Battelle Development Work Plans.i.Battelle will provide a high standard of professional service in its performance hereunder of any Battelle DosePro Development Services.However, Battelle, as a provider of such services, cannot guarantee success, thus BATTELLE PROVIDES NOWARRANTY OR GUARANTEE, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATIONWARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE OR MERCHANTABILITY, FOR ANY REPORT,DESIGN, ITEM, SERVICE OR OTHER RESULT TO BE DELIVERED UNDER THIS AGREEMENT OR INCONNECTION WITH ANY BATTELLE DOSEPRO DEVELOPMENT SERVICES PERFORMED PURSUANTHERETO.ii.Zogenix assumes all responsibility for its use, misuse, or inability to use the results of any Battelle DosePro Development Servicesperformed pursuant to this Agreement and any Battelle DosePro Development Services performed pursuant hereto.iii.Zogenix shall indemnify, defend and hold harmless Battelle from any and all liabilities, suits, claims, demands and damages, and allcosts and expenses in connection therewith, including without limitation, reasonable attorneys’ fees and costs (collectively,“Damages”), asserted by third parties from any cause whatsoever arising out of this Agreement or any Battelle DoseProDevelopment Services performed pursuant hereto, except for Damages occurring during performance of Battelle DoseProDevelopment Services under this Agreement on Battelle-owned or -operated premises where fault of Zogenix is not acontributing cause.b.Co-Marketing Efforts.***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.i.Battelle and Zogenix shall each use commercially reasonable efforts while carrying out their obligations under this Agreement. However, neitherParty can guarantee success; thus, NEITHER PARTY PROVIDES ANY WARRANTY OR GUARANTEE, EXPRESS ORIMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE ORMERCHANTABILITY, FOR ANY REPORT, DESIGN, ITEM, SERVICE OR OTHER RESULT TO BE DELIVEREDUNDER THIS AGREEMENT.ii.Battelle shall indemnify, defend and hold harmless Zogenix and is officers, directors, trustees, agents and employees, from and against anyand all Damages asserted by third parties occurring during Battelle’s performance of its Co-Marketing obligations underthis Agreement resulting from the [***] or [***] act or [***] of Battelle, or any of its employees or agents.i.Zogenix shall indemnify, defend and hold harmless Battelle and is officers, directors, trustees, agents and employees, from and against anyand all Damages asserted by third parties occurring during Zogenix’ performance of its Co-Marketing obligations under thisAgreement resulting from the [***] or [***] or [***] of Zogenix, or any of its employees or agents.c.No Liability for Certain Damages. Except as otherwise expressly provided for elsewhere in this Agreement, in no event shalleither Party have any liability for any indirect, incidental or consequential damages, including lost sales or lost profits,relating to or arising from or in connection with this Agreement, even if such damages may have been foreseeable;provided that such limitation shall not apply in the case of either Party’s indemnification obligations under thisSection 13 or in the case of [***] or [***].d.Insurance. Each Party shall carry and maintain in full force and effect throughout the Term and for a period of [***] thereafterreasonable and customary insurance in view of its obligations hereunder. Each Party shall provide the other, uponrequest, with evidence of such insurance and shall provide the other Party with [***] prior written notice of anyproposed cancellation of such insurance.14.Representations and Warranties. Each Party represents and warrants to the other Party that as of the Effective Date:a.Such Party is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has fullcorporate power and authority to enter into this Agreement and to carry out the provisions hereof;***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.b.Such Party has taken all corporate action necessary to authorize the execution and delivery of this Agreement and the performance of itsobligations under this Agreement and has full power and authority to enter into this Agreement and perform its obligationsunder this Agreement;c.This Agreement has been duly executed by such Party and constitutes a valid and legally binding obligation of such Party, enforceable inaccordance with its terms, subject to and limited by: (i) applicable bankruptcy, insolvency, reorganization, moratorium,and other laws generally applicable to creditors' rights; and (ii) judicial discretion in the availability of equitable relief;d.Such Party has obtained, or is not required to obtain, the consent, approval, order, or authorization of any third party, or has completed, or isnot required to complete, any registration, qualification, designation, declaration or filing with, any governmental entity, inconnection with the execution and delivery of this Agreement and the performance by such Party of its obligations underthis Agreement;e.The execution and delivery of this Agreement, and the performance by such Party of its obligations under this Agreement does not and will not:(i) conflict with, nor result in any violation of or default under any instrument, judgment, order, writ, decree, contract orprovision to which such Party is otherwise bound; (ii) give rise to any lien, charge or encumbrance upon any assets ofsuch Party or the suspension, revocation, impairment, forfeiture or non-renewal of any material permit, license,authorization or approval that applies to such Party, its business or operations or any of its assets or properties; or (iii)conflict with any rights granted by such Party to any third party or breach any obligation that such Party has to any thirdparty; andf.Every officer, scientific employee and technical consultant of such Party has an obligation to assign his or her inventions to such Party to theextent such inventions are within the scope of his or her activities for such Party with respect to this Agreement, and allsuch officers, scientific employees and technical consultants retained by such Party to provide services to such Party hasan obligation to maintain the confidentiality of such Party's confidential information.15.Dispute Resolution. The Designated Executives shall attempt to resolve any disputes between the Parties under thisAgreement, including, but not limited to disputes referred to them by the Representatives or the JDSC. If, after [***] ofgood faith discussions, the Designated Executives are unable to agree on a resolution of the dispute, then the Parties willsubmit the dispute to an independent mediator (to be jointly selected by and paid for by the Parties), who shall have [***]days after the matter is fully submitted to him or her to assist the Parties in reaching a resolution. If either Party refuses,in its sole discretion to accept the resolution proposed as a result of the mediation, it shall give prompt written notice ofsuch refusal to the***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.other Party and at any time following any such notice each Party shall be free to pursue any legal, equitable or other remediesavailable to it regarding the matter in dispute.16.Nature of Services. This Agreement shall not constitute, create or give effect to, or otherwise imply a joint venture,corporation, partnership, or any form of formal business entity of any kind. Each Party to this Agreement shall act as anindependent contractor with respect to the other Party. Neither Party shall have any authority or control over the otherParty or the other Party’s employees, nor shall either Party have the power to bind the other Party, nor shall thisAgreement be construed as creating any actual or implied authority or any type of agency relationship.17.Force Majeure. Neither Party shall be held liable or responsible to the other Party nor be deemed to be in default under, or inbreach of any provision of, this Agreement for failure or delay in fulfilling or performing any obligation of thisAgreement to the extent that such failure or delay is due to Force Majeure, and without the willful wrongdoing,recklessness or gross negligence of the Party so failing or delaying. For purposes of this Agreement, “Force Majeure” isdefined as causes beyond the reasonable control of the Party, including acts of God; changes in regulations or laws of anygovernment; war; terrorism; civil commotion; destruction of production facilities or materials by fire, flood, earthquake,explosion or storm; labor disturbances; epidemic; and failure of public utilities or common carriers. In the event that theability of Battelle or Zogenix to perform its obligations under this Agreement, as the case may be, shall be so affected,the affected Party shall immediately notify the other Party of such inability and of the period for which such inability isexpected to continue. The Party giving such notice shall thereupon be excused from such of its obligations under thisAgreement as it is thereby disabled from performing for so long as it is [***]. To the extent possible, each Party shall usecommercially reasonable efforts to minimize the duration of any Force Majeure.18.Entire Agreement. This Agreement represents the entire agreement of the parties and supersedes any prior discussions orunderstandings, whether written or oral, relating to the subject matter hereof, including the Prior Agreement; forclarity, the Confidential Disclosure Agreement dated January 6, 2011, as amended, between the Parties is superseded inits entirety by Section 11 of this Agreement. This Agreement may be modified or amended only by mutual agreement inwriting, signed by a duly authorized representative of each Party. No course of dealing, usage of trade, waiver or non-enforcement shall be construed to modify or otherwise alter the terms and conditions of this Agreement.19.Governing Law. This Agreement shall be governed by and construed in accordance with the substantive laws of the State ofNew York, without regard to conflicts of laws principles.20.Notices. Any notice, request or other communication required or permitted to be given under or in connection with thisAgreement shall be deemed to have been sufficiently given if in***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.writing and personally delivered, facsimile transmission (receipt verified) or overnight express courier service (signaturerequired), prepaid, to the Party for which such notice is intended, at the address set forth for such Party below:Battelle Memorial InstituteAttention:Fax: If to Zogenix:Zogenix, Inc.12400 High Bluff Drive, Suite 650San Diego, California 92130Attention: Chief Financial OfficerFax: With a copy to (which shall not constitute notice to Zogenix):Latham & Watkins LLP12636 High Bluff Drive, Suite 400San Diego, California 92130Attention: Faye H. RussellFacsimile: (858) 523-5450or any other addresses of which a Party shall notify the other Party in writing; provided that notices of a change of address shall beeffective only upon receipt thereof. If delivered personally or by facsimile transmission, the date of delivery shall be deemed to be thedate on which such notice or request was given. If sent by overnight express courier service, the date of delivery shall be deemed to bethe next business day after such notice or request was deposited with such service.21.Assignment; Miscellaneous.a.This Agreement, and the rights and obligations hereunder, may not be assigned or transferred by either Party without the prior written consentof the other Party; provided, however, [***]. This Agreement shall be binding upon and inure to the successors andpermitted assigns of the Parties and the name of a Party appearing herein shall be deemed to include the names of suchParty’s successors and permitted assigns to the extent necessary to carry out the intent of this Agreement.a.Zogenix agrees that it shall comply with all U.S. laws and regulations applicable to export of products, materials, items and/or technical dataor information. Zogenix agrees not to export or re-export any technical data, product(s), or the direct product of technicaldata received from Battelle outside the United States or to a foreign person (i.e. any person who is not a lawful permanentresident of the U.S. or is not a protected individual as defined by 8 U.S.C sections 1101 and 1324) unless Zogenix or theBattelle Client has obtained in advance all required licenses, agreements or other authorizations from the U.S. Government.Exports of technical data include, without***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.limitation, the sending or taking of any technical data out of the United States in any manner; disclosing or transferringtechnical data to a foreign person whether in the United States or abroad; or performing services for a foreign client,whether in the United States or abroad.b.If any part of this Agreement shall be held invalid or unenforceable, such invalidity and unenforceability shall not affect any other part of thisAgreement.c.This Agreement may be executed in counterparts, with the same effect as if the Parties had signed the same document. Each counterpart soexecuted shall be deemed to be an original, and all such counterparts shall be construed together and shall constitute oneAgreement.This Agreement is executed and effective as of the date written above.BATTELLE MEMORIAL INSTITUTEZOGENIX, INC. By:_/s/ Marty Toomajian By:_/s/ Stephen J. FarrIts: President, Energy, Health and EnvironmentalIts: PresidentExhibit ABattelle Clients[***]***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.Exhibit BZogenix Clients[***]***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.Exhibit CIllustrative Battelle DosePro Development Services for [***]Zogenix will be the design authority for the DosePro Technology, Battelle will lead the effort to design and implement DoseProTechnology specifically into the [***]. Battelle’s focus will be those items necessary to deliver the device technology through the CPVstudy as described in the [***] DosePro Development Plan jointly developed by Battelle and Zogenix. While commercial activities arenot explicitly described, it is the goal of both Battelle and Zogenix to leverage the development of the CPV product to support theDosePro commercial development for a to be determined (tbd) client(s). When programs transition from CPV to commercialdevelopment, Battelle will maintain its role as the preferred provider of design and development services for [***]. Battelle DosePro Development Services may include:•Establishment of DosePro technology product development center of excellence at Battelle•Injection parameter characterization necessary to deliver [***] of fluid in the DosePro device •Investigational clinical trial test stand development•Requirements development and management•Risk analysis planning and execution•Human factors planning and execution•Device system and subsystem design and outputs•Device design reviews•Device prototype assembly process development•Device prototype test method development•Device prototype fabrication and testing•Device Design History File (DHF)•Program management of the above activities.In most Battelle Client Development Work Plans, Zogenix will take the lead on other related activities such as the InvestigationalClinical Trial, the Clinical Performance Verification (CPV) Trial, the capsule filling process, and regulatory activities. Commercialmanufacturing and related development activities will likely be led by tbd client(s). While Battelle and Zogenix each will lead particulartasks, both companies may jointly participate in various tasks as necessary to insure program success. ***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.Exhibit DZogenix Patents[***]***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.Exhibit 10.44EMPLOYMENT AGREEMENTTHIS EMPLOYMENT AGREEMENT (this “Agreement”) is entered into by and between Zogenix, Inc., a Delawarecorporation (the “Company”), and Bradley Stuart Galer, M.D. (“Executive”), and shall be effective as of December 17th, 2013 (the“Effective Date”).WHEREAS, the Company desires to employ Executive, and Executive desires to accept employment with the Company, onthe terms and conditions set forth in this Agreement.NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties agree as follows:1.Definitions. As used in this Agreement, the following terms shall have the following meanings:(a) “Board” means the Board of Directors of the Company.(b) “Bonus” means an amount equal to the average of the bonuses awarded to Executive for each of the three (3)fiscal years prior to the date of Executive’s termination of employment, or such lesser number of years as may be applicable ifExecutive has not been employed for three (3) full years on the date of Executive’s termination of employment. For purposes ofdetermining Executive’s “Bonus,” (i) to the extent Executive received no bonus in any year due to a failure to meet the applicableperformance objectives, such year will still be taken into account (using zero (0) as the applicable bonus) in determining Executive’s“Bonus,” and (ii) to the extent Executive was not employed for an entire fiscal year, the bonus received by Executive for such fiscalyear for purposes of the preceding calculation. If any portion of the bonuses awarded to Executive consisted of securities or otherproperty, the fair market value thereof shall be determined in good faith by the Board. In no event will Executive’s signing bonuspursuant to Section 3(c) below constitute a “Bonus” for purposes of this definition.(c) “California WARN Act” means California Labor Code Sections 1400 et seq.(d) “Cause” means any of the following:(i) the commission of an act of fraud, embezzlement or dishonesty by Executive, or the commission of someother illegal act by Executive, that has a material adverse impact on the Company or any successor or affiliate thereof;(ii) a conviction of, or plea of “guilty” or “no contest” to, a felony by Executive;(iii) any unauthorized use or disclosure by Executive of confidential information or trade secrets of theCompany or any successor or affiliate thereof that has, or may reasonably be expected to have, a material adverse impact on any suchentity;(iv) Executive’s gross negligence, insubordination or material violation of any duty of loyalty to the Companyor any successor or affiliate thereof, or any other material misconduct on the part of Executive;(v) Executive’s ongoing and repeated failure or refusal to perform or neglect of Executive’s duties as requiredby this Agreement, which failure, refusal or neglect continues for fifteen (15) days following Executive’s receipt of written noticefrom the Board or the Company’s Chief Executive Officer (the “CEO”) stating with specificity the nature of such failure, refusal orneglect; or(vi) Executive’s breach of any Company policy or any material provision of this Agreement;provided, however, that prior to the determination that “Cause” under this Section 1(d) has occurred, the Company shall (A) provide toExecutive in writing, in reasonable detail, the reasons for the determination that such “Cause” exists, (B) other than with respect toclause (v) above which specifies the applicable period of time for Executive to remedy his or her breach, afford Executive a reasonableopportunity to remedy any such breach, (C) provide Executive an opportunity to be heard prior to the final decision to terminateExecutive’s employment hereunder for such “Cause” and (D) make any decision that such “Cause” exists in good faith.The foregoing definition shall not in any way preclude or restrict the right of the Company or any successor or affiliatethereof to discharge or dismiss Executive for any other acts or omissions, but such other acts or omissions shall not be deemed, forpurposes of this Agreement, to constitute grounds for termination for Cause.(e) “Change in Control” means and includes each of the following:(i) a transaction or series of transactions (other than an offering of the Company’s common stock to thegeneral public through a registration statement filed with the Securities and Exchange Commission) whereby any “person” or related“group” of “persons” (as such terms are used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the“Exchange Act”)) (other than the Company, any of its subsidiaries, an employee benefit plan maintained by the Company or any of itssubsidiaries or a “person” that, prior to such transaction, directly or indirectly controls, is controlled by, or is under common controlwith, the Company) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act),of securities of the Company possessing more than fifty percent (50%) of the total combined voting power of the Company’s securitiesoutstanding immediately after such acquisition; or(ii) the consummation by the Company (whether directly involving the Company or indirectly involving theCompany through one or more intermediaries) of (A) a merger, consolidation, reorganization, or business combination or (B) a sale orother disposition of all or substantially all of the Company’s assets in any single transaction or series of related transactions or (C) theacquisition of assets or stock of another entity, in each case other than a transaction:2(1) which results in the Company’s voting securities outstanding immediately before thetransaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Companyor the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, allor substantially all of the Company’s assets or otherwise succeeds to the business of the Company (the Company or suchperson, the “Successor Entity”) directly or indirectly, at least a majority of the combined voting power of the SuccessorEntity’s outstanding voting securities immediately after the transaction, and(2) after which no person or group beneficially owns voting securities representing fiftypercent (50%) or more of the combined voting power of the Successor Entity; provided, however, that no person or group shallbe treated for purposes of this clause (2) as beneficially owning fifty percent (50%) or more of combined voting power of theSuccessor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction. Notwithstanding the foregoing, a transaction shall not constitute a “Change in Control” if: (i) its sole purpose is to change thestate of the Company’s incorporation; (ii) its sole purpose is to create a holding company that will be owned in substantially the sameproportions by the persons who held the Company’s securities immediately before such transaction; (iii) it constitutes the Company’sinitial public offering of its securities; or (iv) it is a transaction effected primarily for the purpose of financing the Company with cash (asdetermined by the Board in its discretion and without regard to whether such transaction is effectuated by a merger, equity financing orotherwise). The Board shall have full and final authority, which shall be exercised in its discretion, to determine conclusively whether aChange in Control of the Company has occurred pursuant to the above definition, and the date of the occurrence of such Change inControl and any incidental matters thereto.(f) “Code” means the Internal Revenue Code of 1986, as amended from time to time, and the Treasury Regulationsand other interpretive guidance issued thereunder.(g) “Good Reason” means the occurrence of any of the following events or conditions without Executive’s written consent:(i) a material diminution in Executive’s authority, duties or responsibilities;(ii) a material diminution in Executive’s base compensation, unless such a reduction is imposed across-the-board to senior management of the Company;(iii) a material change in the geographic location at which Executive must perform his or her duties (and theparties acknowledge that a relocation of the Company’s principal executive offices to a location more than fifty (50) miles from theCompany’s then-current offices(excepting reasonable travel on the Company’s business) shall constitute a material change for purposesof this clause; or3(iv) any other action or inaction that constitutes a material breach by the Company or any successor or affiliateof its obligations to Executive under this Agreement.Executive must provide written notice to the Company of the occurrence of any of the foregoing events or conditions withoutExecutive’s written consent within ninety (90) days of the occurrence of such event. The Company or any successor or affiliate shallhave a period of thirty (30) days to cure such event or condition after receipt of written notice of such event from Executive.(h) “Involuntary Termination” means (i) Executive’s Separation from Service by reason of Executive’s discharge by theCompany other than for Cause, or (ii) Executive’s Separation from Service by reason of Executive’s resignation of employment withthe Company for Good Reason. Executive’s Separation from Service by reason of Executive’s death or discharge by the Companyfollowing Executive’s Permanent Disability shall not constitute an Involuntary Termination. Executive’s Separation from Service byreason of resignation from employment with the Company for Good Reason shall be an “Involuntary Termination” only if suchSeparation from Service occurs within two (2) years following the initial existence of the act or failure to act constituting Good Reason.Executive’s Separation from Service by reason of resignation from employment with the Company for Good Reason shall be treated asinvoluntary.(i) Executive’s “Permanent Disability” shall be deemed to have occurred if Executive shall become physically or mentallyincapacitated or disabled or otherwise unable fully to discharge his or her duties hereunder for a period of ninety (90) consecutivecalendar days or for one hundred twenty (120) calendar days in any one hundred eighty (180) calendar-day period. The existence ofExecutive’s Permanent Disability shall be determined by the Company on the advice of a physician chosen by the Company and theCompany reserves the right to have Executive examined by a physician chosen by the Company at the Company’s expense. (j) “Separation from Service,” with respect to Executive, means Executive’s “separation from service,” as defined inTreasury Regulation Section 1.409A-1(h). (k) “Stock Awards” means all stock options, restricted stock and such other awards granted pursuant to theCompany’s stock option and equity incentive award plans or agreements and any shares of stock issued upon exercise thereof.(l) “WARN Act” shall mean the Worker Adjustment and Retraining Notification Act, 29 U.S.C. Sections 2101 et seq.,and the Department of Labor regulations thereunder.2. Services to Be Rendered.(a) Duties and Responsibilities. Executive shall serve as Executive Vice President and Chief Medical Officer of the Company.In the performance of such duties, Executive shall report directly to the President and shall be subject to the direction of the Presidentand to such limits upon Executive’s authority as the President may from time to time impose. In the event of the President’s incapacityor unavailability, Executive shall be subject4to the direction of the CEO. Executive hereby consents to serve as an officer and/or director of the Company or any subsidiary oraffiliate thereof without any additional salary or compensation, if so requested by the President. Executive shall be employed by theCompany on a full time basis. Executive’s primary place of work shall be the Company’s facility in San Diego, California, or such otherlocations designated by the President from time to time. Executive shall also render services at such other places within or outside theUnited States as the President may direct from time to time. Executive shall be subject to and comply with the policies and proceduresgenerally applicable to senior executives of the Company to the extent the same are not inconsistent with any term of this Agreement.(b) Exclusive Services. Executive shall at all times faithfully, industriously and to the best of his or her ability, experience andtalent perform to the satisfaction of the Board and the CEO all of the duties that may be assigned to Executive hereunder and shalldevote substantially all of his or her productive time and efforts to the performance of such duties. Subject to the terms of theProprietary Information and Inventions Agreement referred to in Section 5(b), this shall not preclude Executive from devoting time topersonal and family investments or serving on community and civic boards, or participating in industry associations, provided suchactivities do not interfere with his or her duties to the Company, as determined in good faith by the President. Executive agrees that he orshe will not join any boards, other than community and civic boards (which do not interfere with his or her duties to the Company),without the prior approval of the President.3.Compensation and Benefits. The Company shall pay or provide, as the case may be, to Executive the compensation andother benefits and rights set forth in this Section 3.(a)Base Salary. The Company shall pay to Executive a base salary of $335,000 per year, payable in accordancewith the Company’s usual pay practices (and in any event no less frequently than monthly). Executive’s base salary shall be subject toreview annually by and at the sole discretion of the Compensation Committee of the Board or its designee.(b)Bonus. Commencing in 2014, Executive shall participate in any bonus plan that the Board or its designee mayapprove for the senior executives of the Company. Executive’s target bonus under the Company’s annual bonus plan shall be forty-fivepercent (45%) of Executive’s base salary.(c) Signing Bonus. Executive shall be entitled to a one-time cash signing bonus in the amount of $60,000, payable on the firstregularly scheduled payroll date of the Company that is at least ten (10) days following the Effective Date. If Executive voluntarilyterminates his employment without Good Reason prior to the first anniversary of the Effective Date, Executive shall repay to theCompany a pro rata portion of the foregoing signing bonus based on the number of days elapsed during the period commencing on theEffective Date and ending on the first anniversary of the Effective Date. The Company will have the right to offset such amountsagainst any compensation otherwise payable to Executive on the date of Executive’s termination of employment.(d) Relocation.5(i) The Company expects Executive to relocate his principal place of residence from Pennsylvania to the SanDiego, California metropolitan area on or before June 30, 2015. In furtherance of Executive’s relocation, the Company shall pay for orreimburse Executive in accordance with the Company’s written expense reimbursement policies and procedures for (i) the movementof Executive’s reasonable household goods, which includes two automobiles (excluding extraordinary or unusual moving costs such asboat, recreational vehicle, playground equipment), (ii) reimbursement for up to total of six (6) round trip tickets for house hunting tripsto San Diego for Executive, his spouse and/or his dependent children, (iii) reimbursement for transportation for Executive, his spouseand his dependent children from Pennsylvania to San Diego, California, and (iv) reasonable and customary realtor costs incurred byExecutive in connection with the purchase of Executive’s residence in San Diego California and the sale of Executive’s residence inPennsylvania (collectively, the “Relocation Reimbursement”).(ii) In addition, the Company shall pay to Executive a tax gross-up (the “Tax Gross-Up”) for any federal andstate income and employment taxes Executive is required to pay resulting from the Relocation Reimbursement and from the TaxGross-Up, which Tax Gross-Up shall be paid in accordance with Treasury Regulation Section 1.409A-3(i)(1)(v). The RelocationReimbursement and any Tax Gross-Up shall be subject to an aggregate cap of $100,000. All amounts eligible for the RelocationReimbursement must be incurred by and paid to Executive during the term of his employment with the Company. The RelocationReimbursement and the Tax Gross-Up shall be paid to Executive within thirty (30) days following the Company’s receipt of a writtenrequest for such reimbursement, but subject to receipt by the Company of supporting receipts and/or documentation and/or receipts inform and substance reasonably acceptable to the Company. If Executive voluntarily terminates his employment without Good Reasonprior to June 30, 2015, Executive shall repay to the Company a pro rata portion of the Relocation Reimbursement and any Tax Gross-Upbased on the number of days elapsed in the one-year period ending on June 30, 2015. The Company will have the right to offset suchamounts against any compensation otherwise payable to Executive on the date of Executive’s termination of employment.(iii) In addition to the foregoing, during the period commencing on the Effective Date and ending on theearlier of (A) the date Executive relocates his primary residence to the San Diego, California area or (B) June 30, 2015, the Companywill pay for or reimburse Executive for temporary housing in the San Diego, California area, subject to the Company’s prior approval ofExecutive’s temporary housing arrangements.(e) Benefits. Executive shall be entitled to participate in benefits under the Company’s benefit plans and arrangements,including, without limitation, any employee benefit plan or arrangement made available in the future by the Company to its seniorexecutives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. TheCompany shall have the right to amend or delete any such benefit plan or arrangement made available by the Company to its seniorexecutives and not otherwise specifically provided for herein; provided, that any reduction of Executive’s benefits such thatExecutive’s benefits are, in the aggregate, materially less favorable to Executive than those benefits offered to Executive as of theEffective Date shall be considered a material breach of this Agreement by the Company. 6(f)Expenses. The Company shall reimburse Executive for reasonable out-of-pocket business expenses incurred inconnection with the performance of his or her duties hereunder, subject to (i) such policies as the Company may from time to timeestablish, (ii) and Executive furnishing the Company with evidence in the form of receipts satisfactory to the Company substantiatingthe claimed expenditures, (iii) Executive receiving advance approval from the President in the case of expenses for travel outside ofNorth America, and (iv) Executive receiving advance approval from the President in the case of expenses (or a series of relatedexpenses) in excess of $5,000.(g)Paid Time Off. Executive shall be entitled to such periods of paid time off (“PTO”) each year as provided fromtime to time under the Company’s PTO policy and as otherwise provided for senior executive officers; specifically twenty-five (25)days PTO plus standard Company holidays.(h)Equity Plans. Executive shall be entitled to participate in any equity or other employee benefit plan that isgenerally available to senior executive officers, as distinguished from general management, of the Company. Except as otherwiseprovided in this Agreement, Executive’s participation in and benefits under any such plan shall be on the terms and subject to theconditions specified in the governing document of the particular plan.(i)Stock Award Acceleration.(i) In the event of a Change in Control, the vesting and exercisability of fifty percent (50%) of Executive’soutstanding unvested Stock Awards shall be automatically accelerated effective immediately prior to the consummation of such Changein Control.(ii) In the event of Executive’s Involuntary Termination or Executive’s Separation from Service by reason ofExecutive’s death or discharge by the Company following Executive’s Permanent Disability, the vesting and/or exercisability of each ofExecutive’s outstanding unvested Stock Awards shall be automatically accelerated on the date of Executive’s Separation from Serviceas to the number of Stock Awards that would vest over the twelve (12) month period following the date of Executive’s Separation fromService had Executive remained continuously employed by the Company during such period.(iii) In the event of Executive’s Involuntary Termination within three (3) months prior to or twelve (12)months following a Change in Control, the vesting and/or exercisability of any outstanding unvested portions of such Stock Awards shallbe automatically accelerated on the later of (A) the date of Executive’s Separation from Service and (B) the date of the Change inControl. In addition, with respect to Stock Awards granted to Executive on or after the Effective Date, such Stock Awards may beexercised by Executive (or Executive’s legal guardian or legal representative) until the latest of (A) three (3) months after the date ofExecutive’s Separation from Service, (B) with respect to any portion of the Stock Awards that become exercisable on the date of aChange in Control pursuant to this Section 3(i)(iii), three (3) months after the date of the Change in Control, or (C) such longer periodas may be specified in the applicable Stock Award agreement; provided, however, that in no event shall any Stock Award remainexercisable beyond the original outside expiration date of such Stock Award.7(iv) The vesting pursuant to clauses (i), (ii) and (iii) of this Section 3(i) shall be cumulative. The foregoingprovisions are hereby deemed to be a part of each Stock Award and to supersede any less favorable provision in any agreement or planregarding such Stock Award.4. Severance. Executive shall be entitled to receive benefits upon a Separation from Service only as set forth in this Section 4:(a) At-Will Employment; Termination. The Company and Executive acknowledge that Executive’s employment isand shall continue to be at-will, as defined under applicable law, and that Executive’s employment with the Company may be terminatedby either party at any time for any or no reason, with or without notice. If Executive’s employment terminates for any reason,Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided in this Agreement.Executive’s employment under this Agreement shall be terminated immediately on the death of Executive.(b) Separation from Service by Death or Following Permanent Disability. Subject to Sections 4(e) and 9(o) andExecutive’s continued compliance with Section 5, in the event of Executive’s Separation from Service as a result of Executive’s deathor discharge by the Company following Executive’s Permanent Disability, Executive or Executive’s estate, as applicable, shall beentitled to receive, in lieu of any severance benefits to which Executive or Executive’s estate may otherwise be entitled under anyseverance plan or program of the Company, the benefits provided below, which, with respect to clause (ii) below will be payable in alump sum within ten (10) days following the effective date of Executive’s Release (or, in the event of Executive’s incapacity as a resultof his or her Permanent Disability, the Release executed by Executive’s legal representative) (or, in the event of Executive’s death,within ten (10) days following the date of Executive’s death):(i) the Company shall pay to Executive or Executive’s estate, as applicable, Executive’s fully earned but unpaid base salary,when due, through the date of Executive’s Separation from Service at the rate then in effect, plus all other benefits, if any, under anyCompany group retirement plan, nonqualified deferred compensation plan, equity award plan or agreement (other than any such plan oragreement pertaining to Stock Awards whose treatment is prescribed by Section 3(i) above), health benefits plan or other Companygroup benefit plan to which Executive or Executive’s estate may be entitled pursuant to the terms of such plans or agreements at thetime of Executive’s Separation from Service;(ii) Executive or Executive’s estate, as applicable, shall be entitled to receive severance pay in an amount equal to twelve (12)multiplied by Executive’s monthly base salary as in effect immediately prior to the date of Executive’s Separation from Service; and(iii) for the period beginning on the date of Executive’s Separation from Service and ending on the date which is twelve (12)full months following the date of Executive’s Separation from Service (or, if earlier, (1) the date on which the applicable continuationperiod under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”) expires or (2) the date Executivebecomes eligible to receive the equivalent or increased healthcare coverage from a subsequent employer) (such period, the “COBRA8Coverage Period”), if Executive and/or his or her eligible dependents who were covered under the Company’s healthinsurance plans as of the date of Executive’s Separation from Service elect to have COBRA coverage and are eligible for such coverage,the Company shall reimburse Executive or his or her estate, as applicable, on a monthly basis for an amount equal to (A) the monthlypremium Executive and/or his or her covered dependents, as applicable, are required to pay for continuation coverage pursuant toCOBRA for Executive and/or his or her eligible dependents, as applicable, who were covered under the Company’s health plans as ofthe date of Executive’s Separation from Service (calculated by reference to the premium as of the date of Executive’s Separation fromService) less (2) the amount Executive would have had to pay to receive group health coverage for Executive and/or his or her covereddependents, as applicable, based on the cost sharing levels in effect on the date of Executive’s Separation from Service. If any of theCompany’s health benefits are self-funded as of the date of Executive’s Separation from Service, or if the Company cannot provide theforegoing benefits in a manner that is exempt from Section 409A (as defined below) or that is otherwise compliant with applicable law(including, without limitation, Section 2716 of the Public Health Service Act), instead of providing the reimbursements as set forthabove, the Company shall instead pay to Executive or his or her estate, as applicable, the foregoing monthly amount as a taxable monthlypayment for the COBRA Coverage Period (or any remaining portion thereof). Executive or his or her estate, as applicable, shall besolely responsible for all matters relating to continuation of coverage pursuant to COBRA, including, without limitation, the election ofsuch coverage and the timely payment of premiums.(c) Severance Upon Involuntary Termination. Subject to Sections 4(e) and 9(o) and Executive’s continuedcompliance with Section 5, if Executive’s employment is Involuntarily Terminated, Executive shall be entitled to receive, in lieu ofany severance benefits to which Executive may otherwise be entitled under any severance plan or program of the Company, thebenefits provided below, which, with respect to clause (ii) below will be payable in a lump sum within ten (10) days following theeffective date of Executive’s Release:(i) the Company shall pay to Executive his or her fully earned but unpaid base salary, when due, through the date ofExecutive’s Involuntary Termination at the rate then in effect, plus all other benefits, if any, under any Company group retirementplan, nonqualified deferred compensation plan, equity award plan or agreement (other than any such plan or agreement pertaining toStock Awards whose treatment is prescribed by Section 3(i) above), health benefits plan or other Company group benefit plan to whichExecutive may be entitled pursuant to the terms of such plans or agreements at the time of Executive’s Involuntary Termination;(ii) Executive shall be entitled to receive severance pay in an amount equal to twelve (12) multiplied by Executive’s monthlybase salary as in effect immediately prior to the date of Executive’s Involuntary Termination; and(iii) for the COBRA Coverage Period, if Executive and his or her eligible dependents who were coveredunder the Company’s health insurance plans as of the date of Executive’s Involuntary Termination elect to have COBRA coverage andare eligible for such coverage, the Company shall reimburse Executive on a monthly basis for an amount equal to (A) the monthlypremium Executive is required to pay for continuation coverage pursuant to9COBRA for Executive and his or her eligible dependents who were covered under the Company’s health plans as of the date ofExecutive’s Involuntary Termination (calculated by reference to the premium as of the date of Executive’s Involuntary Termination)less (2) the amount Executive would have had to pay to receive group health coverage for Executive and his or her covered dependentsbased on the cost sharing levels in effect on the date of Executive’s Involuntary Termination. If any of the Company’s health benefitsare self-funded as of the date of Executive’s Involuntary Termination, or if the Company cannot provide the foregoing benefits in amanner that is exempt from Section 409A (as defined below) or that is otherwise compliant with applicable law (including, withoutlimitation, Section 2716 of the Public Health Service Act), instead of providing the reimbursements as set forth above, the Companyshall instead pay to Executive the foregoing monthly amount as a taxable monthly payment for the COBRA Coverage Period (or anyremaining portion thereof). Executive shall be solely responsible for all matters relating to continuation of coverage pursuant toCOBRA, including, without limitation, the election of such coverage and the timely payment of premiums.(iv) Notwithstanding anything to the contrary in this Section 4(c), and subject to Sections 4(e) and 9(o) and Executive'scontinued compliance with Section 5, in the event of Executive's Involuntary Termination during the period commencing sixty (60)days prior to a Change in Control or twelve (12) months following a Change in Control, Executive shall be entitled to receive, inaddition to the severance benefits described in clauses (i), (ii) and (iii) above, an amount equal to Executive’s Bonus for the year in whichExecutive’s Involuntary Termination occurs, which amount shall be payable in a lump sum within ten (10) days following the later of(A) the effective date of Executive’s Release and (B) the date of the Change in Control.(d) Termination for Cause or Voluntary Resignation Without Good Reason. In the event of Executive’s termination ofemployment as a result of Executive’s discharge by the Company for Cause or Executive’s resignation without Good Reason (otherthan as a result of Executive’s death or Separation of Service by reason of discharge by the Company following Executive’s PermanentDisability), the Company shall not have any other or further obligations to Executive under this Agreement (including any financialobligations) except that Executive shall be entitled to receive (i) Executive’s fully earned but unpaid base salary, through the date oftermination at the rate then in effect, and (ii) all other amounts or benefits to which Executive is entitled under any compensation,retirement or benefit plan or practice of the Company at the time of termination in accordance with the terms of such plans or practices,including, without limitation, any continuation of benefits required by COBRA or applicable law. In addition, in the event of Executive’sSeparation from Service as a result of Executive’s discharge by the Company for Cause or Executive’s resignation without Good Reason(other than as a result of Executive’s death or Separation of Service by reason of discharge by the Company following Executive’sPermanent Disability), all vesting of Executive’s unvested Stock Awards previously granted to him or her by the Company shall ceaseand none of such unvested Stock Awards shall be exercisable following the date of such termination. The foregoing shall be in additionto, and not in lieu of, any and all other rights and remedies which may be available to the Company under the circumstances, whether atlaw or in equity.(e) Release. As a condition to Executive’s receipt of any post-termination benefits pursuant to Sections 4(b) and (c)above, Executive (or, in the event of Executive’s10incapacity as a result of his Permanent Disability, Executive’s legal representative) shall execute and not revoke a general release of allclaims in favor of the Company (the “Release”) in the form attached hereto as Exhibit A. In the event the Release does not becomeeffective within the fifty-five (55) day period following the date of Executive’s Separation from Service, Executive shall not beentitled to the aforesaid payments and benefits.(f) Exclusive Remedy. Except as otherwise expressly required by law (e.g., COBRA) or as specifically provided herein, allof Executive’s rights to salary, severance, benefits, bonuses and other amounts hereunder (if any) accruing after the termination ofExecutive’s employment shall cease upon such termination. In the event of Executive’s termination of employment with theCompany, Executive’s sole remedy shall be to receive the payments and benefits described in this Section 4. In addition, Executiveacknowledges and agrees that he or she is not entitled to any reimbursement by the Company for any taxes payable by Executive as aresult of the payments and benefits received by Executive pursuant to this Section 4, including, without limitation, any excise taximposed by Section 4999 of the Code. Any payments made to Executive under this Section 4 shall be inclusive of any amounts orbenefits to which Executive may be entitled pursuant to the WARN Act or the California WARN Act.(g) No Mitigation. Except as otherwise provided in Section 4(b)(iii) or 4(c)(iii) above, Executive shall not be required tomitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount ofany payment or benefit provided for in this Section 4 be reduced by any compensation earned by Executive as the result of employmentby another employer or self-employment or by retirement benefits; provided, however, that loans, advances or other amounts owed byExecutive to the Company may be offset by the Company against amounts payable to Executive under this Section 4.(h) Return of the Company’s Property. In the event of Executive’s termination of employment for any reason, theCompany shall have the right, at its option, to require Executive to vacate his or her offices prior to or on the effective date of separationand to cease all activities on the Company’s behalf. Upon Executive’s termination of employment in any manner, as a condition toExecutive’s receipt of any severance benefits described in this Agreement, Executive shall immediately surrender to the Company alllists, books and records of, or in connection with, the Company’s business, and all other property belonging to the Company, it beingdistinctly understood that all such lists, books and records, and other documents, are the property of the Company. Executive shalldeliver to the Company a signed statement certifying compliance with this Section 4(h) prior to the receipt of any severance benefitsdescribed in this Agreement.(i) Waiver of the Company’s Liability. Executive recognizes that his or her employment is subject to termination withor without Cause for any reason and therefore Executive agrees that Executive shall hold the Company harmless from and against anyand all liabilities, losses, damages, costs and expenses, including but not limited to, court costs and reasonable attorneys’ fees, whichExecutive may incur as a result of Executive’s termination of employment. Executive further agrees that Executive shall bring noclaim or cause of action against the Company for damages or injunctive relief based on a wrongful termination of11employment. Executive agrees that the sole liability of the Company to Executive upon termination of this Agreement shall be thatdetermined by this Section 4. In the event this covenant is more restrictive than permitted by laws of the jurisdiction in which theCompany seeks enforcement thereof, this covenant shall be limited to the extent permitted by law.5. Certain Covenants.(a) Noncompetition. Except as may otherwise be approved by the Board, during the term of Executive’s employment, Executive shallnot have any ownership interest (of record or beneficial) in, or have any interest as an employee, salesman, consultant, officer ordirector in, or otherwise aid or assist in any manner, any firm, corporation, partnership, proprietorship or other business that engages inany county, city or part thereof in the United States and/or any foreign country in a business which competes directly or indirectly (asdetermined by the Board) with the Company’s business in such county, city or part thereof, so long as the Company, or any successor ininterest of the Company to the business and goodwill of the Company, remains engaged in such business in such county, city or partthereof or continues to solicit customers or potential customers therein; provided, however, that Executive may own, directly orindirectly, solely as an investment, securities of any entity which are traded on any national securities exchange if Executive (i) is not acontrolling person of, or a member of a group which controls, such entity; or (ii) does not, directly or indirectly, own one percent (1%)or more of any class of securities of any such entity.(b) Confidential Information. Executive and the Company have entered into the Company’s standard employee proprietaryinformation and inventions agreement (the “Employee Proprietary Information and Inventions Agreement”). Executive agrees toperform each and every obligation of Executive therein contained.(c) Solicitation of Employees. Executive shall not during the term of Executive’s employment and for the applicable severance periodfor which Executive receives severance benefits following any termination hereof pursuant to Section 4(b) or (c) above (regardless ofwhether Executive receives payment of severance amounts payable thereunder in a lump sum) (the “Restricted Period”), directly orindirectly, solicit or encourage to leave the employment of the Company or any of its affiliates, any employee of the Company or any ofits affiliates.(d) Solicitation of Consultants. Executive shall not during the term of Executive’s employment and for the Restricted Period, directlyor indirectly, hire, solicit or encourage to cease work with the Company or any of its affiliates any consultant then under contract withthe Company or any of its affiliates within one year of the termination of such consultant’s engagement by the Company or any of itsaffiliates.(e) Rights and Remedies Upon Breach. If Executive breaches or threatens to commit a breach of any of the provisions of this Section 5(the “Restrictive Covenants”), the Company shall have the following rights and remedies, each of which rights and remedies shall beindependent of the other and severally enforceable, and all of which rights and remedies shall be in addition to, and not in lieu of, anyother rights and remedies available to the Company under law or in equity:12(i) Specific Performance. The right and remedy to have the Restrictive Covenants specifically enforced byany court having equity jurisdiction, all without the need to post a bond or any other security or to prove any amount of actual damage orthat money damages would not provide an adequate remedy, it being acknowledged and agreed that any such breach or threatened breachwill cause irreparable injury to the Company and that money damages will not provide adequate remedy to the Company; and(ii) Accounting and Indemnification. The right and remedy to require Executive (A) to account for and payover to the Company all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive or anyassociated party deriving such benefits as a result of any such breach of the Restrictive Covenants; and (B) to indemnify the Companyagainst any other losses, damages (including special and consequential damages), costs and expenses, including actual attorneys’ fees andcourt costs, which may be incurred by them and which result from or arise out of any such breach or threatened breach of theRestrictive Covenants.(f) Severability of Covenants/Blue Pencilling. If any court determines that any of the Restrictive Covenants, or anypart thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given fulleffect, without regard to the invalid portions. If any court determines that any of the Restrictive Covenants, or any part thereof, areunenforceable because of the duration of such provision or the area covered thereby, such court shall have the power to reduce theduration or area of such provision and, in its reduced form, such provision shall then be enforceable and shall be enforced. Executivehereby waives any and all right to attack the validity of the Restrictive Covenants on the grounds of the breadth of their geographic scopeor the length of their term.(g) Enforceability in Jurisdictions. The Company and Executive intend to and do hereby confer jurisdiction to enforcethe Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of such covenants. If the courts of any one ormore of such jurisdictions hold the Restrictive Covenants wholly unenforceable by reason of the breadth of such scope or otherwise, itis the intention of the Company and Executive that such determination not bar or in any way affect the right of the Company to therelief provided above in the courts of any other jurisdiction within the geographical scope of such covenants, as to breaches of suchcovenants in such other respective jurisdictions, such covenants as they relate to each jurisdiction being, for this purpose, severable intodiverse and independent covenants.(h) Definitions. For purposes of this Section 5, the term “Company” means not only Zogenix, Inc., but also anycompany, partnership or entity which, directly or indirectly, controls, is controlled by or is under common control with Zogenix, Inc.6. Insurance; Indemnification.(a) Insurance. The Company shall have the right to take out life, health, accident, “key-man” or other insurance coveringExecutive, in the name of the Company and at the Company’s expense in any amount deemed appropriate by the Company. Executiveshall assist the Company in obtaining such insurance, including, without limitation, submitting to any required examinations andproviding information and data required by insurance companies.13(b) Indemnification. Executive will be provided with indemnification against third party claims related to his or her work forthe Company as required by Delaware law. The Company shall provide Executive with directors and officers liability insurancecoverage at least as favorable as that which the Company may maintain from time to time for members of the Board and other executiveofficers.7. Arbitration. Any dispute, claim or controversy based on, arising out of or relating to Executive’s employment or thisAgreement shall be settled by final and binding arbitration in San Diego, California, before a single neutral arbitrator in accordance withthe National Rules for the Resolution of Employment Disputes (the “Rules”) of the American Arbitration Association, and judgment onthe award rendered by the arbitrator may be entered in any court having jurisdiction. Arbitration may be compelled pursuant to theCalifornia Arbitration Act (Code of Civil Procedure §§ 1280 et seq.). If the parties are unable to agree upon an arbitrator, one shall beappointed by the AAA in accordance with its Rules. Each party shall pay the fees of its own attorneys, the expenses of its witnesses andall other expenses connected with presenting its case; however, Executive and the Company agree that, to the extent permitted by law,the arbitrator may, in his or her discretion, award reasonable attorneys’ fees to the substantially prevailing party; provided, further, thatthe prevailing party shall be reimbursed for such fees, costs and expenses within forty-five (45) days following any such award, but inno event later than the last day of Executive’s taxable year following the taxable year in which the fees, costs and expenses wereincurred; provided, further, that the parties’ obligations pursuant to this sentence shall terminate on the tenth (10th) anniversary of thedate of Executive’s termination of employment. Other costs of the arbitration, including the cost of any record or transcripts of thearbitration, AAA’s administrative fees, the fee of the arbitrator, and all other fees and costs, shall be borne by the Company. This Section7 is intended to be the exclusive method for resolving any and all claims by the parties against each other for payment of damages underthis Agreement or relating to Executive’s employment; provided, however, that Executive shall retain the right to file administrativecharges with or seek relief through any government agency of competent jurisdiction, and to participate in any governmentinvestigation, including but not limited to (i) claims for workers’ compensation, state disability insurance or unemployment insurance;(ii) claims for unpaid wages or waiting time penalties brought before the California Division of Labor Standards Enforcement; provided,however, that any appeal from an award or from denial of an award of wages and/or waiting time penalties shall be arbitrated pursuant tothe terms of this Agreement; and (iii) claims for administrative relief from the United States Equal Employment OpportunityCommission and/or the California Department of Fair Employment and Housing (or any similar agency in any applicable jurisdictionother than California); provided, further, that Executive shall not be entitled to obtain any monetary relief through such agencies otherthan workers’ compensation benefits or unemployment insurance benefits. This Agreement shall not limit either party’s right to obtainany provisional remedy, including, without limitation, injunctive or similar relief, from any court of competent jurisdiction as may1 The Rules may be found online at: http://www.adr.org/aaa/faces/rules/searchrules/rulesdetail?doc=ADRSTG_004366&_afrLoop=721106809527652&_afrWindowMode=0&_afrWindowId=sxz1jtpec_119#%40%3F_afrWindowId%3Dsxz1jtpec_119%26_afrLoop%3D721106809527652%26doc%3DADRSTG_004366%26_afrWindowMode%3D0%26_adf.ctrl-state%3Dsxz1jtpec_17114be necessary to protect their rights and interests pending the outcome of arbitration, including without limitation injunctive relief, in anycourt of competent jurisdiction pursuant to California Code of Civil Procedure § 1281.8 or any similar statute of an applicablejurisdiction. Seeking any such relief shall not be deemed to be a waiver of such party’s right to compel arbitration. Both Executive andthe Company expressly waive their right to a jury trial.8. General Relationship. Executive shall be considered an employee of the Company within the meaning of all federal, stateand local laws and regulations including, but not limited to, laws and regulations governing unemployment insurance, workers’compensation, industrial accident, labor and taxes.9. Miscellaneous.(a) Modification; Prior Claims. This Agreement and the Employee Proprietary Information and Inventions Agreementset forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements betweenthem concerning such subject matter, including that certain offer letter dated November 21, 2013 between the Company andExecutive. This Agreement may be amended or modified only with the written consent of Executive and an authorized representativeof the Company. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.(b) Assignment; Assumption by Successor. The rights of the Company under this Agreement may, without theconsent of Executive, be assigned by the Company, in its sole and unfettered discretion, to any person, firm, corporation or otherbusiness entity which at any time, whether by purchase, merger or otherwise, directly or indirectly, acquires all or substantially all ofthe assets or business of the Company. The Company will require any successor (whether direct or indirect, by purchase, merger orotherwise) to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform thisAgreement in the same manner and to the same extent that the Company would be required to perform it if no such succession hadtaken place; provided, however, that no such assumption shall relieve the Company of its obligations hereunder. As used in thisAgreement, the “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaidwhich assumes and agrees to perform this Agreement by operation of law or otherwise.(c) Survival. The covenants, agreements, representations and warranties contained in or made in Sections 3(i), 4, 5,6, 7 and 9 of this Agreement shall survive any Executive’s termination of employment.(d) Third‑Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rightsenforceable by any person not a party to this Agreement.(e) Waiver. The failure of either party hereto at any time to enforce performance by the other party of any provisionof this Agreement shall in no way affect such party’s rights thereafter to enforce the same, nor shall the waiver by either party of anybreach of any provision hereof be deemed to be a waiver by such party of any other breach of the same or any other provision hereof.15(f) Section Headings. The headings of the several sections in this Agreement are inserted solely for the convenienceof the parties and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof.(g) Notices. Any notice required or permitted by this Agreement shall be in writing and shall be delivered as followswith notice deemed given as indicated: (i) by personal delivery when delivered personally; (ii) by overnight courier upon writtenverification of receipt; (iii) by email, telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or(iv) by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to Executive at the addresslisted on the Company’s personnel records and to the Company at its principal place of business, or such other address as either partymay specify in writing.(h) Severability. All Sections, clauses and covenants contained in this Agreement are severable, and in the event anyof them shall be held to be invalid by any court, this Agreement shall be interpreted as if such invalid Sections, clauses or covenantswere not contained herein.(i) Governing Law and Venue. This Agreement is to be governed by and construed in accordance with the laws of theState of California applicable to contracts made and to be performed wholly within such State, and without regard to the conflicts of lawsprinciples thereof. Except as provided in Sections 5 and 7, any suit brought hereon shall be brought in the state or federal courts sitting inSan Diego, California, the parties hereto hereby waiving any claim or defense that such forum is not convenient or proper. Each partyhereby agrees that any such court shall have in personam jurisdiction over it and consents to service of process in any manner authorizedby California law.(j) Non-transferability of Interest. None of the rights of Executive to receive any form of compensation payablepursuant to this Agreement shall be assignable or transferable except through a testamentary disposition or by the laws of descent anddistribution upon the death of Executive. Any attempted assignment, transfer, conveyance, or other disposition (other than as aforesaid)of any interest in the rights of Executive to receive any form of compensation to be made by the Company pursuant to this Agreementshall be void.(k) Gender. Where the context so requires, the use of the masculine gender shall include the feminine and/or neutergenders and the singular shall include the plural, and vice versa, and the word “person” shall include any corporation, firm, partnershipor other form of association.(l) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed anoriginal, but all of which together shall constitute one and the same Agreement.(m) Construction. The language in all parts of this Agreement shall in all cases be construed simply, according to itsfair meaning, and not strictly for or against any of the parties hereto. Without limitation, there shall be no presumption against any partyon the ground that such party was responsible for drafting this Agreement or any part thereof.16(n) Withholding and other Deductions. All compensation payable to Executive hereunder shall be subject to suchdeductions as the Company is from time to time required to make pursuant to law, governmental regulation or order.(o) Code Setion 409A.(i) This Agreement is not intended to provide for any deferral of compensation subject to Section 409A of the Code, and,accordingly, the severance payments payable under Sections 4(b)(ii) and 4(c)(ii) and (iv) shall be paid no later than the later of: (A) thefifteenth (15th) day of the third month following Executive’s first taxable year in which such amounts are no longer subject to asubstantial risk of forfeiture, and (B) the fifteenth (15th) day of the third month following first taxable year of the Company in whichsuch amounts are is no longer subject to substantial risk of forfeiture, as determined in accordance with Code Section 409A and anyTreasury Regulations and other guidance issued thereunder. To the extent applicable, this Agreement shall be interpreted in accordancewith Code Section 409A and Department of Treasury regulations and other interpretive guidance issued thereunder. Each series ofinstallment payments made under this Agreement is hereby designated as a series of “separate payments” within the meaning of Section409A of the Code. For purposes of this Agreement, all references to Executive’s “termination of employment” shall mean Executive’sSeparation from Service.(ii) If Executive is a “specified employee” (as defined in Section 409A of the Code), as determined by the Company inaccordance with Section 409A of the Code, on the date of Executive’s Separation from Service, to the extent that the payments orbenefits under this Agreement are subject to Section 409A of the Code and the delayed payment or distribution of all or any portion ofsuch amounts to which Executive is entitled under this Agreement is required in order to avoid a prohibited distribution under Section409A(a)(2)(B)(i) of the Code, then such portion deferred pursuant to this Section 9(o)(ii) shall be paid or distributed to Executive in alump sum on the earlier of (A) the date that is six (6)-months following Executive’s Separation from Service, (B) the date ofExecutive’s death or (C) the earliest date as is permitted under Section 409A of the Code. Any remaining payments due under theAgreement shall be paid as otherwise provided herein.(iii) To the extent applicable, this Agreement shall be interpreted in accordance with the applicable exemptionsfrom Section 409A of the Code. If Executive and the Company determine that any payments or benefits payable under this Agreementintended to comply with Sections 409A(a)(2), (3) and (4) of the Code do not comply with Section 409A of the Code, Executive and theCompany agree to amend this Agreement, or take such other actions as Executive and the Company deem reasonably necessary orappropriate, to comply with the requirements of Section 409A of the Code and the Treasury Regulations thereunder (and any applicabletransition relief) while preserving the economic agreement of the parties. To the extent that any provision in this Agreement isambiguous as to its compliance with Section 409A of the Code, the provision shall be read in such a manner that no payments payableunder this Agreement shall be subject to an “additional tax” as defined in Section 409A(a)(1)(B) of the Code.(iv) Any reimbursement of expenses or in-kind benefits payable under17this Agreement shall be made in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv) and shall be paid on or before the lastday of Executive’s taxable year following the taxable year in which Executive incurred the expenses. The amount of expensesreimbursed or in-kind benefits payable during any taxable year of Executive’s shall not affect the amount eligible for reimbursement orin-kind benefits payable in any other taxable year of Executive’s, and Executive’s right to reimbursement for such amounts shall not besubject to liquidation or exchange for any other benefit.(v) In the event that the amounts payable under Sections 4(b)(ii) and 4(c)(ii) and (iv) are subject to Section409A of the Code and the timing of the delivery of Executive’s Release could cause such amounts to be paid in one or another taxableyear, then notwithstanding the payment timing set forth in such sections, such amounts shall not be payable until the later of (A) thepayment date specified in such section or (B) the first business day of the taxable year following Executive’s Separation from Service.(Signature Page Follows)18IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above.Zogenix, Inc.By: /s/ Roger Hawley Name: Roger Hawley Title: Chief Executive Officer Executive /s/ Bradley Stuart Galer, M.D. Bradley Stuart Galer, M.D.SIGNATURE PAGE TO EMPLOYMENT AGREEMENTExhibit AGENERAL RELEASE OF CLAIMS[The language in this Release may change based on legal developments and evolving best practices; this form is provided as anexample of what will be included in the final Release document.]This General Release of Claims (“Release”) is entered into as of this 17th day of December, 2013, between Bradley StewartGaler, M.D. (“Executive”), and Zogenix, Inc., a Delaware corporation (the “Company”) (collectively referred to herein as the“Parties”).WHEREAS, Executive and the Company are parties to that certain Employment Agreement dated as of December 17, 2013(the “Agreement”);WHEREAS, the Parties agree that Executive is entitled to certain severance benefits under the Agreement, subject toExecutive’s execution of this Release; andWHEREAS, the Company and Executive now wish to fully and finally to resolve all matters between them.NOW, THEREFORE, in consideration of, and subject to, the severance benefits payable to Executive pursuant to theAgreement, the adequacy of which is hereby acknowledged by Executive, and which Executive acknowledges that he or she would nototherwise be entitled to receive, Executive and the Company hereby agree as follows:1. General Release of Claims by Executive.(a) Executive, on behalf of himself or herself and his or her executors, heirs, administrators, representatives andassigns, hereby agrees to release and forever discharge the Company and all predecessors, successors and their respective parentcorporations, affiliates, related, and/or subsidiary entities, and all of their past and present investors, directors, shareholders, officers,general or limited partners, employees, attorneys, agents and representatives, and the employee benefit plans in which Executive is orhas been a participant by virtue of his or her employment with or service to the Company (collectively, the “Company Releasees”),from any and all claims, debts, demands, accounts, judgments, rights, causes of action, equitable relief, damages, costs, charges,complaints, obligations, promises, agreements, controversies, suits, expenses, compensation, responsibility and liability of every kindand character whatsoever (including attorneys’ fees and costs), whether in law or equity, known or unknown, asserted or unasserted,suspected or unsuspected (collectively, “Claims”), which Executive has or may have had against such entities based on any events orcircumstances arising or occurring on or prior to the date hereof or on or prior to the date hereof, arising directly or indirectly out of,relating to, or in any other way involving in any manner whatsoever Executive’s employment by or service to the Company or thetermination thereof, including any and all claims arising under federal, state, or local laws relating to employment, including withoutlimitation claims of wrongful discharge, breach of express or implied contract, fraud, misrepresentation,1defamation, or liability in tort, and claims of any kind that may be brought in any court or administrative agency including, withoutlimitation, claims under Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. Section 2000, et seq.; the Americans withDisabilities Act, as amended, 42 U.S.C. § 12101 et seq.; the Rehabilitation Act of 1973, as amended, 29 U.S.C. § 701 et seq.; the CivilRights Act of 1866, and the Civil Rights Act of 1991; 42 U.S.C. Section 1981, et seq.; the Age Discrimination in Employment Act, asamended, 29 U.S.C. Section 621, et seq. (the “ADEA”); the Equal Pay Act, as amended, 29 U.S.C. Section 206(d); regulations of theOffice of Federal Contract Compliance, 41 C.F.R. Section 60, et seq.; the Family and Medical Leave Act, as amended, 29 U.S.C. § 2601et seq.; the Fair Labor Standards Act of 1938, as amended, 29 U.S.C. § 201 et seq.; the Employee Retirement Income Security Act, asamended, 29 U.S.C. § 1001 et seq.; and the California Fair Employment and Housing Act, California Government Code Section 12940,et seq.Notwithstanding the generality of the foregoing, Executive does not release the following claims:(i) Claims for unemployment compensation or any state disability insurance benefits pursuant to the terms ofapplicable state law; (ii) Claims for workers’ compensation insurance benefits under the terms of any worker’s compensation insurancepolicy or fund of the Company;(iii) Claims pursuant to the terms and conditions of the federal law known as COBRA; (iv) Claims for indemnity under the bylaws of the Company, as provided for by California law or under any applicableinsurance policy with respect to Executive’s liability as an employee, director or officer of the Company;(v) Claims based on any right Executive may have to enforce the Company’s executory obligations under theAgreement; and(vi) Claims Executive may have to vested or earned compensation and benefits. (b) EXECUTIVE ACKNOWLEDGES THAT he or she HAS BEEN ADVISED OF AND IS FAMILIAR WITHTHE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS:“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOTKNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE,WHICH, IF KNOWN BY HIM OR HER, MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENTWITH THE DEBTOR.”2BEING AWARE OF SAID CODE SECTION, EXECUTIVE HEREBY EXPRESSLY WAIVES ANY RIGHTS he or she MAYHAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON LAW PRINCIPLES OF SIMILAREFFECT.[Note: Clauses (c), (d) and (e) apply only if Executive is age 40 or older at time of termination](c) Executive acknowledges that this Release was presented to him or her on the date indicated above and thatExecutive is entitled to have [twenty-one (21)][forty-five (45)] days’ time in which to consider it. Executive further acknowledges thatthe Company has advised him or her that he or she is waiving his or her rights under the ADEA, and that Executive should consult withan attorney of his or her choice before signing this Release, and Executive has had sufficient time to consider the terms of this Release.Executive represents and acknowledges that if Executive executes this Release before [twenty-one (21)][forty-five (45)] days haveelapsed, Executive does so knowingly, voluntarily, and upon the advice and with the approval of Executive’s legal counsel (if any), andthat Executive voluntarily waives any remaining consideration period.(d) Executive understands that after executing this Release, Executive has the right to revoke it within seven (7)days after his or her execution of it. Executive understands that this Release will not become effective and enforceable unless the seven(7) day revocation period passes and Executive does not revoke the Release in writing. Executive understands that this Release may notbe revoked after the seven (7) day revocation period has passed. Executive also understands that any revocation of this Release must bemade in writing and delivered to the Company at its principal place of business within the seven (7) day period.(e) Executive understands that this Release shall become effective, irrevocable, and binding upon Executive on theeighth (8th) day after his or her execution of it, so long as Executive has not revoked it within the time period and in the mannerspecified in clause (d) above.(f) Executive further understands that Executive will not be given any severance benefits under the Agreementunless this Release is effective on or before the date that is fifty-five (55) days following the date of Executive’s termination ofemployment.2. No Assignment. Executive represents and warrants to the Company Releasees that there has been no assignment or othertransfer of any interest in any Claim that Executive may have against the Company Releasees. Executive agrees to indemnify and holdharmless the Company Releasees from any liability, claims, demands, damages, costs, expenses and attorneys’ fees incurred as a resultof any such assignment or transfer from Executive.3. Severability. In the event any provision of this Release is found to be unenforceable by an arbitrator or court of competentjurisdiction, such provision shall be deemed modified to the extent necessary to allow enforceability of the provision as so limited, itbeing intended that the parties shall receive the benefit contemplated herein to the fullest extent permitted by law. If a deemedmodification is not satisfactory in the judgment of such arbitrator or court, the unenforceable provision shall be deemed deleted, and thevalidity and enforceability of the remaining provisions shall not be affected thereby.34. Interpretation; Construction. The headings set forth in this Release are for convenience only and shall not be used ininterpreting this Agreement. This Release has been drafted by legal counsel representing the Company, but Executive has participated inthe negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an opportunity to review and revise theRelease and have it reviewed by legal counsel, if desired, and, therefore, the normal rule of construction to the effect that anyambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Release. Either party’s failureto enforce any provision of this Release shall not in any way be construed as a waiver of any such provision, or prevent that partythereafter from enforcing each and every other provision of this Release.5. Governing Law and Venue. This Release will be governed by and construed in accordance with the laws of the UnitedStates of America and the State of California applicable to contracts made and to be performed wholly within such State, and withoutregard to the conflicts of laws principles thereof. Any suit brought hereon shall be brought in the state or federal courts sitting in SanDiego County, California, the Parties hereby waiving any claim or defense that such forum is not convenient or proper. Each partyhereby agrees that any such court shall have in personam jurisdiction over it and consents to service of process in any manner authorizedby California law.6. Entire Agreement. This Release and the Agreement constitute the entire agreement of the Parties in respect of the subjectmatter contained herein and therein and supersede all prior or simultaneous representations, discussions, negotiations and agreements,whether written or oral. This Release may be amended or modified only with the written consent of Executive and an authorizedrepresentative of the Company. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.7. Counterparts. This Release may be executed in multiple counterparts, each of which shall be deemed to be an original butall of which together shall constitute one and the same instrument.(Signature Page Follows) 4IN WITNESS WHEREOF, and intending to be legally bound, the Parties have executed the foregoing Release as of the date firstwritten above.Executive Zogenix, Inc. /s/ Bradley Stuart Galer, M.D. By: /s/ Roger Hawley Print Name: Bradley Stuart Galer, M.D. Print Name: Roger Hawley Title: Chief Executive Officer Exhibit 10.45CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TOA REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITHTHE SECURITIES AND EXCHANGE COMMISSION.Execution VersionDEVELOPMENT AND OPTION AGREEMENTTHIS DEVELOPMENT AND OPTION AGREEMENT (this “Agreement”) is made as of November 1, 2013 (the“Effective Date”), by and between ALTUS FORMULATION INC., a Quebec company having its principal place of business at17800 Rue Lapointe, Mirabel Quebec J7J 1P3, Canada (“Altus”), and ZOGENIX, INC., a Delaware corporation having its principalplace of business at 12400 High Bluff Drive, Suite 650, San Diego, CA 92130 USA (“Zogenix”). Each of Altus and Zogenix aresometimes referred to herein individually as a “Party” and together as the “Parties”.WHEREAS, Altus is a drug formulation and development company with a number of proprietary drug delivery technologies,including the Altus Technology, and owns or has exclusive rights to patent rights and other technology relating thereto; andWHEREAS, Zogenix is a specialty pharmaceutical company which has developed Zohydro ER, for the treatment of moderateto severe chronic pain, that in Clinical Trials demonstrated adequate efficacy and safety; andWHEREAS, Zogenix and Altus desire to collaborate on the development of the Licensed Product, on the terms and subject tothe conditions set forth herein; andWHEREAS, Zogenix wishes to obtain, and Altus is willing to grant to Zogenix, a time-limited exclusive option to obtain anexclusive license to develop and commercialize the Licensed Product in the Field in the Territory, on the terms and subject to theconditions set forth herein.NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants contained herein, the Partieshereby agree as follows:1.DEFINITIONS.1.1 “Access Fee” shall have the meaning provided in Section 2.1.1.2 “Active Ingredient” shall mean hydrocodone bitartrate and other pharmaceutically acceptable salts ofhydrocodone.1.3 “Active Ingredient Cost” shall have the meaning provided in Section 3.5(a).1.4 “Affiliate” shall mean, with respect to a Party or a Third Party, any corporation, firm, limited-liability company,partnership or other entity which directly controls or is controlled by or is under common control with such Party or ThirdParty. “Control”, for purposes of this definition, means ownership, directly or indirectlythrough one or more Affiliates, of [***] or more of the shares entitled to vote for the election of directors, in the case of acorporation, or [***] or more of the equity interests in the case of any other type of legal entity, status as a general partner in anypartnership, or any other arrangement whereby such Party or Third Party controls or has the right to control the Board ofDirectors or equivalent governing body of a corporation or other entity. As of the Effective Date: (a) Altus has no Affiliates; and(b) Zogenix Europe Limited is the only Affiliate of Zogenix.1.5 “Altus-Assigned Invention” shall have the meaning provided in Section 5.2(b).1.6 “Altus Know-How” shall mean Information not included in the Altus Patents that Altus Controls during theOption Period and throughout the term of the License Agreement that is necessary or useful for the Development,Manufacture or Commercialization of the Licensed Product, including Altus-Assigned Inventions and Altus’ rights in the JointInventions.1.7 “Altus Patents” shall mean all Patents that Altus Controls during the Option Period and throughout the term ofthe License Agreement that claim or cover the Development, Manufacture or Commercialization of the Licensed Product,including Patents claiming Altus-Assigned Inventions. For the avoidance of doubt, “Altus Patents” include the Altus ProductPatents, the Altus Technology Patents and Altus’ rights in the Joint Patents.1.8 “Altus Product Patents” shall mean the Altus Patents with one or more Valid Claims covering, and exclusivelyrelated to, the Licensed Product. A Patent with Valid Claims such that it could be considered both an Altus Product Patent and anAltus Technology Patent shall in all circumstances be an Altus Product Patent. As of the Effective Date, there are no AltusProduct Patents.1.9 “Altus Product Technology” shall mean Altus Know-How that is exclusively related to the Licensed Productand the Altus Product Patents.1.10 “Altus Technology” shall mean Altus Know-How that is relevant to, but not exclusively related to, theLicensed Product and the Altus Technology Patents.1.11 “Altus Technology Patents” shall mean the Altus Patents with one or more Valid Claims relevant to, but notexclusively related to, the Licensed Product. In no event shall an Altus Product Patent be considered an Altus TechnologyPatent. As of the Effective Date, all Altus Technology Patents are set forth in Exhibit B.1.12 “[***]” shall mean [***]1.13 “CDMO” shall mean a Third Party contract development and manufacturing organization.***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.21.14 “Clinical Trial” shall mean a human clinical trial that would satisfy the requirements for a Phase 1 study asdefined in 21 CFR § 312.21(a) (or its successor regulation), a Phase 2 study as defined in 21 CFR § 312.21(b) (or its successorregulation), or a Phase 3 study as defined in 21 CFR § 312.21(c) (or its successor regulation).1.15 “Commercial Scale” shall mean a scale of Manufacture of greater or equal to [***] performed by Zogenix or aCDMO on behalf of Zogenix.1.16 “Commercialize” or “Commercialization” shall mean the Manufacture at a Commercial Scale and themarketing, use, supply, distribution, offering for sale and sale of a Licensed Product by Zogenix, or on Zogenix’s behalf, in theField in the Territory.1.17 “Commercially Reasonable Efforts” shall mean, with respect to a Party and the Licensed Product, the effortsand resources which would be used (including the promptness in which such efforts and resources would be applied) by suchParty relating to a given activity or activities, consistent with its normal business practices, for a pharmaceutical product ownedby it or to which it has similar rights, with similar product characteristics, which is of similar market potential at a similar stage inits development or product life, taking into account the proprietary position of the compound or product and the potential oractual profitability of the applicable product.1.18 “Confidential Information” shall have the meaning provided in Section 7.1.1.19 “Control” shall mean, with respect to any Information, Patents or other intellectual property rights, possessionby a Party of the right, power and authority (whether by ownership, license or otherwise) to grant access to, to grant use of, orto grant a license or a sublicense to such Information, Patents or intellectual property rights to the other Party without violatingthe terms of any agreement or other arrangement with any Third Party.1.20 “Develop” or “Development” shall mean the [***], in each case as set forth in one or more Work Plans.1.21 “Development Fees” shall have the meaning provided in Section 3.6.1.22 “Development Phase” shall mean each phase of Development set forth in a Work Plan.1.23 “Development Results” shall have the meaning provided in Section 3.8.1.24 “FDA” shall mean the United States Food and Drug Administration, or any successor agency thereto in theUnited States of America.***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.31.25 “Field” shall mean the treatment or relief of pain, pain syndromes or pain associated with medical conditions orprocedures in humans.1.26 “First Commercial Sale” shall mean the first sale of Licensed Product by Zogenix, its Affiliate or aSublicensee to a Third Party (other than a Sublicensee) in the Territory in an arm’s-length transaction following the receipt ofall Regulatory Approvals.1.27 “Information” shall mean tangible and intangible techniques, technology, practices, trade secrets, inventions(whether patentable or not), methods, knowledge, know-how, skill, experience, test data and results (including biological,chemical, pharmacological, toxicological, pharmacokinetic, clinical, analytical, quality control, mechanical, software, electronicand other data, results and descriptions) and compositions of matter.1.28 “Invention” shall mean any invention or discovery, whether or not patentable, that is made, in whole or in part,in the course and as a result of the conduct of the activities expressly contemplated by this Agreement or the LicenseAgreement.1.29 “Joint Invention(s)” shall have the meaning provided in Section 5.2(c).1.30 “Joint Patents” shall have the meaning provided in Section 5.7.1.31 “License Agreement” shall mean a definitive agreement between Zogenix and Altus setting forth the terms andconditions contained in Exhibit C: License Terms, as well as such other reasonable and customary terms related to the licenseby Zogenix of the Altus Technology and Altus Product Technology, to be entered into by Zogenix and Altus following exerciseof the Option by Zogenix; provided, however, until such time (if ever) that Zogenix and Altus have entered into a definitiveagreement, the term “License Agreement” shall mean only those terms and conditions set forth in Exhibit C: LicenseTerms.1.32 “Licensed Product” shall mean any and all Versions, alone or in the aggregate.1.33 “Manufacture” or “Manufacturing” shall mean the combination of the Active Ingredient with other rawmaterials in such a way as to produce a Licensed Product for any purpose.1.34 “NDA” shall mean a New Drug Application, as more fully defined in 21 CFR 314.5 and supplements thereto filed with the FDA.1.35 “Net Sales” shall mean, with respect to an applicable period the gross amount invoiced by a Party, and/or itsAffiliates and Sublicensees (a “Selling Party”) for sale or other commercial disposition of the Licensed Product (in whateverform) to a***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.4unrelated Third Party (other than a Sublicensee) in an arms’- length transaction, minus the following allowances and otherdeductions [***]1.36 “Option” shall have the meaning provided in Section 2.2.1.37 “Option Period” shall mean the period beginning on the Effective Date and, subject to earlier termination ofthis Agreement in accordance with Article 8, expiring on the earlier of: (a) [***] or (b) [***].1.38 “Paladin Agreement” [***]1.39 “Patents” shall mean patents and patent applications, including provisional applications, continuations,continuations-in-part, continued prosecution applications, divisions, substitutions, reissues, additions, renewals, reexaminations,extensions, term restorations, confirmations, registrations, revalidations, revisions, priority rights, requests for continuedexamination and supplementary protection certificates granted in relation thereto, as well as utility models, innovation patents,petty patents, patents of addition, inventor’s certificates, and equivalents in any country or jurisdiction.1.40 “Pilot Scale” shall mean a scale of Manufacture of [***].1.41 “Product Data” shall mean [***] “Product Data” shall also include [***]1.42 “Regulatory Approval” shall mean any and all approvals, authorizations, designations, licenses, or registrationsrequired from the FDA or other applicable governmental bodies to Manufacture, Commercialize, use, handle, store, import ortransport the Licensed Product in the Field in the Territory.1.43 “Regulatory Authority” shall mean any country, federal, supranational, state or local regulatory agency,department, bureau or other governmental or regulatory authority having the administrative authority to regulate thedevelopment or marketing of pharmaceutical products in the Territory.1.44 “Strengths” shall mean any specific dosage strength for a Version set forth in milligrams of Active Ingredient,as may be requested by Zogenix. “Initial Strengths” shall be [***] strength Versions only.1.45 “Sublicensee” shall mean any Third Party to which Zogenix or its Affiliate has directly or indirectly (i.e.,through multiple tiers of sublicense) granted a sublicense under all or any portion of the license granted to Zogenix by Altusupon exercise of the Option.1.46 “Successful Demonstration” shall mean meeting the pre-specified primary study end point(s) as agreedbetween the Parties (such end points to be in accordance with FDA guidance and guidelines, as applicable).***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.51.47 “Term” shall have the meaning provided in Section 8.1.1.48 “Territory” shall mean the United States of America, including all territories and protectorates thereof.1.49 “Third Party” shall mean any entity other than the Parties and their respective Affiliates.1.50 “Units” shall mean a single dose consisting of one pill or one tablet.1.51 “Valid Claim” shall mean a claim: (a) with respect to a granted and unexpired patent in the Territory, that (i) hasnot been held permanently revoked, unenforceable or invalid by a decision of a court or other governmental entity of competentjurisdiction, which decision is unappealable or unappealed within the time allowed for appeal, and (ii) has not been abandoned,disclaimed, denied or admitted to be invalid or unenforceable through reissue or disclaimer or otherwise; or (b) with respect to apending patent application, that was filed and is being prosecuted in good faith and has not been abandoned or finally disallowedwithout the possibility of appeal or re-filing of the application and has not been on file with the United States Patent andTrademark Office for more than [***] from the earlier of its date of filing or earliest claim of priority under 35 USC §119 or§120 and its successors in the Territory.1.52 “Version(s)” shall mean controlled release pharmaceutical formulations containing the Active Ingredient as thesole active ingredient, in various Strengths, intended for [***] and that in addition display abuse deterrent properties designed tomitigate misuse and abuse of Active Ingredient, the Manufacture and/or Commercialization of which would, but for the licensegranted by Altus to Zogenix following exercise of the Option, infringe one or more Valid Claims of the Altus Patents.1.53 “Work Plan” shall have the meaning provided in Section 3.1.1.54 “Zogenix Regulatory Filings” shall have the meaning provided in Section 2.2 of Exhibit C: License Terms.1.55 “Zohydro ER” shall mean the pharmaceutical product formulation for human use containing the ActiveIngredient as its sole active ingredient which is known as Zohydro ER, as of the Effective Date, as more particularly describedin NDA No. 202880 submitted to FDA by Zogenix on May 1, 2012.2.OPTION.2.1 Access Fee. Within thirty (30) calendar days of the Effective Date, Zogenix shall pay Altus a non‑refundable,non‑creditable access fee of Seven Hundred Fifty Thousand Dollars ($750,000) (the “Access Fee”).***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.62.2 Option Grant. Subject to the terms and conditions of this Agreement, Altus hereby grants to Zogenix theexclusive option, exercisable by Zogenix during the Option Period, to obtain an exclusive, royalty-bearing license, with the rightto sublicense through multiple tiers of sublicense, under the Altus Technology and the Altus Product Technology to make,have made, import, use, offer for sale, sell and have sold Licensed Products in the Field in the Territory for the term of theLicense Agreement (the “Option”).2.3 Exercise of Option. Zogenix may, in its sole discretion, exercise the Option by delivering written notice of suchexercise to Altus at any time prior to expiration of the Option Period or the earlier termination of this Agreement. Upon exerciseof the Option, Zogenix shall automatically, and without further action, have the license rights and obligations set forth inExhibit C: License Terms, until such time as the Parties have negotiated and entered into the definitive License Agreement.2.4 Retained Rights. Altus will at all times retain the exclusive and absolute right to practice the Altus Technologyand the Altus Product Technology in the Territory, subject only to the Option during the Option Period; provided, however, that,during the Option Period, Altus shall not, and shall ensure that its Affiliates do not, [***]. For clarity, Altus will at all timesretain the exclusive and absolute right to practice and license the Altus Technology and the Altus Product Technology for anyand all uses outside of the Territory.2.5 Effect of Expiration of Option. If the Option Period expires or this Agreement is terminated without Zogenixhaving exercised the Option in accordance with Section 2.3, then, effective as of such expiration or termination (as applicable),Zogenix shall cease to have any license, option or other right with respect to the Licensed Product; provided, however, that[***].2.6 Commercial Scale Manufacturing. For a period starting ten (10) days following the Effective Date throughthe date which is [***] (“Manufacturing Discussion Period”), Zogenix will engage in good-faith discussions with [***] as[***] for any Commercial Scale Manufacturing. In addition, during the Manufacturing Discussion Period, Zogenix will notenter into any definitive agreement for Commercial Scale Manufacturing [***].2.7 Sublicensed Intellectual Property. During the Option Period, the Parties shall [***].3.DEVELOPMENT; WORK PLANS; CONDUCT AND RESULTS OF DEVELOPMENT.3.1 Development; Work Plans. During the Option Period, Altus agrees to perform Development for Zogenix fromtime to time. The Development to be performed by Altus shall be mutually agreed upon by the Parties and set forth in one ormore work plans (each a "Work Plan"), a form of which is attached hereto as Exhibit A, with each***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.7Work Plan describing one or more Development Phases; provided that Altus may not unreasonably delay or withhold itsapproval of any Work Plan. Each Work Plan shall be signed by an authorized representative of each Party and attached hereto asan exhibit. Each Work Plan shall include detailed information concerning the Development to be undertaken, including adescription of the specific services and related deliverables to be provided ("Scope of Work"), target completion dates for thedeliverables ("Project Schedule"), a detailed budget ("Project Budget"), a schedule of payments related to the ProjectSchedule and the Project Budget ("Payment Schedule"), all set forth with respect to each Development Phase contained inthe applicable Work Plan. The Project Schedule included in each Work Plan shall contain project timelines, milestones or targetdates for completion of a project or a portion thereof (including each Development Phase), and all such schedules shall bereasonable for the Development to be provided. In all events, the Parties shall use their Commercially Reasonable Efforts tocomply with the Project Schedule set forth in each Work Plan. If at any time either Party anticipates a delay in meeting thetimelines for a given Work Plan as set forth in its Project Schedule, then the anticipating Party shall promptly notify the otherParty in writing, specifying the reason for the delay and the anticipated effect upon the timelines, milestones or otherdeliverables in such Project Schedule.3.2 Changes to Work Plans. Any change in the details of a Work Plan or the assumptions upon which the WorkPlan is based may require changes in the Project Budget, Payment Schedule or Project Schedule. Every such material change(e.g., a change which involves a change of [***] shall require a written amendment to the Work Plan (a "Work PlanAmendment"). Each Work Plan Amendment shall detail the requested changes to the applicable task, responsibility, duty,budget, timeline or other matter. The Work Plan Amendment will become effective upon the execution of the Work PlanAmendment by both Parties, and if applicable, will specify the period of time within which the Parties will use CommerciallyReasonable Efforts to implement the changes. Both Parties agree to act in good faith and promptly when considering a WorkPlan Amendment requested by the other Party but neither Party is obligated to execute a Work Plan Amendment. No Work PlanAmendment shall become effective unless and until it is signed by both Parties. Any such changes that result in additionalDevelopment Fees or other charges shall be reflected in the Work Plan Amendment to the affected Work Plan, Project Budgetor Payment Schedule.3.3 Standard of Conduct. The Parties shall conduct the Development in compliance with the terms and conditionsof this Agreement and the relevant Work Plan, and all applicable laws, rules and regulations (including the Federal Food, Drug,and Cosmetic Act and the regulations promulgated pursuant thereto) and in accordance with high professional standards,consistent with GXP (as applicable) and with the standard of care customary in the contract development and manufactureindustry. The personnel assigned to perform Development shall be qualified and professionally capable of performing theDevelopment tasks, shall be adequate to effectively perform the***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.8Development on the schedule set forth in the Project Schedule and shall devote such time as is necessary to perform theDevelopment on such schedule.3.4 Altus Cooperation. Altus shall cooperate in good faith with Zogenix’s due diligence investigation and reasonablerequests for information regarding Versions, the Licensed Product, Altus Technology and Altus Product Technology.3.5 Supply of Active Ingredient and Other Material.(a) Altus, on Zogenix’s behalf, shall purchase all Active Ingredient (including all analytical referencestandards) and excipients required for Development, subject to the prior written approval of Zogenix. Altus shall invoiceZogenix for the requested amount of such Active Ingredient, at the [***] (collectively, the “Active Ingredient Cost”). Zogenixshall pay Altus for the Active Ingredient Costs [***] Altus’ placing of definitive orders for the Active Ingredient. Altus shallprovide Zogenix with a copy of the Third Party supplier’s corresponding invoice to Altus.(b) [***](c) [***](d) [***]3.6 Development Fees. Zogenix agrees to pay Altus for Development rendered pursuant to the Project Budget andPayment Schedules included in each Work Plan (the “Development Fees”). All Development Fees billed to Zogenix by Altusmust be accompanied by appropriate documentary evidence, such as receipts or other documentation reasonably acceptable toZogenix. Zogenix shall deliver undisputed payments to Altus within [***] after receipt of a written invoice and requiredsupporting documentation as applicable.3.7 Use and Transfer of Active Ingredient Purchased on Behalf of Zogenix. Altus shall use the ActiveIngredient purchased on behalf of Zogenix (“Purchased Active Ingredient”) solely for conducting Development under thisAgreement and for no other purpose, including any commercial purpose, or any research other than Development. Altus shallnot sell, transfer, disclose or otherwise provide access to the Purchased Active Ingredient, or any material resulting from the useof the Purchased Active Ingredient, to any person or entity, except that Altus may allow access to the Purchased ActiveIngredient to those employees, officers and consultants of Altus who require such access in order to conduct the Developmentand solely for purposes consistent with this Agreement; provided that each such employee, officer or consultant is bound byagreement to retain and use the Purchased Active Ingredient in a manner that is consistent with the terms of this Agreement.Altus will use the Purchased Active Ingredient in compliance with all applicable laws, rules and regulations, including laws,rules and regulations relating to the research, testing, production, storage, transportation, export,***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.9packaging, labeling or other authorized use of the Purchased Active Ingredient. When the Development is completed, or uponthe earlier termination of this Agreement, Altus shall return any remaining Purchased Active Ingredient to Zogenix, orotherwise dispose of the Purchased Active Ingredient as instructed by Zogenix at Zogenix’s expense. For clarity, nothing in thisAgreement shall prevent or limit Altus from purchasing, on its own behalf or on behalf of Third Parties, the Active Ingredientfor purposes other than those contemplated by this Agreement.3.8 Development Results. Each Party shall keep complete and accurate records of the results of the Developmentperformed by such Party under this Agreement including under any Work Plan (“Development Results”) and of allInventions. Each Party shall promptly and fully disclose to the other Party in writing all Development Results and Inventions.Without limiting the generality of the foregoing, a Party shall deliver to the other Party a written report of the DevelopmentResults associated with each Development Phase for which it is responsible in a form to be mutually agreed by the Parties within[***] after the completion of such Development Phase or such longer period of time as is mutually agreed by the Parties. Inaddition, each Party shall make available to the other Party relevant records, programs and data as may reasonably be requestedby such other Party in connection with the exercise of the rights of such Party under this Agreement or the License Agreement.3.9 Ownership and Access to Development Results and Product Data.(a) As between the Parties, [***] all Development Results and such Development Results shall be theConfidential Information [***], subject to the limitations on use and disclosure set forth in Section 7.(b) [***], subject to the limitations on use and disclosure set forth in Section 7 and to the extent that [***].(c) Altus, at its sole discretion, will be [***]; provided that Altus [***] a [***], subject to a [***].(d) [***] shall not use [***] for any purpose except as otherwise permitted under this Agreement or theLicense Agreement.3.10 Governance. Within thirty (30) days of the Effective Date, a Joint Development Committee ("JDC") will beformed with three (3) representatives from each Party. At the JDC, the Parties will consult about Manufacturing, research,Development and Commercialization issues and measure progress against the Work Plans. Meetings will be on a periodic basis, asagreed by the Parties. For clarity, the JDC shall have no decision-making authority.3.11 Zogenix Diligence Standard. Zogenix will use Commercially Reasonable Efforts to [***].***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.103.12 Zogenix’s expense; Development Fees for such additional Strengths shall be substantially similar to those agreed with Zogenixfor Initial Strengths as set forth in the applicable Work Plan(s). For clarity, Zogenix shall not be required to pay an additional“access fee” or “development milestones” in connection with such Development of additional Strengths.4.DEVELOPMENT FINANCIAL MILESTONES.4.1 Development Milestones. Upon the first achievement of each of the milestones below, Zogenix shall pay toAltus the corresponding non‑refundable, non‑creditable Development milestone payments set forth below:MilestoneMilestonePayment[***][***][***][***][***] [***][***][***][***][***][***][***][***] The payments of the amounts set forth opposite each Development milestone in this Section 4.1 shall be payable within [***]after achievement of the applicable milestone.***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.11Each of the milestone payments set forth above shall be payable [***]. Development milestone 5 above [***] shall be paid,even if [***], if Zogenix has [***].4.2 Manner and Place of Payment. All payment amounts specified in this Agreement are stated, and all paymentshereunder shall be payable, in U.S. dollars. All payments owed under this Agreement shall be made by wire transfer to a bankand account designated in writing by Altus, unless otherwise specified in writing by Altus.5.INTELLECTUAL PROPERTY.5.1 Inventorship. Inventorship of any Invention shall be determined in accordance with U.S. patent laws.5.2 Ownership.(a) Altus Technology and Altus Product Technology. Zogenix acknowledges that Altus is and shall at alltimes remain the sole and exclusive owner or licensee of the Altus Technology and Altus Product Technology.(b) Altus-Assigned Inventions. As between the Parties, all Inventions, regardless of inventorship, that aredirected or exclusively related to Altus Technology or Altus Product Technology including any such use directed or exclusivelyrelated to Altus Technology or Altus Product Technology and any improvements thereof (collectively, “Altus-AssignedInventions”), shall be owned solely by Altus. Zogenix hereby assigns to Altus all of its right, title and interest in and to allAltus-Assigned Inventions, together with all Patent and other intellectual property rights therein (it being understood thatAltus-Assigned Inventions and Patents claiming Altus-Assigned Inventions would be included in the Altus Technology andAltus Product Technology licensed to Zogenix upon exercise of the Option). Zogenix agrees promptly to disclose each Altus-Assigned Invention to Altus in writing and to execute such documents and perform such other acts as Altus may reasonablyrequest to obtain, perfect and enforce such rights to the Altus-Assigned Inventions and the assignment thereof.(c) Other Inventions. With the exception of Altus-Assigned Inventions, all Inventions [***] shall be ownedsolely by [***], and all Inventions made [***], shall be owned [***] (“Joint Invention(s)”).5.3 Patent Prosecution and Maintenance. During the Option Period, Altus shall have the sole right, but not theobligation, to control and manage the preparation, filing, prosecution and maintenance of all Altus Patents in the Territory, bycounsel of its own choice; provided, however, that Altus shall not file any Altus Patent in the Territory (or amend any AltusPatent filed before the effective date of this Agreement) which includes, incorporates or is based upon any DevelopmentResults without the prior written consent of Zogenix, such consent not to be unreasonably withheld, conditioned or delayed.The costs and expense associated with the preparation, filing, prosecution and***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.12maintenance of all Altus Product Patents in the Territory (including the costs associated with counsel) shall be paid by [***] thecosts and expense associated with the preparation, filing, prosecution and maintenance of all Altus Technology Patents in theTerritory (including the costs associated with counsel) shall be paid by [***]. Altus will, to the maximum extent practicable,strive to separate any claims within Patents that claim Inventions into separate Patents consisting of claims that claim solelyInventions covering, and exclusively related to the Licensed Product or claims that claim Inventions relevant to, but notexclusively related to, the Licensed Product. Altus shall consult with Zogenix as to the preparation, filing, prosecution andmaintenance of Altus Patents in the Territory reasonably prior to any deadline or action with the U.S. Patent & TrademarkOffice, and shall furnish to Zogenix copies of all relevant documents reasonably in advance of such consultation. In the eventthat Altus desires not to prepare and file any Altus Patent in the Territory or to abandon or decline responsibility for any AltusPatent in the Territory, Altus shall provide reasonable prior written notice to Zogenix of such intention (which notice shall, inany event, be given no later than [***] prior to the next deadline for any action that may be taken with respect to such AltusPatent with the U.S. Patent & Trademark Office), and Zogenix shall have the right in the Territory, at its sole expense, inconsultation with Altus, to prepare, file, prosecute, and maintain such Altus Patent. For purposes of this Section 5.3, a Party’sright to prosecute and maintain a Patent shall be deemed to include the right to control any inter parties review, derivation,interference, supplemental examination, post-grant review, reexamination, reissue or opposition proceeding with respect to suchPatent, and the right to seek patent term restorations, supplementary protection certificates and other forms of patent termextensions with respect to such Patent.5.4 Cooperation. Each Party agrees to cooperate fully in the preparation, filing, prosecution and maintenance ofPatents under this Article 5. Such cooperation includes: (a) executing all papers and instruments, or requiring its employees orcontractors, to execute such papers and instruments, so as to effectuate the ownership of Inventions set forth in Section 5.2, andPatents claiming or disclosing such Inventions, and to enable the other Party to apply for and to prosecute patent applications inany country as permitted by Section 5.3; and (b) promptly informing the other Party of any matters coming to such Party’sattention that may affect the preparation, filing, prosecution or maintenance of any such Patent.5.5 Infringement by Third Parties. In the event that either Altus or Zogenix becomes aware of any infringementor threatened infringement by a Third Party of any Altus Patent or Joint Patent, it shall promptly notify the other Party inwriting to that effect. During the Option Period, [***] shall have the sole right, but not the obligation, to bring and control anyaction or proceeding with respect to infringement of any Altus Patent or Joint Patent, at its own expense and by counsel of itschoice.5.6 Third Party Infringement Claims. Each Party shall promptly notify the other in writing of any allegation by aThird Party that the activity of either of the Parties***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.13pursuant to this Agreement infringes or may infringe the intellectual property rights of such Third Party. [***] shall have thesole right to control any defense of any such claim involving alleged infringement of Third Party rights by Altus’s activities atits own expense and by counsel of its own choice. Zogenix shall have the sole right to control any defense of any such claiminvolving alleged infringement of Third Party rights by Zogenix’s activities at its own expense and by counsel of its own choice.Neither Party shall have the right to settle any patent infringement litigation under this Section 5.6 in a manner that diminishesthe rights or interests of the other Party without the prior written consent of such other Party (which shall not be unreasonablywithheld).5.7 Joint Inventions. With respect to the decision to initiate the drafting and filing of a new patent application claiminga Joint Invention, the Parties shall first exchange sufficient information identifying such Joint Invention and discuss in good faiththe relative merits of seeking patent rights thereto and, upon the prior mutual agreement of the Parties to proceed, notunreasonably withheld, Zogenix shall take such actions as are necessary or appropriate to procure, prosecute and maintainpatents and/or patent applications to such Joint Invention (“Joint Patents”) (including any issuance, reissuance orreexamination thereof and the defense of any interference, revocation or opposition proceedings related thereto) at Zogenix’ssole cost and expense.6.REPRESENTATIONS AND WARRANTIES; INSURANCE; LIMITATION OF LIABILITY.6.1 Mutual Representations and Warranties As of Effective Date; Covenants. Each Party represents andwarrants to the other Party that, as of the Effective Date: (a) it is duly organized and validly existing under the laws of itsjurisdiction of incorporation or formation, and has full corporate or other power and authority to enter into this Agreement and tocarry out the provisions hereof; (b) it is duly authorized to execute and deliver this Agreement and each Work Plan and toperform its obligations hereunder and thereunder, and the person or persons executing this Agreement on its behalf have beenduly authorized to do so by all requisite corporate action; (c) the execution, delivery and performance of this Agreement andeach Work Plan will not violate any organizational document governing such Party, any agreement to which such Party is aparty, or any law or court or governmental order, holding or writ by which such Party is bound; and (d) this Agreement and eachWork Plan is legally binding upon it, enforceable in accordance with its terms, and does not conflict with any agreement,instrument or understanding, oral or written, to which it is a party or by which it may be bound, nor violate any material law orregulation of any court, governmental body or administrative or other agency having jurisdiction over it. Each Party covenants tothe other Party that such Party will not enter into any agreement that conflicts with this Agreement.6.2 Altus Representations and Warranties As of Effective Date. Altus hereby represents and warrants toZogenix that, as of the Effective Date: (a) Exhibit B attached hereto contains a true, complete and correct list of the existingAltus Patents;***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.14(b) Altus Controls the Patents listed in Exhibit B; (c) Altus has not granted to any Third Party any option, license or other rightwith respect to the Licensed Product in the Territory; (d) Altus is not a party to any legal action, suit or proceeding relating to theAltus Technology or Altus Product Technology nor is under any known threat to any legal action, suit, or proceeding; and (e)there is no litigation, regulatory investigation or proceeding, administrative hearing or any other similar proceeding pending or, tothe best of its knowledge, threatened against Altus which could adversely affect Altus’ ability to perform the Development orgrant the licenses in connection with the exercise of the Option by Zogenix.6.3 Paladin Agreement.(a) Altus hereby represents and warrants to Zogenix, as of the Effective Date, that: (i) Altus has provided toZogenix a true, complete and correct copy of the Paladin Agreement; (ii) the Paladin Agreement is the only agreement existingas of the Effective Date by which Altus has licensed from a Third Party any part of the Altus Technology or Altus ProductTechnology; (iii) Altus is not in breach of the Paladin Agreement and has not submitted to Paladin any notice (written or oral) tothe effect that Paladin is in breach of the Paladin Agreement; (iv) Altus has not received from Paladin any notice (written ororal) to the effect that Altus is in breach of the Paladin Agreement; and (v) the Paladin Agreement is legal, valid, binding,enforceable and in full force and effect (except as enforcement may be affected by bankruptcy, insolvency or other similarlaws and by general principles of equity).(b) Altus covenants that during the Term:(i) it shall fulfill and comply with all of its obligations under the Paladin Agreement, with which thefailure to comply would result in the termination of such Paladin Agreement;(ii) it shall comply with the payment terms under the Paladin Agreement and shall provide to Zogenixwritten evidence of each payment it makes under the Paladin Agreement within [***] of such payment being made; and(iii) it shall not amend the Paladin Agreement in such a manner as could have a material and adverseeffect on Zogenix or Zogenix’s rights under this Agreement or the License Agreement.6.4 Insurance. Each Party shall carry and maintain in full force and effect while this Agreement is in effectreasonable insurance in view of its obligations hereunder, including product liability insurance with a policy limit of at least$[***] per occurrence and in the aggregate.Each Party hereto shall name the other Party hereto as an "additional insured" on their respective product liability policies. EachParty upon request shall provide the other with***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.15evidence of such insurance. Each Party shall provide to the other thirty (30) calendar days' prior written notice of any proposedcancellation, termination, reduction or change in its coverage. Maintenance of such insurance coverage will not relieve a Partyof any responsibility under this Agreement for damage in excess of insurance limits or otherwise.6.5 Disclaimer. Except as expressly set forth in this Agreement, EACH PARTY EXPRESSLY DISCLAIMS ANYAND ALL WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, WRITTEN OR ORAL, INCLUDING THEWARRANTIES OF DESIGN, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OFPATENTS, NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, ORARISING FROM A COURSE OF DEALING, USAGE OR TRADE PRACTICES.6.6 Limitation of Liability. EXCEPT FOR LIABILITY FOR BREACH OF ARTICLE 7, AND WITHOUTLIMITING THE PARTIES’ OBLIGATIONS UNDER ARTICLE 9, NEITHER PARTY SHALL BE ENTITLED TORECOVER FROM THE OTHER PARTY ANY SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL ORPUNITIVE DAMAGES (INCLUDING DAMAGES RESULTING FROM LOSS OF USE, LOSS OF PROFITS,INTERRUPTION OR LOSS OF BUSINESS OR OTHER ECONOMIC LOSS) ARISING OUT OF THIS AGREEMENTOR WITH RESPECT TO A PARTY’S PERFORMANCE OR NON-PERFORMANCE HEREUNDER.7.CONFIDENTIALITY.7.1 Confidential Information. “Confidential Information” shall mean all scientific, regulatory, marketing,financial, and commercial information or data, whether communicated in written, oral, graphic, electronic or visual form, that isprovided by one Party (the “Disclosing Party”) to the other Party (the “Receiving Party”) in connection with Development,this Agreement or the License Agreement; provided, however, that: (a) all Development Results (including Product Data) shallbe deemed Confidential Information of Zogenix only, and Zogenix shall be deemed the Disclosing Party and Altus the ReceivingParty with respect thereto; and (b) all Altus-Assigned Inventions shall be deemed the Confidential Information of Altus only,and Altus shall be deemed the Disclosing Party and Zogenix the Receiving Party with respect thereto. Except as expressly setforth in this Agreement or the License Agreement or as otherwise agreed in writing by the Parties, the Receiving Party agreesthat it will keep strictly confidential, in accordance with the terms and conditions of this Article 7, the Disclosing Party’sConfidential Information, shall use the Disclosing Party’s Confidential Information solely as expressly authorized by thisAgreement or the License Agreement, and shall not disclose the Confidential Information to any Third Party without the priorwritten consent of the Disclosing Party. The Receiving Party shall use at least the same degree of care to protect the DisclosingParty’s Confidential Information as the Receiving Party would use to protect its own Confidential Information, but no less thanreasonable care. Notwithstanding the foregoing, the Receiving Party may share the Disclosing Party’s Confidential Informationwith***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.16those of its officers, directors, employees, consultants and other representatives that have a need to know such information forthe purposes expressly authorized by this Agreement or the License Agreement, have been advised by the Receiving Party ofthe Receiving Party’s obligations under this Article 7, and are contractually or legally bound by obligations of non‑disclosure andnon‑use at least as stringent as those contained herein. The failure of any officer, director, employee, consultant or otherrepresentative of the Receiving Party to comply with the terms and conditions of this Agreement shall be considered a breach ofthis Agreement or the License Agreement, as applicable, by the Receiving Party.7.2 Exceptions. Confidential Information of the Disclosing Party shall not include information that the ReceivingParty can demonstrate by competent evidence: (a) was in the public domain at the time of disclosure by the Disclosing Party;(b) later became part of the public domain through no act or omission of the Receiving Party in breach of this Article 7; (c) islawfully disclosed to the Receiving Party on a non‑confidential basis by a Third Party having the right to disclose it; or (d) wasalready known by the Receiving Party at the time of receiving such information from the Disclosing Party, as evidenced by itspre‑existing written records (provided that the exception set forth in this clause (d) shall not apply to Development Results orAltus-Assigned Inventions).7.3 Authorized Disclosure. The Receiving Party may disclose Confidential Information as expressly permitted bythis Article 7, or if and to the extent such disclosure is reasonably necessary in the following instances:(a) filing or prosecuting Patents as permitted by this Agreement or the License Agreement;(b) enforcing the Receiving Party’s rights under this Agreement or the License Agreement;(c) prosecuting or defending litigation as permitted by this Agreement or the License Agreement;(d) complying with applicable court orders or governmental regulations;(e) [***];(f) [***];(g) disclosure to the Receiving Party’s Affiliates, provided that Confidential Information so disclosed shallremain subject to this Article 7;(h) in the case of Zogenix, disclosure to Sublicensees and bona fide potential Sublicensees, to Third Parties inconnection with due diligence or similar investigations by such Third Parties, and to potential Third Party investors inconfidential***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.17financing documents, on the condition that each such Third Party agrees to be bound by confidentiality and non-use obligationsthat are no less stringent than the terms of this Agreement;(i) in the case of Altus, subject to Section 3.9(c), disclosure of Product Data to a licensee of Licensed Productsoutside of the Territory solely in connection with the exercise of such licensee’s rights or the performance of such licensee’sobligations under the applicable definitive license agreement, on the condition that each such licensee agrees to be bound byconfidentiality and non-use obligations that are no less stringent than the terms of this Agreement;(j) in the case of Altus, solely for the purpose of demonstrating to Third Parties the benefits of the AltusPatents, disclosure to such Third Parties of the numerical values underlying abuse deterrent performance of the AltusTechnology reflected in the Development Results, on the condition that each such Third Party agrees to be bound byconfidentiality and non-use obligations that are no less stringent than the terms of this Agreement; provided that Altus does notdisclose [***]; and(k) in the case of Altus prior to the submission by Zogenix of an NDA for Licensed Product in the Territory,disclosure to Third Parties of pharmacokinetic or in vivo data included within the Development Results, on the condition thateach such Third Party agrees to be bound by confidentiality and non-use obligations that are no less stringent than the terms ofthis Agreement, and further subject to the consent of Zogenix.Notwithstanding the foregoing, in the event the Receiving Party is required to make a disclosure of the Disclosing Party’sConfidential Information pursuant to Section 7.3(c) or Section 7.3(d), it shall, except where impracticable, give reasonable advancenotice to the Disclosing Party of such disclosure and use efforts to secure confidential treatment of such information at least as diligentas the Receiving Party would use to protect its own confidential information, but in no event less than reasonable efforts. In any event,the Receiving Party agrees to take all reasonable action to avoid unauthorized disclosure and unauthorized use of ConfidentialInformation.7.4 Confidentiality of Agreement. Except as otherwise provided in this Article 7, each Party agrees not to disclose toany Third Party the terms or existence of this Agreement without the prior written consent of the other Party hereto, exceptthat each Party may make such disclosure to the extent permitted under Section 7.3 and, after the initial announcement of thisAgreement pursuant to Section 7.6, each Party may disclose the terms of this Agreement that have previously been madepublic as contemplated by Section 7.6. The Parties will consult with each other on the provisions of this Agreement to beredacted in any filings made by either Party with the Securities and Exchange Commission or as otherwise required by law.7.5 Publications. During the Term and the term of the License Agreement, Altus will not submit any publicationsregarding the Licensed Product (including the***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.18Development Results) without the prior written consent of Zogenix. Any proposed publication by Zogenix regarding theLicensed Product in the Territory (including the Development Results) shall comply with this Section 7.5. At least [***]before a manuscript is to be submitted to a publisher, Zogenix will provide Altus with a copy of the manuscript. If Zogenixwishes to make an oral or visual presentation at any conference, it will provide Altus with a summary of such presentation,unless such disclosed information has previously been reviewed by Altus, at least [***] before such oral or visual presentationand, if an abstract is to be published, [***] before such abstract is to be submitted. Any oral or visual presentation, including anyquestion period, shall not include any Confidential Information belonging to Altus unless Altus agrees in writing to suchinclusion in advance of such oral presentation. Altus will review the manuscript, abstract, text or any other material provided toit to determine whether patentable subject matter or valuable trade secrets of Altus are disclosed and to assess the accuracy ofthe technical content therein. Altus will notify Zogenix within [***] of receipt of the proposed publication if Altus, in goodfaith, determines that patentable subject matter or valuable trade secrets of Altus are or may be disclosed, or if Altus, in goodfaith, believes Confidential Information of Altus is or may be disclosed. If it is determined by Altus that patent applicationsshould be filed in advance of the proposed publication, Zogenix shall delay its publication or presentation for a period not toexceed [***] from Altus’ receipt of the proposed publication or presentation to allow time for the filing of patent applicationscovering patentable subject matter. If it is determined in good faith by Altus that Confidential Information of Altus is beingdisclosed, the Parties shall consult in good faith to arrive at an agreement on mutually acceptable modifications to the proposedpublication or presentation to avoid such disclosure. Any publications (whether written or oral), where consistent withcustomary academic practice, shall acknowledge Altus as the developer and licensor of the Altus Technology and the AltusProduct Technology.7.6 Publicity. It is further acknowledged that each Party may desire or be required to issue one or more subsequentpress releases relating to this Agreement or the License Agreement or activities hereunder or thereunder. The Parties agree toconsult with each other reasonably and in good faith with respect to the text and timing of any such press release prior to theissuance thereof, provided that a Party may not unreasonably withhold consent to such releases, and that either Party may issuesuch press releases as it determines, based on advice of counsel, are reasonably necessary to comply with applicable law or withthe requirements of any stock exchange on which securities issued by such Party or its Affiliates are traded. In the event of arequired public announcement, to the extent practicable under the circumstances, the Party making such announcement shalluse commercially reasonable efforts to provide the other Party with a copy of the proposed text of such announcementsufficiently in advance of the scheduled release to afford such other Party a reasonable opportunity to review and commentupon the proposed text.***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.197.7 Injunctive Relief. The Receiving Party hereby acknowledges and agrees that in the event of any breach of thisArticle 7 by the Receiving Party, including the actual or threatened disclosure or unauthorized use of Confidential Informationof the Disclosing Party without the prior written consent of the Disclosing Party, the Disclosing Party may suffer an irreparableinjury such that no remedy at law may adequately protect or appropriately compensate the Disclosing Party for such injury.Accordingly, the Receiving Party agrees that the Disclosing Party shall have the right to seek enforcement of this Article 7 andany of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to anyother rights and remedies that the Disclosing Party may have for such breach.8.TERM; TERMINATION.8.1 Term. The term of this Agreement (the “Term”) shall begin on the Effective Date and, unless earlier terminatedin accordance with this Article 8, shall expire upon expiration of the Option Period.8.2 Termination by Zogenix.(l) Zogenix may terminate this Agreement in its entirety at will at any time upon thirty (30) days’ writtennotice to Altus; provided such termination shall not in and of itself affect any then uncompleted Work Plan and associatedpayments due or pending.(m) Zogenix may terminate any Work Plan with or without cause immediately upon giving Altus writtennotice of such termination.(n) Zogenix may terminate this Agreement and any uncompleted Work Plans in their entirety if Altusmaterially breaches any provision of this Agreement and has not cured such breach within thirty (30) days after receipt ofwritten notice from Zogenix specifying the nature of such breach.8.3 Termination by Altus.(a) [Intentionally left blank](b) Altus may terminate a Work Plan only if Zogenix materially breaches any obligation or representation orwarranty thereunder and has not cured such breach within thirty (30) days after receipt of written notice from Altus specifyingthe nature of such breach.(c) Altus may terminate this Agreement effective immediately upon written notice to Zogenix, except to theextent that Altus’ right to terminate may be limited by Bankruptcy Rules (as defined below), in the event that Zogenixinstitutes any proceeding, takes any corporate action, or executes any agreement to authorize its participation in or thecommencement of any proceeding seeking: (i) to adjudicate it bankrupt or insolvent; (ii) liquidation, dissolution,***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.20winding-up, reorganization, arrangement, protection, relief or composition of it or any of its property or debts or making aproposal with respect to it under any law relating to bankruptcy, insolvency, reorganization or compromise of debts or othersimilar laws (collectively, the “Bankruptcy Rules”); or (iii) appointment of a receiver, trustee, agent, custodian or other similarofficial for it or for any substantial part of its properties and assets; or(d) Altus may terminate this Agreement effective immediately upon written notice to Zogenix, except to theextent that Altus’ right to terminate may be limited by Bankruptcy Rules, in the event that a creditor privately commences anyproceeding against Zogenix (except during any period up to a maximum of ninety (90) days during which such proceeding isbeing contested in good faith by appropriate proceedings by Zogenix) seeking: (i) to adjudicate it bankrupt or insolvent; (ii)liquidation, dissolution, winding-up, reorganization, arrangement, protection, relief or composition of it or any of its property ordebts or making a proposal with respect to it under any Bankruptcy Rules; or (iii) appointment of a receiver, trustee, agent,custodian or other similar official for it or for any substantial part of its properties and assets.8.4 Consequences of Expiration or Termination.(a) Expiration or Termination Prior to License Effective Time. Upon (i) expiration of this Agreementpursuant to Section 8.1, or (ii) any termination of this Agreement for any reason prior to the end of the Option Period, theOption shall terminate and be of no further force or effect. Within thirty (30) days after such expiration or termination (otherthan as a result of Zogenix’s exercise of the Option), Zogenix shall return to Altus all Confidential Information of Altus, allAltus Technology and all Altus Product Technology that is in Zogenix’s or its Affiliates’ possession, including any and alldocumentation and other tangible embodiments thereof, except that Zogenix may retain one archival copy of Altus’ ConfidentialInformation solely for purposes of monitoring compliance with its obligations hereunder.(b) In the event of any termination of a Work Plan before completion, Zogenix agrees to pay Altus on a prorata basis for all Development rendered pursuant to the unfinished Work Plan prior to such date of termination and any non-cancelable expenses incurred in connection with Altus’ performance of the remaining activities included in the then-ongoingDevelopment Phase. For clarity, Zogenix shall not be responsible for any expenses associated with any Development Phase to beinitiated after the effective date of termination of a Work Plan unless continued activity by Altus with respect to suchDevelopment Phase has been requested by Zogenix. As soon as reasonably practicable following receipt of a termination notice,Altus shall submit an itemized accounting of Development performed, expenses incurred pursuant to performance of theDevelopment, non-cancelable expenses incurred by Altus relating to the remaining activities included in the then-ongoingDevelopment Phase under the terminated Work Plan, and payments received by Altus from Zogenix in order to determine abalance to be paid by either Party to the other. Such undisputed balance shall be paid by the applicable Party within thirty (30)days of receipt of such an itemized accounting by Zogenix. Under no circumstances shall any Development milestone paymentmade by Zogenix pursuant to Section***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.214.1 be refunded in whole or in part, or in any way used to offset or credit other amounts due hereunder.(c) As soon as practicable after receipt of any notice of termination of this Agreement or any Work Plan, theParties shall cooperate in good faith to agree on a plan to expeditiously conclude activities with respect to such matter.8.5 Surviving Obligations. Neither expiration nor termination of this Agreement shall relieve either Party of anyobligation accruing prior to such expiration or termination. In addition, in the event of expiration or termination of thisAgreement without the exercise by Zogenix of the Option, Sections 2.4, 2.5, 3.7, 3.8, 3.9, 6.4, 6.5, 8.4 and this Section 8.5 andArticles 1 (to the extent necessary to interpret any other surviving provisions), 5, 7, 9 and 10 shall survive any such expirationor termination of this Agreement. In the event of expiration or termination of this Agreement in connection with the exercise ofthe Option by Zogenix, Sections 3.7, 3.8, 3.9, 3.11, 3.12, 5.1, 5.2, 6.4, 6.5 and Articles 1 (to the extent necessary to interpretany other surviving provisions or the License Agreement), 4, 7, 9 and 10.9.INDEMNIFICATION.9.1 Indemnification by Zogenix. Zogenix hereby agrees to save, defend, indemnify and hold harmless Altus, itsAffiliates and their respective officers, directors, employees, consultants and agents (the “Altus Indemnitees”) from andagainst any and all losses, damages, liabilities, expenses and costs, including reasonable legal expense and attorneys’ fees(“Losses”), to which any Altus Indemnitee may become subject as a result of any claim, demand, action or other proceeding byany Third Party to the extent such Losses arise directly or indirectly out of (a) the gross negligence or willful misconduct of anyZogenix Indemnitee (defined below), or (b) the breach by Zogenix of any warranty, representation, covenant or agreementmade by it in this Agreement; except, in each case, to the extent such Losses result from the gross negligence or willfulmisconduct of any Altus Indemnitee or the breach by Altus of any warranty, representation, covenant or agreement made by itin this Agreement.9.2 Indemnification by Altus. Altus hereby agrees to save, defend, indemnify and hold harmless Zogenix, itsAffiliates and their respective officers, directors, employees, consultants and agents (the “Zogenix Indemnitees”) from andagainst any and all Losses to which any Zogenix Indemnitee may become subject as a result of any claim, demand, action orother proceeding by any Third Party to the extent such Losses arise directly or indirectly out of (a) the gross negligence orwillful misconduct of any Altus Indemnitee, (b) the breach by Altus of any warranty, representation, covenant or agreementmade by Altus in this Agreement or (c) the development, manufacture, use, handling, storage, sale, distribution or otherdisposition of Licensed Product outside the Territory, or within the Territory but outside the Field; in each case, except to theextent such Losses result from the gross negligence or willful misconduct of any Zogenix Indemnitee or the breach by Zogenixof any warranty, representation, covenant or agreement made by Zogenix in this Agreement.9.3 Control of Defense. In the event a Party seeks indemnification under Section 9.1 or 9.2, it shall inform the otherParty (the “Indemnifying Party”) of a claim as soon as reasonably***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.22practicable after such Party (the “Indemnified Party”) receives notice of the claim (it being understood and agreed, however,that the failure by an Indemnified Party to give notice of a claim as provided in this Section 9.3 shall not relieve theIndemnifying Party of its indemnification obligation under this Agreement except and only to the extent that such IndemnifyingParty is actually damaged as a result of such failure to give notice), shall permit the Indemnifying Party to assume direction andcontrol of the defense of the claim (including the right to settle the claim solely for monetary consideration), and shall cooperateas requested (at the expense of the Indemnifying Party) in the defense of the claim. The Indemnified Party shall not agree to anysettlement of such action, suit, proceeding or claim without the prior written consent of the Indemnifying Party. TheIndemnifying Party shall not agree to any settlement of such action, suit, proceeding or claim or consent to any judgment inrespect thereof that does not include a complete and unconditional release of the Indemnified Party from all liability with respectthereto, that imposes any liability or obligation on the Indemnified Party or that acknowledges fault by the Indemnified Party; ineach case, without the prior written consent of the Indemnified Party.10.MISCELLANEOUS.10.1 No Implied License. No right or license under any Patents or Information of either Party is granted or shall begranted by implication. All such rights or licenses are or shall be granted only as expressly provided in this Agreement or theLicense Agreement.10.2 Dispute Resolutions. Upon the written request of either Party to the other Party, any claim, dispute, orcontroversy as to the breach, enforcement, interpretation or validity of this Agreement (a “Dispute”) will be referred to thedesignated executive officers of the Parties, which initially shall be the President of Zogenix for Zogenix and the ChiefExecutive Officer of Altus for Altus (“Executive Officers”) for attempted resolution. In the event the Executive Officers areunable to resolve such Dispute within 30 days after the initial written request, then either Party shall have the right to pursue allrights and remedies available to it under applicable law, including bringing an action in any court of competent jurisdiction.10.3 Governing Law. This Agreement shall be governed by and interpreted in accordance with the substantive lawsof the State of New York, U.S.A., without regard to its or any other jurisdiction’s choice of law rules.10.4 Entire Agreement; Modification. This Agreement (including the Exhibits hereto) is both a final expression ofthe Parties’ agreement and a complete and exclusive statement with respect to all of its terms. This Agreement supersedes allprior and contemporaneous agreements and communications, whether oral, written or otherwise, concerning any and allmatters contained herein, including the Mutual Confidential Disclosure Agreement between the Parties [***]. This Agreementmay only be modified or supplemented in a writing expressly stated for such purpose and signed by the Parties to thisAgreement.***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.2310.5 Relationship between the Parties. The Parties’ relationship, as established by this Agreement, is solely that ofindependent contractors. This Agreement does not create any partnership, joint venture or similar business relationship betweenthe Parties. Neither Party is a legal representative of the other Party and neither Party can assume or create any obligation,representation, warranty or guarantee, express or implied, on behalf of the other Party for any purpose whatsoever.10.6 Non-Waiver. The failure of a Party to insist upon strict performance of any provision of this Agreement or toexercise any right arising out of this Agreement shall neither impair that provision or right nor constitute a waiver of thatprovision or right, in whole or in part, in that instance or in any other instance. Any waiver by a Party of a particular provision orright shall be in writing, shall be as to a particular matter and, if applicable, for a particular period of time and shall be signed bysuch Party.10.7 Assignment. Except as expressly provided hereunder, neither this Agreement nor any rights or obligationshereunder may be assigned or otherwise transferred by either Party without the prior written consent of the other Party (whichconsent shall not be unreasonably withheld); provided, however, that either Party may assign this Agreement and its rights andobligations hereunder without the other Party’s consent:(a) in connection with the transfer or sale to a Third Party of all or substantially all of the business of suchParty to which this Agreement relates, whether by merger, sale of stock, sale of assets or otherwise; provided, however, that inthe event of such a transaction (whether this Agreement is actually assigned or is assumed by the acquiring party by operation oflaw), intellectual property rights of the acquiring party to such transaction (if other than one of the Parties to this Agreement)shall not be included in the technology licensed hereunder or otherwise subject to this Agreement; or(b) to an Affiliate, provided that the assigning party shall remain liable and responsible to the non‑assigningparty hereto for the performance and observance of all such duties and obligations by such Affiliate.The rights and obligations of the Parties under this Agreement shall be binding upon and inure to the benefit of the successorsand permitted assigns of the Parties, and the name of a Party appearing herein will be deemed to include the name of such Party’ssuccessors and permitted assigns to the extent necessary to carry out the intent of this section. Any assignment not inaccordance with this Agreement shall be void.10.8 No Third Party Beneficiaries. This Agreement is neither expressly nor impliedly made for the benefit of anyparty other than those executing it.10.9 Severability. If, for any reason, any part of this Agreement is adjudicated invalid, unenforceable or illegal by acourt of competent jurisdiction, then such adjudication shall not,***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.24to the extent feasible, affect or impair, in whole or in part, the validity, enforceability or legality of any remaining portions of thisAgreement. All remaining portions shall remain in full force and effect as if the original Agreement had been executed withoutthe invalidated, unenforceable or illegal part.10.10 Notices. Any notice to be given under this Agreement must be in writing and delivered either in person, or byovernight courier, to the Party to be notified at its address(es) given below, or at any address such Party has previously designatedby prior written notice to the other. Notice shall be deemed sufficiently given for all purposes upon the earliest of: (a) the date ofactual receipt; or (b) if delivered by overnight courier, the second business day on which the overnight courier regularly makesdeliveries.If to Zogenix, notices must be addressed to:***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.25Zogenix, Inc.12400 High Bluff Drive, Suite 650San Diego, CA 92130Attention: Chief Financial OfficerWith a required copy to (which shall not constitute notice):Latham & Watkins, LLP12636 High Bluff Dr., Suite 400San Diego, CA 92130Attention: Faye H. RussellIf to Altus, notices must be addressed to:Altus Formulations Inc.17800 Rue LapointeMirabelQuebec J7J 1P3Canada Attention: Chief Executive OfficerWith a required copy to (which shall not constitute notice):Delegatus Legal Services Inc.438 McGill St., Suite 400Montreal, QuebecCanada H2Y 2G1Attention: Keith Flavell10.11 Force Majeure. Except for the obligation to make payment when due, each Party shall be excused fromliability for the failure or delay in performance of any obligation under this Agreement by reason of any event beyond suchParty’s reasonable control, including acts of nature, fire, flood, explosion, earthquake, or other natural forces, war, civil unrest,acts of terrorism, accident, destruction or other casualty, any lack or failure of transportation facilities, any lack or failure ofsupply of raw materials, any strike or labor disturbance, or any other event similar to those enumerated above. Such excusefrom liability shall be effective only to the extent and duration of the event(s) causing the failure or delay in performance andprovided that the Party has not caused such event(s) to occur. Notice of a Party’s failure or delay in performance due to forcemajeure must be given to the other Party within [***] after its occurrence. All delivery dates under this Agreement that havebeen affected by force majeure shall be tolled for the duration of such force majeure.***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.2610.12 Interpretation. The headings of clauses contained in this Agreement preceding the text of the sections,subsections and paragraphs hereof are inserted solely for convenience and ease of reference only and shall not constitute anypart of this Agreement, or have any effect on its interpretation or construction. All references in this Agreement to the singularshall include the plural where applicable. Unless otherwise specified, references in this Agreement to any section shall includeall subsections and paragraphs in such section and references in this Agreement to any subsection shall include all paragraphs insuch subsection. All references to days in this Agreement shall mean calendar days, unless otherwise specified. Ambiguities anduncertainties in this Agreement, if any, shall not be interpreted against either Party, irrespective of which Party may be deemedto have caused the ambiguity or uncertainty to exist. This Agreement has been prepared in the English language and the Englishlanguage shall control its interpretation. In addition, all notices required or permitted to be given hereunder, and all written,electronic, oral or other communications between the Parties regarding this Agreement shall be in the English language. Theterm “including” or “includes” means “including without limitation” or “includes without limitation.”10.13 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an originaldocument, and all of which, together with this writing, shall be deemed one instrument. This Agreement may be executed byfacsimile or PDF signatures, which signatures shall have the same force and effect as original signatures.[Signature page follows]***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.27IN WITNESS WHEREOF, the Parties have duly executed this Development and Option Agreement as of the EffectiveDate.Zogenix, Inc.Altus Formulation Inc.By: /s/ Roger L. Hawley Name: Roger L. Hwley Title: Chief Executive Officer By: /s/ Damon Smith Name: Damon Smith Title: President and CEO Exhibit AFORM OF WORK PLANSD\1381336.1 WORK PLANDevelopment of Multiple Versionsof the Licensed ProductConfidentialSD\1381336.1 [***]***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.1 Exhibit BALTUS PATENTSCountryFiling DateSerial NoPatent No.(Publ.No.)Issue Date (Pub Date)TitleStatusAltus Technology Patents[***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***][***] [***][***][***][***][***][***][***][***][***][***][***][***] [***][***]B-1***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions. Exhibit CLICENSE TERMSUpon exercise of the Option by Zogenix (if ever), the following terms and conditions automatically shall apply until supersededby a definitive License Agreement:Unless otherwise indicated in the License Agreement, all capitalized terms have the meaning set forth in the Development andOption Agreement, dated November 1, 2013, between Altus and Zogenix (the “D&O Agreement”).1.License.1.1 License Grant. Subject to the terms and conditions of this Exhibit C: License Terms, Altus hereby grants toZogenix an exclusive, royalty-bearing license, with the right to sublicense through multiple tiers of sublicense, under AltusTechnology and Altus Product Technology solely to make, have made, use, sell, have sold, offer for sale and import LicensedProducts in the Field in the Territory.1.2 Sublicensing. Zogenix may sublicense rights granted to it hereunder at any time at its sole discretion and without theprior written consent of Altus provided that Zogenix informs Altus in writing promptly regarding the nature of the transaction aftersuch a transaction has taken place. Any and all sublicenses of the license granted to Zogenix under Section 1.1 shall be in writing andshall be subject to, and consistent with, the terms and conditions of this Exhibit C: License Terms. Zogenix shall be fullyresponsible for the compliance of its Affiliates and Sublicensees with the terms and conditions of this Exhibit C: License Terms.1.3 Negative Covenants. During the term of this License Agreement:(a) Zogenix shall not practice, and shall not permit or cause any Zogenix Affiliate, Sublicensee or other ThirdParty to practice, any Altus Product Technology or Altus Technology for any purpose outside the express scope of the licensegranted under Section 1.1; and(b) Altus shall not, and shall ensure that its Affiliates do not, license, develop, Manufacture, market, use,supply, distribute, offer for sale or sell any abuse deterrent controlled-release pharmaceutical formulations containing theActive Ingredient as the sole active ingredient for use in the Territory, other than as contemplated by this License Agreement.1.4 Retained Rights. Subject to Section 1.3(b) of this Exhibit C: License Terms, Altus will at all times retain the soleand exclusive right to practice and license the Altus Technology and the Altus Product Technology for any and all uses, including tomake, have made, use, sell, have sold, offer for sale and import Licensed Products outside of the Territory.***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.1 1.5 Bankruptcy Code. All rights and licenses granted under or pursuant to this License Agreement are, and shallotherwise be deemed to be, for purposes of Section 365(n) of Title 11 of the United States Code and other similar laws in anyjurisdiction outside the U.S. (collectively, the "Bankruptcy Laws"), licenses of rights to be "intellectual property" as defined underthe Bankruptcy Laws. If a case is commenced during the term of this License Agreement by or against a Party under the BankruptcyLaws then, unless and until this License Agreement is rejected as provided in such Bankruptcy Laws, such Party (in any capacity,including debtor-in-possession) and its successors and assigns (including a trustee) shall perform all of the obligations provided in thisLicense Agreement to be performed by such Party. If a case is commenced during the term of this License Agreement by or against aParty under the Bankruptcy Laws, this License Agreement is rejected as provided in the Bankruptcy Laws and the other Party electsto retain its rights hereunder as provided in the Bankruptcy Laws, then the Party subject to such case under the Bankruptcy Laws (inany capacity, including debtor-in-possession) and its successors and assigns (including a Title 11 trustee), shall provide to the otherParty copies of all Information necessary for such other Party to prosecute, maintain and enjoy its rights under the terms of thisLicense Agreement promptly upon such other Party's written request therefore. All rights, powers and remedies of the non-bankruptParty as provided herein are in addition to and not in substitution for any and all other rights, powers and remedies now or hereafterexisting at law or in equity (including the Bankruptcy Laws) in the event of the commencement of a case by or against a Party underthe Bankruptcy Laws.2.DEVELOPMENT AND COMMERCIALIZATION OF PRODUCTS.2.1 Development. Zogenix shall use Commercially Reasonable Efforts (a) to conduct such development activities as arenecessary to support the filing of an NDA, and (b) to obtain and maintain regulatory or marketing approval the Licensed Product in theField in the Territory. Zogenix shall be solely responsible for Development expenses in the Field in the Territory, including the fullcosts of any Clinical Trials or other human clinical or pharmacokinetic studies required for the Licensed Product in the Field in theTerritory.2.2 Regulatory. Except with respect to the Altus DMF(s), if any, Zogenix (or its Affiliate or Sublicensee, as applicable)shall own and have the sole responsibility, at its sole expense, for all regulatory filings, submissions and approvals, including INDs andNDAs, for the Licensed Product in the Field in the Territory (collectively, “Zogenix Regulatory Filings”). Zogenix will useCommercially Reasonable Efforts to [***] and will use Commercially Reasonable Efforts to obtain Regulatory Approval of LicensedProduct in a timely manner. Altus shall provide such assistance and information as is reasonably requested by Zogenix in connectionwith any Zogenix Regulatory Filings. Altus will be compensated at a fixed hourly rate of $[***] for such assistance.2.3 Altus DMF(s). Zogenix shall have the right to reference any Altus DMFs applicable to the Licensed Product (whichAltus shall maintain at its sole expense).2.11 Manufacture and Supply; Technology Transfer.***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.2 (a) Zogenix shall be responsible for all aspects of Manufacturing for Commercial use in the Field in theTerritory. Altus may perform certain aspects of Manufacturing for clinical use in the Field in the Territory as set forth in one ormore Work Plan(s).(b) As soon as reasonably practicable following exercise of the Option, Altus shall diligently execute on thetransfer of the analytical methods and Pilot Scale Manufacturing processes for the Licensed Product to a CDMO designated byZogenix for purposes of Commercialization. In connection with the transfer of such methods and processes, Altus shall discloseto Zogenix or to its CDMO (to the extent not previously disclosed) all Altus Know-How available in written or other recordedform, including: (a) the final reports of all in vitro and in vivo studies of Licensed Product conducted by or on behalf of Altus orZogenix; and (b) Altus Know-How related to the Manufacture of Licensed Product, including Manufacturing processes, scale-upinformation, analytical methods, and specifications.2.5 Commercialization. Zogenix shall be solely responsible for Commercialization in the Field, at Zogenix’s sole expense.Following receipt of Regulatory Approval (and in any event [***]), Zogenix shall use Commercially Reasonable Efforts to effect theFirst Commercial Sale, at Zogenix’s sole expense. For clarity, commercially reasonable delays include if the CDMO is not able todeliver sufficient quantities of Licensed Product to meet Zogenix’s forecasts or quota of the Active Ingredient is not available to meetZogenix’s forecasts.2.6 Pharmacovigilance; Recalls. Zogenix will be responsible in the Territory, at its sole expense, for the ‘quality’ ofthe Licensed Product, all necessary monitoring of the Licensed Product in the Territory following receipt of RegulatoryApproval, the setting up and maintenance of pharmacovigilance and medical information systems for the Licensed Product in theTerritory. Altus shall ensure that its licensees of the Licensed Product outside the Territory, if any, are similarly obligated toreport safety data to Zogenix. Zogenix shall have the right and responsibility to control any product recall, field correction orwithdrawal of the Licensed Product in the Territory, whether required by FDA or deemed appropriate by Zogenix, at its soleexpense.2.7 Product Trademarks. Zogenix shall have the sole right, at its sole expense, to select the Licensed Product names andall trademarks used in connection with Commercialization (the “Product Trademarks”) and shall own all such Product Trademarks.2.8 Alliance Managers. Upon the exercise of the Option by Zogenix, each Party will appoint (and notify the other Party ofthe identity of) a senior representative having a general understanding of pharmaceutical Development and Commercialization issues toact as its alliance manager (each, an "Alliance Manager"). The Alliance Managers will serve as the contact point between the Partiesfor the purpose of providing Altus with information on the***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.3 progress of Zogenix’ Development and Commercialization of the Licensed Product and will be primarily responsible for facilitating theflow of information and otherwise promoting communication, coordination and collaboration between the Parties. Each Party mayreplace its Alliance Manager on written notice to the other Party.3.FINANCIAL TERMS OF LICENSE.3.1 Milestones. Upon the first achievement of each of the milestones below, Zogenix shall pay to Altus the correspondingnon‑refundable, non‑creditable milestone payment set forth below:MilestoneMilestonePayment1. [***] .[***]2. [***] .[***]3. Net Sales: When Net Sales for the first time, equal or exceed [***] by the following amounts in [***](individually, a “Net Sales Milestone” and collectively, the “Net Sales Milestones”), subject to Section 3.4below . Net Sales Above [***] of: [***][***][***][***][***][***][***][***][***][***][***][***]The milestone payments above shall be payable [***] after achievement of the applicable milestone. Each of the milestone payments setforth above shall be payable only once, regardless of the Versions included in the Licensed Product.3.2 Royalties. Zogenix shall pay royalties to Altus on Net Sales equal to the following royalty rates (the “Net SalesRoyalties”):(c) From the First Commercial Sale, through [***], [***] and(b) [***]provided, however, should for any reason the Altus Patents cease to contain one or more Valid Claims that would be infringed bythe Manufacture or Commercialization of the Licensed Product in the Territory, then at that time the royalty rate shall be [***]***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.4 3.3 Altus Responsibility for Third Party Payments. Notwithstanding the provisions of this License Agreement, duringthe term of this License Agreement, Altus shall remain responsible for the payment of royalty, milestone and other paymentobligations, if any, due to Third Parties under any Altus Technology or Altus Product Technology which have been licensed to Altusand are sublicensed to Zogenix under this License Agreement, including any such payments due pursuant to the Paladin Agreement.All such payments shall be made by Altus in accordance with the terms of the applicable license agreement.3.4 [***] Due to Altus. Notwithstanding Sections 3.1 and 3.2 during the [***], Altus shall earn [***]. In the event thatNet Sales Royalties and Net Sales Milestones payable in aggregate by Zogenix to Altus for the [***] total in aggregate [***], Zogenixshall [***]. If Net Sales Royalties and Net Sales Milestones payable in aggregate by Zogenix to Altus for the [***] total in aggregate[***], then Zogenix shall [***]. For clarity, the [***] milestones shall [***] in the calculation of the minimum and maximumpayments due to Altus under this Section 3.4.4.PAYMENTS; REPORTS; AUDITS.4.1 Payment; Reports. Royalties under Section 3.2 shall be calculated and reported for each calendar quarter and shall bepaid within [***] after the end of the calendar quarter. Each royalty payment shall be accompanied by a report of Net Sales of LicensedProduct by Zogenix, its Affiliates and their respective Sublicensees in sufficient detail to permit confirmation of the accuracy of thepayment made, including gross sales and Net Sales and the royalty payable.4.2 Manner and Place of Payment. All payment amounts specified in this License Agreement are stated, and allpayments hereunder shall be payable, in U.S. dollars. All payments owed under this License Agreement shall be made by wiretransfer to a bank and account designated in writing by Altus, unless otherwise specified in writing by Altus.4.3 Income Tax Withholding. Altus will pay any and all taxes levied on account of any payments made to it under thisLicense Agreement. If any taxes are required to be withheld by Zogenix from any payment made to Altus under this LicenseAgreement, Zogenix shall (a) deduct such taxes from the payment made to Altus, (b) timely pay the taxes to the proper taxingauthority, and (c) send proof of payment to Altus and certify its receipt by the taxing authority within 30 days following such payment.4.4 Audits. During the Term and for a period of [***] years thereafter, Zogenix shall keep, and shall cause its Affiliates tokeep, complete and accurate records pertaining to the sale or other disposition of the Licensed Product by Zogenix and its Affiliates, insufficient detail to permit Altus to confirm the accuracy of royalty payments due under Section 3.2 and the timing of achievement ofmilestone 3 under Section 3.1. Altus shall have the right to cause an independent, certified public accountant reasonably acceptable toZogenix to audit such records to confirm Net Sales and royalties for a period covering not more than the preceding [***]. Zogenix mayrequire such accountant to***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.5 execute a reasonable confidentiality agreement with Zogenix prior to commencing the audit. Such audits may be conducted duringnormal business hours upon reasonable prior written notice to Zogenix, but no more frequently than [***]. No accounting period ofZogenix shall be subject to audit more than [***] by Altus. Prompt adjustments (including remittances of underpayments oroverpayments disclosed by such audit) shall be made by the Parties to reflect the results of such audit. Altus shall bear the full cost ofsuch audit unless such audit discloses an underpayment by Zogenix of [***] of the amount of payments due under this LicenseAgreement, in which case Zogenix shall bear the full cost of such audit.4.5 Late Payments. In the event that any payment due under this License Agreement is not made when due, such paymentshall accrue interest calculated on a daily basis (both before and after any judgment) at the rate of [***]; provided, however, that in noevent shall such rate exceed the maximum legal annual interest rate. The payment of such interest shall not limit Altus fromexercising any other right under this License Agreement.5.REPRESENTATIONS AND WARRANTIES.5.1 Mutual Representations and Warranties As of Option Exercise Effective Date and Effective Date of LicenseAgreement. Each Party represents and warrants to the other Party that, as of the effective date of the exercise of the Option (the“Option Exercise Effective Date”) and as of the effective date of this License Agreement (if different): (a) it is duly organized andvalidly existing under the laws of its jurisdiction of incorporation or formation, and has full corporate or other power and authority toenter into this License Agreement and to carry out the provisions hereof; (b) it is duly authorized to execute and deliver this LicenseAgreement and to perform its obligations hereunder, and the person or persons executing this License Agreement on its behalf havebeen duly authorized to do so by all requisite corporate action; (c) the execution, delivery and performance of this License Agreementwill not violate any organizational document governing such Party, any agreement to which such Party is a party, or any law or court orgovernmental order, holding or writ by which such Party is bound; and (d) this License Agreement is legally binding upon it,enforceable in accordance with its terms, and does not conflict with any agreement, instrument or understanding, oral or written, towhich it is a party or by which it may be bound, nor violate any material law or regulation of any court, governmental body oradministrative or other agency having jurisdiction over it.5.2 Altus Representations and Warranties as of Option Exercise Effective Date. Altus hereby represents andwarrants to Zogenix that, as of the Option Exercise Effective Date and as of the effective date of this License Agreement (ifdifferent):(a) Exhibit B contains a true, complete and correct list of the existing Altus Patents; provided, however, that Altusmay update Exhibit B (as of the Option Exercise Effective Date) (“Updated Exhibit B”) following Altus’ receipt of written noticeof Zogenix’s intention to exercise the Option at least three (3) days prior to the Option Exercise Effective Date by delivering toZogenix***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.6 such Updated Exhibit B (which shall be attached hereto), in which case the Updated Exhibit B contains a true, complete and correctlist of the existing Altus Patents;(b) Altus Controls the Patents listed in Exhibit B (or Updated Exhibit B, if delivered to Zogenix on or before theOption Exercise Effective Date pursuant to subsection (a) above);(c) Altus has not granted to any Third Party any option, license or other right with respect to the Licensed Product inthe Territory;(d) except as disclosed to Zogenix in writing prior to the Option Exercise Effective Date, Altus is not a party to anylegal action, suit or proceeding relating to the Altus Technology or Altus Product Technology nor is under any known threat to anylegal action, suite, or proceeding;(e) except as disclosed to Zogenix in writing prior to the Option Exercise Effective Date, there is no litigation,regulatory investigation or proceeding, administrative hearing or any other similar proceeding pending or, to the best of its knowledge,threatened against Altus which could adversely affect Altus’ ability to perform its obligations under this License Agreement;(f) the Altus Patents are valid and enforceable, all maintenance fees have been paid in the Territory for theAltus Patents, and, to the best of Altus’ knowledge, neither the Manufacture nor Commercialization in accordance with thisLicense Agreement will infringe any patents, trademarks or other intellectual property rights of any Third Party;(g) except as disclosed to Zogenix in writing prior to the Option Exercise Effective Date, Altus (i) has not receivedany written claim or demand from any Third Party alleging that any infringement, violation or misappropriation of such Third Party'sintellectual property rights has occurred as a result of the Manufacture, use, offer for sale, sale or importation of the Licensed Productin the Territory; (ii) is not aware of any actual, alleged or threatened infringement, violation or misappropriation by a Third Party ofany intellectual property rights Controlled by Altus and covering the Licensed Product or its uses; and (iii) has not received anywritten claim or demand from any Third Party alleging invalidity or unenforceability of any Altus Patents; and(h) the Altus Technology and the Altus Product Technology constitutes all of the intellectual property rights that areControlled by Altus and are necessary for Zogenix to make, have made, use, have used, offer to sell, sell, have sold, import, haveimported and to otherwise Manufacture and Commercialize any Licensed Product in the Territory.5.3 Paladin Agreement.(a) Altus hereby represents and warrants to Zogenix, as of the Option Exercise Effective Date, that: (i) Altus hasprovided to Zogenix a true, complete and correct copy of the Paladin Agreement; (ii) the Paladin Agreement is the only agreementexisting as of the Option Exercise Effective Date by which Altus has licensed from a Third Party any part of the Altus Technology or***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.7 the Altus Product Technology; (iii) Altus is not in breach of the Paladin Agreement and has not submitted to Paladin any notice(written or oral) to the effect that Paladin is in breach of the Paladin Agreement; (iv) Altus has not received from Paladin any notice(written or oral) to the effect that Altus is in breach of the Paladin Agreement; and (v) the Paladin Agreement is legal, valid, binding,enforceable and in full force and effect (except as enforcement may be affected by bankruptcy, insolvency or other similar laws andby general principles of equity).(b) Altus covenants that during the term of this License Agreement:(i) it shall fulfill and comply with all of its obligations under the Paladin Agreement, with which the failureto comply would result in the termination of such Paladin Agreement;(ii) it shall comply with the payment terms under the Paladin Agreement and shall provide to Zogenixwritten evidence of each payment it makes under the Paladin Agreement within [***] of such payment being made; and(iii) it shall not amend the Paladin Agreement in such a manner as could have a material and adverse effecton Zogenix or Zogenix’s rights under this License Agreement.5.4 Insurance. Each Party shall carry and maintain in full force and effect while this Agreement is in effect reasonableinsurance in view of its obligations hereunder, including product liability insurance with a policy limit of at least $[***] per occurrenceand in the aggregate; provided that Zogenix shall have a policy with a limit of [***], and Altus or its its Affiliates or its Sublicensees shallhave a policy limit of [***].Each Party hereto shall name the other Party hereto as an "additional insured" on their respective product liability policies. Each Partyupon request shall provide the other with evidence of such insurance. Each Party shall provide to the other [***] prior written notice ofany proposed cancellation, termination, reduction or change in its coverage. Maintenance of such insurance coverage will not relieve aParty of any responsibility under this Agreement for damage in excess of insurance limits or otherwise.5.5 Disclaimer. Except as expressly set forth in this License Agreement, EACH PARTY EXPRESSLY DISCLAIMSANY AND ALL WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, WRITTEN OR ORAL, INCLUDING THEWARRANTIES OF DESIGN, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF PATENTS,NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, OR ARISING FROM ACOURSE OF DEALING, USAGE OR TRADE PRACTICES.5.6 Limitation of Liability. EXCEPT FOR LIABILITY FOR BREACH OF ARTICLE 7, NEITHER PARTY SHALL BEENTITLED TO RECOVER FROM THE OTHER PARTY ANY SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIALOR PUNITIVE DAMAGES***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.8 (INCLUDING DAMAGES RESULTING FROM LOSS OF USE, LOSS OF PROFITS, INTERRUPTION OR LOSS OFBUSINESS OR OTHER ECONOMIC LOSS) ARISING OUT OF THIS AGREEMENT OR WITH RESPECT TO A PARTY’SPERFORMANCE OR NON-PERFORMANCE HEREUNDER.6.INTELLECTUAL PROPERTY.6.1 Ownership. Sections 5.1 and 5.2 of the D&O Agreement are incorporated herein by this reference.6.2 Patent Prosecution and Maintenance. Altus shall have the sole right, but not the obligation, to control and managethe preparation, filing, prosecution and maintenance of all Altus Patents in the Territory, by counsel of its own choice; provided,however, that Altus shall not file any Altus Patent in the Territory (or amend any Altus Patent filed before the effective date of thisLicense Agreement) which includes, incorporates or is based upon any Development Results without the prior written consent ofZogenix, such consent not to be unreasonably withheld, conditioned or delayed. The costs and expense associated with the preparation,filing, prosecution and maintenance of all Altus Product Patents in the Territory (including the costs associated with counsel) shall bepaid by [***] the costs and expense associated with the preparation, filing, prosecution and maintenance of all Altus TechnologyPatents in the Territory (including the costs associated with counsel) shall be paid by [***]. Altus will, to the maximum extentpracticable, strive to separate any claims within Patents that claim Inventions into separate Patents consisting of claims that claim solelyInventions covering, and exclusively related to the Licensed Product or claims that claim Inventions relevant to, but not exclusivelyrelated to, the Licensed Product. Altus shall consult with Zogenix as to the preparation, filing, prosecution and maintenance of AltusPatents in the Territory reasonably prior to any deadline or action with the U.S. Patent & Trademark Office, and shall furnish toZogenix copies of all relevant documents reasonably in advance of such consultation. In the event that Altus desires not to prepare andfile any Altus Patent in the Territory or to abandon or decline responsibility for any Altus Patent in the Territory, Altus shall providereasonable prior written notice to Zogenix of such intention (which notice shall, in any event, be given no later than [***] prior to thenext deadline for any action that may be taken with respect to such Altus Patent with the U.S. Patent & Trademark Office), andZogenix shall have the right in the Territory, at its sole expense, in consultation with Altus, to prepare, file, prosecute, and maintainsuch Altus Patent. For purposes of this Section 6.2, a Party’s right to prosecute and maintain a Patent shall be deemed to include theright to control any inter parties review, derivation, interference, supplemental examination, post-grant review, reexamination,reissue or opposition proceeding with respect to such Patent, and the right to seek patent term restorations, supplementary protectioncertificates and other forms of patent term extensions with respect to such Patent.6.3 Cooperation. Each Party agrees to cooperate fully in the preparation, filing, prosecution and maintenance of Patentsunder this Article 6. Such cooperation includes: (a) executing all papers and instruments, or requiring its employees or contractors, toexecute such papers and instruments,***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.9 so as to effectuate the ownership of Inventions, and Patents claiming or disclosing such Inventions, and to enable the other Party toapply for and to prosecute patent applications in any country as permitted by Section 6.2; and (b) promptly informing the other Party ofany matters coming to such Party’s attention that may affect the preparation, filing, prosecution or maintenance of any such Patent.6.4 Infringement by Third Parties. In the event that either Altus or Zogenix becomes aware of any infringement orthreatened infringement by a Third Party of any, Altus Patent or Joint Patent in the Territory, it shall promptly notify the other Partyin writing to that effect. To the extent such infringement or threatened infringement relates to the Licensed Product or apharmaceutical product with the Active Ingredient as the sole active ingredient (a “Competitive Product”), Altus and Zogenix shallthereafter consult and cooperate fully to determine a course of action, including the commencement of legal action by either or bothParties consistent with this Section 6.4, to terminate any such infringement, and each Party may hire separate counsel. In connectionwith such cooperation, the Parties, as soon as reasonably practicable, shall negotiate a mutually agreeable joint defense agreement.(a) As between Altus and Zogenix, Zogenix shall have the first right, but not the obligation, upon writtennotice to Altus, and in consultation with Altus to initiate, prosecute and control the enforcement of any Altus Product Patent orJoint Patent against infringement by a Third Party in the Territory through the manufacture, use, marketing, sale, offer for saleor import of a Licensed Product or a Competitive Product. If Zogenix does not institute a proceeding against such Third Partyalleging infringement of the Altus Product Patents or Joint Patents within [***] of a Party's first notice to the other Party ofsuch Third Party infringement, then Altus shall have the right, but not the obligation, to institute such an action against suchThird Party for infringement of such Altus Product Patents or Joint Patents. For clarity, if an action includes both Altus ProductPatents and Altus Technology Patents, this Section 6.4(a) shall govern.(b) As between Altus and Zogenix, Altus shall have the first right, but not the obligation, upon written noticeto Zogenix, and in consultation with Zogenix, to initiate, prosecute and control the enforcement of any Altus Technology Patentagainst infringement by a Third Party in the Territory through the manufacture, use, marketing, sale, offer for sale or import ofa Licensed Product or a Competitive Product. If Altus does not institute a proceeding against such Third Party alleginginfringement of such Altus Technology Patents within [***] of a Party's first notice to the other Party of such Third Partyinfringement, then Zogenix shall have the right, but not the obligation, to institute such an action against such Third Party forinfringement of any of the Altus Technology Patents; provided, however, that Zogenix's right to undertake any such actionalleging infringement of such Altus Technology Patents shall be subject to the prior written consent of Altus, not to beunreasonably withheld or delayed. For clarity, if an action includes both Altus Product Patents and Altus Technology Patents,Section 6.4(a) shall govern.***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.10 (c) The Party pursuing such action shall furnish the other Party with copies of substantive litigationdocuments sufficiently in advance of the due date for such document, permit the other Party to offer its comments thereonbefore such document is due or delivered to the opposing side and consider any such comments in good faith, incorporating suchcomments if reasonable. For any such action under this Section 6.4, in the event that either Party is unable to initiate orprosecute such action solely in its own name or it is otherwise advisable to do so, the other Party will join such action, or agree tohave such action initiated or prosecuted in its name, voluntarily and will execute and cause its Affiliates to execute alldocuments necessary for the enforcing Party to initiate and maintain such action. Each Party shall at its own expense promptlygive to the Party bringing such infringement proceedings such reasonable assistance as the Party bringing the action mayreasonably request.(d) The Party instituting any action under this Section 6.4 may not enter into any settlement, consentjudgment or other voluntary final disposition of such action that settles a Paragraph IV Certification, admits the invalidity orunenforceability of any Patent licensed hereunder, subjects the other Party to an injunction, requires the other Party tocontribute to any monetary payment or otherwise materially and adversely affects the rights licensed hereunder without theprior written consent of the other Party, not to be unreasonably withheld by the other Party.(e) The costs of any such action under this Section 6.4 (including fees of attorneys and other professionals)shall be borne by the Party instituting the action, or, if the Parties elect to cooperate in instituting and maintaining such action,such costs shall be borne by the Parties in such proportions as they may agree in writing. Any recovery obtained as a result of aninfringement action brought under this Section 6.4, whether by judgment, award, decree or settlement, will: (i) first [***]; and(ii) any amounts [***]. [***] shall be entitled to the remaining balance of any such recovery.6.5 Defense of Altus Patents in the Territory. In the event that either Altus or Zogenix becomes aware of any actioninitiated by a Third Party (or any counterclaim or defense asserted in any other action) in the Territory alleging invalidity orunenforceability of any Altus Patents or Joint Patent, such Party will promptly notify the other Party of all the relevant facts andcircumstances known by it in connection with such action. Altus and Zogenix shall thereafter consult and cooperate fully todetermine a course of action consistent with this Section 6.5, and each Party may hire separate counsel. In connection with suchcooperation, the Parties, as soon as reasonably practicable, shall negotiate a mutually agreeable joint defense agreement.(a) As between Altus and Zogenix, Zogenix shall have the first right, but not the obligation, upon writtennotice to Altus, and in consultation with Altus, to defend and control any action initiated by a Third Party (or any counterclaimor defense asserted in any other action) in the Territory alleging invalidity or unenforceability of any Altus Product Patent orJoint Patent. If Zogenix fails to defend any such action initiated by a Third Party (or any***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.11 counterclaim or defense asserted in any other action) within [***] of notice from such Third Party (or, if not possible, suchshorter time period that would permit Altus a reasonable opportunity to respond in a timely manner), Altus shall thereafter havethe right, but not the obligation, to defend and control any such invalidity action, counterclaim or defense in the Territory. Forclarity, if an action includes both Altus Product Patents and Altus Technology Patents, this Section 6.5(a) shall govern.(b) As between Altus and Zogenix, Altus shall have the first right, but not the obligation, upon written noticeto Zogenix, and in consultation with Zogenix, to defend and control any action initiated by a Third Party (or any counterclaim ordefense asserted in any other action) in the Territory alleging invalidity or unenforceability of any Altus Technology Patent. IfAltus fails to defend any such action initiated by a Third Party (or any counterclaim or defense asserted in any other action)within [***] of notice from such Third Party (or, if not possible, such shorter time period that would permit Zogenix areasonable opportunity to respond in a timely manner), Zogenix shall thereafter have the right, but not the obligation, to defendand control any such invalidity action, counterclaim or defense in the Territory; provided, however, that Zogenix's right toundertake any defense of such action relating to such Altus Technology Patents shall be subject to the prior written consent ofAltus, not to be unreasonably withheld or delayed. For clarity, if an action includes both Altus Product Patents and AltusTechnology Patents, Section 6.5(a) shall govern.(c) The Party pursuing such an action shall furnish the other Party with copies of substantive litigationdocuments sufficiently in advance of the due date for such document, permit the other Party to offer its comments thereonbefore such document is due or delivered to the opposing side and consider any such comments in good faith, incorporating suchcomments if reasonable. For any such action under this Section 6.5, in the event that either Party is unable to defend such actionsolely in its own name or it is otherwise advisable to obtain an effective remedy, the other Party will join such action or agree tohave such action initiated or prosecuted in its name, voluntarily and will execute and cause its Affiliates to execute alldocuments necessary for the defending Party to defend such action. Each Party shall at its own expense promptly give to thedefending Party such reasonable assistance as the Party defending the action may reasonably request.6.6 Patent Infringement Claims in the Territory. Each Party shall notify the other Party promptly in writing of anyclaim of, or action for, infringement of any Patents or misappropriation of trade secret rights of any Third Party that is threatened,made or brought against either Party by reason of the development, manufacture, use, sale, offer for sale, importation or exportationof the Licensed Product in the Territory subject to the following;(a) In the event of the institution of any suit by a Third Party against either Party for Patent infringementinvolving the development, manufacture, use, sale, offer for sale, importation or exportation by or on behalf of Zogenix, itsAffiliates or Sublicensees of the***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.12 Licensed Product in the Territory after the Effective Date, Zogenix shall be responsible for the defense of any such suit and,subject to the terms of this Section 6.6, Zogenix shall control such defense. Zogenix shall select defense counsel and, providedthat Zogenix can do so without compromising attorney-client privilege, regularly consult with Altus and its counsel to keepthem reasonably informed on the progress and status of the suit. Altus shall assist Zogenix and cooperate in any such litigation atZogenix's request and cost. No settlement, compromise or other disposition of any such proceeding that subjects Altus to aninjunction or requires Altus to contribute to any monetary payment or otherwise materially and adversely affect Altus’ rightshereunder shall be entered into without Altus’ prior written consent, which consent will not be unreasonably withheld ordelayed.(b) Zogenix shall be responsible for all costs to defend any suit for which it is responsible under this Section6.6, including all fees and costs of attorneys, expert witnesses and other out-of-pocket litigation costs and all damages, penalties,court costs, attorney fees and other payments payable to any such Third Party, whether as a result of any judgment, award,settlement or otherwise (such liability, "Patent Litigation Losses"); provided, however, if such Patent Litigation Losses relateto a Licensed Product feature covered by a Valid Claim in the Altus Patents, Zogenix may offset fifty percent (50%) of all suchPatent Litigation Losses against any future royalties for Licensed Product due to Altus, not to exceed ([***]; provided furtherthat any such set-off when aggregated with other set-offs may not reduce the royalties to Altus by more than fifty percent(50%) in any calendar quarter; provided further in the event that the Patent Litigation Losses that may be offset against anyfuture royalties under this Section 6.6(b) exceed the amount by which Zogenix can offset royalties payable to Altus hereunderin any single calendar quarter, Zogenix shall be entitled to carry forward the excess to offset royalties due to Altus with respectto sales of the Licensed Product in future calendar quarters.(c) In the event a Third Party threatens suit against either Party for Patent infringement involving thedevelopment, manufacture, use, sale, offer for sale, importation, exportation, license or marketing of the Licensed Product inthe Territory, the Parties shall confer with respect to the appropriate course of action, and if they determine that a declaratoryaction is warranted, then with respect to such action, the provisions of this Section 6.6 shall apply thereto with respect to theprosecution of such action and the defense of any claims asserted in response thereto.(d) In the event that either Party becomes aware of a Third Party Patent (other than a [***]) to which alicense would be reasonably required in order to avoid infringement by the Manufacture or Commercialization of the LicensedProduct in the Territory, such Party shall promptly notify the other Party. The Parties shall then confer in good faith withrespect to the appropriate course of action. Zogenix shall have the right to negotiate and obtain such a license or other resolutionand, subject to the terms of this Section 6.6(d) below, Zogenix shall be solely responsible for all costs and obligations under suchlicense (the "Third Party***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.13 License Fees"); provided, however, that: (i) if such license relates to a Licensed Product feature covered by a Valid Claim in theAltus Patents, Zogenix may offset fifty percent (50%) of all such Third Party License Fees against any future royalties forLicensed Product due to Altus, not to exceed [***]; provided further that any such set-off when aggregated with other set-offsmay not reduce the royalties to Altus by more than fifty percent (50%) in any calendar quarter; provided further in the eventthat the Third Party License Fees that may be offset against any future royalties under this Section 6.6(d) exceed the amount bywhich Zogenix can offset royalties payable to Altus hereunder in any single calendar quarter, Zogenix shall be entitled to carryforward the excess to offset royalties due to Altus with respect to sales of the Licensed Product in future calendar quarters. IfAltus does not agree with Zogenix's determination that the license is reasonably required, either Party may submit the matterfor resolution by a single, neutral patent expert mutually agreeable to both Parties with knowledge and experience in thepharmaceutical sector. Such patent expert shall be available for consultation with both Parties jointly and shall render adetermination within [***] after referral of such matter, with the written record of such determination constituting a simplerecommendation as to whether or not taking a license at the time under the circumstances is reasonably required. If such patentexpert determines that a license is not reasonably required in order to avoid infringement by the Manufacture orCommercialization of the Licensed Product in the Territory, Zogenix may not offset any Third Party License Fees associatedwith such license against any future royalties for Licensed Product due to Altus.6.7 Joint Inventions. With respect to the decision to initiate the drafting and filing of a new patent application claiminga Joint Invention, the Parties shall first exchange sufficient information identifying such Joint Invention and discuss in good faiththe relative merits of seeking patent rights thereto and, upon the prior mutual agreement of the Parties to proceed, notunreasonably withheld, Zogenix shall take such actions as are necessary or appropriate to procure, prosecute and maintain a JointPatent (including any issuance, reissuance or reexamination thereof and the defense of any interference, revocation oropposition proceedings related thereto) at Zogenix’s sole cost and expense.6.8 Orange Book Listing. The Parties acknowledge that Zogenix, as holder of any NDA for the Licensed Product,may refer to applicable Altus Patents in the listings for Licensed Products in the FDA’s Approved Drug Product List withTherapeutic Equivalence Evaluations (which lists all products and the patents that cover the products, that have been approvedby the FDA for safety and effectiveness, and explains the therapeutic equivalence code for multi-source products) (the“Orange Book”). At Zogenix’s request, Altus and its Affiliates shall support Zogenix in listing the applicable Altus Patents inthe Orange Book. In the event that any Altus Patent is listed in the Orange Book, Zogenix shall use Commercially ReasonableEfforts to ensure that Altus is listed as the assignee of the Altus Patents and both Zogenix and Altus shall be identified as thepoint of contact for any Paragraph IV notifications. The Parties shall co-***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.14 operate with respect to data exclusivity periods (such as those periods listed in the Orange Book (including any available pediatricextensions)) at Zogenix’s expense.6.9 Paragraph IV Certifications. In the event either Party receives notice that a Third Party has filed a patentcertification under the Hatch-Waxman Act or any successor statute (e.g., a Paragraph IV Certification under 21 C.F.R.§314.50(i) or 314.94(a)(12)) referencing a Patent licensed under Section 1.1, then such Party shall immediately notify theother Party in writing of such notice. The allocation of the right between the Parties to institute an action against a Third Partyfor infringement of Patents listed in the Orange Book covering the Licensed Product in response to such Third Party's filing of aParagraph IV certification referencing such Patent, and the rights and obligations applicable to any actions so brought shall be asset forth in Section 6.4; provided, however, with respect to actions brought in response to a Paragraph IV certification by a ThirdParty, the Party with the first right to institute an action shall be required to notify the other Party whether it intends to exercisesuch first right at least [***] before the expiration of the period within which a patent holder may bring an action forinfringement against such Third Party so that other Party may timely institute an action in the event that such Party does elect toinstitute an action.7.INCORPORATION OF CERTAIN SECTIONS FROM THE D&O AGREEMENT. In addition to thoseSections/Articles incorporated by reference above, Sections 3.9, 3.11, 3.12, Articles 1 (to the extent necessary to interpret thisLicense Agreement), 4, 7, 9 and 10 of the D&O Agreement shall be incorporated herein by this reference.***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to theomitted portions.15Exhibit 10.46EMPLOYMENT TRANSITION AGREEMENTTHIS EMPLOYMENT TRANSITION AGREEMENT (this “Agreement”) is entered into by and between Zogenix, Inc., aDelaware corporation (the “Company”), and Cynthia Y. Robinson, Ph.D. (“Employee”), and shall be effective as of November 1, 2013(the “Effective Date”).WHEREAS, the Company and Employee are parties to that certain Employment Agreement dated as of May 7, 2008 (the“Prior Agreement”);WHEREAS, Employee is currently the Chief Development Officer of the Company; andWHEREAS, the Company desires to continue to employ Employee, and Employee desires to continue employment with theCompany in a new role, through May 31, 2014 (the “Expiration Date”), on the terms and conditions set forth in this Agreement.NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties agree as follows:1. Services to Be Rendered.(a) Duties and Responsibilities. As of the Effective Date, Employee will resign her position as Chief Development Officer ofthe Company (or such other title as she then holds) (and any other officer positions she may hold with the Company or any of itssubsidiaries), and agrees she shall thereafter continue to serve the Company as an employee in the role of Advisor to the President of theCompany. Following the Effective Date, Employee shall not be an executive officer of the Company. In the performance of theforegoing duties, Employee shall report directly to the President and shall be subject to the direction of the President and to such limitsupon Employee’s authority as the President may from time to time impose. In the event of the President’s incapacity or unavailability,Employee shall be subject to the direction of the Chief Executive Officer (“CEO”) of the Company. Employee’s primary place of workshall be the Company’s facility in Emeryville, California. Employee shall also render services at such other places within or outside theUnited States as the President may direct from time to time. Employee shall be subject to and comply with the policies and proceduresgenerally applicable to senior employees of the Company to the extent the same are not inconsistent with any term of this Agreement.(b) Exclusive Services. Employee shall at all times faithfully, industriously and to the best of her ability, experience and talentperform to the satisfaction of the Board of Directors of the Company (the “Board”) and the President all of the duties that may beassigned to Employee hereunder. Employee shall devote such portion of her productive time and efforts to the performance of suchduties as is mutually agreed upon from time to time by Employee and the President. Subject to the terms of the Employee ProprietaryInformation and Inventions Agreement referred to in Section 4(b), this shall not preclude Employee from devoting time to personal andfamily investments or serving on community and civic boards, or participating in industry associations, provided such activities do notinterfere with her duties to1the Company, as determined in good faith by the President. Employee agrees that she will not join any boards, other thancommunity and civic boards (which do not interfere with her duties to the Company), without the prior approval of the President.(c) Term. The term of Employee’s employment pursuant to this Agreement will commence on the Effective Dateand shall automatically terminate on the Expiration Date, or upon any earlier termination of this Agreement pursuant to Section 3(a) ofthis Agreement by either party (the date on which Employee’s employment terminates, the “Termination Date”). Effective as of theTermination Date, Employee hereby agrees to resign her employment, her position as Advisor to the President (and any other titles orpositions she may hold) of the Company or any of its affiliates. Employee shall execute any additional documentation necessary toeffectuate such resignations.2.Compensation and Benefits. The Company shall pay or provide, as the case may be, to Employee the compensationand other benefits and rights set forth in this Section 2.(a)Base Salary. For the period commencing on the Effective Date and ending on the Expiration Date, the Companyshall pay to Employee a base salary of $24,072.19 per month. The Employee’s base salary shall be payable in accordance with theCompany’s usual pay practices (and in any event no less frequently than monthly).(b)Bonus. Employee shall be eligible to receive an annual bonus for 2013 pursuant to the Company’s annualbonus plan for the senior employees of the Company. Employee will not be eligible for an annual bonus for 2014. Employee’s targetannual bonus for 2013 shall be $75,000.(c)Benefits. Employee shall be entitled to participate in benefits under the Company’s benefit plans andarrangements, including, without limitation, any employee benefit plan or arrangement made available in the future by the Company toits senior employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans andarrangements. The Company shall have the right to amend or delete any such benefit plan or arrangement made available by theCompany to its senior employees and not otherwise specifically provided for herein.(d)Expenses. The Company shall reimburse Employee for reasonable out-of-pocket business expensesincurred in connection with the performance of her duties hereunder, subject to (i) such policies as the Company may from time to timeestablish, (ii) Employee furnishing the Company with evidence in the form of receipts satisfactory to the Company substantiating theclaimed expenditures, (iii) Employee receiving advance approval from the CEO in the case of expenses for travel outside of NorthAmerica, and (iv) Employee receiving advance approval from the CEO in the case of expenses (or a series of related expenses) inexcess of $5,000. Any amounts payable under this Section 2(d) shall be made in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv) and shall be paid on or before the last day of Employee’s taxable year following the taxable year in which Employee incurredthe expenses. The amounts provided under this Section 2(d) during any taxable year of Employee’s will not affect such amountsprovided in any other taxable year of Employee’s, and2Employee’s right to reimbursement for such amounts shall not be subject to liquidation or exchange for any other benefit.(e)Paid Time Off. Employee shall be entitled to such periods of paid time off (“PTO”) each year as providedfrom time to time under the Company’s PTO policy and as otherwise provided for senior employees.(f)Stock Options. During the term of her employment hereunder, Employee’s stock options shall continue tovest and be exercisable in accordance with the terms of the stock option agreements and the equity plans pursuant to which such stockoptions were issued.3. Termination of Employment. Employee shall be entitled to receive benefits upon her termination of employment only asset forth in this Section 3:(a) At-Will Employment; Termination. The Company and Employee acknowledge that Employee’s employment isand shall continue to be at-will, as defined under applicable law, and that Employee’s employment with the Company may be terminatedby either party at any time for any or no reason, with or without notice. If Employee’s employment terminates for any reason,Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided in this Agreement.Employee’s employment under this Agreement shall be terminated immediately on the death of Employee.(b) Payments Upon Termination of Employment.(i) In the event of Employee’s termination of employment by the Company for any reason, except asotherwise provided in Section 3(b)(ii) below, the Company shall not have any other or further obligations to Employee under thisAgreement (including any financial obligations) except that Employee shall be entitled to receive (i) Employee’s fully earned but unpaidbase salary, through the Termination Date at the rate then in effect, and (ii) all other amounts or benefits to which Employee is entitledunder any compensation, retirement or benefit plan or practice of the Company at the time of termination in accordance with the termsof such plans or practices, including, without limitation, any continuation of benefits required by COBRA or applicable law. In addition,all vesting of Employee’s unvested stock options previously granted to her by the Company shall cease and none of such unvested stockoptions shall be exercisable following the Termination Date. The foregoing shall be in addition to, and not in lieu of, any and all otherrights and remedies which may be available to the Company under the circumstances, whether at law or in equity.(ii) In the event of Employee’s termination of employment by the Company without Cause (as definedbelow), in addition to the amounts or benefits specified in Section 3(b)(i) above, and subject to Section 3(b)(iii) and 9(o) and Employee’scontinued compliance with Section 4, Employee shall be entitled to receive, in lieu of any severance benefits to which Employee mayotherwise be entitled under any severance plan or program of the Company, the benefits provided below:3(A) an amount equal to the remaining base salary payable to Employee pursuant to Section 2(a)through the Expiration Date, payable in a lump sum within ten (10) days following the effective date of Employee’s Release (as definedbelow);(B) to the extent Employee’s termination of employment by the Company without Cause occursprior to the date on which annual bonuses are paid for 2013 pursuant to the Company’s annual bonus plan, Employee’s target annualbonus for 2013 (which target bonus will be pro-rated to the extent Employee’s termination of employment occurs prior to December31, 2013), payable in a lump sum within ten (10) days following the effective date of Employee’s Release; and(C) for the period beginning on the date of Employee’s termination of employment and ending on theExpiration Date (or, if earlier, (1) the date on which the applicable continuation period under the Consolidated Omnibus BudgetReconciliation Act of 1985, as amended (“COBRA”) expires or (2) the date Employee becomes eligible to receive the equivalent orincreased healthcare coverage from a subsequent employer) (such period, the “COBRA Coverage Period”), if Employee elects to haveCOBRA coverage and is eligible for such coverage, the Company shall reimburse Employee on a monthly basis for an amount equal to(1) the monthly premium Employee or her dependents is required to pay for continuation coverage pursuant to COBRA for Employee(if applicable) and her eligible dependents who were covered under the Company’s health plans as of the date of Employee’s terminationof employment (calculated by reference to the premium as of the date of Employee’s termination of employment) less (2) the amountEmployee would have had to pay to receive group health coverage form Employee and her dependents based on the cost sharing levelsin effect on the date of Employee’s termination of employment (the “Monthly Company Payment Amount”). If any of the Company’shealth benefits are self-funded as of the date of Employee’s termination of employment, or if the Company cannot provide theforegoing benefits in a manner that is exempt from Section 409A (as defined below) or that is otherwise compliant with applicable law(including, without limitation, Section 2716 of the Public Health Service Act), instead of providing the reimbursements as set forthabove, the Company shall instead pay to Employee a taxable monthly payment for the COBRA Coverage Period equal to the MonthlyCompany Payment Amount. Employee shall be solely responsible for all matters relating to her continuation of coverage pursuant toCOBRA, including, without limitation, her election of such coverage and her timely payment of premiums.The foregoing severance benefits shall be the exclusive severance benefits to which Employee is entitled.(iii) As a condition to Employee’s receipt of any post-termination benefits pursuant to Section 3(b)(ii) above,Employee shall execute and not revoke a general release of all claims in favor of the Company (the “Release”) in the form attachedhereto as Exhibit A. In the event Employee’s Release does not become effective within the fifty-five (55) day period following the dateof Employee’s termination of employment, Employee shall not be entitled to the aforesaid payments and benefits.(iv) “Cause” means any of the following:4(A) the commission of an act of fraud, embezzlement or dishonesty by Employee, or the commissionof some other illegal act by Employee, that has a material adverse impact on the Company or any successor or affiliate thereof;(B) a conviction of, or plea of “guilty” or “no contest” to, a felony by Employee;(C) any unauthorized use or disclosure by Employee of confidential information or trade secrets ofthe Company or any successor or affiliate thereof that has, or may reasonably be expected to have, a material adverse impact on any suchentity;(D) Employee’s gross negligence, insubordination or material violation of any duty of loyalty to theCompany or any successor or affiliate thereof, or any other material misconduct on the part of Employee;(E) Employee’s ongoing and repeated failure or refusal to perform or neglect of Employee’s duties asrequired by this Agreement, which failure, refusal or neglect continues for fifteen (15) days following Employee’s receipt of writtennotice from the Board or the CEO stating with specificity the nature of such failure, refusal or neglect; or(F) Employee’s breach of any Company policy or any material provision of this Agreement;provided, however, that prior to the determination that “Cause” under this Section 3(b)(iv) has occurred, the Company shall (A) provideto Employee in writing, in reasonable detail, the reasons for the determination that such “Cause” exists, (B) other than with respect toclause (v) above which specifies the applicable period of time for Employee to remedy her breach, afford Employee a reasonableopportunity to remedy any such breach, (C) provide Employee an opportunity to be heard prior to the final decision to terminateEmployee’s employment hereunder for such “Cause” and (D) make any decision that such “Cause” exists in good faith.The foregoing definition shall not in any way preclude or restrict the right of the Company or any successor or affiliatethereof to discharge or dismiss Employee for any other acts or omissions, but such other acts or omissions shall not be deemed, forpurposes of this Agreement, to constitute grounds for termination for Cause.(c) Exclusive Remedy. Except as otherwise expressly required by law (e.g., COBRA) or as specifically providedherein, all of Employee’s rights to salary, severance, benefits, bonuses and other amounts hereunder (if any) accruing after thetermination of Employee’s employment shall cease upon such termination. In the event of Employee’s termination of employmentwith the Company, Employee’s sole remedy shall be to receive the payments and benefits described in this Section 3. In addition,Employee acknowledges and agrees that she is not entitled to any reimbursement by the Company for any taxes payable by Employee asa result of the payments and benefits received by Employee pursuant to this Section 3, including, without limitation, any excise taximposed by Section 4999 of the Internal Revenue Code of 1986, as amended from time to time, and the Treasury Regulations and otherinterpretive guidance issued thereunder (the “Code”).5(d) Return of the Company’s Property. In the event of Employee’s termination of employment for any reason, theCompany shall have the right, at its option, to require Employee to vacate her offices prior to or on the effective date of separation and tocease all activities on the Company’s behalf. Upon Employee’s termination of employment in any manner, and as a condition toEmployee’s receipt of any severance benefits described in this Agreement, Employee shall immediately surrender to the Company alllists, books and records of, or in connection with, the Company’s business, and all other property belonging to the Company, it beingdistinctly understood that all such lists, books and records, and other documents, are the property of the Company. Employee shalldeliver to the Company a signed statement certifying compliance with this Section 3(d) prior to the receipt of any severance benefitsdescribed in this Agreement.(e) Waiver of the Company’s Liability. Employee recognizes that her employment is subject to termination with orwithout cause for any reason and therefore Employee agrees that Employee shall hold the Company harmless from and against any andall liabilities, losses, damages, costs and expenses, including but not limited to, court costs and reasonable attorneys’ fees, whichEmployee may incur as a result of Employee’s termination of employment. Employee further agrees that Employee shall bring noclaim or cause of action against the Company for damages or injunctive relief based on a wrongful termination of employment.Employee agrees that the sole liability of the Company to Employee upon termination of this Agreement shall be that determined bythis Section 3. In the event this covenant is more restrictive than permitted by laws of the jurisdiction in which the Company seeksenforcement thereof, this covenant shall be limited to the extent permitted by law.4. Certain Covenants.(a) Noncompetition. Except as may otherwise be approved by the President, during the term of Employee’s employment,Employee shall not have any ownership interest (of record or beneficial) in, or have any interest as an employee, salesman, consultant,officer or director in, or otherwise aid or assist in any manner, any firm, corporation, partnership, proprietorship or other business thatengages in any county, city or part thereof in the United States and/or any foreign country in a business which competes directly orindirectly (as determined by the President) with the Company’s business in such county, city or part thereof, so long as the Company, orany successor in interest of the Company to the business and goodwill of the Company, remains engaged in such business in suchcounty, city or part thereof or continues to solicit customers or potential customers therein; provided, however, that Employee mayown, directly or indirectly, solely as an investment, securities of any entity which are traded on any national securities exchange ifEmployee (i) is not a controlling person of, or a member of a group which controls, such entity; or (ii) does not, directly or indirectly,own one percent (1%) or more of any class of securities of any such entity.(b) Confidential Information. Employee and the Company have entered into the Company’s standard employee proprietaryinformation and inventions agreement (the “Employee Proprietary Information and Inventions Agreement”). Employee agrees toperform each and every obligation of Employee therein contained.6(c) Solicitation of Employees. Employee shall not during the term of Employee’s employment and for a period of twelve(12) months thereafter (the “Restricted Period”), directly or indirectly, solicit or encourage to leave the employment of the Company orany of its affiliates, any employee of the Company or any of its affiliates.(d) Solicitation of Consultants. Employee shall not during the term of Employee’s employment and for the Restricted Period,directly or indirectly, hire, solicit or encourage to cease work with the Company or any of its affiliates any consultant then undercontract with the Company or any of its affiliates within one year of the termination of such consultant’s engagement by the Companyor any of its affiliates.(e) Rights and Remedies Upon Breach. If Employee breaches or threatens to commit a breach of any of the provisions of thisSection 4 (the “Restrictive Covenants”), the Company shall have the following rights and remedies, each of which rights and remediesshall be independent of the other and severally enforceable, and all of which rights and remedies shall be in addition to, and not in lieu of,any other rights and remedies available to the Company under law or in equity:(i) Specific Performance. The right and remedy to have the Restrictive Covenants specifically enforced byany court having equity jurisdiction, all without the need to post a bond or any other security or to prove any amount of actual damage orthat money damages would not provide an adequate remedy, it being acknowledged and agreed that any such breach or threatened breachwill cause irreparable injury to the Company and that money damages will not provide adequate remedy to the Company; and(ii) Accounting and Indemnification. The right and remedy to require Employee (A) to account for and payover to the Company all compensation, profits, monies, accruals, increments or other benefits derived or received by Employee or anyassociated party deriving such benefits as a result of any such breach of the Restrictive Covenants; and (B) to indemnify the Companyagainst any other losses, damages (including special and consequential damages), costs and expenses, including actual attorneys’ fees andcourt costs, which may be incurred by them and which result from or arise out of any such breach or threatened breach of theRestrictive Covenants.(f) Severability of Covenants/Blue Pencilling. If any court determines that any of the Restrictive Covenants, or anypart thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given fulleffect, without regard to the invalid portions. If any court determines that any of the Restrictive Covenants, or any part thereof, areunenforceable because of the duration of such provision or the area covered thereby, such court shall have the power to reduce theduration or area of such provision and, in its reduced form, such provision shall then be enforceable and shall be enforced. Employeehereby waives any and all right to attack the validity of the Restrictive Covenants on the grounds of the breadth of their geographic scopeor the length of their term.(g) Enforceability in Jurisdictions. The Company and Employee intend to and do hereby confer jurisdiction to enforcethe Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of such covenants. If the courts of any one ormore7of such jurisdictions hold the Restrictive Covenants wholly unenforceable by reason of the breadth of such scope or otherwise, it is theintention of the Company and Employee that such determination not bar or in any way affect the right of the Company to the reliefprovided above in the courts of any other jurisdiction within the geographical scope of such covenants, as to breaches of such covenantsin such other respective jurisdictions, such covenants as they relate to each jurisdiction being, for this purpose, severable into diverse andindependent covenants.(h) Definitions. For purposes of this Section 4, the term “Company” means not only Zogenix, Inc., but also anycompany, partnership or entity which, directly or indirectly, controls, is controlled by or is under common control with Zogenix, Inc.5. Arbitration. Any dispute, claim or controversy based on, arising out of or relating to Employee’s employment or thisAgreement shall be settled by final and binding arbitration in San Diego, California, before a single neutral arbitrator in accordance withthe National Rules for the Resolution of Employment Disputes (the “Rules”) of the American Arbitration Association, and judgment onthe award rendered by the arbitrator may be entered in any court having jurisdiction. Arbitration may be compelled pursuant to theCalifornia Arbitration Act (Code of Civil Procedure §§ 1280 et seq.). If the parties are unable to agree upon an arbitrator, one shall beappointed by the AAA in accordance with its Rules. Each party shall pay the fees of its own attorneys, the expenses of its witnesses andall other expenses connected with presenting its case; however, Employee and the Company agree that, to the extent permitted by law,the arbitrator may, in his or her discretion, award reasonable attorneys’ fees to the prevailing party; provided, further, that the prevailingparty shall be reimbursed for such fees, costs and expenses within forty-five (45) days following any such award, but in no event laterthan the last day of the Employee’s taxable year following the taxable year in which the fees, costs and expenses were incurred;provided, further, that the parties’ obligations pursuant to this sentence shall terminate on the tenth (10th) anniversary of theTermination Date. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, AAA’s administrativefees, the fee of the arbitrator, and all other fees and costs, shall be borne by the Company. This Section 5 is intended to be the exclusivemethod for resolving any and all claims by the parties against each other for payment of damages under this Agreement or relating toEmployee’s employment; provided, however, that neither this Agreement nor the submission to arbitration shall limit the parties’ rightto seek provisional relief, including without limitation injunctive relief, in any court of competent jurisdiction pursuant to CaliforniaCode of Civil Procedure § 1281.8 or any similar statute of an applicable jurisdiction. Seeking any such relief shall not be deemed to be awaiver of such party’s right to compel arbitration. Both Employee and the Company expressly waive their right to a jury trial.6. General Relationship. Employee shall be considered an employee of the Company within the meaning of all federal, stateand local laws and regulations including, but not limited to, laws and regulations governing unemployment insurance, workers’compensation, industrial accident, labor and taxes.7. Miscellaneous.8(a) Modification; Prior Claims. This Agreement and the Employee Proprietary Information and Inventions Agreementset forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements betweenthem concerning such subject matter, including the Prior Agreement. This Agreement may be amended or modified only with thewritten consent of Employee and an authorized representative of the Company. No oral waiver, amendment or modification will beeffective under any circumstances whatsoever.(b) Assignment; Assumption by Successor. The rights of the Company under this Agreement may, without theconsent of Employee, be assigned by the Company, in its sole and unfettered discretion, to any person, firm, corporation or otherbusiness entity which at any time, whether by purchase, merger or otherwise, directly or indirectly, acquires all or substantially all ofthe assets or business of the Company. The Company will require any successor (whether direct or indirect, by purchase, merger orotherwise) to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform thisAgreement in the same manner and to the same extent that the Company would be required to perform it if no such succession hadtaken place; provided, however, that no such assumption shall relieve the Company of its obligations hereunder. As used in thisAgreement, the “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaidwhich assumes and agrees to perform this Agreement by operation of law or otherwise.(c) Survival. The covenants, agreements, representations and warranties contained in or made in Sections 3, 4, 5 and7 of this Agreement shall survive any Employee’s termination of employment.(d) Third‑Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rightsenforceable by any person not a party to this Agreement.(e) Waiver. The failure of either party hereto at any time to enforce performance by the other party of any provisionof this Agreement shall in no way affect such party’s rights thereafter to enforce the same, nor shall the waiver by either party of anybreach of any provision hereof be deemed to be a waiver by such party of any other breach of the same or any other provision hereof.(f) Section Headings. The headings of the several sections in this Agreement are inserted solely for the convenienceof the parties and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof.(g) Notices. Any notice required or permitted by this Agreement shall be in writing and shall be delivered as followswith notice deemed given as indicated: (i) by personal delivery when delivered personally; (ii) by overnight courier upon writtenverification of receipt; (iii) by email, telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or(iv) by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to Employee at the addresslisted on the Company’s personnel records and to the Company at its principal place of business, or such other address as either partymay specify in writing.9(h) Severability. All Sections, clauses and covenants contained in this Agreement are severable, and in the event anyof them shall be held to be invalid by any court, this Agreement shall be interpreted as if such invalid Sections, clauses or covenantswere not contained herein.(i) Governing Law and Venue. This Agreement is to be governed by and construed in accordance with the laws of theState of California applicable to contracts made and to be performed wholly within such State, and without regard to the conflicts of lawsprinciples thereof. Except as provided in Sections 4 and 5, any suit brought hereon shall be brought in the state or federal courts sitting inSan Diego, California, the parties hereto hereby waiving any claim or defense that such forum is not convenient or proper. Each partyhereby agrees that any such court shall have in personam jurisdiction over it and consents to service of process in any manner authorizedby California law.(j) Non-transferability of Interest. None of the rights of Employee to receive any form of compensation payablepursuant to this Agreement shall be assignable or transferable except through a testamentary disposition or by the laws of descent anddistribution upon the death of Employee. Any attempted assignment, transfer, conveyance, or other disposition (other than as aforesaid)of any interest in the rights of Employee to receive any form of compensation to be made by the Company pursuant to this Agreementshall be void.(k) Gender. Where the context so requires, the use of the masculine gender shall include the feminine and/or neutergenders and the singular shall include the plural, and vice versa, and the word “person” shall include any corporation, firm, partnershipor other form of association.(l) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed anoriginal, but all of which together shall constitute one and the same Agreement.(m) Construction. The language in all parts of this Agreement shall in all cases be construed simply, according to itsfair meaning, and not strictly for or against any of the parties hereto. Without limitation, there shall be no presumption against any partyon the ground that such party was responsible for drafting this Agreement or any part thereof.(n) Withholding and other Deductions. All compensation payable to Employee hereunder shall be subject to suchdeductions as the Company is from time to time required to make pursuant to law, governmental regulation or order.(o) Code Section 409A Exempt.(i) This Agreement is not intended to provide for any deferral of compensation subject to Section 409A of the Code, and,accordingly, the amounts payable hereunder shall be paid no later than the later of: (A) the fifteenth (15th) day of the third monthfollowing Employee’s first taxable year in which such amounts are no longer subject to a substantial risk of forfeiture, and (B) thefifteenth (15th) day of the third month following first taxable year of the Company in which such amounts are no longer subject tosubstantial10risk of forfeiture, as determined in accordance with Code Section 409A and any Treasury Regulations and other guidance issuedthereunder. To the extent applicable, this Agreement shall be interpreted in accordance with Code Section 409A and Department ofTreasury regulations and other interpretive guidance issued thereunder. Each series of installment payments made under thisAgreement is hereby designated as a series of “separate payments” within the meaning of Section 409A of the Code. For purposes of thisAgreement, all references to Employee’s “termination of employment” shall mean Employee’s “separation from service,” as definedin Treasury Regulation Section 1.409A-1(h) (a “Separation from Service”). (ii) If the Employee is a “specified employee” (as defined in Section 409A of the Code), as determined by theCompany in accordance with Section 409A of the Code, on the date of the Employee’s Separation from Service, to the extent that thepayments or benefits under this Agreement are subject to Section 409A of the Code and the delayed payment or distribution of all or anyportion of such amounts to which Employee is entitled under this Agreement is required in order to avoid a prohibited distribution underSection 409A(a)(2)(B)(i) of the Code, then such portion deferred pursuant to this Section 7(o)(ii) shall be paid or distributed toEmployee in a lump sum on the earlier of (A) the date that is six (6)-months following Employee’s Separation from Service, (B) thedate of Employee’s death or (C) the earliest date as is permitted under Section 409A of the Code. Any remaining payments due underthe Agreement shall be paid as otherwise provided herein.(iii) To the extent applicable, this Agreement shall be interpreted in accordance with the applicableexemptions from Section 409A of the Code. If Employee and the Company determine that any payments or benefits payable under thisAgreement intended to comply with Sections 409A(a)(2), (3) and (4) of the Code do not comply with Section 409A of the Code,Employee and the Company agree to amend this Agreement, or take such other actions as Employee and the Company deem reasonablynecessary or appropriate, to comply with the requirements of Section 409A of the Code and the Treasury Regulations thereunder (andany applicable transition relief) while preserving the economic agreement of the parties. If any provision of the Agreement would causesuch payments or benefits to fail to so comply, such provision shall not be effective and shall be null and void with respect to suchpayments or benefits, and such provision shall otherwise remain in full force and effect.(p)RIGHT TO ADVICE OF COUNSEL. EMPLOYEE ACKNOWLEDGES THAT HE HAS THE RIGHT,AND IS ENCOURAGED, TO CONSULT WITH HER LAWYER; BY HER SIGNATURE BELOW, EMPLOYEEACKNOWLEDGES THAT SHE HAS CONSULTED, OR HAS ELECTED NOT TO CONSULT, WITH HER LAWYERCONCERNING THIS RELEASE.(Signature Page Follows)11IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above.ZOGENIX, INC.By: /s/ Stephen Farr Name: Stephen Farr Title: President EMPLOYEE /s/ Cynthia Y. Robinson, Ph.D. Cynthia Y. Robinson, Ph.D.[SIGNATURE PAGE TO EMPLOYMENT TRANSITION AGREEMENT]EXHIBIT AGENERAL RELEASE OF CLAIMS[The language in this Release may change based on legal developments and evolving best practices; this form is provided as anexample of what will be included in the final Release document.]This General Release of Claims (“Release”) is entered into as of this ____ day of _______, _____, between Cynthia Y.Robinson, Ph.D. (“Employee”), and Zogenix, Inc., a Delaware corporation (the “Company”) (collectively referred to herein as the“Parties”).WHEREAS, Employee and the Company are parties to that certain Employment Transition Agreement effective as ofNovember 1, 2013 (the “Agreement”);WHEREAS, the Parties agree that Employee is entitled to certain severance benefits under the Agreement, subject toEmployee’s execution of this Release; andWHEREAS, the Company and Employee now wish to fully and finally to resolve all matters between them.NOW, THEREFORE, in consideration of, and subject to, the severance benefits payable to Employee pursuant to theAgreement, the adequacy of which is hereby acknowledged by Employee, and which Employee acknowledges that he or she would nototherwise be entitled to receive, Employee and the Company hereby agree as follows:1. General Release of Claims by Employee.(a) Employee, on behalf of himself or herself and his or her executors, heirs, administrators, representatives andassigns, hereby agrees to release and forever discharge the Company and all predecessors, successors and their respective parentcorporations, affiliates, related, and/or subsidiary entities, and all of their past and present investors, directors, shareholders, officers,general or limited partners, employees, attorneys, agents and representatives, and the employee benefit plans in which Employee is orhas been a participant by virtue of his or her employment with or service to the Company (collectively, the “Company Releasees”),from any and all claims, debts, demands, accounts, judgments, rights, causes of action, equitable relief, damages, costs, charges,complaints, obligations, promises, agreements, controversies, suits, expenses, compensation, responsibility and liability of every kindand character whatsoever (including attorneys’ fees and costs), whether in law or equity, known or unknown, asserted or unasserted,suspected or unsuspected (collectively, “Claims”), which Employee has or may have had against such entities based on any events orcircumstances arising or occurring on or prior to the date hereof or on or prior to the date hereof, arising directly or indirectly out of,relating to, or in any other way involving in any manner whatsoever Employee’s employment by or service to the Company or thetermination thereof, including any and all claims arising under federal, state, or local laws relating to employment, including withoutlimitation claims of wrongful discharge, breach of express or implied contract, fraud,1misrepresentation, defamation, or liability in tort, and claims of any kind that may be brought in any court or administrative agencyincluding, without limitation, claims under Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. Section 2000, et seq.; theAmericans with Disabilities Act, as amended, 42 U.S.C. § 12101 et seq.; the Rehabilitation Act of 1973, as amended, 29 U.S.C. § 701 etseq.; the Civil Rights Act of 1866, and the Civil Rights Act of 1991; 42 U.S.C. Section 1981, et seq.; the Age Discrimination inEmployment Act, as amended, 29 U.S.C. Section 621, et seq. (the “ADEA”); the Equal Pay Act, as amended, 29 U.S.C. Section206(d); regulations of the Office of Federal Contract Compliance, 41 C.F.R. Section 60, et seq.; the Family and Medical Leave Act, asamended, 29 U.S.C. § 2601 et seq.; the Fair Labor Standards Act of 1938, as amended, 29 U.S.C. § 201 et seq.; the EmployeeRetirement Income Security Act, as amended, 29 U.S.C. § 1001 et seq.; and the California Fair Employment and Housing Act,California Government Code Section 12940, et seq.Notwithstanding the generality of the foregoing, Employee does not release the following claims:(i) Claims for unemployment compensation or any state disability insurance benefits pursuant to the terms ofapplicable state law; (ii) Claims for workers’ compensation insurance benefits under the terms of any worker’s compensation insurancepolicy or fund of the Company;(iii) Claims pursuant to the terms and conditions of the federal law known as COBRA; (iv) Claims for indemnity under the bylaws of the Company, as provided for by California law or under any applicableinsurance policy with respect to Employee’s liability as an employee, director or officer of the Company;(v) Claims based on any right Employee may have to enforce the Company’s executory obligations under theAgreement; and(vi) Claims Employee may have to vested or earned compensation and benefits. (b) EMPLOYEE ACKNOWLEDGES THAT HE OR SHE HAS BEEN ADVISED OF AND IS FAMILIAR WITHTHE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS:“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOTKNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE,WHICH, IF KNOWN BY HIM OR HER, MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENTWITH THE DEBTOR.”2BEING AWARE OF SAID CODE SECTION, EMPLOYEE HEREBY EXPRESSLY WAIVES ANY RIGHTS HE OR SHE MAYHAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON LAW PRINCIPLES OF SIMILAREFFECT.(c) Employee acknowledges that this Release was presented to him or her on the date indicated above and thatEmployee is entitled to have twenty-one (21) days’ time in which to consider it. Employee further acknowledges that the Company hasadvised him or her that he or she is waiving his or her rights under the ADEA, and that Employee should consult with an attorney of hisor her choice before signing this Release, and Employee has had sufficient time to consider the terms of this Release. Employeerepresents and acknowledges that if Employee executes this Release before twenty-one (21) days have elapsed, Employee does soknowingly, voluntarily, and upon the advice and with the approval of Employee’s legal counsel (if any), and that Employee voluntarilywaives any remaining consideration period.(d) Employee understands that after executing this Release, Employee has the right to revoke it within seven (7)days after his or her execution of it. Employee understands that this Release will not become effective and enforceable unless the seven(7) day revocation period passes and Employee does not revoke the Release in writing. Employee understands that this Release may notbe revoked after the seven (7) day revocation period has passed. Employee also understands that any revocation of this Release must bemade in writing and delivered to the Company at its principal place of business within the seven (7) day period.(e) Employee understands that this Release shall become effective, irrevocable, and binding upon Employee on theeighth (8th) day after his or her execution of it, so long as Employee has not revoked it within the time period and in the mannerspecified in clause (d) above.(f) Employee further understands that Employee will not be given any severance benefits under the Agreementunless this Release is effective on or before the date that is fifty-five (55) days following the date of Employee’s termination ofemployment.2. No Assignment. Employee represents and warrants to the Company Releasees that there has been no assignment or othertransfer of any interest in any Claim that Employee may have against the Company Releasees. Employee agrees to indemnify and holdharmless the Company Releasees from any liability, claims, demands, damages, costs, expenses and attorneys’ fees incurred as a resultof any such assignment or transfer from Employee.3. Severability. In the event any provision of this Release is found to be unenforceable by an arbitrator or court of competentjurisdiction, such provision shall be deemed modified to the extent necessary to allow enforceability of the provision as so limited, itbeing intended that the parties shall receive the benefit contemplated herein to the fullest extent permitted by law. If a deemedmodification is not satisfactory in the judgment of such arbitrator or court, the unenforceable provision shall be deemed deleted, and thevalidity and enforceability of the remaining provisions shall not be affected thereby.4. Interpretation; Construction. The headings set forth in this Release are for convenience only and shall not be used ininterpreting this Agreement. This Release has been3drafted by legal counsel representing the Company, but Employee has participated in the negotiation of its terms. Furthermore,Employee acknowledges that Employee has had an opportunity to review and revise the Release and have it reviewed by legal counsel,if desired, and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting partyshall not be employed in the interpretation of this Release. Either party’s failure to enforce any provision of this Release shall not in anyway be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision ofthis Release.5. Governing Law and Venue. This Release will be governed by and construed in accordance with the laws of the UnitedStates of America and the State of California applicable to contracts made and to be performed wholly within such State, and withoutregard to the conflicts of laws principles thereof. Any suit brought hereon shall be brought in the state or federal courts sitting in SanDiego County, California, the Parties hereby waiving any claim or defense that such forum is not convenient or proper. Each partyhereby agrees that any such court shall have in personam jurisdiction over it and consents to service of process in any manner authorizedby California law.6. Entire Agreement. This Release and the Agreement constitute the entire agreement of the Parties in respect of the subjectmatter contained herein and therein and supersede all prior or simultaneous representations, discussions, negotiations and agreements,whether written or oral. This Release may be amended or modified only with the written consent of Employee and an authorizedrepresentative of the Company. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.7. Counterparts. This Release may be executed in multiple counterparts, each of which shall be deemed to be an original butall of which together shall constitute one and the same instrument.(Signature Page Follows)4IN WITNESS WHEREOF, and intending to be legally bound, the Parties have executed the foregoing Release as of the datefirst written above.EMPLOYEE ZOGENIX, INC. By: Print Name: Cynthia Y. Robinson, Ph.D. Print Name: Title: [SIGNATURE PAGE TO RELEASE]Exhibit 23.1Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 333-179337, 333-185900, 333-185901and 333-192109, and FormS-8 Nos. 333-170875 and 333-181543) of Zogenix, Inc. and in the related Prospectuses of our reports dated March 7, 2014, with respect to the consolidatedfinancial statements of Zogenix, Inc., and the effectiveness of internal control over financial reporting of Zogenix, Inc. included in this Annual Report (Form10-K) for the year ended December 31, 2013./s/ Ernst & Young LLPSan Diego, CaliforniaMarch 7, 2014Exhibit 31.1CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Roger L. Hawley, certify that:1.I have reviewed this Annual Report on Form 10-K of Zogenix, Inc. for the fiscal year ended December 31, 2013;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (theregistrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internalcontrol over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditorsand the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adverselyaffect the registrant’s ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financialreporting. /s/ Roger L. HawleyRoger L. HawleyChief Executive OfficerDate: March 7, 2014Exhibit 31.2CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Ann D. Rhoads, certify that:1.I have reviewed this Annual Report on Form 10-K of Zogenix, Inc. for the fiscal year ended December 31, 2013;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (theregistrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internalcontrol over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditorsand the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adverselyaffect the registrant’s ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financialreporting. /s/ Ann D. RhoadsAnn D. RhoadsChief Financial OfficerDate: March 7, 2014Exhibit 32.1CERTIFICATIONPursuant to Section 906 of the Sarbanes-Oxley Act of 2002(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)In connection with the Annual Report on Form 10-K of Zogenix, Inc. (the “Company”) for the period ended December 31, 2013, as filed with the Securities andExchange Commission on the date hereof (the “Report”), I, Roger L. Hawley, as Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date:March 7, 2014 /s/ Roger L. Hawley Roger L. Hawley Chief Executive OfficerThe foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the SecuritiesExchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of anygeneral incorporation language in such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by theCompany and furnished to the Securities and Exchange Commission or its staff upon request.Exhibit 32.2CERTIFICATIONPursuant to Section 906 of the Sarbanes-Oxley Act of 2002(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)In connection with the Annual Report on Form 10-K of Zogenix, Inc. (the “Company”) for the period ended December 31, 2013, as filed with the Securities andExchange Commission on the date hereof (the “Report”), I, Ann D. Rhoads, as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date:March 7, 2014 /s/ Ann D. Rhoads Ann D. Rhoads Chief Financial OfficerThe foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the SecuritiesExchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of anygeneral incorporation language in such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by theCompany and furnished to the Securities and Exchange Commission or its staff upon request.

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