7.	Business combination and BELBUCA^® acquisition:

On December 7, 2016, the Company and Endo entered into the Termination Agreement to terminate Endo’s licensing rights for BELBUCA^®. The transaction closed on January 6, 2017. At the closing date, the Company purchased from Endo the following net assets (the “net assets”): (i) current BELBUCA^® product inventory and work-in-progress, (ii) material manufacturing contracts related to BELBUCA^® , (iii) BELBUCA^®-related domain names and trademarks (including the BELBUCA^® trademark), (iv) BELBUCA^® -related manufacturing equipment, and (v) all pre-approval regulatory submissions, including any Investigational New Drug Applications and New Drug Applications, regulatory approvals and post-approval regulatory submissions concerning BELBUCA^® . The purchase price for the net assets (the “Asset Purchase Price”) was equal to the sum of: (i) the aggregate book value of the portion of the transferred product inventory forecasted to be used or sold by the Company, (ii) the aggregate book value of work-in-

progress inventory, and (iii) the assumption of any assumed liabilities. Together with the Asset Purchase Price, pursuant to the terms of the Termination Agreement, the Company will also pay to Endo a fee in the amount of $5 million in consideration for (i) Endo’s agreement not to compete for a period of two years from the closing date of the termination agreement and (ii) Endo’s waiver of its right to sell product for twelve months following the closing of the termination agreement.

At the closing date, the Company accepted transfer of the net assets and assumed and agreed to discharge when due all applicable liabilities assumed by the Company, which consisted of post-closing obligations for liabilities and payments associated with the net assets, the assumed contracts related to the net assets and applicable taxes (with the obligation for pre-closing and other certain liabilities resulting from the acts or omissions of Endo being retained by Endo). The Asset Purchase Price, together with all other payments (including a non-compete covenant payment) due to Endo under the Termination Agreement, will be paid to Endo in cash in four quarterly installments on the last calendar day of each quarter in 2017. Furthermore, the Company is not responsible for future royalties or milestone payments to Endo and Endo is not obligated to any future milestone payments to the Company. The Termination Agreement contains customary representations and warranties and mutual releases and indemnification.

At the closing date, the Company and Endo entered into a Transition Services Agreement which governed the post-closing rights and responsibilities of the Company and Endo in connection with the license termination and the transfer of the Assets to the Company. Under this agreement, the Company and Endo agreed to the handling of transition matters such as managing customer contracts, BELBUCA^® price reporting, payments, returns and rebates, and customer and managed care relations. In connection therewith, Endo has agreed to provide to the Company an agreed upon number of work hours to be provided by Endo personnel during the transition for certain of these transition services and other assistance with respect to the transition of BELBUCA^® to the Company.

The BELBUCA^® acquisition was accounted for as a business combination in accordance with ASC No. 805, Business Combinations which, among other things, requires assets acquired and liabilities assumed to be measured at their acquisition date fair values. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses and cash flows, weighted average cost of capital, discount rates, and estimates of terminal values. The Company believes the estimates used are reasonable and the significant effects of the BELBUCA^® acquisition are properly reflected.

The following table summarizes the consideration paid to acquire BELBUCA^® and the estimated values of assets acquired and liabilities assumed in the accompanying condensed consolidated balance sheet based on their fair values on January 6, 2017 (the date of the Endo Closing):


*Asset purchase price:*
Deferred cash consideration to Endo	$	7,536

Total asset purchase price	$	7,536

*Estimated fair value of assets acquired:*
Current BELBUCA^® product inventory and work-in process	$	5,412
BELBUCA^®-related manufacturing equipment		432
License and distribution rights intangible assets		45,000
Deferred tax liability		(15,972	)

Amount attributable to assets acquired	$	34,872

Bargain purchase gain	$	(27,336	)

Inventories acquired included raw materials, work-in-progress and finished goods. The fair value of the acquired finished goods inventory was estimated by adjusting the anticipated selling price costs to sell and an appropriate profit on selling activities. For work-in-process, in addition to those inputs used to estimate the fair value of finished goods, the cost and estimated profit on completing the manufacturing are also included. The fair value of the raw materials represent cost to acquire the materials from suppliers.

The fair value of the equipment was determined by consideration of replacement cost and equipment condition and was assigned a useful life of seven years. The fair value of the license and distribution rights intangible assets as amortized in the accompanying condensed consolidated balance sheets were estimated primarily using the “income method,” which starts with a forecast of all expected future cash flows. As such, it is considered level 3 in the fair value hierarchy. Some of the more significant assumptions inherent in the development of intangible asset values, from the perspective of a market participant, include: the amount and timing of projected future cash flows (including net revenue, cost of sales, commercial expenses, research and development costs and working capital requirements) as well as estimated contributory asset charges; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, among other factors. The license and distribution rights intangible assets will be amortized over ten years, which approximates the current, remaining patent life of the BELBUCA^® -related intellectual property.

As a result of the business combination, the Company recognized a deferred tax liability of $16.0 million. This deferred tax liability was netted against its deferred tax assets as of September 30, 2017. Because a full valuation allowance has been provided against the Company’s deferred tax assets as it is considered more likely than not that they will not be utilized, the Company released a corresponding amount of its valuation allowance during the nine months ended September 30, 2017 and recognized a $16.0 million tax benefit in the accompanying condensed consolidated statement of operations.

In January 2017, the Company recorded the asset acquisition as a bargain purchase gain of $27.3 million in the accompanying condensed consolidated statement of operations.

Pro forma impact of acquisition of BELBUCA^®

The following pro forma combined results of operations are provided for the year ended December 31, 2016, as though the BELBUCA^® acquisition had been completed as of January 1, 2016. These pro forma results are not presented for the interim period as the BELBUCA^® product line was not previously accounted for as a stand-alone business and interim results are therefore unavailable. These supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future. The pro forma results of operations do not include any cost savings or other synergies that resulted, or may result, from the BELBUCA^® acquisition or any estimated costs that will be incurred to integrate the BELBUCA^® product line, nor do they reflect the bargain purchase gain recognized. Future results may vary significantly from the results in this pro forma information because of future events and transactions, as well as other factors.


(in thousands, except per share data)	December 31, 2016 (unaudited)
Revenue	$	25,010
Net loss	$	(201,769	)
Pro forma net loss per common share
Basic	$	(3.76	)
Diluted	$	(3.76	)

The Company’s historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the BELBUCA^® acquisition and factually supportable. The unaudited pro forma consolidated results include historical revenues and expenses of assets acquired in the acquisition with the following adjustments:

•

Adjustment to recognize incremental amortization expense based on the fair value of intangibles acquired;

•

Adjustment to recognize incremental depreciation expense for equipment acquired in the acquisition.

8.	License obligations:

Evonik development and exclusive license option agreement:

On October 27, 2014, the Company entered into a definitive Development and Exclusive License Option Agreement (the “Development Agreement”) with Evonik Corporation, (“Evonik”) to develop and commercialize an injectable, extended release, microparticle formulation of buprenorphine for the treatment of opioid dependence (the “Evonik Product”). Under the Development Agreement, the Company also has the right to pursue development of the Evonik Product for pain management.

This product candidate is currently in the pre-clinical stage of development. An Investigational New Drug Application (“IND”) for the treatment of opioid dependence was filed in the fourth quarter 2016.