7. Long-Term Obligations

The following table summarizes the carrying amount of the Company's borrowings under various long-term obligations (in thousands):


	December 31,
	2011		2010
Cowen Financing Agreement	$	53,344	$	44,844
Hercules Technology Growth Capital, Inc.—Term loan		14,231		—

Total		67,575		44,844
Less: Long-term obligations—current portion		4,829		2,222

Long-term obligations	$	62,746	$	42,622

Cowen Financing Agreement

On April 30, 2010, the Company entered into a Financing Agreement (the "Financing Agreement") with Cowen Healthcare Royalty Partners, L.P., a limited partnership organized under the laws of the State of Delaware ("Cowen"). Under the terms of the Financing Agreement, the Company borrowed $40.0 million from Cowen (the "Borrowed Amount") and the Company agreed to repay such Borrowed Amount together with a return to Cowen, as described below, out of royalty, milestone, option and certain other payments (collectively, "Revenue Interest") that the Company may receive under the Astellas Agreement or a replacement licensee, as a result of commercializing the Company's product, Qutenza, in the Licensed Territory, including payments that Astellas may make to the Company to maintain its option to commercialize NGX-1998 in the Licensed Territory.

Under the Financing Agreement, the Company is obligated to pay to Cowen:

•

All of the Revenue Interest payments due to the Company under the Astellas Agreement, until Cowen has received $90.0 million of Revenue Interest payments; and

•

5% of the Revenue Interest payments due to the Company under the Astellas Agreement for Revenue Interest received by Cowen over $90.0 million and until Cowen has received $106.0 million of Revenue Interest payments.

The Company also has the option to pay a prepayment amount to terminate the Financing Agreement at the Company's election at any time or in connection with a change of control of the Company. Such amount is set at a base amount of $76.0 million (or $68.0 million if it is being exercised in connection with a change of control), or, if higher, an amount that generates a specified internal rate of return, as noted below, on the Borrowed Amount as of the date of prepayment, in each case reduced by the Revenue Interest payments received by Cowen up to the date of prepayment.

The obligation of the Company to pay Revenue Interest during the term of the Financing Agreement (which is defined below) is secured by rights that the Company has to Revenue Interest under the Astellas Agreement, and by intellectual property and other rights of the Company to the extent necessary or used to commercialize products covered by the Astellas Agreement in the Licensed Territory.

Unless terminated earlier pursuant to a prepayment, the Financing Agreement terminates on the earlier of:

•

The time when Cowen has received at least $106.0 million of Revenue Interest payments; or

•

The maturity date, which is the latest to occur of 10 years following the first commercial sale of Qutenza in the Licensed Territory or the last to expire of any patents or regulatory exclusivity covering the products commercialized under the Astellas Agreement in the Licensed Territory.

If Cowen has not received Revenue Interest payments totaling at least $40.0 million by the maturity date, the Company will be obligated to pay to Cowen the difference between such amount and the Revenue Interest paid to Cowen under the Financing Agreement up to such date. This represents the Company's minimum financial obligation under the Financing Agreement.

In addition, in the event of the Company's default under the Financing Agreement, the Company is obligated to pay to Cowen the borrowed amount together with interest accrued thereon from the effective date of the Financing Agreement, to the date of repayment at an internal rate of return equal to the lesser of a 19% rate of interest or the maximum rate permitted by law, less any Revenue Interest payments received by Cowen. Under the Financing Agreement, an event of default includes standard insolvency and bankruptcy terms, including a failure to maintain liquid assets equal to at least the Company's liabilities due and payable during the following three months.

The upfront cash receipt of $40.0 million less a discount of $0.5 million in cost reimbursements paid to Cowen was recorded in Long-term obligations at issuance. The Company is accreting the discount to interest expense over the term of the related debt. The carrying value of the Long-term obligation at December 31, 2011, including accrued interest of $13.8 million, is $53.3 million. The carrying value of the Long-term obligation at December 31, 2010, including accrued interest of $5.4 million, was $44.8 million. The Company received $0.9 million of royalty payments from Astellas in the year ended December 31, 2011, and consistent with the provisions of the arrangement, the Company paid that amount to Cowen as a reduction of the obligation. The Company made payments to Cowen of less than $0.1 million in the year ended December 31, 2010.

The best estimate of future payments, the timing of which determines the short- and long-term classification of the obligation under the Financing Agreement, was based upon returning to Cowen an internal rate of return of 19% through Revenue Interest payments. Under this methodology, the Company recorded interest expense of $9.4 million and $5.4 million for the years ended December 31, 2011 and 2010, respectively. The accrued interest on the Long-term debt obligation is presented on the consolidated balance sheets as of December 31, 2011 in two components, the Long-term obligation—current portion, which totals $2.5 million and the remaining $11.3 million included in Long-term obligation. At December 31, 2010, the Long-term obligation—current portion was $2.2 million of accrued interest and the remaining $3.1 million of accrued interest was included in Long-term obligations.

The Company capitalized $0.3 million of debt issuance costs related to the Financing Agreement which are being amortized over the term. At both December 31, 2011 and December 31, 2010, the unamortized debt issuance cost was $0.3 million, and is included in "Prepaid expenses and other current assets" and "Other assets" on the Company's consolidated balance sheets.

The estimated fair value of the Cowen Borrowed Amount at December 31, 2011 and December 31, 2010 was $43.6 million and $40.9 million, respectively, and the fair value was measured using Level 3 inputs. The estimated fair market value was calculated using the income method of valuation. The key assumptions required for the calculation were an estimate of the amount and timing of future royalty revenues to be received from Astellas and an estimated cost of capital. Management's estimate of the future royalty revenues to be received from Astellas is subject to significant variability due to the recent product launch, regulatory process still to be conducted for significant portions of the Astellas territory and the extended time period associated with the Cowen Financing Agreement, and thus is subject to significant uncertainty.

Hercules Loan Agreement

In August 2011, the Company entered into a loan agreement with Hercules, which includes both a $5.0 million accounts receivable line and a $15.0 million term loan. Under the terms of the loan agreement, the $15.0

million term loan is required to be repaid over the course of the 42-month maturity period, which includes a 12-month interest only period at the beginning of the term. Interest on the term loan has a minimum rate of 9.5%, which can increase based on fluctuations in the prime rate. The $5.0 million accounts receivable line is a revolving line that is available until December 31, 2012 and then is renewable at the option of Hercules each year thereafter. The accounts receivable line bears interest at a minimum interest rate of 6.75%, which can also increase based on fluctuations in the prime rate, and the maximum borrowing availability under the revolving line is based upon a percentage of eligible accounts receivable of the Company. The Company may prepay and terminate the term loan at any time, subject to certain prepayment fees, and is obligated to also pay a fee of $0.6 million when the term loan is repaid and which is being accrued to interest expense over the term of the loan. The obligations of the Company under the loan agreement are secured by certain personal property of the Company.

The loan agreement also contains customary negative covenants and is subject to customary events of default, such as a failure to make a scheduled principal or interest payment, insolvency, and breaches of covenants under loan agreement and agreements and instruments entered into in connection with the loan agreement, including covenants in the Hercules warrant. Upon an event of default, including a change of control, Hercules has the option to accelerate repayment of the loan, including payment of any applicable prepayment charges, which range from 1%-3% of the outstanding loan balance and accrued interest, as well as a final payment fee of $0.6 million. This option is considered a contingent default provision liability as the holder of the loan may exercise the option in the event of default and, is a derivative which must be bifurcated and valued separately in the Company's financial statements. As of December 31, 2011, the estimated fair value of the contingent put option upon an event of default liability was $0.1 million which was determined by evaluating multiple potential outcomes of an event of default, including a change of control, using an income approach and discounting the values back to December 31, 2011. As of December 31, 2011, the contingent put option liability is included in Other long-term liabilities on the consolidated balance sheets and the fair value of the warrants at the time of issuance resulted in a debt discount. The contingent put option liability will be revalued at the end of each reporting period and any change in the fair value will be recognized in the statements of operations.

In connection with the entry of the Company into the loan agreement, Hercules was issued a warrant for 791,667 shares of the Company's common stock (representing an aggregate exercise price equal to approximately 7.125% of the maximum aggregate funds potentially available to the Company under the loan agreement) (the Hercules Warrant). The warrants have a term of five years, contains a net-exercise provision, and has an exercise price of $1.80 per share. The fair value of the warrants issued was approximately $1.1 million based on a Black-Scholes valuation model; $0.8 million of which was attributable to the warrants issued in connection with the term loan, and $0.3 million of which was attributable to warrants issued in connection with the accounts receivable line. The fair value of the warrants issued in connection with the term loan resulted in a debt discount, which is being amortized to interest expense over the life of the loan using the effective interest method. The fair value of the warrants issued in connection with the accounts receivable line was recorded in Prepaid and other current assets and Other assets, respectively. The Company will amortize these assets over the initial term of the accounts receivable line that ends December 31, 2012 on a straight-line basis. The Company also paid $0.4 million in issuance costs which were allocated to the term loan and accounts receivable line and accounted for consistent with the warrants as described above.

In March 2012, the Company entered into an amendment to the Hercules Warrant in which the Company amended the covenant with respect to the requirement to maintain its listing on the NASDAQ Global Market to allow for the NASDAQ Capital Market and certain over-the-counter markets to be permissible alternative markets on which the Company can list its shares of common stock. Under the terms of the amendment, the number of shares underlying the warrant was increased to 1,950,000 and the exercise price per share of common stock was reduced to $0.50.

The recorded value of the term loan is $13.8 million after deducting expenses of $0.3 million paid to Hercules, $0.8 million for the value of the warrants allocated to the term loan and $0.1 million for the value ascribed to the default provision of the agreement. The estimated fair value of the Hercules term loan and the default provision was $15.0 million and $0.1 million, respectively, at December 31, 2011 and the liabilities were measured at fair value using Level 3 inputs.

The Company had $0.8 million available for draw-down on the accounts receivable line at December 31, 2011 based upon a percentage of the then eligible accounts receivable of the Company. The Company has not drawn any funds from the accounts receivable line.