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`TABLE OF CONTENTS
`INDEX TO FINANCIAL STATEMENTS
`
`Table of Contents
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`UNITED STATES
`SECURITIES AND EXCHANGE COMMISSION
`Washington, D.C. 20549
`
`FORM 10-K
`
`
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`
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`
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`Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
`
`For the fiscal year ended December 31, 2011
`
`OR
`
`
`Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
`
`For the transition period from: to
`Commission File Number: 001-13111
`
`(Mark one)
`
` ý
`
` o
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`DEPOMED, INC.
`(Exact Name of Registrant as Specified in its Charter)
`
`California
`(State or other jurisdiction of
`incorporation or organization)
`
`1360 O'Brien Drive, Menlo Park, California
`(Address of principal executive offices)
`Registrant's telephone number, including area code: (650) 462-5900
`
`94-3229046
`(I.R.S. Employer
`Identification No.)
`
`94025
`(Zip Code)
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`Securities registered pursuant to Section 12(b) of the Act:
`
`Title of each class
`Common Stock, no par value
`Securities registered pursuant to Section 12(g) of the Act: None
`
`
`
`
`
`Name of each exchange on which registered
`The NASDAQ Stock Market LLC
`
` Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
`
` Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No ý
`
` Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the
`preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
`the past 90 days. Yes ý No o
`
` 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 submitted and 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 to submit and post such files). Yes ý No o
`
` Indicate 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 registrant'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. ý
`
` Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, as defined in Rule 12b-2 of the
`Exchange Act.
`
`

`
`Large accelerated filer o
`
`
`
`Accelerated filer ý
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`
`
`Non-accelerated filer o
`(Do not check if a
`smaller reporting company)
` Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
`
`
`
`Smaller reporting company o
`
` The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing price of
`Common Stock on the Nasdaq Stock Market on June 30, 2011 was approximately $450,316,000. Shares of Common Stock held by each officer and director
`and by each person who owned 10% or more of the outstanding Common Stock as of June 30, 2011 have been excluded in that such persons may be deemed
`to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
`
` The number of shares outstanding of the registrant's Common Stock, no par value, as of March 7, 2012 was 55,557,879.
`
`Documents Incorporated by Reference
`
` Portions of the registrant's Proxy Statement, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A in
`connection with the registrant's 2012 Annual Meeting of Shareholders, expected to be held on or about May 15, 2012, are incorporated by reference in Part III
`of this Form 10-K.
`
`
`
`

`
`DEPOMED, INC.
`
`2011 FORM 10-K REPORT
`
`TABLE OF CONTENTS
`
` PAGE
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`
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`PART I
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`
`
`Table of Contents
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`Item 1.
`
` Business
`
`Item 1A. Risk Factors
`Item 1B. Unresolved Staff Comments
`Item 2.
` Properties
`Item 3.
` Legal Proceedings
`Item 4.
` Mine Safety Disclosures
`
`Item 5.
`
`PART II
` Market for the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of
`Equity Securities
` Selected Financial Data
`Item 6.
` Management's Discussion and Analysis of Financial Condition and Results of Operations
`Item 7.
`Item 7A. Quantitative and Qualitative Disclosures about Market Risk
`Item 8.
` Financial Statements and Supplementary Data
`Item 9.
` Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
`Item 9A. Controls and Procedures
`Item 9B. Other Information
`
`PART III
`Item 10. Directors, Executive Officers and Corporate Governance
`
`
`Item 11. Executive Compensation
`
`Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
`Item 13. Certain Relationships and Related Transactions, and Director's Independence
`
`Item 14. Principal Accountant Fees and Services
`
`
`Item 15. Exhibits and Financial Statement Schedules
`
` Signatures
`
`PART IV
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`2
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`NOTE REGARDING FORWARD-LOOKING STATEMENTS
`
` Statements made in this Annual Report on Form 10-K that are not statements of historical fact are forward-looking statements within the meaning of
`Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the
`Exchange Act). We have based these forward-looking statements on our current expectations and projections about future events. Our actual results could
`differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements are identified by words such as
`"believe," "anticipate," "expect," "intend," "plan," "will," "may" and other similar expressions. In addition, any statements that refer to expectations,
`projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements include, but are not
`necessarily limited to, those relating to:
`
`the commercial success and market acceptance of GraliseTM (gabapentin), our once-daily product for the management of postherpetic neuralgia;
`
`the commercial success of Glumetza® (metformin hydrochloride extended-release tablets) in the United States, and the efforts of our Glumetza
`commercial partner, Santarus, Inc. (Santarus);
`
`the results of our ongoing litigation against filers of abbreviated New Drug Applications (each, an ANDA) to market generic Gralise in the
`United States;
`
`the outcome of our ongoing litigation with Sun Pharmaceutical Industries Inc. (Sun) related to its ANDA to market generic Glumetza in the
`United States, or the outcome of any legal or regulatory challenge to our settlement agreement with Lupin Limited (Lupin) related to marketing
`generic Glumetza in the United States;
`
`any patent infringement or other litigation that has been or may be instituted related to Gralise, Glumetza or any other of our product candidates
`under the Hatch-Waxman Act;
`
`our and our collaborative partners' compliance or non-compliance with legal and regulatory requirements related to the promotion of
`pharmaceutical products in the United States;
`
`our plans to in-license, acquire or co-promote other products;
`
`discussions with the U.S. Food and Drug Administration regarding the results of Breeze 3, our Phase 3 trial evaluating Serada for menopausal
`hot flashes that did not meet all primary endpoints;
`
`the results and timing of our clinical trials;
`
`the results of our research and development efforts;
`
`submission, acceptance and approval of regulatory filings;
`
`our need for, and ability to raise, additional capital;
`
`our collaborative partners' compliance or non-compliance with obligations under our collaboration agreements; and
`
`our plans to develop other product candidates.
`
`• •
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`•
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`•
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`•
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`•
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`• •
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`• • • • • •
`
` Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more
`fully described in the "ITEM 1A. RISK FACTORS" section and elsewhere in this Annual Report on Form 10-K. We disclaim any intent to update or revise
`these forward-looking statements to reflect new events or circumstances.
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`CORPORATE INFORMATION
`
` The address of our Internet website is http://www.depomed.com. We make available, free of charge through our website or upon written request, our
`Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other periodic SEC reports, along with amendments to all
`of those reports, as soon as reasonably practicable after we file the reports with the SEC.
`
` Unless the context indicates otherwise, "Depomed", "the Company", "we", "our" and "us" refer to Depomed, Inc. Depomed was incorporated in the State
`of California on August 7, 1995. Our principal executive offices are located at 1360 O'Brien Drive, Menlo Park, California 94025, and our telephone number
`is (650) 462-5900.
`
` Depomed®, Serada®, Proquin® and Acuform® are registered trademarks of Depomed. GraliseTM is a trademark of Depomed. Glumetza® is a
`registered trademark of Valeant Pharmaceuticals International, Inc. exclusively licensed in the United States to Depomed. All other trademarks and trade
`names referenced in this Annual Report on Form 10-K are the property of their respective owners.
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`ITEM 1. BUSINESS
`
`COMPANY OVERVIEW
`
`PART I
`
` Depomed is a specialty pharmaceutical company initially focused on neurology, pain and other diseases of the central nervous system. The centerpiece of
`our specialty pharmaceutical business is Gralise (gabapentin), a once-daily product for the management of postherpetic neuralgia that we launched and made
`commercially available in October 2011. We also have a portfolio of royalty and milestone producing assets based on our proprietary drug delivery
`technologies. The cornerstone of that portion of our business is Glumetza, a once-daily treatment for adults with type 2 diabetes that we licensed to, and is
`currently being commercialized by Santarus, Inc. (Santarus) in the United States. We have a number of other license and development arrangements
`associated with our Acuform gastroretentive drug delivery technology. In addition, we have two product candidates in clinical development, DM-1992 for
`Parkinson's disease and Serada for menopausal hot flashes.
`
` We are seeking to develop and commercialize a number of pharmaceutical products for neurology, pain and other central nervous system conditions and
`diseases that can be promoted together effectively. We are actively seeking to expand our product portfolio through in-licensing, acquiring or obtaining co-
`promotion rights to commercially available products or late-stage product candidates that could be marketed and sold through our existing sales and marketing
`capability.
`
` We also seek to realize value from our drug delivery technology and related intellectual property through licensing and collaborative development
`partnerships with other companies. Our license agreement with Santarus which we restructured in August 2011, our license and development arrangements
`with Covidien, Janssen Pharmaceutica N.V. (Janssen), Boehringer Ingelheim International GMBH (Boehringer Ingelheim), and Ironwood
`Pharmaceuticals, Inc. (Ironwood) and our license agreement with Merck & Co., Inc. (Merck) are examples of this element of our strategy.
`
`SIGNIFICANT DEVELOPMENTS DURING 2011
`
` Among the significant developments in our business during 2011 were the following:
`
`•
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`•
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`•
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`•
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`•
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`•
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`In January 2011, the FDA approved Gralise for the treatment of postherpetic neuralgia. This approval triggered a $48 million milestone payment
`from a subsidiary of Abbott Laboratories that we received in February 2011.
`
`In March 2011, we received all rights to Gralise from Abbott Laboratories along with a settlement payment of $40 million, and we announced
`our intention to commercialize Gralise in the United States.
`
`In March 2011, we entered into a License and Services Agreement with Boehringer Ingelheim, granting Boehringer Ingelheim a license to use
`our Acuform drug delivery technology for use in combination metformin products.
`
`In April 2011, James A. Schoeneck was appointed as our President and Chief Executive Officer, following the resignation of Carl A. Pelzel, our
`former President and Chief Executive Officer.
`
`In June 2011, we entered into a service agreement with Ventiv Commercial Services, LLC (Ventiv), to provide 164 full-time sales
`representatives dedicated to us to promote Gralise.
`
`In July 2011, we entered into a research collaboration and license agreement with Ironwood Pharmaceuticals, Inc. granting Ironwood a license
`for worldwide rights to our Acuform drug delivery technology for an undisclosed Ironwood early stage development program.
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`•
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`•
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`•
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`•
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`In August 2011, we entered into a commercialization agreement with Santarus, superseding our Promotion Agreement with Santarus, pursuant to
`which Santarus assumed commercial, manufacturing and regulatory responsibility for the commercial activities of Glumetza and agreed to pay us
`a royalties on net sales of 26.5% in 2011, 29.5% in 2012, 32% in 2013 & 2014, and 34.5% in 2015 and thereafter.
`
`In September 2011, we entered into a manufacturing and supply agreement with Patheon Puerto Rico, Inc. (Patheon) for the manufacture,
`package and supply of commercial quantities of Gralise.
`
`In October 2011, we made Gralise commercially available, began distributing Gralise and began promoting Gralise to physicians through our
`contract sales organization.
`
`Total revenues for the year ended December 31, 2011 were $133.0 million compared to $80.8 million for the year ended December 31, 2010.
`Revenue for the year ended December 31, 2011 included a $48.0 million milestone from Abbott Products.
`
`Operating expenses for the year ended December 31, 2011 were $56.7 million, compared to $69.0 million for the year ended December 31, 2010.
`Operating expenses for 2011 included a $40.0 million gain on termination of our agreement with Abbott related to Gralise, which reduced
`operating expenses for the year.
`
`Cash, cash equivalents and marketable securities were $139.8 million as of December 31, 2011, compared to $76.9 million as of December 31,
`2010.
`
`RECENT DEVELOPMENTS AFTER DECEMBER 31, 2011
`
`•
`
`•
`
`In January 2012, Merck received FDA approval to market Janumet XR in the United States. We are entitled to receive very low single digit
`royalties on net product sales of Janumet XR through the expiration date of the licensed patents.
`
`In February 2012, we entered into a settlement and license agreement with Lupin to resolve our patent litigation with respect to Glumetza.
`
`OUR PRODUCTS AND PRODUCT PIPELINE
`
` The following table summarizes our marketed products and product pipeline.
`
`Product
`GraliseTM
`
`Indication
`
` Postherpetic neuralgia
`
`
`Glumetza®
`
`
`Type 2 diabetes
`
`
`
`Commercialized Products
`
`Status
`
` Currently sold by Depomed in the United States.
`Approved by the FDA in January 2011.
`
`Launched in October 2011.
`
`Currently sold in the United States and Canada.
`United States rights held by Santarus.
`
`Canadian rights held by Valeant.
`
`
`
`Product Pipeline
`
`Product
`Serada®
`
`DM-1992
`
`Indication
`
` Menopausal hot flashes
`
`Parkinson's disease
`
`
`
`Status
`
` Three Phase 3 studies completed (Breeze 1, Breeze 2, and Breeze 3).
`
`Phase 2 study commenced in January 2012.
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`COMMERCIALIZED PRODUCTS
`
`GraliseTM (gabapentin) tablets for the Management of Postherpetic Neuralgia
`
`General
`
` Gralise (gabapentin) is our proprietary, once-daily formulation of gabapentin for the management of postherpetic neuralgia (PHN). We made Gralise
`commercially available in October 2011, following its FDA approval in January 2011 and our reacquisition of the product in March 2011 from Abbott
`Products, our former licensee. We received a $48 million approval milestone from our former licensee in February 2011, and a settlement payment of
`$40 million in March 2011 in connection with the termination of our Gralise license agreement.
`
` Postherpetic Neuralgia. Postherpetic neuralgia (PHN) is a persistent pain condition caused by nerve damage during a shingles, or herpes zoster, viral
`infection. PHN afflicts approximately one in five patients diagnosed with shingles in the United States. The incidence of PHN increases in elderly patients.
`Three of four shingles patients over 70 years old develop PHN. Approximately 120,000 to 200,000 Americans are affected by PHN each year. The pain
`associated with PHN can interfere with daily activities such as sleep and recreational activities for months, and can be associated with clinical depression.
`
` In 2006, the Centers for Disease Control and Prevention Advisory Committee on Immunization Practices recommended that adults 50 years of age be
`vaccinated with a shingles vaccine. While the shingles vaccine is not a treatment for PHN, it could impact the future market for therapies for PHN.
`
` Orphan Drug Designation. In November 2010, the FDA granted Gralise Orphan Drug designation for the management of PHN based on a plausible
`hypothesis that Gralise is "clinically superior" to immediate release gabapentin due to the incidence of adverse events observed in Gralise clinical trials
`relative to the incidence of adverse events reported in the package insert for immediate release gabapentin. Generally, an Orphan-designated drug approved
`for marketing is eligible for seven years of regulatory exclusivity for the orphan-designated indication. If granted, Orphan Drug exclusivity for Gralise will
`run for seven years from January 28, 2011. However, the FDA has indicated to us that Gralise is not currently eligible for Orphan Drug exclusivity because
`the hypothesis upon which the product's Orphan Drug designation was granted has not been proven. We believe a showing of clinical superiority is not
`required under the statute and regulations related to Orphan Drugs in effect at the time of Gralise's Orphan Drug designation and approval. We also believe
`amendments to the FDA's Orphan Drug regulations proposed in October 2011 do not apply to our pending request to grant Orphan Drug exclusivity for
`Gralise. Although we are seeking to resolve these issues with the FDA, we may not succeed in obtaining Orphan Drug exclusivity for Gralise.
`
` Important Information about Gralise. Gralise is to be titrated over a two-week period to an 1800 mg once-daily dose, given with the evening meal.
`Gralise tablets swell in gastric fluid and gradually release gabapentin. Gralise is not interchangeable with other gabapentin products because of differing
`pharmacokinetic profiles that affect the frequency of administration. The most common treatment-emergent adverse events associated with Gralise in our
`clinical trials were dizziness (10.9% with Gralise vs. 2.2% placebo), somnolence (4.5% vs. 2.7%) and headache (4.2% vs. 4.1%).
`
`Gralise Commercialization and Manufacturing Arrangements
`
` Ventiv Commercial Services, LLC. In June 2011, we entered in to a service agreement with Ventiv Commercial Services, LLC (Ventiv), pursuant to
`which Ventiv's outsourced sales business, inVentiv Selling Solutions, provides us with sales force recruiting, training, deployment and ongoing operational
`support to promote Gralise. The agreement provides for a sales force of 164 full-time sales representatives dedicated to the Company, all of whom are
`employees of Ventiv. The sales
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`representatives were hired in September 2011 and began promoting Gralise to physicians in October 2011. Members of sales management are our employees.
`
` Under the terms of the agreement, we incurred an upfront implementation fee, and we pay fixed monthly management fees. The monthly management
`fee is subject to adjustment for actual staffing levels. A portion of the monthly management fee is payable only on Ventiv's achievement of specified
`performance objectives. We also pay certain pass-through costs of Ventiv. The agreement will expire in October 2013, two years after the date on which sales
`representatives hired by Ventiv are deployed, but may be terminated by either party upon advance notice after the first anniversary of the deployment date.
`The agreement is also subject to early termination under certain circumstances, such as a party's uncured material breach.
`
` Patheon Puerto Rico, Inc. In September 2011, we entered into a manufacturing agreement with Patheon Puerto Rico, Inc. (Patheon) pursuant to which
`Patheon manufactures, packages and supplies commercial quantities of Gralise. Under the agreement, we provide periodic rolling forecasts to Patheon. A
`portion of each rolling forecast constitutes a firm purchase order. We may obtain a portion of our product requirements from a second manufacturing source.
`We provide Patheon with the active pharmaceutical ingredient in Gralise. The agreement will expire on May 31, 2016, subject to early termination under
`certain circumstances.
`
`Litigation
`
` We are involved in patent litigation associated with Gralise that is described below under "Legal Proceedings".
`
`Former Gralise License Arrangement
`
` In November 2008, we entered into an exclusive license agreement with Solvay Pharmaceuticals, Inc. (Solvay) granting Solvay exclusive rights to
`develop and commercialize Gralise for pain indications in the United States, Canada and Mexico. The agreement became effective in January 2009 and we
`received a $25.0 million upfront payment from Solvay in February 2009.
`
` In February 2010, Abbott Laboratories completed its acquisition of the pharmaceutical business of Solvay. Abbott Products, a subsidiary of Abbott
`Laboratories, then assumed responsibility for the Gralise license agreement. In March 2010, Abbott Products submitted a New Drug Application (NDA) for
`Gralise to the FDA for the management of postherpetic neuralgia. The NDA was submitted under Section 505(b)(2) of the Food, Drug and Cosmetic Act
`because it references certain toxicity, safety and other data of Neurontin®, the formulation of gabapentin initially approved by the FDA. In May 2010, the
`FDA accepted the NDA for filing, which triggered a $10.0 million milestone payment from Abbott Products that we received in June 2010. In January 2011,
`the FDA approved the Gralise NDA, which triggered a $48.0 million milestone payment from Abbott Products that we received in February 2011.
`
` In March 2011, we and Abbott Products agreed to terminate the Gralise license agreement. Pursuant to the termination arrangement, we received a
`payment of $40.0 million from Abbott Products, and the Gralise NDA and all activities associated with the commercialization of Gralise were transitioned to
`us.
`
`Glumetza® (metformin hydrochloride extended release tablets) for Type 2 Diabetes
`
`General
`
` Glumetza is a once-daily extended release metformin product approved in the United States for type 2 diabetes that we have licensed to Santarus, Inc.
`The FDA approved Glumetza for marketing in the United States in 2005, and we began selling the 500mg Glumetza in 2006. In December 2007, the FDA
`approved the currently marketed 1000mg Glumetza, and we began selling it in June 2008. We
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`developed the 500mg Glumetza and licensed it to Valeant (formerly Biovail) in 2002. In December 2005, we reacquired the U.S. rights to Glumetza from
`Valeant, including an exclusive U.S. license to the 1000mg strength of Glumetza, which was developed by Valeant utilizing proprietary Valeant drug delivery
`technology.
`
`Diabetes
`
` Diabetes is a disease in which levels of glucose, a type of sugar found in the blood, are above normal. Diabetic patients do not produce sufficient insulin,
`a hormone produced in the pancreas, or do not properly use insulin, making it difficult for the body to convert food into energy. The body breaks down food
`into glucose, and delivers glucose to cells through the bloodstream. Cells use insulin to help process blood glucose into energy. In the case of type 2 diabetes,
`cells fail to use insulin properly or the pancreas cannot make as much insulin as the body requires. That causes the amount of glucose in the blood to increase,
`while starving cells of energy. Over time, high blood glucose levels damage nerves and blood vessels, which can lead to complications such as heart disease,
`stroke, blindness, kidney disease, nerve problems, gum infections and amputation.
`
` Type 2 diabetes is the most common form of diabetes, accounting for 90 to 95 percent of all diabetes cases, according to the National Institute of
`Diabetes and Digestive and Kidney Diseases of the National Institutes of Health, or the NIDDK.
`
`Target Market
`
` According to the American Diabetes Association (ADA), 25.8 million people in the United States have diabetes. Of those, 18.8 million are diagnosed.
`The ADA estimates that 1.9 million new cases of diabetes were diagnosed in people aged 20 or older in 2010. Among adults with diagnosed diabetes,
`58 percent take oral medication only, and 14 percent take both insulin and oral medication, according to the 2007-2009 National Health Interview Survey of
`the Centers for Disease Control and Prevention.
`
`Glumetza Collaboration, Commercialization and Licensing Arrangements
`
` Santarus, Inc. Commercialization Agreement. In July 2008, we entered into a promotion agreement with Santarus granting Santarus exclusive right to
`promote Glumetza in the United States. Santarus began promotion of Glumetza in October 2008. In August 2011, we restructured our agreement with
`Santarus and entered into a commercialization agreement that superseded the July 2008 promotion agreement. Under the commercialization agreement, we
`granted Santarus exclusive rights to manufacture and commercialize Glumetza in the United States in return for a royalty on Glumetza net sales.
`
` During 2011, we sold Glumetza for the first eight months of the year, recognized Glumetza product sales and paid Santarus a promotion fee equal to 75%
`of Glumetza gross margin. In the final four months of the year, Santarus was responsible for Glumetza distribution and sales, recognized Glumetza product
`sales and paid us a royalty equal to 26.5% of net sales. During the first 8 months of 2011, we recognized $40.7 million in product sales of Glumetza,
`$3.8 million in cost of sales of Glumetza, and $27.3 million in promotion fee expense to Santarus. We recognized $9.6 million in royalty revenue during the
`final four months under the commercialization agreement.
`
` Pursuant to the commercialization agreement, we transitioned to Santarus responsibility for manufacturing, distribution, pharmacovigilance and
`regulatory affairs. We ceased shipments of Glumetza in August 2011, and Santarus began selling Glumetza in September 2011. Santarus is responsible for
`advertising and promotional marketing activities for Glumetza. In November 2011, we and Santarus entered into an assignment and assumption agreement
`pursuant to which Santarus assumed all of our rights and obligations under our commercial manufacturing agreement with
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`Patheon, which provides that Patheon will serve as Santarus' sole commercial supplier of the 500mg Glumetza in the United States.
`
` Santarus pays us royalties on Glumetza net product sales in the United States, as follows:
`
`26.5% in 2011;
`
`29.5% in 2012;
`
`32.0% in 2013 and 2014; and
`
`34.5% in 2015 and beyond prior to generic entry of a Glumetza product.
`
`• • • •
`
` In the event of generic entry of a Glumetza product in the United States, the parties will equally share Glumetza proceeds based on a gross margin split.
`Santarus has the exclusive right to commercialize authorized generic versions of Glumetza. Santarus will not pay additional sales milestones to us, as was
`required under the prior promotion agreement.
`
` In connection with its assumption of distribution and sales responsibility of Glumetza, Santarus purchased our existing inventory of Glumetza and bulk
`metformin hydrochloride at cost. We are financially responsible for returns of Glumetza distributed by us, up to the amount of our product returns reserve
`account for Glumetza product returns on the date immediately before Santarus began distributing Glumetza. We are also be financially responsible for
`Glumetza rebates and chargebacks up to the amount of our reserve account for those items on the date immediately before Santarus began distributing
`Glumetza. Santarus is responsible for all other Glumetza returns, rebates and chargebacks.
`
` We have the option to co-promote Glumetza products to physicians other than those targeted by Santarus, subject to certain limitations. If we exercise
`this option, we will be entitled to receive a royalty equal to 70% of net sales attributable to prescriptions generated by our called upon physician, over a pre-
`established baseline.
`
` Under the commercialization agreement, we agreed to manage the patent infringement lawsuits against Sun Pharmaceutical Industries, Inc. (Sun) and
`Lupin Limited (Lupin), subject to certain consent rights in favor of Santarus, including with regard to any proposed settlements. Santarus reimburses us for
`70% of our non-settlement out-of-pocket costs, and we reimburse Santarus for 30% of its non-settlement out-of-pocket costs related to these two existing
`infringement cases.
`
` The commercialization agreement will continue in effect for so long as Santarus commercializes branded Glumetza or authorized generic products,
`unless terminated sooner. Subject to 60 days' prior written notice to Santarus, we may terminate the agreement if Santarus fails to meet its obligations with
`respect to minimum promotion and expenditure obligations and fails to cure any such breach within a specified time period. The commercialization agreement
`is also subject to early termination for certain other matters, such as a party's material breach or insolvency.
`
` Valeant (1000mg Glumetza License and Supply; Canadian License). In December 2005, we entered into a manufacturing transfer agreement and a
`supply agreement with Valeant related to the 1000mg Glumetza. Under those agreements, we received an exclusive license to market the 1000mg Glumetza
`in the United States, and an exclusive license to the "Glumetza" trademark in the United States for the purpose of marketing Glumetza. We purchase the
`1000mg Glumetza for Santarus exclusively from Valeant under the supply agreement, and Santarus reimburses us at cost. The supply agreement with Valeant
`has back-up manufacturing rights in our favor. If we exercise our back-up manufacturing rights, compensation to Valeant will change from a supply-based
`arrangement to royalties of six percent of net sales of the 1000mg Glumetza in the United States (or, if less, thirty percent of royalties and other similar
`payments from our licensees) under the manufacturing transfer agreement. We also pay Valeant royalties of one percent of net sales of the 500mg Glumetza
`in the United States (or, if less, five percent of royalties and other similar payments from our licensees).
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`Table of Contents
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` Valeant has an exclusive license in Canada to manufacture and market the 500mg Glumetza pursuant to an amended and restated license agreement we
`entered into with Valeant in December 2005. Under the agreement, we receive royalties of six percent of Canadian net sales of the 500mg Glumetza. We also
`receive payments from Valeant equal to one percent of Canadian net sales of the 1000mg Glumetza.
`
` King Pharmaceuticals (2006-2007). King Pharmaceuticals (King) promoted Glumetza in the United States between June 2006 and October 2007 under
`a promotion agreement we entered into with King in June 2006. Glumetza was launched in the United States in September 2006. In October 2007, we
`terminated our promotion agreement w