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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________
FORM 10-Q
___________________________________________
(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
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: 001-34962
ZOGENIX, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware20-5300780
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
5959 Horton Street, Suite 500
Emeryville, California 94608
(Address of Principal Executive Offices and Zip Code)
510-550-8300
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.001 per shareZGNXThe Nasdaq Global Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes   ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No
The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of April 30, 2021 was 55,812,590.



ZOGENIX, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2021
TABLE OF CONTENTS
 
Page
Financial Statements




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZOGENIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except par value)

March 31, 2021December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents$86,317 $166,916 
Marketable securities348,905 338,193 
Accounts receivable, net6,119 3,824 
Inventory2,324 1,026 
Prepaid expenses and other current assets11,065 12,215 
Total current assets454,730 522,174 
Property and equipment, net8,377 8,724 
Operating lease right-of-use assets7,452 7,748 
Intangible asset, net96,587 98,558 
Goodwill6,234 6,234 
Other non-current assets7,584 7,692 
Total assets$580,964 $651,130 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$11,964 $11,945 
Accrued and other current liabilities30,749 54,964 
Deferred revenue, current5,297 5,318 
Current portion of operating lease liabilities1,621 1,688 
Current portion of contingent consideration8,900 8,800 
Total current liabilities58,531 82,715 
Deferred revenue, noncurrent5,664 5,479 
Operating lease liabilities, net of current portion9,937 10,314 
Contingent consideration, net of current portion34,100 33,600 
Convertible senior notes151,451 149,353 
Total liabilities259,683 281,461 
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000 shares authorized; none issued and outstanding
  
Common stock and additional paid-in capital, $0.001 par value: 100,000 shares authorized; 55,813 and 55,736 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively
1,701,788 1,694,580 
Accumulated deficit(1,380,470)(1,324,840)
Accumulated other comprehensive loss(37)(71)
Total stockholders’ equity321,281 369,669 
Total liabilities and stockholders’ equity$580,964 $651,130 
See accompanying notes to the unaudited condensed consolidated financial statements.
ZOGENIX, INC. | Q1 2021 Form 10-Q | 1


ZOGENIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share amounts)
Three Months Ended March 31,
20212020
Revenues:
Net product sales$12,349 $ 
Collaboration revenue1,335 1,249 
Total revenues13,684 1,249 
Costs and expenses:
Cost of product sales (excluding amortization of intangible asset)676  
Research and development30,969 33,240 
Selling, general and administrative31,272 21,318 
Intangible asset amortization1,971  
Acquired in-process research and development costs 1,500 
Change in fair value of contingent consideration600 (7,900)
Total costs and expenses65,488 48,158 
Loss from operations(51,804)(46,909)
Interest income308 1,088 
Interest expense(3,737) 
Other (expense) income, net(397)20,021 
Net loss$(55,630)$(25,800)
Net loss per share, basic and diluted$(1.00)$(0.54)
Weighted average number of shares used in the calculation of basic and diluted net loss per common share55,750 48,185 
See accompanying notes to the unaudited condensed consolidated financial statements.
ZOGENIX, INC. | Q1 2021 Form 10-Q | 2


ZOGENIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
(In thousands)
Three Months Ended March 31,
20212020
Net loss$(55,630)$(25,800)
Other comprehensive (loss) income, net of tax:
Change in unrealized gains related to marketable securities(112)(172)
Foreign currency translation adjustments146 5 
Total other comprehensive income (loss)34 (167)
Comprehensive loss(55,596)(25,967)
See accompanying notes to the unaudited condensed consolidated financial statements.
ZOGENIX, INC. | Q1 2021 Form 10-Q | 3


ZOGENIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(In thousands)

Three Months Ended March 31, 2021Shares of
Common Stock
Common Stock
and
Additional
Paid-in Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
Balance at December 31, 202055,736 $1,694,580 $(1,324,840)$(71)$369,669 
Net loss— — (55,630)— (55,630)
Other comprehensive income— — — 34 34 
Issuance of common stock under employee equity plans120 6 — — 6 
Shares repurchased to satisfy tax withholding obligation of vesting restricted stock units(43)(896)— — (896)
Stock-based compensation— 8,098 — — 8,098 
Balance at March 31, 202155,813 $1,701,788 $(1,380,470)$(37)$321,281 


Three Months Ended March 31, 2020Shares of
Common Stock
Common Stock
and
Additional
Paid-in Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
Balance at December 31, 201945,272 $1,360,137 $(1,115,457)$379 $245,059 
Net loss— — (25,800)— (25,800)
Other comprehensive loss— — — (167)(167)
Issuance of common stock, net of offering costs9,798 221,708 — — 221,708 
Issuance of common stock under employee equity plans297 3,882 — — 3,882 
Shares repurchased to satisfy tax withholding obligation of vesting restricted stock units(26)(569)— — (569)
Stock-based compensation— 6,394 — — 6,394 
Balance at March 31, 202055,341 $1,591,552 $(1,141,257)$212 $450,507 

See accompanying notes to the unaudited condensed consolidated financial statements.
ZOGENIX, INC. | Q1 2021 Form 10-Q | 4


ZOGENIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
 
Three Months Ended March 31,
20212020
Cash flows from operating activities:
Net loss$(55,630)$(25,800)
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation8,098 6,394 
Depreciation and amortization2,365 357 
Amortization of debt discount and issuance costs2,098  
Acquired in-process research and development expense 1,500 
Change in fair value of contingent consideration liability600 (7,900)
Other non-cash items, net236 (38)
Changes in operating assets and liabilities:
Accounts receivable(2,295) 
Inventory(1,298) 
Prepaid expenses and other current assets1,150 (20,463)
Other non-current assets108 (405)
Accounts payable, accrued and other current liabilities(9,010)(4,435)
Operating lease liabilities(444)(452)
Deferred revenue164 (1,249)
Net cash used in operating activities(53,858)(52,491)
Cash flows from investing activities:
Cash paid for in-process research and development asset (1,500)
Purchases of marketable securities(141,652)(15,695)
Proceeds from sale and maturities of marketable securities130,888 54,605 
Purchases of property and equipment(87)(193)
Net cash (used in) provided by investing activities(10,851)37,217 
Cash flows from financing activities:
Payment of contingent consideration(15,000) 
Proceeds from issuance of common stock under equity incentive plans6 2,040 
Payments of tax withholding obligation on vesting restricted stock units(896)(569)
Proceeds from issuance of common stock, net of issuance costs 221,708 
Net cash (used in) provided by financing activities(15,890)223,179 
Net (decrease) increase in cash and cash equivalents(80,599)207,905 
Cash and cash equivalents, beginning of the period166,916 62,070 
Cash and cash equivalents, end of the period$86,317 $269,975 
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
 Right-of-use assets obtained in exchange for new operating lease liabilities$ $1,156 
See accompanying notes to the unaudited condensed consolidated financial statements.
ZOGENIX, INC. | Q1 2021 Form 10-Q | 5


ZOGENIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 – Organization, Basis of Presentation and Liquidity
Zogenix, Inc., and subsidiaries (also referred to as Zogenix, we, our or us) is a global biopharmaceutical company committed to developing and commercializing therapies with the potential to transform the lives of patients and their families living with rare diseases. Our first rare disease therapy, Fintepla (fenfluramine) oral solution, has been approved by the U.S. Food and Drug Administration (FDA) and the European Medicines Agency (EMA) for the treatment of seizures associated with Dravet syndrome, a rare, devastating, severe lifelong epilepsy. Fintepla is also currently under development in Japan. We also have two late-stage development programs underway: one for Fintepla for the treatment of seizures associated with Lennox-Gastaut syndrome (LGS), a rare childhood-onset epilepsy, and another for MT1621, an investigational novel substrate enhancement therapy for the treatment of TK2 deficiency, a rare genetic disorder.
We operate as a single operating segment engaged in the research, development and commercialization of pharmaceutical products, and our headquarters are located in Emeryville, California.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared pursuant to generally accepted accounting principles in the United States (GAAP) for interim financial reporting and the rules and regulations of the Securities and Exchange Commission (SEC). The condensed consolidated financial statements do not include all of the information and note disclosures required by GAAP for complete financial statements and should therefore be read in conjunction with the consolidated financial statements and related notes included in our 2020 Annual Report on Form 10-K (2020 Form 10-K), which was filed with the SEC on March 1, 2021. In the opinion of management, these condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for a fair statement of our financial position, results of operations and cash flows for the periods indicated. The results of operations for any interim period are not necessarily indicative of results of operations for any future period.
The accompanying condensed consolidated financial statements include the accounts of Zogenix, Inc. and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Liquidity
As of March 31, 2021, our cash, cash equivalents and marketable securities totaled $435.2 million. Excluding gains from two discrete business divestitures, we have incurred significant net losses and negative cash flows from operating activities since inception, resulting in an accumulated deficit of $1.4 billion as of March 31, 2021. We expect to continue to incur significant operating losses and negative cash flows from operations to support the sales and marketing of Fintepla for Dravet syndrome in the U.S. and Europe, potential commercialization of Fintepla for LGS, as well as continuing to advance our clinical programs. Additionally, we are obligated to make future milestone payments that are contingent upon the successful achievement of certain development, regulatory and sales-based milestone events related to Fintepla and MT1621. Historically, we have relied primarily on the proceeds from equity and convertible debt offerings to finance our operations. Until such time, if ever, we can generate a sufficient amount of revenue to finance our cash requirements, we may need to continue to rely on additional financing to achieve our business objectives. However, we may not be able to secure such financing in a timely manner or on favorable terms, if at all, and this risk could be exacerbated by the impact of COVID-19 on global economic conditions. Failure to raise sufficient capital when needed could require us to significantly delay, scale back or discontinue one or more of our product development programs or commercialization efforts or other aspects of our business plans, and our operating results and financial condition would be adversely affected.
Note 2 – Accounting Policies
Use of Estimates
The preparation of our condensed consolidated financial statements requires us to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, judgments and methodologies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenues and expenses. Actual results may differ from those estimates.
ZOGENIX, INC. | Q1 2021 Form 10-Q | 6


Significant Accounting Policies
The significant accounting policies and estimates used in the preparation of the accompanying condensed consolidated financial statements are described in Note 2, Summary of Significant Accounting Policies to the consolidated financial statements in our 2020 Form 10-K. There have been no material changes in our significant accounting policies during the three months ended March 31, 2021.
Recently Issued Accounting Pronouncements Not Yet Adopted
Account Standard Update (ASU) 2020-06, Debt — Debt with Conversion and Other Options (subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (subtopic 815-40) (ASU 2020-06) simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible debt instruments with cash conversion features. Specifically, ASU 2020-06 removes the existing guidance that we currently follow for our convertible senior notes, which requires entities to account for cash conversion features in equity separately from the host contract. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification and, as a result, not accounted for as derivatives, as well as fewer embedded features requiring separate accounting from the host contract. In addition, ASU 2020-06 eliminates the treasury stock method when calculating diluted earnings per share for convertible instruments that can be settled in whole or in part with equity and requires the use of the if-converted method. Early adoption is permitted, but no earlier than the fiscal year beginning after December 15, 2020. The standard can be applied using a full or modified retrospective approach.    
ASU 2020-06 will be effective for us as of January 1, 2022. When effective, we expect the accounting for our convertible senior notes as a single unit of account will: i) increase the carrying value of our convertible notes to be closer to its outstanding principal balance, ii) decrease our interest expense over the expected life of the financial instrument, and iii) result in the debt instrument’s effective interest rate to be closer to the stated coupon rate. In addition, the use of the more favorable treasury stock method, which allows an entity with a stated policy of settling convertible instruments with a combination of cash and shares to exclude shares issuable upon conversion that it expects to settle with cash when calculating diluted earnings per share, is no longer permitted. Even if we have the intent and ability to settle conversions by paying the conversion value in cash up to the principal amount being converted and any excess in shares, the adoption of ASU 2020-06 will require that we presume such instruments will be settled by issuance of shares (the “if-converted method”). As a result, our diluted earnings per share under ASU 2020-06 may be lower than if we were able to apply the treasury stock method when calculating the dilutive effect of our Notes in earnings per share.
Note 3 – Product Revenue and Concentration of Credit Risks
Net Product Sales
Fintepla is distributed in the U.S. through an exclusive arrangement with a specialty distributor, who is our customer. The specialty distributor subsequently resells our product through its related specialty pharmacy provider to patients and health care providers. Separately, we have or may enter into payment arrangements with various third-party payers including pharmacy benefit managers, private healthcare insurers and government healthcare programs who provide coverage and reimbursement for our products that have been proscribed to a patient.
In February 2021, we began to distribute Fintepla in Europe (currently, in Germany) through a third-party logistics provider (3PL) for distribution to pharmacies throughout Germany. The pharmacies are our customers, who subsequently resell our product directly to patients and health care providers.
For the three months ended March 31 ,2021, total net product sales generated from Fintepla was $12.3 million, and consisted of $11.3 million derived in the United States and $1.0 million derived in Germany. Fintepla was approved by the FDA in June 2020 and the EMA in December 2020.
We record product revenue at the net sales price (transaction price), which includes estimates of consideration payable to our customers and third-party payers for which reserves are established and that result from government rebates, chargebacks, co-pay assistance, prompt-payment discounts and other allowances that are offered under arrangements between us, our customers, and third-party payers related to the sales of Fintepla.
The following table summarizes the provisions, and credits/payments, for sales-related deductions.
ZOGENIX, INC. | Q1 2021 Form 10-Q | 7


(In thousands)RebatesTrade Discounts, Distributor Fees and OtherTotal
Balance at December 31, 2020$1,161 $129 $1,290 
Current period provisions1,904 593 2,497 
Credits/payments(774)(481)(1,255)
Balance at March 31, 2021$2,291 $241 $2,532 
We generally invoice our customers and recognize revenue once our performance obligations are satisfied, at which point payment is unconditional. Accordingly, our arrangements with customers did not give rise to contract assets or liabilities during the three months ended March 31, 2021.
Concentration of Credit Risk and Major Customers
As is common in the pharmaceutical industry for products treating rare diseases, Fintepla is distributed through exclusive arrangements with a specialty distributor in the U.S. and through a 3PL who distributes to pharmacy providers throughout Germany. As a result, our accounts receivable balance at March 31, 2021 is highly concentrated with our U.S. customer accounting for over 90% of the balance and over 90% of net product revenue for the three months ended March 31, 2021. Accounts receivable are stated net of an allowance that reflects our current estimate of credit losses expected to occur over the life of the receivable. Estimates of our allowance for credit losses consider a number of factors including existing contractual payment terms, individual customer circumstances, historical payment patterns of our customers, a review of the local economic environment and its potential impact on expected future customer payment patterns. As of March 31, 2021 and December 31, 2020, we believe that the allowances for doubtful accounts, if any, are adequate based on our analysis of the specific business circumstances and expectations of collection for each of the underlying accounts.
Note 4 – Collaboration Arrangement
Nippon Shinyaku Co., Ltd
In March 2019, we entered into an agreement (Shinyaku Agreement) with Nippon Shinyaku Co., Ltd. (Shinyaku) for the exclusive distribution of Fintepla in Japan for the treatment of Dravet syndrome and LGS. No development rights or intellectual property licenses were transferred. As part of the Shinyaku Agreement, we are responsible for completing the global clinical development and all regulatory approval activities for Fintepla to support the submission of new drug applications in Japan for Dravet syndrome and LGS. Upon regulatory approval of Fintepla in Japan, Shinyaku will act as our exclusive distributor for Fintepla and will be responsible for the commercialization activities including the promotion, marketing, sale and distribution of Fintepla in Japan.
Shinyaku has agreed to support development and regulatory approval of Fintepla in Japan by actively participating in the design of non-clinical, clinical and manufacturing requirements needed for regulatory submission, actively planning and participating in product labeling decisions and discussions with the Japanese Ministry of Health, Labor and Welfare (MHLW) and obtained distribution exclusivity through the payment of an initial fixed consideration. The collaborative activities under the Shinyaku Agreement prior to regulatory approval are within the scope of the accounting guidance related to collaborative arrangements.
Pursuant to the terms of the agreement, Shinyaku agreed to make aggregate fixed payments of $20.0 million in scheduled installments over a two-year period from the date of the agreement. As of March 31, 2021, all fixed consideration has been received. In addition, we can earn up to $66.0 million from Shinyaku for the achievement of certain regulatory milestones for the treatment of Dravet syndrome and LGS. At contract inception and through March 31, 2021, the regulatory milestone variable consideration was fully constrained as the achievement of the events tied to these regulatory milestone payments was highly dependent on factors outside our control.
We can earn up to an additional $42.5 million tied to the achievement of certain net sales milestones by Shinyaku through the term of the agreement, which generally expires in 2045. Shinyaku will only become a customer and subject to revenue from contracts from customers accounting guidance after regulatory approval of Fintepla in Japan occurs and Shinyaku places purchase orders with us. To date, Shinyaku has not provided us with any purchase orders and thus no revenue has been recognized for the supply of Fintepla.
For the three months ended March 31, 2021 and 2020, collaboration revenue under this arrangement was $1.3 million and $1.2 million, respectively. As of March 31, 2021, the deferred revenue balance of $11.0 million was classified as either current or net of current portion in the accompanying condensed consolidated balance sheets
ZOGENIX, INC. | Q1 2021 Form 10-Q | 8


based on the period over which the collaboration revenue is expected to be recognized. We expect to recognize collaboration revenue related to these collaborative activities through the end of 2023.
Note 5 – Strategic License Agreement
Tevard Collaboration, Option and License Agreement
In October 2019, we entered into an option agreement with Tevard Biosciences (Tevard), a privately-held company focused on advancing novel gene therapies and other genetic epilepsies. In December 2020, we exercised the option on Tevard’s Dravet syndrome program and entered into a collaboration, option and license agreement with Tevard (the Tevard Agreement) and will be responsible for funding preclinical studies and clinical development for this program. The financial terms of the Tevard Agreement included an upfront payment of $5.2 million. In connection with the transaction, we also purchased a convertible promissory note issued by Tevard in the amount of $5.0 million. The note matures in December 2022 and carries interest at 3.5% per year. The note will automatically convert into equity securities issued by Tevard in their next equity financing transaction at a conversion price equal to the price paid per share by other investors of the financing transaction.
For the three months ended March 31, 2021, amounts payable to reimburse Tevard for its costs incurred under the Dravet syndrome program of $0.8 million were recorded as research and development expense. For the three months ended March 31, 2020, option maintenance fees of $1.5 million incurred prior to our opt-in of Tevard’s Dravet syndrome program in December 2020 were immediately expensed to acquired in-process research and development costs.
At the inception of the agreement and through March 31, 2021, Tevard is a variable interest entity in which we held variable interests through our licensed Dravet syndrome program and convertible promissory note. We determined that we are not the primary beneficiary of Tevard as we do not have voting control or other forms of power to direct activities that most significantly impact Tevard’s economic performance.
At each reporting period, we evaluate the note receivable for current expected credit loss by considering factors such as historical experience, market data, issuer-specific factors, and current economic conditions. As of March 31, 2021, no provision for current expected credit losses was deemed necessary based on the expected timing of an equity financing that would result in the automatic conversion of the note to equity securities of Tevard and their existing cash on hand was sufficient to meet their operating requirements prior to the consummation of a financing transaction.
As of March 31, 2021, we do not have any current legal or contractual obligations to provide financing to Tevard and our maximum exposure to future loss is limited to the $5.0 million note receivable. While we have committed to fund the Dravet syndrome development program for Tevard’s early discovery activities, our obligation to fund these efforts is contingent upon continued involvement in the program and/or the lack of any adverse events which could cause the discontinuance of the program. Our exposure to future losses is limited as we have the unilateral right to terminate the agreement with 180 days advanced notice.
Note 6 – Cash, Cash Equivalents and Marketable Securities
The following tables summarize the amortized cost and the estimated fair value of our cash, cash equivalents and marketable securities as of March 31, 2021 and December 31, 2020:
ZOGENIX, INC. | Q1 2021 Form 10-Q | 9


March 31, 2021
(In thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Current assets:
Cash$26,847 $— $— $26,847 
Cash equivalents:
Money market funds38,974 — — 38,974 
Certificate of deposits1,500 — — 1,500 
Commercial paper18,996 — — 18,996 
Total cash and cash equivalents86,317 — — 86,317 
Marketable securities:
U.S. Treasuries26,924 6  26,930 
Certificate of deposits55,283   55,283 
Commercial paper233,419   233,419 
Corporate debt securities27,002 59 (2)27,059 
U.S. Government-sponsored enterprises debt securities6,200 14  6,214 
Total marketable securities348,828 79 (2)348,905 
Total cash, cash equivalents and marketable securities$435,145 $79 $(2)$435,222 


December 31, 2020
(In thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Current assets:
Cash$23,887 $— $— $23,887 
Cash equivalents:
Money market funds80,986 — — 80,986 
Commercial paper61,043 — — 61,043 
Certificate of deposits1,000 — — 1,000 
Total cash equivalents143,029 — — 143,029 
Total cash and cash equivalents166,916 — — 166,916 
Marketable securities:
U.S. Treasuries43,050 1 (1)43,050 
Commercial paper210,986   210,986 
Certificate of deposits44,480   44,480 
U.S. Government-sponsored enterprises debt securities6,200 17  6,217 
Corporate debt securities33,288 172  33,460 
Total marketable securities338,004 190 (1)338,193 
Total cash, cash equivalents and marketable securities$504,920 $190 $(1)$505,109 
As of March 31, 2021, all marketable securities held have maturity dates within one year or less. We regularly review our available-for-sale marketable securities in an unrealized loss position and evaluate the current expected credit loss by considering factors such as historical experience, market data, issuer-specific factors, and current economic conditions. As of March 31, 2021, the aggregate difference between the amortized cost and fair value of each security in an unrealized loss position was de minimis. Since any provision for expected credit losses for a security held is limited to the amount the fair value is less than its amortized cost, no allowance for expected credit loss was deemed necessary at March 31, 2021.
See Note 7 for further information regarding the fair value of our financial instruments.
ZOGENIX, INC. | Q1 2021 Form 10-Q | 10


Note 7 – Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-level valuation hierarchy has been established under GAAP for disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined 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; and
Level 3:Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Our financial instruments consist primarily of cash and cash equivalents, marketable securities, notes receivable and other current assets, accounts payable and accrued liabilities, convertible senior notes and contingent consideration liability, and are reported at their respective fair values on our condensed consolidated balance sheets. The remaining financial instruments are carried at cost which approximates their respective fair values because of the short-term nature of these financial instruments. See Note 6 for further information regarding the amortized cost of our financial assets.
The following tables summarize assets and liabilities recognized or disclosed at fair value on a recurring basis as of March 31, 2021 and December 31, 2020:

March 31, 2021
(In thousands)
Level 1Level 2Level 3Total
Assets:
Cash equivalents:
Money market funds$38,974 $ $ $38,974 
Certificate of deposits 1,500  1,500 
Commercial paper 18,996  $18,996 
Marketable securities:
U.S. Treasury securities 26,930  26,930 
Certificate of deposits 55,283  55,283 
Commercial debt securities 233,419  233,419 
Commercial paper 27,059  27,059 
U.S. Government-sponsored enterprises debt securities 6,214  6,214 
Total(1)
$38,974 $369,401 $ $408,375 
Liabilities:
Contingent consideration$ $ $43,000 $43,000 
ZOGENIX, INC. | Q1 2021 Form 10-Q | 11


December 31, 2020
(In thousands)
Level 1Level 2Level 3Total
Assets:
Cash equivalents:
U.S. Treasuries$ $13,799 $ $13,799 
Money market funds39,536   39,536 
Certificate of deposits 3,008  3,008 
Commercial paper 21,648  21,648 
Marketable securities:
U.S. Treasuries 27,896  27,896 
Commercial paper 101,951  101,951 
U.S. Government-sponsored enterprises debt securities 6,219  6,219 
Corporate debt securities 50,357  50,357 
Certificate of deposits 41,284  41,284 
Total(1)
$39,536 $266,162 $ $305,698 
Liabilities:
Contingent consideration$ $ $42,400 $42,400 

————————————
(1)Fair value is determined by taking into consideration valuations obtained from third-party pricing services. The third-party pricing services utilize industry standard valuation models, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; and other observable inputs.
Contingent Consideration Liability
As of March 31, 2021, our contingent consideration liability consisted of sales-based milestones for Fintepla, which resulted from our 2014 acquisition of Brabant. The maximum amount of future contingent consideration (undiscounted) that we could be required to pay was $45.0 million.
The following table provides a reconciliation of our contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2021 and 2020 (in thousands):
Three Months Ended March 31,
20212020
Balance at beginning of period$42,400 $63,800 
Change in fair value600 (7,900)
Balance at end of period$43,000 $55,900 
For the three months ended March 31, 2021, the $0.6 million increase to the estimated fair value of the contingent consideration liability reflects the interest component of contingent consideration related to the passage of time. For the three months ended March 31, 2020, the $7.9 million was primarily due to changes to our probability-weighted estimates for achieving regulatory/commercial milestones and the use of a higher discount rate to reflect an increase in credit-adjusted interest rates.
The following table summarizes the significant unobservable inputs used in the fair value measurement of our contingent consideration liabilities as of March 31, 2021.
ZOGENIX, INC. | Q1 2021 Form 10-Q | 12


Fair Value as of
March 31, 2021
(in thousands)
Valuation TechniqueUnobservable InputRange
Weighted
Average(1)
$43,000Discounted cash flowDiscount rate
1.9% — 3.0%
2.5%
Probability of payment
100%
100%
Projected year of payment2021 — 20302022
————————————
(1)Unobservable inputs were weighted by the relative fair value of each sales-based milestone payment.
Convertible Senior Notes
As of March 31, 2021 and December 31, 2020, the estimated fair value of our convertible senior notes due 2027 was approximately $259.8 million and $260.5 million, respectively, and was determined based on a binomial lattice model with Level 2 inputs. When determining the estimated fair value of our Notes, we utilize a binomial lattice model which incorporates the terms and conditions of our convertible senior notes and market-based risk measurements that are indirectly observable, such as credit risk. The lattice model produces an estimated fair value based on changes in the price of the underlying common stock price over successive periods of time. An estimated yield based on comparable non-convertible debt instruments in the market is used to discount the cash flows.
Note 8 – Intangible Asset
Our intangible asset consists of worldwide development, commercialization and related intellectual property rights including patents and licenses for Fintepla, our first rare disease therapy approved for marketing in the U.S. and Europe.
The following table provides details of the carrying amount of our finite-lived intangible asset:
(In thousands)March 31, 2021December 31, 2020
Finite-lived intangible asset$102,500 $102,500 
Accumulated amortization(5,913)(3,942)
Total intangible asset, net$96,587 $98,558 
As of March 31, 2021 and December 31, 2020, the carrying value of the intangible asset will be amortized over its estimated remaining useful life of 12.3 years and 12.5 years, respectively. At March 31, 2021, the estimated amortization expense for each of the five succeeding years was approximately $7.9 million per year.
Note 9 – Balance Sheet Details
Inventory
The following table provides details of our inventory balance:
(In thousands)March 31, 2021December 31, 2020
Raw materials$659 $391 
Work in process755 243 
Finished goods910 392 
Total$2,324 $1,026 
ZOGENIX, INC. | Q1 2021 Form 10-Q | 13


Accrued and Other Current Liabilities
The following table provides details of accrued and other current liabilities:
(In thousands)March 31, 2021December 31, 2020
Accrued clinical trial expenses$14,405 $16,477 
Accrued compensation7,135 10,917 
Accrued milestone payment 15,000 
Other accrued liabilities9,209 12,570 
Total$30,749 $54,964 
Note 10 – Convertible Senior Notes
In September and October 2020, we issued $230.0 million aggregate principal amount of 2.75% convertible senior notes due 2027 (the Notes) and realized net proceeds of $222.5 million. The Notes are governed by an indenture (Indenture), dated as of September 28, 2020, between Zogenix and U.S. Bank National Association, as trustee. Under the Indenture, the Notes are senior, unsecured obligations of Zogenix, are equal in right of payment with its future senior, unsecured indebtedness of Zogenix, and structurally subordinated to all indebtedness and liabilities of its subsidiaries. Interest is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2021 at a rate of 2.75% per year. The Notes mature on October 1, 2027, unless earlier repurchased, redeemed or converted. The Indenture contains customary terms and covenants and may become due and payable upon the occurrence of an event of default, but does not contain any financial covenants. As of March 31, 2021, we were in compliance with all covenants under the Indenture.
The Notes are convertible, subject to certain conditions described below, into shares of our common stock at an initial conversion rate of 41.1794 shares per $1,000 principal amount of the Notes, which represents an initial conversion price of approximately $24.28 per share, subject to adjustments upon the occurrence of certain events. Certain corporate events described in the Indenture may increase the conversion rate for holders who elect to convert their Notes in connection with such corporate event should they occur. We also may choose to repurchase outstanding Notes through open-market transactions, including through Rule 10b5-1 trading plan to facilitate open-market repurchases, or otherwise, from time to time.
Holders may convert the Notes in multiples of $1,000 principal amount at any time prior to October 1, 2027, but only in the following circumstances:
during any calendar quarter ending after December 31, 2020, if our closing stock price exceeds 130% of the conversion price on each of at least 20 trading days of the last 30 consecutive trading days of the immediately preceding calendar quarter;
during the five consecutive business day period after any 10 consecutive trading day period in which the Notes’ trading price is less than 98% of the product of our closing stock price times the conversion rate; or
the occurrence of certain corporate events, such as a change of control, merger, default or liquidation.
In addition, holders may also convert their Notes at their option at any time beginning on July 1, 2027 until the close of business on the second scheduled trading day immediately before the maturity date for the Notes, without regard to the foregoing circumstances.
Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination thereof at our election.
We may not redeem the Notes prior to October 7, 2024. On or after October 7, 2024, the Notes are redeemable for cash, in whole or in part (subject to minimum redemption amounts), at our option at any time, and from time to time, before the 40th scheduled trading day immediately before October 1, 2027, at a cash redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, but only if our closing stock price exceeds 130% of the conversion price on (1) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice; and (2) the trading day immediately before the date we send such notice. In addition, calling any Note for redemption will constitute a make-whole fundamental change (as defined in the Indenture) with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption.
ZOGENIX, INC. | Q1 2021 Form 10-Q | 14


In accounting for the issuance of the Notes, we separated the Notes between a liability component and an equity component utilizing applicable guidance for convertible instruments that may be settled with a combination of cash and shares, at our election. This resulted in the recognition of $152.1 million as the liability component of the Notes. The carrying amount of the equity component of approximately $77.9 million, representing the conversion option, was determined by deducting the fair value of the liability component from the principal amount of the Notes. The difference between the principal amount of the Notes and the liability component (the debt discount) is amortized to interest expense using the effective interest method over the expected term of the Notes. The equity component of the Notes is included in additional paid-in capital in the condensed consolidated balance sheets. In accounting for debt issuance costs, we allocated the total amount incurred of $7.5 million to the liability and equity components using the same proportions as the principal amount of the Notes. Debt issuance costs attributable to the liability component of $4.9 million were recorded as debt discount and are being amortized to interest expense over the expected term of the Notes. Debt issuance costs attributable to the equity component of approximately $2.6 million were netted with the equity component within our condensed consolidated stockholders' equity.
The equity component balance of $75.3 million, net of allocated issuance costs, is not remeasured as long as the conversion option of the Notes continues to meet the conditions for equity classification. As of March 31, 2021, there have been no changes to the net carrying value of the equity component balance since the date of issuance of the Notes.
The following table provides additional details on the carrying amounts of our:
(in thousands)March 31, 2021December 31, 2020
Liability component:
Principal amount of Notes$230,000 $230,000 
Less: unamortized debt discount and issuance costs(78,549)(80,647)
Net carrying amount of Notes$151,451 $149,353 
Equity component — net carrying amount$75,333 $75,333 
For the three months ended March 31, 2021, total interest expense recognized related to our Notes consists of the following:
(in thousands)Three Months Ended
March 31, 2021
Contractual coupon interest1,615 
Amortization of debt discount and issuance costs2,098 
Total interest expense$3,713 
For the three months ended March 31, 2021, the effective interest rate on the liability component of the Notes was 9.9%, which remained unchanged from the date of issuance. The unamortized debt discount and issuance costs of $78.5 million as of March 31, 2021 will be amortized over the remaining term of approximately 6.5 years. We had no interest expense for the same period in 2020 as we had no borrowings.
During the three months ended March 31, 2021, the closing price of our common stock did not exceed 130% of the applicable conversion price of our Notes on at least 20 of the last 30 consecutive trading days of the quarter; furthermore, no other conditions allowing holders of the Notes to convert have been met as of March 31, 2021. Therefore, the Notes are not convertible for the three months ending June 30, 2021 and are classified as long-term debt. Should the closing price conditions be met in a future quarter, the Notes will be convertible at the holders’ option during the immediately following quarter. Based on the closing price of our common stock of $19.52 per share on March 31, 2021, the if-converted value of the Notes was less than the outstanding principal balance.
Note 11 – Stock-Based Compensation
Stock Options
The following is a summary of stock option activity for the three months ended March 31, 2021 (in thousands, except per share data):
ZOGENIX, INC. | Q1 2021 Form 10-Q | 15


Shares
Weighted-
Average
Exercise
Price per Share
Outstanding at December 31, 20205,311 $29.12 
Granted
946 18.96 
Exercised
(1)10.33 
Canceled
(75)33.73 
Outstanding at March 31, 20216,181 $27.51 

Restricted Stock Units
Time-based restricted stock units (RSUs) and performance-based restricted stock units (PSUs) will be settled with our common stock on a one-to-one basis upon vesting. The following is a summary of our stock award activity for the three months ended March 31, 2021 (in thousands, except per share data):
RSUs
PSUs
Total
December 31, 2020393  393 
Granted(1)
450 482 932 
Vested
(119) (119)
Canceled
(6)(3)(9)
Outstanding at March 31, 2021718 479 1,197 
(1) Weighted-average grant date fair value
$18.76 $19.60 $19.20 
For the three months ended March 31, 2021, we granted 0.5 million PSUs to employees and executive officers. The PSUs are subject to vesting based on various performance conditions including achievement of certain regulatory milestones, net product revenue targets and the number of patients with reimbursed therapy, subject to continued service by the employee. Compensation expense related to equity-based awards with performance conditions and terms that provide for a graded vesting schedule is recognized over the requisite service period on a straight-line basis for each separately vesting tranche of the award, and is based on the expected satisfaction of the performance conditions at each reporting date. For performance conditions associated with regulatory milestones, we determined the outcome is not probable of being achieved unless and until the occurrence of the event. As a result, compensation expense will only be recognized, at a point in time, when regulatory approval occurs. We expect stock-based compensation will fluctuate from period to period based on the timing of achievement of regulatory milestones and such fluctuations may be material. For performance conditions associated with the net product revenue and the number of patients receiving reimbursed therapy, we determined the outcome is probable of being achieved and stock-based compensation expense is recognized commencing at the grant date over the implicit service period.
The following table summarizes the components of total stock-based compensation expense included in our condensed consolidated statements of operations:
Three Months Ended March 31,
(In thousands)20212020
Research and development$3,299 $2,729 
Selling, general and administrative4,799 3,665 
Total$8,098 $6,394 
The following table summarizes stock-based compensation expense by award type included in our condensed consolidated statements of operations:
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Three Months Ended March 31,
(In thousands)20212020
Time-based stock options and restricted stock units$7,475 $6,242 
Performance-based stock units427  
Employee stock purchase plan (ESPP)196 152 
Total$8,098 $6,394 
Shares reserved and available for future issuance under all employee equity plans as of March 31, 2021 and December 31, 2020 were 2.1 million shares and 3.9 million shares, respectively.
Note 12 – Net Loss Per Share
Basic net loss per share is calculated by dividing net loss by the weighted average number of shares outstanding for the period. Diluted net loss per share is calculated by dividing net loss by the weighted average number of shares of common stock and potential dilutive common stock equivalents outstanding during the period if the effect is dilutive. Our potentially dilutive shares of common stock include outstanding stock options, restricted stock units, warrants to purchase common stock and rights under our Notes.
A reconciliation of the numerators and denominators used in computing net loss per share is as follows (in thousands, except per share amounts):
Three Months Ended March 31,
20212020
Numerator:
Net loss$(55,630)$(25,800)
Denominator:
Shares used in per share calculation55,750 48,185 
Net loss per share, basic and diluted$(1.00)$(0.54)
The following table presents the potential shares of common stock outstanding that were excluded from the calculation of diluted net loss per share for the periods presented because including them would have been anti-dilutive (in thousands):
Three Months Ended March 31,
20212020
Shares subject to outstanding stock options5,476 4,450 
Shares subject to outstanding restricted stock units738 485 
Shares subject to outstanding warrants to purchase common stock28 28 
Shares issuable upon conversion of Notes9,430  
Total15,672 4,963 

Note 13 – United Kingdom (U.K.) Research and Development (R&D) Tax Relief Scheme
We conduct extensive research and development activities that benefit from U.K.’s small and medium-sized enterprises (SMEs) R&D tax relief scheme. Under this tax relief scheme, a SME can make an election (i) to receive an enhanced U.K. tax deduction on its eligible R&D activities or, when an SME entity is in a net operating loss position, or (ii) to surrender net operating losses that arise from its eligible R&D activities in exchange for a cash payment from the U.K. tax authorities. As the tax incentives may be received without regard to an entity’s actual tax liability, they are not subject to accounting for income taxes. Amounts recognized by us for cash payment claims under the SME R&D tax relief scheme are recorded as a component of other income after an election for tax relief has been made by submitting a claim for a discrete tax year and collectability is deemed probable and reasonably assured.
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In December 2019, we elected to surrender net operating losses by submitting claims to receive cash payments of $9.9 million and $9.8 million related to our 2017 and 2018 tax years, respectively. Upon approval of our submitted claims by the U.K. tax authorities in the first quarter of 2020, we recorded income of $19.7 million as a component of other income on the condensed consolidated statement of operations. For our 2019 tax year, we have not yet decided whether to seek tax relief by surrendering some of our losses for a tax credit cash rebate claim or electing to receive enhanced U.K. tax deductions on our eligible research and development activities. Under the U.K.’s tax legislation, there is a two-year window after the end of a tax year to seek relief under this tax relief scheme.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements include, but are not limited to, statements about:
our ability to commercialize Fintepla;
the progress and timing of clinical trials of Fintepla and MT1621;
the safety and efficacy of our product candidates;
the impact of COVID-19 pandemic;
the timing of submissions to, and decisions made by the U.S. Food and Drug Administration (FDA), the European Medicines Agency (EMA) and other regulatory agencies, including foreign regulatory agencies, with regards to the demonstration of the safety and efficacy of our product candidates and adequacy of the manufacturing processes related to our product candidates to the satisfaction of the FDA and such other regulatory agencies;
our ability to obtain, maintain and successfully enforce adequate patent and other intellectual property or regulatory exclusivity protection of our product candidates and the ability to operate our business without infringing the intellectual property rights of others;
the goals of our development activities and estimates of the potential markets for our product candidates, and our ability to compete within those markets;
our ability to obtain and maintain adequate levels of coverage and reimbursement from third-party payors for any of our product candidates that may be approved for sale, the extent of such coverage and reimbursement and the willingness of third-party payors to pay for our products versus less expensive therapies;
the impact of healthcare reform laws; 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” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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 the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements relate to future events or our future financial performance or condition and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q 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 of the date of this report. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained 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.
Fintepla® and Zogenix™ are our trademarks. All other trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. Use or display by us of other parties’ trademarks, trade dress or products is not intended 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 Quarterly Report on Form 10-Q to “Zogenix,” “we,” “us” and “our” refer to Zogenix, Inc., a Delaware corporation, and its consolidated subsidiaries.
The condensed consolidated financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2020 and the related Management’s Discussion and
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Analysis of Financial Condition and Results of Operations, both of which are contained in our 2020 Annual Report on Form 10-K, which was filed with the SEC on March 1, 2021.
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Overview
We are a global biopharmaceutical company committed to developing and commercializing therapies with the potential to transform the lives of patients and their families living with rare diseases. Our first rare disease therapy, Fintepla (fenfluramine) oral solution has been approved by the U.S. Food and Drug Administration (FDA) and the European Medicines Agency (EMA) for the treatment of seizures associated with Dravet syndrome, a rare, severe lifelong epilepsy. We have two additional late-stage development programs underway: Fintepla for the treatment of seizures associated with Lennox-Gastaut syndrome (LGS), another rare epilepsy and MT1621, an investigational therapy for the treatment of TK2 deficiency (TK2d), a rare genetic disease.
Fintepla for Patients with Rare Epilepsy Disorders
Dravet Syndrome
On June 25, 2020, the FDA granted approval of Fintepla for the treatment of seizures associated with Dravet syndrome in patients 2 years of age and older. During the third quarter of 2020, we commercially launched Fintepla through a restricted distribution program, called the Fintepla Risk Evaluation and Mitigation Strategy (REMS) Program. On December 18, 2020, the EMA granted marketing authorization for Fintepla for the treatment of seizures associated with Dravet syndrome as an add-on therapy to other anti-epileptic medicines for patients two years of age and older. Fintepla is available in Europe under a controlled access program requested by the EMA to prevent off-label use for weight management and to confirm that prescribing physicians have been informed of the need for periodic cardiac monitoring in patients taking Fintepla. We launched Fintepla for sale in Germany in February 2021 and expect to expand into other European markets thereafter. The approval for marketing of Fintepla in the U.S. and Europe was based on positive safety and efficacy results from two randomized, international, multi-center, placebo-controlled Phase 3 trials (Study 1 and Study 2), as well as data from an interim analysis of a long-term, open-label extension study in 330 Dravet syndrome patients treated up to three years.
In September 2020, we reported positive top-line results from our third Phase 3 trial (Study 3) of Fintepla for the treatment of seizures associated with Dravet syndrome. Study 3 corroborates the substantial impact of Fintepla on convulsive seizure reduction in patients with Dravet syndrome as previously demonstrated in Studies 1 and 2. Study 3 expands the countries where Fintepla has been evaluated to include Japan. In March 2019, we entered into an exclusive distribution agreement (Shinyaku Agreement) with Nippon Shinyaku Co., Ltd. (Shinyaku) for the potential commercialization of Fintepla in Japan. We retained responsibility for clinical development programs for Fintepla, including completion of an additional Phase 3 trial (Study 3) to expand the countries to include Japan, amongst others, where Fintepla for the treatment of Dravet syndrome has been evaluated. We expect to include Study 3 as the pivotal study in our planned submission of a Japanese New Drug Application (J-NDA) in the second half of 2021.
Lennox-Gastaut Syndrome
In February 2020, we reported positive top-line results from our Phase 3 multicenter, global LGS trial (Study 1601), a double-blind, placebo-controlled study to assess the safety, tolerability and efficacy of Fintepla when added to a patient’s current anti-epileptic regimen. Study 1601 included a total of 263 patients between the ages of 2 and 35 years whose seizures were uncontrolled while on one or more anti-epileptic drugs. The trial met its primary objective of demonstrating that Fintepla at a dose of 0.7 mg/kg/day was superior to placebo in reducing the frequency of drop seizures and demonstrated statistically significant improvements versus placebo in key secondary efficacy measures, including proportion of patients with a clinically meaningful reduction in drop seizure frequency. We have completed all required studies to support a supplemental New Drug Application (sNDA) in the U.S., and compilation of data package is ongoing with anticipated filing of sNDA in the third quarter of 2021. In Europe, we anticipate submitting a Marketing Authorization Application with European Medicines Agency in the fourth quarter of 2021.
Other Potential Indications
In addition to Dravet syndrome and LGS, we are evaluating the treatment potential of Fintepla in other serious, treatment-resistant epileptic syndromes, including CDKL5 Deficiency Disorder (CDD), an infantile-onset genetic seizure disorder. New data presented from an investigator-initiated study in CDD at the American Epilepsy Society Annual Meeting in December 2020 suggests potential of Fintepla for the treatment of seizures associated with CDD. We anticipate initiating a Phase 3 study of Fintepla for the treatment of CDD in the second half of 2021.
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MT1621 for Patients with TK2 Deficiency
As a result of our acquisition of Modis in September 2019, we became a party to the Exclusive License Agreement, by and between Modis and Columbia University, dated as of September 26, 2016 (the Columbia Agreement), related to MT1621. MT1621 is an investigational deoxynucleoside-combination substrate enhancement therapy in development for the treatment of TK2d, a rare, debilitating, and often fatal genetic mitochondrial DNA depletion disease that primarily affects infants and children and for which there are currently no approved therapies.
In April 2020, we held an End-of-Phase 2 meeting with the FDA and in June 2020, we met with the FDA to discuss chemistry, manufacturing, and controls (CMC) for MT1621. In the meetings, the FDA outlined the additional clinical and non-clinical information needed for an NDA submission. Based on the feedback, we expect availability of all required data by end of 2021 to support an NDA submission and anticipate submission of an NDA in the first half of 2022. In addition, we are conducting a Phase 1 pharmacokinetic (PK) study in renal impairment, as recommended by the FDA, to provide dosing recommendations in the setting of impaired renal function and include the results in the NDA submission. The FDA also concurred with our proposed CMC plan for the prospective NDA submission.
Preclinical Pipeline

Tevard Gene Therapy Collaboration for Genetic Epilepsies
In December 2020, we entered into a collaboration with Tevard Biosciences, Inc. (Tevard) for the research, development and commercialization of gene therapies for the treatment of Dravet syndrome and other epilepsy disorders. The collaboration is at the research and discovery stage and will leverage Tevard’s novel t-RNA-based technology to treat genetic disorders not amenable to traditional types of gene therapies, such as Dravet Syndrome.
Business Update Regarding the COVID-19 Pandemic
The current COVID-19 worldwide pandemic has presented substantial public health and economic challenges and is affecting our employees, patients and their families and caregivers, communities and business operations, as well as the U.S. and global economies and financial markets. International and U.S. governmental authorities in impacted regions are taking actions in an effort to slow the spread of COVID-19, including issuing varying forms of “stay-at-home” orders, and restricting business functions outside of one’s home. In response, we closed our offices for all but the most essential activities and have implemented a policy allowing all employees to work from home across all locations, following the guidelines or directives issued by federal, state and local government agencies in the U.S. as well as the U.K. government.
We commenced the commercial launch of Fintepla in the United States in July 2020 and in Germany in February 2021. Our commercialization efforts will need to navigate through the operational restrictions imposed on our sales force from quarantines, travel restrictions and bans and other governmental and healthcare restrictions related to COVID-19. As a result of these restrictions, until very recently, our sales force has not been able to conduct in-person interactions with physicians and healthcare providers and are largely restricted to primarily conducting educational and promotional activities for Fintepla virtually, which may impact our ability to market Fintepla. In addition, Fintepla is being launched through our Fintepla REMS program in the U.S. and a controlled access program in Europe, with each program requiring patients to obtain echocardiograms during this pandemic.
To date, we have been able to continue to supply Fintepla and MT1621 to our patients currently enrolled in our clinical trials and do not currently anticipate any interruptions in supply. Any delays in the completion of our clinical trials and any disruption in our supply chain could have a material adverse effect on our business, results of operations and financial condition. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international markets.
Critical Accounting Policies and Estimates
The preparation of our unaudited condensed consolidated financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based
ZOGENIX, INC. | Q1 2021 Form 10-Q | 22


on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our critical accounting policies are discussed in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” section of our 2020 Form 10-K. There have been no material changes during the three months ended March 31, 2021 to the critical accounting policies previously disclosed in that report.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements that are of significance or potential significance to us, see Note 2, Accounting Policies to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Results of Operations
Comparison of Three Months Ended March 31, 2021 and 2020
The following table summarizes our total revenues for the periods indicated:
Revenues
Three Months Ended March 31,
(in thousands)20212020Change
Net product sales$12,349 $— $12,349 
Collaboration revenue1,335 1,249 86 
Total revenues$13,684 $1,249 $12,435 
Net Product Sales
For the three months ended March 31, 2021, total net product sales generated from Fintepla was $12.3 million, and consisted of $11.3 million derived in the United States and $1.0 million derived in Germany. Fintepla was approved by the FDA in June 2020 and marketing authorization was granted by the EMA in December 2020.
Collaboration Revenue
Collaboration revenue was flat for the three months ended March 31, 2021 as compared to the same period in 2020 as we conducted Study 3 to expand the countries where Fintepla has been evaluated to include Japan in fulfillment of our performance obligations under the collaboration arrangement. We anticipate Study 3 will be the pivotal study included in our planned submission of a J-NDA, expected to occur in the second half of 2021.
Cost of Product Sales (Excluding Amortization of Intangible Asset)
Cost of product sales (excluding amortization of intangible asset) includes the cost of producing and distributing inventories that are related to product revenues during the respective period (including salary-related and stock-based compensation expenses for employees involved with production and distribution, freight and indirect overhead costs) and third-party royalties payable on our net product revenues. Cost of product sales may also include costs related to excess or obsolete inventory adjustment charges, abnormal costs, unabsorbed manufacturing and overhead costs, and manufacturing variances.
During the three months ended March 31, 2021, cost of product sales primarily consisted of royalties payable on net product sales of Fintepla under a license agreement and labeling and packaging costs. Substantially all the cost of product sold during the three months ended March 31, 2021 had a zero-cost basis. Prior to receiving FDA approval for Fintepla, we recorded all manufacturing product costs as research and development expense. We expect our inventory with zero-cost basis will be depleted by the end of 2021 and expect cost of product sales to increase as a percentage of net sales in future periods as we produce and then sell inventory that reflects the full cost of manufacturing.
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Research and Development Expenses
Three Months Ended March 31,
(in thousands)20212020Change
Research and development$30,969 $33,240 $(2,271)
Research and development (R&D) expenses consist of expenses incurred in developing, testing and seeking marketing approval of our product candidates, including: payments made to third-party clinical research organizations (CROs) and investigational sites, which conduct our clinical trials on our behalf, and consultants; expenses associated with regulatory submissions, pre-clinical development and clinical trials; payments to third-party manufacturers, which produce our active pharmaceutical ingredient and finished product; pre-launch inventory, personnel related expenses, such as salaries, benefits, travel and other related expenses, including stock-based compensation; and facility, maintenance, depreciation and other related expenses.
For each of our R&D programs, we incur both external and internal costs. External costs include clinical and non-clinical activities performed by CROs, lab services, purchases of product candidate materials and manufacturing development costs. We track external R&D expenses for each of our key development programs. We have not tracked internal costs on a program-by-program basis because our R&D employees and infrastructure resources are utilized across our product candidate development programs.
The table below sets forth components of our R&D expenses for the periods presented.
Three Months Ended March 31,
(in thousands)20212020Change
Fintepla for Dravet syndrome$4,515 $7,311 $(2,796)
Fintepla for LGS7,834 7,943 (109)
MT16215,997 1,652 4,345 
Tevard gene-therapy program for Dravet syndrome786 — 786 
Other(1)
177 797 (620)
Total external costs19,309 17,703 1,606 
Internal costs11,660 15,537 (3,877)
Total$30,969 $33,240 $(2,271)
————————————
(1)Other external costs include early-phase exploratory research programs.
In October 2014, we acquired worldwide development and commercialization rights to Fintepla from the acquisition of Brabant and have since incurred significant expenditures related to conducting clinical trials of Fintepla. R&D expenses related to Fintepla for Dravet syndrome decreased by $2.8 million for the three months ended March 31, 2021 compared to the same period in 2020 primarily due to the wind-down of clinical activities related to our Phase 3 trials Study 1 and Study 1504, partially offset by costs incurred to conduct a Phase 3 clinical trial (Study 3) to support a J-NDA submission in Japan. R&D expenses related to MT1621 increased by $4.3 million in the same year-over-year periods as we continue to advance the MT1621 development program, including work related to chemistry, manufacturing, and controls process requirements. Internal costs for research and development activities decreased by $3.9 million for the three months ended March 31, 2021 compared to the same period in 2020 as our medical affairs function subsequent to regulatory approval of Fintepla is classified as selling, general and administrative expenses.
Selling, General and Administrative Expenses
Three Months Ended March 31,
(in thousands)