Liability Related to Sale of Future Royalties

September 18, 2015,

the Company consummated the Royalty Monetization, in which it sold certain royalty and milestone payment rights to its newly formed wholly owned subsidiary, ARPI LLC, pursuant to a Purchase and Sale Agreement, or PSA. Subsequently, ARPI LLC sold the royalty and milestone payment rights to PDL for an upfront cash purchase price of

$65.0

million, subject to a capped amount of

$195.0

million pursuant to the Subsequent Purchase and Sale Agreement, or SPSA. Under the SPSA, PDL will receive

75%

of the European royalties under the Amended License Agreement as well as

80%

of the

first

four

commercial milestones, worth

$35.6

million (or

80%

$44.5

million), subject to the capped amount. The Company is entitled to receive

25%

of the royalties,

20%

of the

first

four

commercial milestones,

100%

of the remaining commercial milestones and all remaining development milestones of

$43.5

million, including the

$15.0

million payment for the EC approval of the MAA for ZALVISO.

The Company and ARPI LLC continue to retain certain duties and obligations under the Amended License Agreement. These include the collection of the royalty and milestones amounts due and enforcement of related provisions under the Amended License Agreement, among others. In addition, the Company must prepare a quarterly distribution report relating to the Amended License Agreement, containing among other items, the amount of royalty and milestone payments received, reimbursable expenses and set-offs. The Company and ARPI LLC must also provide PDL with notice of certain communications, events or actions with respect to the Amended License Agreement and infringement of any underlying intellectual property.

The Company has significant continuing involvement in the Royalty Monetization primarily due to an obligation to act as the intermediary for the supply of

ZALVISO to

Grünenthal. Under the relevant accounting guidance, because of its significant continuing involvement, the Royalty Monetization has been accounted for as a liability that will be amortized using the interest method over the life of the arrangement. In order to determine the amortization of the liability, the Company is required to estimate the total amount of future royalty

and milestone payments to be received by PDL and payments the Company is required to make to PDL, up to a capped amount of

$195.0

million, over the life of the arrangement. The sum of the capped amount of

$195.0

million, less the

$61.2

million of net proceeds the Company received will be recorded as interest expense over the life of the liability. Consequently, the Company imputes interest on the unamortized portion of the liability and records interest expense. The Company’s estimate of the interest rate under the arrangement is based on the amount of royalty and milestone payments expected to be received by PDL over the life of the arrangement. The Company’s estimate of this total interest expense resulted in an effective annual interest rate of approximately

14%.

The Company will periodically assess the expected royalty and milestone payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments are greater or less than our initial estimates or the timing of such payments is materially different than our original estimates, the Company will prospectively adjust the amortization of the liability and the interest rate.

The following table shows the activity within the liability account during the year ended

December 31,

201

(in thousands):

	Year ended December 31, 201 7			Period from inception to December 31, 201 7
Liability related to sale of future royalties — beginning balance	$	72,987		$	—
Proceeds from sale of future royalties		—			61,184
Non-cash royalty revenue		(120	)		(127	)
Non-cash interest expense recognized		10,721			22,531

Liability related to sale of future royalties as of December 31, 2017		83,588			83,588
Less: current portion		(604	)		(604	)
Liability related to sale of future royalties — net of current portion	$	82,984		$	82,984

Estimated non-cash royalty revenue

$31.0

thousand recognized in the

fourth

quarter of

2017

has

not

yet been remitted to PDL and therefore is

not

included in the table above.

As royalties are remitted to PDL from ARPI LLC, as described in Note

“Organization and Summary of Significant Accounting Policies,” the balance of the liability will be effectively repaid over the life of the agreement. The Company will record non-cash royalty revenues and non-cash interest expense within its Consolidated Statements of Comprehensive Loss over the term of the Royalty Monetization.