Drug developer Zogenix Inc. (Nasdaq: ZGNX) plans to sell its common stock to raise $56 million after the company’s accountant raised concerns about Zogenix’s ability to continue without liquidation.

The San Diego-based company develops and commercializes medications for people with central nervous system and pain-related conditions. Ernst & Young LLP, Zogenix’s accountant, raised substantial doubt about the company’s ability to continue as a going concern, or without the threat of liquidation in March because of the company’s losses and lack of capital.

Zogenix, which laid off 55 people are part of a restructuring in May, brought in $7.2 million in revenue for the third quarter of 2013, compared with $8.5 million for the third quarter of 2012. Most of the company’s revenue came from sales of Sumavel DosePro, a migraine treatment. Other revenue came from the company’s agreement with Valeant Pharmaceuticals International Inc. (NYSE: VRX) to co-promote Migranal Nasal spray, which also aims to treat migraine headaches. 

Zogenix had a $10.9 million net loss for the third quarter of 2013, down from a $19.3 million net loss for the third quarter of 2012. As of Sept. 30, 2013, the company had an accumulated deficit of $374.6 million.

Zogenix entered into an underwriting agreement with Stifel Nicolaus & Co. Inc. and Leerink Swann LLC to sell about 26.67 million shares of common stock at $2.25 per share, it said in a Nov. 5 statement. Wells Fargo Securities LLC, Stifel and Leerink are acting as book-running managers for the offering. Oppenheimer & Co. and William Blair & Co. LLC are acting as co-managers for the offering.

The company is hoping to generate about $56 million from the sale, which is expected to close on Nov. 12.  The company’s shares opened at $2.74 on Nov. 12.

Without additional capital, Zogenix would have had to reduce the scope, eliminate one of its development programs, or shut down operations, the company says in a Nov. 4 filing with the U.S. Securities and Exchange Commission.

Zogenix was started in May 2006 as SJ2Therapeutics Inc., and changed its name in August 2006 to Zogenix.

The U.S. Food and Drug Administration approved Zohydro ER, an extended-release, oral form of hydrocodone that does not have acetaminophen, to manage sever pain. The company expects to launch Zohydro ER in March 2014. In the next few months Zogenix plans to focus on evaluating co-marketing opportunities and completing pre-commercial activities for the medication.

The company is also working to develop a medication called Relday, which would treat symptoms of schizophrenia and bipolar disorder. Management expects losses and negative cash flows to continue over the next year, the company says in a Nov. 4 SEC filing, as Zogenix continues to commercialize and develop drug candidates.

For last week’s edition of Turnaround Tuesday, see “Comstock Mining Increases Gold Production.” 

For more struggling companies, see Mergers & Acquisitions’ Distressed Company Watch List. 

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