PART I. FINANCIAL INFORMATION

The accompanying notes are an integral part of the condensed consolidated financial statements.

The accompanying notes are an integral part of the condensed consolidated financial statements.

The accompanying notes are an integral part of the condensed consolidated financial statements.

ARALEZ PHARMACEUTICALS INC.

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires the extensive use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. The most significant assumptions are employed in estimates used in determining values of: inventories; acquisition-date fair value of long-lived assets, including goodwill,   in-process research and development (“IPR&D”), and other intangible assets; accrued expenses; income taxes; accounting for share-based compensation; as well as estimates used in accounting for contingencies and revenue recognition. Actual results could differ from these estimates.

Concentration of Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, including money market funds. Our investment policy places restrictions on credit ratings, maturities, and concentration by type and issuer. We are exposed to credit risk in the event of a default by the financial institutions holding our cash and cash equivalents to the extent recorded on the balance sheet.

We are also subject to credit risk from our accounts receivable related to product sales. We monitor our exposure within accounts receivable and record a reserve against uncollectible accounts receivable as necessary. We extend credit to pharmaceutical wholesale distributors and specialty pharmaceutical distribution companies, primarily in Canada and the United States, and to other international distributors and hospitals. Customer creditworthiness is monitored and collateral is not required.

Inventory

Inventories are stated at the lower of cost or net realizable value on a first-in, first-out basis. Cost is determined to be the purchase price for raw materials and the production cost, including materials, labor and indirect manufacturing costs, for work-in-process and finished goods. The Company analyzes its inventory levels quarterly and writes-down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value, inventory in excess of expected sales requirements or inventory that fails to meet commercial sale specifications to cost of product revenues. Expired inventory is disposed of and the related costs are written off to cost of product revenues.

Intangible Assets

Goodwill

Goodwill relates to amounts that arose in connection with the acquisition of Tribute. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired when accounted for using the acquisition method of accounting for business combinations. Goodwill is not amortized but is evaluated for impairment on an annual basis, in the fourth quarter, or more frequently if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of the Company's reporting unit below its carrying amount.

IPR&D

IPR&D acquired in a business combination is capitalized as indefinite-lived assets on the Company's condensed consolidated balance sheets at its acquisition-date fair value. Until the underlying project is completed, these assets are accounted for as indefinite-lived intangible assets and are subject to impairment testing. Once the project is completed, the carrying value of the IPR&D is reclassified to other intangible assets, net and is amortized over the estimated useful

life of the asset. Post-acquisition research and development expenses related to the IPR&D projects are expensed as incurred.

The projected discounted cash flow models used to estimate the fair values of the Company's IPR&D assets reflect significant assumptions regarding the estimates a market participant would make in order to evaluate a drug development asset, including: (i) probability of successfully completing clinical trials and obtaining regulatory approval; (ii) market size, market growth projections, and market share; (iii) estimates regarding the timing of and the expected costs to advance clinical programs to commercialization; (iv) estimates of future cash flows from potential product sales; and (v) a discount rate.

The accounting standard for testing indefinite-lived intangible assets for impairment permits a company to first assess the qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. If, after assessing the totality of events or circumstances, a company concludes it is more likely than not that the fair value of the indefinite-lived intangible asset exceeds its carrying value, then the company is not required to take further action.

IPR&D is tested for impairment on an annual basis or more frequently if impairment indicators are present. If IPR&D becomes impaired or is abandoned, the carrying value of the IPR&D is written down to its revised fair value with the related impairment charge recognized in the period in which the impairment occurs. If the carrying value of the asset becomes impaired as the result of unfavorable data from any ongoing or future clinical trial, changes in assumptions that negatively impact projected cash flows, or because of any other information regarding the prospects of successfully developing or commercializing our programs, we could incur significant charges in the period in which the impairment occurs.

Other Intangible Assets, net

Other intangible assets, net consist of acquired technology rights. The Company amortizes its intangible assets using the straight-line method over their estimated economic lives. Costs to obtain, maintain and defend the Company's patents are expensed as incurred. We will evaluate the potential impairment of other intangible assets if events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. The impairment test is based on a comparison of the undiscounted cash flows expected to be generated from the use of the asset group and its eventual disposition to the carrying value of the asset group. If impairment is indicated, the asset is written down by the amount by which the carrying value of the asset exceeds the related fair value of the asset.

Revenue Recognition

Principal sources of revenue are (i) product sales from the product portfolio acquired with our acquisition of Tribute, and (ii) royalty revenues from sales of VIMOVO ® by our commercialization partners. In all instances, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, and collectibility of the resulting receivable is reasonably assured.

Product Revenues, net

All revenues from product sales are recorded net of applicable provisions for trade discounts, returns, and allowances in the same period the related sales are recorded. Estimates for gross-to-net provisions are analyzed quarterly.

Other revenues

Other revenues include revenue from licensing arrangements with other biopharmaceutical companies, including upfront payments, milestones payments, and royalties. Revenue from royalties is recognized when Aralez has fulfilled the terms in accordance with contractual agreements and has no material future obligation. Royalty revenue that is reasonably estimable and determinable is recognized based on those estimates which relies on information provided by

our distribution partners. License revenues may include upfront fees or the amortization of upfront fees as well as ongoing milestones that we may receive under a license and collaboration agreement.

At the inception of an agreement that includes milestone payments, we evaluate whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. If the milestones are deemed substantive and the milestone payments are nonrefundable, such milestone payments are recognized as revenue upon successful achievement of the milestones.

Income Taxes

We account for income taxes using the liability method in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), Topic 740, “Income Taxes” (“ASC 740”). Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax basis assets and liabilities and are measured by applying enacted rates and laws to taxable years in which differences are expected to be recovered or settled. Further, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the rate changes. A valuation allowance is required when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. Since our inception, we have incurred substantial cumulative losses and may incur substantial and recurring losses in future periods. The utilization of the loss carryforwards to reduce future income taxes will depend on our ability to generate sufficient taxable income prior to the expiration of the loss carryforwards. In addition, the maximum annual use of net operating loss and research credit carryforwards is limited in certain situations where changes occur in stock ownership.

Aralez and its subsidiaries will file federal and state income tax returns, as applicable, with the tax authorities in various jurisdictions including Canada, Ireland and the United States. Pozen is no longer subject to U.S. federal or North Carolina state income tax examinations by tax authorities for years before 2012. Tribute is no longer subject to Canadian income tax examinations by tax authorities for years before 2011. However, the loss and credit carryforwards generated by Pozen and Tribute may still be subject to change to the extent these losses and credits are utilized in a year that is subject to examination by tax authorities.

ASC 740 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return, including a decision whether to file or not file a return in a particular jurisdiction. Our financial statements reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts. We recognize any interest and penalties accrued related to unrecognized tax benefits as income tax expense.

Share-Based Compensation

We expense the fair value of employee share-based compensation over the employees' service periods, which are generally the vesting period of the equity award. For awards with performance conditions granted, we recognize compensation cost over the expected period to achieve the performance conditions, provided achievement of the performance conditions are deemed probable. Awards with market-based conditions are expensed over the performance period regardless of whether achievement of the market condition is deemed probable or is ultimately achieved. Compensation expense is measured using the fair value of the award at the grant date, adjusted for estimated forfeitures.

In order to determine the fair value of option awards on the grant date, we use the Black-Scholes option pricing model. Inherent in this model are assumptions related to expected share price volatility, estimated option life, risk-free interest rate and dividend yield. Our expected share price volatility assumption is based on the historical volatility of our stock, which is obtained from public data sources. The expected life represents the weighted average period of time that share-based awards are expected to be outstanding giving consideration to vesting schedules, historical exercise patterns and post-vesting cancellations for terminated employees that have been exhibited historically, adjusted for specific factors that may influence future exercise patterns. The risk-free interest rate is based on factual data derived from public sources. We use a dividend yield of zero as we have no intention to pay cash dividends in the foreseeable future. For

performance-based awards with market conditions, the Company used a Monte Carlo simulation model to determine the fair value of awards as of the grant date.

We estimate forfeitures based on our historical experience of pre-vesting cancellations for terminated employees. Our estimated forfeiture rate is applied to all equity awards, which includes option awards and restricted stock units, including performance stock units. We believe that our estimates are based on outcomes that are reasonably likely to occur. To the extent actual forfeitures differ from our estimates, such amounts will be recorde d as a cumulative adjustment in the period estimates are revised.

Determining the appropriate amount to expense for performance-based awards based on the achievement of stated goals requires judgment, including forecasting future performance results. The estimate of expense is revised periodically based on the probability of achieving the required performance targets and adjustments are made as appropriate. The cumulative impact of any revisions is reflected in the period of change. If any applicable financial performance goals are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed.

Fair Value Measurements

The accounting standard for fair value measurements defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and requires detailed disclosures about fair value measurements. Under this standard, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. This standard classifies these inputs into the following hierarchy:

The fair value hierarchy level is determined by asset class based on the lowest level of significant input. In periods of market inactivity, the observability of prices and inputs may be reduced for certain instruments. This condition could cause an instrument to be reclassified between levels.

The carrying amount of our cash and cash equivalents approximates its fair value due to the short-term nature of these amounts. Liabilities carried at fair value include the warrants liability, included within other current liabilities on our condensed consolidated balance sheet at March 31, 2016, where we utilized Level 3 inputs to estimate fair value.

Foreign currency

Our reporting currency is the U.S. dollar. The assets and liabilities of our subsidiaries that have a functional currency other than the U.S. dollar, primarily the Canadian dollar, are translated into U.S. dollars at the exchange rates in effect at the balance sheet date with the results of operations of subsidiaries translated at average exchange rates for the period. The cumulative foreign currency translation adjustment is recorded as a component of accumulated other comprehensive income within shareholders’ equity.

Transactions in foreign currencies are remeasured into the functional currency of the relevant subsidiary at the exchange rate in effect at the date of the transaction. Any monetary assets and liabilities arising from these transactions are translated into the functional currency at exchange rates in effect at the balance sheet date or on settlement. Resulting gains and losses are recorded in other income (expense), net within the condensed consolidated statements of operations.

Accumulated Other Comprehensive Income

A company is required to present, either on the face of the statement where net income is presented, in a separate statement of comprehensive income or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. There were no amounts reclassified out of accumulated other comprehensive income for the three months ended March 31, 2016 or 2015. Other comprehensive income for the three months ended March 31, 2016 related to foreign currency translation adjustments.

Basic and Diluted Net Loss Per Common Share

Basic net loss per common share has been computed by dividing net loss by the weighted average number of shares outstanding during the period. Except where the result would be antidilutive to income from continuing operations, diluted net loss per common share is computed assuming the conversion of convertible obligations and the elimination of the interest expense related to the Company’s 2.5% senior secured convertible notes due in 2022 (“2022 Notes”), and the exercise of options to purchase common shares, the exercise of warrants, and the vesting of restricted stock units (“RSUs”), including performance stock units (“PSUs”), as well as their related income tax effects. Diluted net loss per common share differs from basic net loss per common share for the three months ended March 31, 2016 given potential common shares underlying the warrants liability are dilutive when considering the unrealized gain recognized for the change in the fair value of the warrants during the period.

Shares outstanding at March 31, 2016 include (i) the issuance of 18.5 million shares as consideration for the acquisition of Tribute on February 5, 2016, and (ii) the issuance of 12.0 million shares to certain investors in connection with the Subscription Agreement, which increased additional paid-in capital during the three months ended March 31, 2016 by $115.1 million and $75.0 million, respectively. Refer to Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC and with applicable Canadian securities regulators on March 15, 2016, for additional information.

Potential common shares excluded from the calculation of diluted net loss per common share as their inclusion would have been antidilutive were:

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) , which requires revenue recognition based on the transfer of promised goods or services to customers in an amount that reflects consideration Aralez expects to be entitled to in exchange for goods or services. In August 2015, the FASB issued updated guidance deferring the effective date of the revenue recognition standard. The new rules supersede prior revenue recognition requirements and most industry-specific accounting guidance. In March and April 2016, the FASB issued additional updated guidance, which clarifies certain aspects of the ASU and the related implementation guidance issued by the FASB-IASB Joint Transition Resource Group for Revenue Recognition. The ASU will be effective for Aralez in the first quarter of 2018, with either full retrospective or modified retrospective application required. We have not yet selected a transition method and are evaluating the impact of the ASU on our financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10) , which requires equity investments to be measured at fair value with changes in fair value recognized in net income. It allows an entity to choose to measure equity investments that do not have readily determinable fair values at cost minus impairment. It also simplifies the impairment assessment of equity investments without readily determinable fair values and eliminates the requirements to disclose the methods used to estimate fair value for instruments measured at amortized cost on the balance sheet. The amendments in the ASU are effective for Aralez in the first quarter of 2018. We do not expect the adoption to have a material impact to our financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which supersedes current lease accounting guidance. The primary difference between current GAAP and the new standard is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under current GAAP. The standard requires a modified retrospective approach upon adoption, with practical expedients that may be available to elect. The standard is effective for Aralez in the first quarter of 2019 and early adoption is permitted. We are evaluating the impact of the ASU on our financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718) , which simplifies several aspects of the accounting for share-based payment transactions, such as the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments include the requirement to recognize excess tax benefits and tax deficiencies as income tax expense or benefit, and to recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. It also allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The amendments in the ASU are effective for Aralez in the first quarter of 2017, and early adoption is permitted. We are evaluating the impact of the ASU on our financial statements.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815) , which clarifies the steps required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts. The ASU clarifies that when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) is related to interest rates or credit risks. The ASU is intended to eliminate diversity in practice in assessing embedded contingent call (put) options in debt instruments. The amendments in the ASU are effective for Aralez in the first quarter of 2017, and early adoption is permitted. We do not expect the adoption to have a material impact to our financial statements.

2. BUSINESS COMBINATIONS AND ACQUISITIONS

Acquisition of Tribute

On February 5, 2016, Aralez completed its acquisition of Tribute. The transaction provided Aralez with increased financial strength and product portfolio diversity with several marketed products and product candidates acquired. Pursuant to the transaction, Tribute shareholders received 0.1455 common shares of Aralez, no par value per share (the “Aralez Shares”) in exchange for each common share of Tribute, no par value per share (the “Tribute Shares”)

held by such shareholders. At the effective time of the Merger, each share of Pozen common stock, $0.001 par value per share (the “Pozen Common Stock”) was cancelled and automatically converted into the right to receive one Parent Share.

We valued the entire issued and to be issued share capital of Tribute at approximately $115.1 million based on Pozen’s closing share price of $5.94 on February 5, 2016 and an exchange ratio of 0.1455. Upon the close of the transaction, (a) each outstanding Tribute warrant entitled its respective holders the right to purchase 0.1455 fully-paid and non-assessable Aralez Shares for no additional consideration beyond that set out in the respective Tribute warrant; (b) each Tribute employee stock option entitled the respective holders of the option to either (i) exchange their Tribute option for a Tribute common share immediately prior to the Merger or (ii) convert into Aralez options entitling the holder to purchase Aralez Shares equal to the number of 0.1455 Tribute Shares originally issuable (with the exercise price of each Aralez option equal to the original exercise price adjusted for the 0.1455 conversion); and (c) each Tribute compensation option entitled its respective holders the right to purchase 0.1455 fully-paid and non-assessable Aralez Shares, as well as 0.1455 one-half warrants for Aralez Shares, for no additional consideration beyond that set out in the respective compensation option certificate. As a result of the Merger, the warrants, employee stock options and compensation options are fully-vested and exercisable at any time.

The acquisition-date fair value of the consideration transferred is as follows:

The acquisition-date fair value of total consideration transferred above excludes approximately $0.5 million related to the accelerated vesting of certain equity awards of Tribute pursuant to the Merger Agreement, which was included in share-based compensation expense for the postcombination period ended March 31, 2016.

The transaction was accounted for as a business combination under the acquisition method of accounting. Accordingly, the tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the date of acquisition, with the remaining purchase price recorded as goodwill. The goodwill recognized is attributable primarily to strategic opportunities related to leveraging Tribute’s existing infrastructure. Goodwill is not deductible for tax purposes.

The following table summarizes the estimated preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition:

The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the February 5, 2016 acquisition date.

The fair values of intangible assets, including IPR&D, were determined using an income approach, including a discount rate applied to the projected net cash flows. We believe the assumptions are representative of those a market participant would use in estimating fair value. The preliminary fair value of intangible assets includes the following:

The deferred tax liability of $6.9 million relates primarily to the temporary differences associated with the identifiable intangible assets, which are not deductible for tax purposes.

The operating results of Tribute for the period from February 5, 2016 to March 31, 2016, including revenues and an operating loss of $3.6 million and $2.2 million, respectively, have been included in our condensed consolidated financial statements as of and for the period ended March 31, 2016. We incurred a total of $7.3 million in transaction costs in connection with the acquisition, which were included in selling, general and administrative expenses within the condensed consolidated statements of operations for the three months ended March 31, 2016.

The following supplemental unaudited pro forma information presents Aralez’s financial results as if the acquisition of Tribute had occurred on January 1, 2015:

The above unaudited pro forma information was determined based on the historical GAAP results of Aralez and Tribute. The unaudited pro forma condensed consolidated results are provided for informational purposes only and are not necessarily indicative of what Aralez’s consolidated results of operations actually would have been if the acquisition was completed on January 1, 2015 or what the consolidated results of operations will be in the future. The pro forma condensed consolidated net loss includes pro forma adjustments relating to the following significant recurring and non-recurring items directly attributable to the business combination, net of the pro forma tax impact utilizing applicable statutory tax rates:

3. BUSINESS AGREEMENTS

Agreement with AstraZeneca/Horizon regarding VIMOVO ®

In August 2006, we entered into a collaboration and license agreement, effective September 7, 2006 (the “Original AZ Agreement”), with AstraZeneca AB (“AstraZeneca”) regarding the development and commercialization of proprietary fixed dose combinations of the proton pump inhibitor (“PPI”) esomeprazole magnesium with the non-steroidal anti-inflammatory drug (“NSAID”) naproxen in a single tablet for the management of pain and inflammation associated with conditions such as osteoarthritis and rheumatoid arthritis in patients who are at risk for developing NSAID-associated gastric ulcers. Under the terms of the Original AZ Agreement, we granted to AstraZeneca an exclusive, fee-bearing license, in all countries of the world except Japan, under our patents and know-how relating to combinations of gastroprotective agents and NSAIDs (other than aspirin and its derivatives). We retained responsibility for the development and filing of the New Drug Application (“NDA”) for the product in the United States, while AstraZeneca was responsible for all development activities outside the United States, as well as for all manufacturing, marketing, sales and distribution activities worldwide. We agreed to bear all expenses related to certain specified U.S. development activities. AstraZeneca would pay all other development expenses, including all manufacturing-related expenses. The Original AZ Agreement established joint committees with representation of both AstraZeneca and us to manage the development and commercialization of the product. If consensus could not be reached between AstraZeneca and us, we generally would have the deciding vote with respect to development activities required for marketing approval of the product in the United States, and AstraZeneca generally would have the deciding vote with respect to any other matters. Pursuant to the terms of the Original AZ Agreement, we received an upfront license fee of $40.0 million from AstraZeneca.

We entered into an amendment to the Original AZ Agreement, effective as of September 6, 2007 (the “Amendment to the Original AZ Agreement”). Under the terms of the Amendment to the Original AZ Agreement, AstraZeneca agreed to pay us up to $345.0 million, in the aggregate, in milestone payments upon the achievement of certain development, regulatory and sales events. To date we have received an aggregate of $85.0 million in milestone payments including an upfront payment and payments for development and regulatory milestones. An additional $260.0 million is potentially payable to us as sales performance milestones if certain aggregate sales thresholds are achieved.

Pursuant to the Original AZ Agreement, as amended, we receive a flat, low double-digit royalty rate during the royalty term on annual net sales of products made by AstraZeneca, its affiliates and sublicensees in the United States and royalties ranging from the mid-single digits to the high-teens on annual net sales of products made by AstraZeneca, its affiliates and sublicensees outside of the United States. The royalty rate may be reduced due to the loss of market share as a result of generic competition inside and outside of the United States. Our right to receive royalties from AstraZeneca for the sale of such products expires on a country-by-country basis upon the later of (a) expiration of the last-to-expire of certain patent   rights   relating   to   such   products   in   that   country,   and   (b)   ten   years   after   the   first   commercial   sale   of   such   products   in   such   country.

Unless earlier terminated in accordance with its terms, the Original AZ Agreement, as amended, will expire upon the payment of all applicable royalties for the products commercialized under the agreement. Either party has the right to terminate by notice in writing to the other party upon or after any material breach of the agreement by the other party, if the other party has not cured the breach within 90 days after written notice to cure has been given, with certain exceptions. The parties also can terminate for cause under certain defined conditions. In addition, AstraZeneca can terminate at any time, at will, for any reason or no reason, in its entirety or with respect to countries outside the United States, upon 90 days’ notice. If terminated at will, AstraZeneca will owe us a specified termination payment or, if termination occurs after the product is launched, AstraZeneca may, at its option, under and subject to the satisfaction of conditions specified in the Original AZ Agreement, elect to transfer the product and all rights to us.

During 2013, AstraZeneca decided to cease promotion and sampling of VIMOVO in certain countries, including the United States and all countries in Europe, other than Spain and Portugal, which have pre-existing contractual relationships with third parties. In September 2013, we and AstraZeneca entered into a third amendment to the Original AZ Agreement which made clarifications to certain intellectual property provisions of the Original AZ Agreement to clarify that AstraZeneca’s rights under those provisions do not extend to products which contain

acetylsalicylic acid. In September 2013, we and AstraZeneca also executed a letter agreement whereby we agreed that in the event that AstraZeneca divested its rights and obligations to market VIMOVO in the United States to a third-party, AstraZeneca would be relieved of its obligations under the Original AZ Agreement, as amended, with respect to the United States as of the effective date of such divestiture, including its   obligation   under   the   Original   AZ   Agreement, as amended,   to   guarantee   the   performance   of   such   assignee   and/or   sublicensee.

In November 2013, AstraZeneca divested of all of its rights, title and interest to develop, commercialize and sell VIMOVO in the United States to Horizon Pharma USA, Inc. (“Horizon”). In connection with this divestiture, in November 2013, we and AstraZeneca entered into an Amended and Restated Collaboration and License Agreement for the United States (the “U.S. Agreement”) and an Amended and Restated License and Collaboration Agreement for outside the United States (the “ROW Agreement”), which agreements collectively amended and restated the Original AZ Agreement. With our consent pursuant to a letter agreement among us, AstraZeneca and Horizon, AstraZeneca subsequently assigned the U.S. Agreement to Horizon in connection with the divestiture. Further, the letter agreement establishes a process for AstraZeneca and Horizon to determine if sales milestones set forth in the Original AZ Agreement are achieved on a global basis and provides other clarifications and modifications required as a result of incorporating the provisions of the Original AZ Agreement into the U.S. Agreement and the ROW Agreement or as otherwise agreed by the parties.

Pursuant to an amendment of the U.S. Agreement (the “Amendment to the U.S. Agreement”) between us and Horizon, we are guaranteed an annual minimum royalty amount of $7.5 million each calendar year, provided that the patents owned by us which cover VIMOVO are in effect and no generic forms of VIMOVO are in the marketplace. The Amendment to the U.S. Agreement also provides that Horizon has assumed AstraZeneca’s right to lead the on-going Paragraph IV litigation relating to VIMOVO currently pending in the United States District Court for the District of New Jersey and will assume all patent-related defense costs relating to such litigation, including reimbursement up to specified amounts of the cost of any counsel retained by us, amends certain time periods for Horizon’s delivery of quarterly sales reports to us, and provides for quarterly update calls between the parties to discuss   performance   of   VIMOVO   and   Horizon’s   commercialization   efforts.

Agreements with GSK, Pernix and CII regarding MT 400 (including Treximet ® )

In June 2003, we entered into an agreement with Glaxo Group Limited, d/b/a GlaxoSmithKline (“GSK”) for the development and commercialization of proprietary combinations of a triptan (5-HT1B/1D agonist) and a long-acting NSAID (the “GSK Agreement”). The combinations covered by the GSK Agreement are among the combinations of MT 400 (including Treximet). Under the terms of the GSK Agreement, GSK has exclusive rights in the United States to commercialize all combinations which combine GSK’s triptans, including Imitrex ® (sumatriptan succinate) or Amerge ® (naratriptan hydrochloride), with a long-acting NSAID. We were responsible for development of the first combination product, while GSK provided formulation development and manufacturing.

Pursuant to the terms of the GSK Agreement, we received an initial $25.0 million payment from GSK and an aggregate of $55.0 million in milestone payments associated with the development and approval of Treximet. In addition, Pernix Therapeutics Holdings, Inc. (“Pernix”), as assignee of GSK, will pay two sales performance milestones totaling up to $80.0 million if certain sales thresholds are achieved. Pernix, as assignee of GSK, will pay royalties on all net sales of marketed products until at least the expiration of the last-to-expire issued applicable patent based upon the scheduled expiration of currently issued patents. Pernix may reduce, but not eliminate, the royalty payable to us if generic competitors attain a pre-determined share of the market for the combination product, or if Pernix owes a royalty to one or more third parties for rights it licenses from such third parties to commercialize the   product.

In November 2011, we entered into a purchase agreement with CPPIB Credit Investments Inc. (“CII”), pursuant to which we sold, and CII purchased, our right to receive future royalty payments arising from U.S. sales of MT 400, including Treximet. By virtue of the agreement, we will receive a 20% interest in any royalties paid on net sales of Treximet and such other products in the United States to CII relating to the period commencing in the second quarter of   2018.

In May 2014, we, GSK, CII and Pernix, entered into certain agreements in connection with GSK’s divestiture of

all of its rights, title and interest to develop, commercialize and sell Treximet in the United States to Pernix. Upon the closing of the transaction in August 2014, with our consent, GSK assigned the GSK Agreement to Pernix. Immediately following the closing of the transaction, we entered into an amendment to the GSK Agreement with Pernix. This amendment, among other things, amends the royalty provisions to provide for a guaranteed quarterly minimum royalty of $4 million for the calendar quarters commencing in January 2015 and ending in March 2018 and requires that Pernix continue certain of GSK’s ongoing development activities and to undertake certain new activities, for which we will provide reasonable assistance. This amendment to the GSK Agreement also eliminates restrictions in the GSK Agreement on our right to develop and commercialize certain dosage forms of sumatriptan/naproxen combinations outside of the United States and permits us to seek approval for these combinations on the basis of the approved NDA for Treximet. Pernix also granted us a warrant to purchase 500,000 shares of Pernix common stock at an exercise price equal to $4.28 per share, which represented the closing price of Pernix common stock as reported on the NASDAQ Global Market on May 13, 2014. In the first quarter of 2015, the Company sold the warrant for $2.5 million. In July 2014, we and Pernix entered into a second amendment of the GSK Agreement, effective upon the closing of the transaction in August 2014, which permits Pernix’s Irish affiliate (to which Pernix assigned its rights) to further assign   the   GSK   Agreement   without   our   prior   written   consent   as   collateral   security   for   the   benefit   of   certain   lenders.

Agreements with Sun Pharma for Fibricor ®

In May 2015, Tribute Pharmaceuticals International Inc. (“TPII”), a Barbados corporation and a wholly-owned subsidiary of Tribute, acquired the U.S. rights to Fibricor and its related authorized generic (collectively, the “Fibricor Products”) from a wholly-owned step-down subsidiary of Sun Pharmaceutical Industries Ltd. (“Sun Pharma”). Financial terms include a total payment of $10.0 million of which approximately $3.0 million is due in May 2016 and is included as a liability assumed in the Merger. In connection with its acquisition of Fibricor, TPII also entered into a transition services and supply agreement with Sun Pharma to facilitate the seamless and efficient transfer of the Fibricor Products to TPII. The agreement required that Sun Pharma continue to manufacture and distribute the Fibricor Products until TPII obtained the necessary marketing authorizations to allow it to take over these functions.

Agreement with Nautilus for Cambia ®

In 2010, Tribute signed a license agreement with Nautilus Neurosciences, Inc. (“Nautilus”) for the exclusive rights to develop, register, promote, manufacture, use, market, distribute and sell Cambia in Canada. In 2011, Tribute and Nautilus executed the first amendment to the license agreement and in 2012 executed the second amendment to the license agreement. Up to $6.0 million in sales-based milestone payments are payable over time. Royalty rates are tiered and payable at rates ranging from 22.5% to 25.0% of net sales.

Agreements with Novartis for Fiorinal ®

In 2014, Tribute entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Novartis AG and Novartis Pharma AG (collectively, “Novartis”) pursuant to which Tribute acquired from Novartis the Canadian rights to manufacture, market, promote, distribute and sell Fiorinal, Fiorinal C, Visken® and Viskazide® for the relief of pain from headache and for the treatment of cardiovascular conditions (the “Novartis Products”), as well as certain other assets relating to the Novartis Products, including certain intellectual property, marketing authorizations and related data, medical, commercial and technical information, and the partial assignment of certain manufacturing and supply agreements and tenders with third parties (the “Acquired Assets”). Tribute also assumed certain liabilities arising out of the Acquired Assets and the Licensed Assets (as defined below) after the acquisition, including product liability claims or intellectual property infringement claims by third parties relating to the sale of the Novartis Products by Tribute in Canada. In connection with the acquisition of the Acquired Assets, and pursuant to the terms of the Asset Purchase Agreement, Tribute concurrently entered into a license agreement with Novartis AG, Novartis Pharma AG and Novartis Pharmaceuticals Canada Inc. (the “License Agreement”), under which the Novartis entities agreed to license to Tribute certain assets relating to the Novartis Products, including certain intellectual property, marketing authorizations and related data, and medical, commercial and technical information (the “Licensed Assets”).

Agreement with Actavis for Bezalip ® SR and Soriatane ®

In 2008, Tribute signed a Sales, Marketing and Distribution Agreement with Actavis Group PTC ehf

(“Actavis”) to perform certain sales, marketing, distribution, finance and other general management services in Canada in connection with the importation, marketing, sales and distribution of Bezalip SR and Soriatane (the “Actavis Products”). In 2010, a first amendment was signed with Actavis to grant Tribute the right and obligation to more actively market and promote the Actavis Products in Canada. In 2011, a second amendment was signed with Actavis that extended the term of the agreement, modified the terms of the agreement and increased Tribute’s responsibilities to include the day-to-day management of regulatory affairs, pharmacovigilance and medical information relating to the Actavis Products. Tribute pays Actavis a sales and distribution fee up to an annual base-line net sales forecast plus an incremental fee for incremental net sales above the base-line. In 2011, Tribute signed a Product Development and Profit Share Agreement with Actavis to develop, obtain regulatory approval of and market Bezalip SR in the United States, Aralez will owe a milestone payment of $5.0 million to Actavis upon receipt of the regulatory approval to market Bezalip SR in the United States.

Agreement with Faes for BLEXTEN TM

In 2014, Tribute entered into an exclusive license and supply agreement with Faes Farma, S.A. (“Faes”), a Spanish pharmaceutical company, for the exclusive right to sell bilastine, a product for the treatment of allergic rhinitis and chronic idiopathic urticaria (hives) in Canada, which is now named BLEXTEN. The exclusive license is inclusive of prescription and non-prescription rights for BLEXTEN, as well as adult and pediatric presentations in Canada. Regulatory approval to sell BLEXTEN in Canada was received from Health Canada in April 2016. We will owe sales-based milestone payments to Faes if certain sales targets are met.

Warrants Liability

In connection with the acquisition of Tribute, Aralez assumed a liability for warrants that are treated as derivatives under accounting guidance for derivatives and hedging as they were issued with exercise prices denominated in a currency different than the Company’s reporting currency. Approximately 2.8 million of the total 3.8 million common shares underlying the warrants outstanding as of March 31, 2016 are classified as liabilities. The warrants liability is valued using a Black-Scholes valuation model, which incorporates Level 3 assumptions including the volatility of the underlying share price and the expected term. The change in the fair value of the warrants liability of

$4.6 million is included within other income (expense), net in the condensed consolidated statements of operations for the three months ended March 31, 2016.

The significant unobservable inputs used in the fair value measurement of our warrants liability include the volatility of our share price and the expected term. Significant increases or decreases in the volatility and expected term utilized would result in a significant higher or lower fair value measurement, respectively.

The table below provides a roll-forward of fair value balances that used Level 3 inputs:

There were no impairment losses to goodwill during the period ended March 31, 2016.

The increase in the gross carrying amount between the Merger closing date and March 31, 2016 is due to the impact of foreign currency translation adjustments between the Canadian and U.S. dollars. Amortization expense was $1.3 million for the three months ended March 31, 2016. There was no amortization expense for the three months ended March 31, 2015.

The estimated aggregate amortization of intangible assets as of March 31, 2016, for each of the five succeeding years and thereafter is as follows:

Exit and Disposal Activities

In connection with the Merger, the Company incurred certain exit costs, primarily severance benefits to former Pozen and Tribute employees. The Company incurred severance expense of $1.1 million during the three months ended March 31, 2016, which is included within selling, general and administrative expenses in the condensed consolidated statements of operations.  

The following table summarizes the exit activity within accrued compensation and other long-term liabilities in the condensed consolidated balance sheets:

Of the accrued severance amounts, the Company expects to pay $4.4 million in 2016 and $0.4 million in 2017.

8. DEBT

Convertible Notes

On February 5, 2016, Aralez issued $75.0 million aggregate principal of the 2022 Notes resulting in net proceeds to Aralez, after debt issuance costs, of $74.5 million in connection with the Facility Agreement, which was executed in December 2015 among the Company, Pozen, Tribute and certain lenders. The 2022 Notes are convertible into common shares of Aralez at an initial conversion premium of 32.5%, subject to adjustment upon certain events, which is equivalent to an initial conversion price of approximately $8.28 per common share. Holders of the 2022 Notes may convert the 2022 Notes at any time and the 2022 Notes are not pre-payable by Aralez. Interest is payable to the note holders quarterly in arrears on the first business day of each January, April, July and October. Interest expense for the three months ended March 31, 2016 was $0.3 million, which includes the amortization of debt issuance costs. The fair value of the $75.0 million aggregate principal amount of the outstanding 2022 Notes was estimated to be approximately $59.9 million as of March 31, 2016 using a binomial lattice model, which incorporates Level 3 inputs. The carrying amount of the 2022 Notes was $74.5 million as of March 31, 2016, which is the principal amount outstanding, net of $0.5 million of unamortized debt issuance costs to be amortized over the remaining term of the 2022 Notes.

Credit Facility

Under the terms of the Facility Agreement, Aralez may also borrow from the lenders up to $200 million under a credit facility until April 30, 2017. The credit facility can be drawn upon for permitted acquisitions and is to be repaid over a six-year period from each draw. Amounts drawn under the credit facility will bear an interest rate of 12.5% per annum and shall be prepayable in whole or in part at any time following the end of the sixth month after the funding date of each draw. The Facility Agreement contains various representations and warranties, and affirmative and negative covenants, customary for financings of this type, including, among other things, limitations on asset sales, mergers and acquisitions, indebtedness, liens and dividends. There were no outstanding borrowings under the credit facility as of March 31, 2016.

MFI Note

On June 16, 2015, Tribute acquired Medical Futures Inc. (“MFI”). As part of the consideration paid, Tribute issued a one-year unsecured convertible promissory note in the aggregate amount of C$5.0 million ($3.9 million) to the

prior owner of MFI (“MFI Note”). The MFI Note bears an interest rate of 8% per annum and is convertible in whole or in part at the holder’s option at any time during the term into Aralez common shares at a conversion rate of C$1.777 per Tribute common share, which equals a conversion rate of C$12.21 per Aralez common share (subject to adjustment in certain events). If the MFI Note is not converted, we will have to repay this loan along with accrued interest at its maturity date of June 16, 2016.

9. SHARE-BASED COMPENSATION

Summary of Share-Based Compensation Plans

In December 2015, our Board of Directors adopted the Aralez Pharmaceuticals 2016 Long-Term Incentive Plan (the “2016 Plan”), which became effective on February 5, 2016, upon consummation of the Merger. The 2016 Plan is the only existing plan in which we are authorized to grant equity-based awards. The 2016 Plan provides for grants of stock options, stock appreciation rights, stock awards, stock units, performance shares, performance units, and other stock-based awards to employees, directors, and consultants. Under the 2016 Plan, the Company initially reserved 2,300,000 common shares for grant plus (i) the number of shares available for issuance under both the Pozen Inc. 2010 Equity Compensation Plan and the Amended and Restated Option Plan of   Tribute Pharmaceuticals Canada Inc. that were not subject to outstanding awards upon the effective date and (ii) the number of shares required to cover each stock option granted in substitution of stock options held by employees of Tribute, as required to consummate the Merger. At March 31, 2016, there were 2,433,414 common shares remaining available for grant under the 2016 Plan.

Summary of Share-Based Compensation Expense

Share-based compensation expense recorded in the condensed consolidated statements of operations for the three months ended March 31, 2016 and 2015, is as follows:

Included in the table above is approximately $0.5 million of postcombination share-based compensation expense related to the accelerated vesting of certain Tribute equity awards upon consummation of the Merger, which was recorded as selling, general and administrative expense for the three months ended March 31, 2016.

The weighted average grant date fair value for option awards granted during the three months ended March 31, 2016 was $2.60.

During the three months ended March 31, 2016, 654,737 PSUs with both market-based and service conditions were granted with an aggregate grant-date fair value of $2.8 million. The PSUs vest at the end of a three-year performance period based on the achievement of pre-determined performance goals.

10. COMMITMENTS AND CONTINGENCIES

Operating Leases

We lease office space and certain equipment under cancellable and non-cancelable operating lease agreements. Rent expense was approximately $0.2 million and $0.1 million for the three months ended March 31, 2016 and 2015, respectively. Future minimum payments under our non-cancelable lease agreements at March 31, 2016 were as follows (in thousands):