##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
 For the quarterly period ended June 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
 For
the transition period fromto  .
 Commission File No. 1-15803
 AVANIR PHARMACEUTICALS, INC.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    33-0314804
(I.R.S. Employer Identification No.)101 Enterprise Suite 300, Aliso Viejo, California
(Address of principal executive offices)
    
    92656
(Zip Code)
 (949) 389-6700
  þ o
  o o
  Large
accelerated
filer oAccelerated
filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ o þ




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##### 



Table of Contents
 PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    3Condensed Consolidated Balance Sheets
    
    3Condensed Consolidated Statements of Operations
    
    4Condensed Consolidated Statements of Cash Flows
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    22Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    32Item 4.
    
    Controls and Procedures
    
    32PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    33Item 1A.
    
    Risk Factors
    
    33Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    42Item 3.
    
    Defaults Upon Senior Securities
    
    42Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    42Item 5.
    
    Other Information
    
    43Item 6.
    
    Exhibits
    
    43Signatures
    
    
    
    44EX-5.1EX-10.1EX-10.2EX-31.1EX-31.2EX-32.1




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 
 AVANIR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    September 30,2009
    
    
    2008(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    26,141,175
    
    
    $
    41,383,930Inventories
    
    
    17,000
    
    
    
    17,000Prepaid expenses
    
    
    401,777
    
    
    
    1,030,630Other current assets
    
    
    109,706
    
    
    
    237,334Current portion of restricted investments in marketable securities
    
    
    
    
    
    
    388,122Total current assets
    
    
    26,669,658
    
    
    
    43,057,016Restricted investments in marketable securities, net of current
portion
    
    
    468,475
    
    
    
    468,475Property and equipment, net
    
    
    615,579
    
    
    
    806,909Non-current inventories
    
    
    1,283,458
    
    
    
    1,316,277Other assets
    
    
    241,400
    
    
    
    257,484TOTAL ASSETS
    
    $
    29,278,570
    
    
    $
    45,906,161LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,025,090
    
    
    $
    451,846Accrued expenses and other liabilities
    
    
    910,515
    
    
    
    1,881,401Accrued compensation and payroll taxes
    
    
    877,876
    
    
    
    1,192,457Current portion of deferred revenues
    
    
    2,282,560
    
    
    
    2,333,932Notes payable
    
    
    
    
    
    
    25,744Total current liabilities
    
    
    5,096,041
    
    
    
    5,885,380Accrued expenses and other liabilities, net of current portion
    
    
    613,374
    
    
    
    868,517Deferred revenues, net of current portion
    
    
    8,393,392
    
    
    
    10,152,100Total liabilities
    
    
    14,102,807
    
    
    
    16,905,997Commitments and contingencies
Stockholders equity:Preferred stock  $0.0001 par value, 10,000,000 shares authorized,
no shares issued or outstanding as of June 30, 2009
(unaudited) and

September 30, 2008, respectively
    
    
    
    
    
    
    Common stock -$0.0001 par value, 200,000,000 shares authorized;
78,244,987 and 78,213,986 shares issued and outstanding as of
June 30, 2009 (unaudited) and September 30, 2008, respectively
    
    
    7,824
    
    
    
    7,821Additional paid-in-capital
    
    
    286,207,067
    
    
    
    284,986,815Accumulated deficit
    
    
    (271,039,128
    )
    
    
    (255,994,472
    )Total stockholders equity
    
    
    15,175,763
    
    
    
    29,000,164TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    29,278,570
    
    
    $
    45,906,161
  3




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AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months Ended June 30,
    
    
    Nine Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008REVENUES FROM PRODUCT SALESNet revenues
    
    $
    
    
    
    $
    3,550
    
    
    $
    
    
    
    $
    129,820Cost of revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,714Product gross margin
    
    
    
    
    
    
    3,550
    
    
    
    
    
    
    
    108,106REVENUES AND COST OF RESEARCH SERVICES AND OTHERRevenue from royalties and royalty rights
    
    
    420,376
    
    
    
    584,314
    
    
    
    2,872,827
    
    
    
    2,993,992Revenues from license agreements
    
    
    170,549
    
    
    
    1,534,552
    
    
    
    283,834
    
    
    
    1,648,459Revenues from government research grant services
    
    
    
    
    
    
    527,517
    
    
    
    
    
    
    
    1,006,922Revenues from research services and other
    
    
    590,925
    
    
    
    2,646,383
    
    
    
    3,156,661
    
    
    
    5,649,373Cost of research and development services
    
    
    
    
    
    
    155,450
    
    
    
    9,746
    
    
    
    232,257Cost of government research grant services
    
    
    
    
    
    
    358,028
    
    
    
    
    
    
    
    915,563Research services and other gross margin
    
    
    590,925
    
    
    
    2,132,905
    
    
    
    3,146,915
    
    
    
    4,501,553Total gross margin
    
    
    590,925
    
    
    
    2,136,455
    
    
    
    3,146,915
    
    
    
    4,609,659OPERATING EXPENSESResearch and development
    
    
    3,358,387
    
    
    
    3,139,685
    
    
    
    11,683,701
    
    
    
    10,090,610General and administrative
    
    
    2,204,435
    
    
    
    2,350,071
    
    
    
    6,679,027
    
    
    
    7,910,990Total operating expenses
    
    
    5,562,822
    
    
    
    5,489,756
    
    
    
    18,362,728
    
    
    
    18,001,600Loss from continuing operations
    
    
    (4,971,897
    )
    
    
    (3,353,301
    )
    
    
    (15,215,813
    )
    
    
    (13,391,941
    )OTHER INCOME (EXPENSES)Interest income
    
    
    15,492
    
    
    
    315,818
    
    
    
    196,338
    
    
    
    1,026,204Interest expense
    
    
    
    
    
    
    (114,375
    )
    
    
    (516
    )
    
    
    (539,589
    )Gain on early extinguishment of debt
    
    
    
    
    
    
    967,547
    
    
    
    
    
    
    
    967,547Other, net
    
    
    436
    
    
    
    1,249,764
    
    
    
    (21,465
    )
    
    
    1,250,950Loss from continuing operations before provision for income taxes
    
    
    (4,955,969
    )
    
    
    (934,547
    )
    
    
    (15,041,456
    )
    
    
    (10,686,829
    )Provision for income taxes
    
    
    
    
    
    
    22,148
    
    
    
    3,200
    
    
    
    37,307Loss from continuing operations
    
    
    (4,955,969
    )
    
    
    (956,695
    )
    
    
    (15,044,656
    )
    
    
    (10,724,136
    )Loss from discontinued operations
    
    
    
    
    
    
    (483,680
    )
    
    
    
    
    
    
    (1,555,257
    )Net loss
    
    $
    (4,955,969
    )
    
    $
    (1,440,375
    )
    
    $
    (15,044,656
    )
    
    $
    (12,279,393
    )BASIC AND DILUTED NET LOSS PER SHARE:Continuing operations
    
    $
    (0.06
    )
    
    $
    (0.01
    )
    
    $
    (0.19
    )
    
    $
    (0.20
    )Discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.03
    )Net loss
    
    $
    (0.06
    )
    
    $
    (0.02
    )
    
    $
    (0.19
    )
    
    $
    (0.23
    )Basic and diluted weighted average number of common shares
outstanding
    
    
    78,236,153
    
    
    
    71,069,841
    
    
    
    78,225,891
    
    
    
    52,418,695
  4




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AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Nine Months Ended June 30,2009
    
    
    2008OPERATING ACTIVITIES:Net loss
    
    $
    (15,044,656
    )
    
    $
    (12,279,393
    )Loss from discontinued operations
    
    
    
    
    
    
    1,555,257Adjustments to reconcile loss from continuing operations to net cash used
in operating activities:Depreciation and amortization
    
    
    203,761
    
    
    
    335,049Share-based compensation expense
    
    
    1,224,182
    
    
    
    1,271,443Amortization of debt discount
    
    
    
    
    
    
    232,776Gain on extinguishment of debt
    
    
    
    
    
    
    (967,547
    )Loss on disposal of assets
    
    
    4,792
    
    
    
    638Changes in operating assets and liabilities (net of effects of
acquisition/disposition of business):Receivables
    
    
    
    
    
    
    (722,528
    )Inventories
    
    
    32,819
    
    
    
    21,714Prepaid expenses and other assets
    
    
    772,565
    
    
    
    134,849Accounts payable
    
    
    573,244
    
    
    
    1,344,022Accrued expenses and other liabilities
    
    
    (1,226,029
    )
    
    
    (939,163
    )Accrued compensation and payroll taxes
    
    
    (314,581
    )
    
    
    (236,383
    )Deferred revenues
    
    
    (1,810,080
    )
    
    
    (1,906,292
    )Net cash used in operating activities of continuing operations
    
    
    (15,583,983
    )
    
    
    (12,155,558
    )Net cash used in operating activities of discontinued operations
    
    
    
    
    
    
    (203,608
    )Net cash used in operating activities
    
    
    (15,583,983
    )
    
    
    (12,359,166
    )INVESTING ACTIVITIES:Proceeds from sales and maturities of investments in securities
    
    
    388,122
    
    
    
    2,300,107Purchases of property and equipment
    
    
    (19,173
    )
    
    
    (16,550
    )Proceeds from disposal of assets
    
    
    1,950
    
    
    
    4,900Net cash provided by investing activities
    
    
    370,899
    
    
    
    2,288,457FINANCING ACTIVITIES:Proceeds from issuances of common stock and warrants, net of commissions
and offering costs
    
    
    
    
    
    
    37,851,772Tax withholding payments reimbursed by restricted stock payments on debt
    
    
    (3,927
    )
    
    
    (28,779
    )Payments on notes and capital lease obligations
    
    
    (25,744
    )
    
    
    (11,243,003
    )Net cash (used in) provided by financing activities
    
    
    (29,671
    )
    
    
    26,579,990Net (decrease) increase in cash and cash equivalents
    
    
    (15,242,755
    )
    
    
    16,509,281Cash and cash equivalents at beginning of period
    
    
    41,383,930
    
    
    
    30,487,962Cash and cash equivalents at end of period
    
    $
    26,141,175
    
    
    $
    46,997,243SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid
    
    $
    516
    
    
    $
    446,058Income taxes paid
    
    $
    6,208
    
    
    $
    37,307SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:Accrued liabilities of discontinued operations in connection
with the Working Capital Adjustment
    
    $
    
    
    
    $
    1,351,649
  5




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AVANIR PHARMACEUTICALS, INC.
 
  1. BASIS OF PRESENTATION
 Avanir Avanir,
  Avanir Avanir Avanir Avanir Avanir Avanir Avanir Avanir Avanir Avanir Avanir
 2. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Business
 Avanir Avanir  ®
 6




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
 Significant Accounting Policies
  Concentrations
    Fair value of financial instruments
  Income Taxes
  7




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Accounting for Uncertainty in Income TaxesAn Interpretation
of FASB Statement No. 109
     Revenue Recognition
  Revenue Recognition. Revenue Recognition When Right
of Return Exists
 Accounting for Revenue Arrangements with Multiple Deliverables.
 8




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##### Table of Contents



Product Sales
 Active Pharmaceutical Ingredient Docosanol (API Docosanol).
 Multiple Element Arrangements
   License Arrangements-
   9




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Research Services Arrangements- Reporting Revenue Gross as a Principal versus Net as an Agent,
 Royalty Arrangements-
  ®
 ® ®
 Government Research Grant Revenues-
 Cost of Revenues
  Recognition of Expenses in Outsourced Contracts
  10




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Share-Based Compensation
 Share-Based Payment
     11




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For the three months ended
    
    
    For the nine months endedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008From Continuing Operations:General and administrative expense
    
    $
    311,142
    
    
    $
    279,074
    
    
    $
    973,598
    
    
    $
    865,973Research and development expense
    
    
    84,802
    
    
    
    71,713
    
    
    
    250,584
    
    
    
    405,470Total
    
    $
    395,944
    
    
    $
    350,787
    
    
    $
    1,224,182
    
    
    $
    1,271,443
 For the three months ended
    
    
    For the nine months endedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Share-based compensation expense from:Stock options
    
    $
    184,442
    
    
    $
    139,010
    
    
    $
    557,750
    
    
    $
    500,186Restricted stock units
    
    
    211,502
    
    
    
    200,066
    
    
    
    666,432
    
    
    
    642,878Restricted stock awards
    
    
    
    
    
    
    11,711
    
    
    
    
    
    
    
    128,379Total
    
    $
    395,944
    
    
    $
    350,787
    
    
    $
    1,224,182
    
    
    $
    1,271,443
  Recently Issued Accounting Pronouncements
 Financial Accounting Standards No. 168 (FAS 168) The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles The
Hierarchy of Generally Accepted Accounting Principles, TM
 Financial Accounting Standards No. 165 (FAS 165). Subsequent Events,
 FASB Staff Position 157-4. Determining Fair Value when the Volume and Level of Activity for the Asset or Liability have
Significantly Decreased and Identifying Transactions that are not Orderly
 12




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FASB Staff Position 115-2. Recognition and Presentation of Other-Than-Temporary Impairments
 FASB Staff Position No. 107-1. Interim
Disclosures about Fair Value of Financial Instruments
 EITF Issue No. 07-5. Determining Whether
an Instrument (or an Embedded Feature) Is Indexed to an Entitys Own Stock
 Financial Accounting Standards No. 160 (FAS 160). Noncontrolling Interests in Consolidated Financials, an Amendment of ARB No. 51,
 Financial Accounting Standards No. 159 (FAS 159). The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment
of FASB Statement 115
 Financial Accounting Standards No. 157. (FAS 157) Fair Value Measurements Effective Date of FASB Statement No. 157,
 13




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3. FAIR VALUE OF FINANCIAL INSTRUMENTS
  
    
    Level 1-Quoted prices in active markets for identical assets and liabilities.
    
    Level 2- Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets and liabilities, quoted prices in
the markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or
liabilities.
    
    Level 3-Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities.
   4. DISCONTINUED OPERATIONS  SALE OF FAZACLO
   Accounting for the Impairment or Disposal of Long-Lived Assets,
  5. RELOCATION OF COMMERCIAL AND GENERAL AND ADMINISTRATIVE OPERATIONS
  14




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Balance at
    
    
    
    
    
    
    Balance atSeptember 30,
    
    
    Payments/
    
    
    June 30,2008
    
    
    Reductions
    
    
    2009Accrued RestructuringLease restructuring liability
    
    $
    1,135,965
    
    
    $
    (242,053
    )
    
    $
    893,912Less current portion
    
    
    (316,086
    )
    
    
    
    
    
    
    (301,160
    )Non-current portion
    
    $
    819,879
    
    
    
    
    
    
    $
    592,752
  6. INVENTORIES
   June 30,
    
    
    September 30,2009
    
    
    2008Raw materials
    
    $
    1,300,458
    
    
    $
    1,333,277Less: current portion
    
    
    (17,000
    )
    
    
    (17,000
    )Non-current portion
    
    $
    1,283,458
    
    
    $
    1,316,277
  15




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7. OTHER ASSETS
  June 30,
    
    
    September 30,2009
    
    
    2008Current receivables from subtenants
    
    $
    80,026
    
    
    $
    167,546Current receivable from license and royalty agreements
    
    
    29,680
    
    
    
    68,251Deposits
    
    
    241,400
    
    
    
    241,400Other
    
    
    
    
    
    
    17,621Total other assets
    
    
    351,106
    
    
    
    494,818Less: current
    
    
    (109,706
    )
    
    
    (237,334
    )Non current total other assets
    
    $
    241,400
    
    
    $
    257,484
 8. ACCRUED EXPENSES AND OTHER LIABILITIES
  June 30,
    
    
    September 30,2009
    
    
    2008Accrued research and development expenses
    
    $
    310,330
    
    
    $
    1,404,556Accrued general and administrative expenses
    
    
    214,425
    
    
    
    160,759Deferred rent
    
    
    20,622
    
    
    
    48,638Lease restructuring liability
    
    
    893,912
    
    
    
    1,135,965Other
    
    
    84,600
    
    
    
    Total accrued expenses and other liabilities
    
    
    1,523,889
    
    
    
    2,749,918Less: current
    
    
    (910,515
    )
    
    
    (1,881,401
    )Non-current total accrued expenses and other liabilities
    
    $
    613,374
    
    
    $
    868,517
 9. DEFERRED REVENUES
 ®
 Drug RoyaltyUSA
    
    
    OtherAgreement
    
    
    Agreements
    
    
    TotalNet deferred revenues as of October 1, 2008
    
    $
    12,202,198
    
    
    $
    283,834
    
    
    $
    12,486,032Changes during the period:Recognized as revenues during period
    
    
    (1,526,246
    )
    
    
    (283,834
    )
    
    
    (1,810,080
    )Net deferred revenues as of June 30, 2009
    
    $
    10,675,952
    
    
    $
    
    
    
    $
    10,675,952Classified and reported as:Current portion of deferred revenues
    
    $
    2,282,560
    
    
    $
    
    
    
    $
    2,282,560Deferred revenues, net of current portion
    
    
    8,393,392
    
    
    
    
    
    
    
    8,393,392Total deferred revenues
    
    $
    10,675,952
    
    
    $
    
    
    
    $
    10,675,952
  16




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10. COMPUTATION OF NET LOSS PER COMMON SHARE
   2009
    
    2008Stock options
    
    
    2,204,438
    
    
    
    648,803Performance stock options
    
    
    2,031,218
    
    
    
    Stock warrants
    
    
    12,240,437
    
    
    
    12,509,742Restricted stock units (1)
    
    
    2,816,780
    
    
    
    2,296,809Restricted stock awards
    
    
    
    
    
    
    3,000
 
 (1)
    
    Includes 536,868 and 148,035 shares of restricted stock, respectively, awarded to
directors that have vested but are still restricted until the directors resign. 11. COMPREHENSIVE LOSS
  For the three months
    
    
    For the nine monthsended June 30,
    
    
    ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (4,955,969
    )
    
    $
    (1,440,375
    )
    
    $
    (15,044,656
    )
    
    $
    (12,279,393
    )Other comprehensive income, net of tax:Unrealized gain on available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,272Total comprehensive loss
    
    $
    (4,955,969
    )
    
    $
    (1,440,375
    )
    
    $
    (15,044,656
    )
    
    $
    (12,276,121
    )
 12. STOCKHOLDERS EQUITY
   13. EMPLOYEE EQUITY INCENTIVE PLANS
 17




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Stock Options
  Weighted AverageWeighted Average
    
    Remaining
    
    AggregateNumber
    
    Exercise Price per
    
    Contractual Term
    
    Intrinsicof Shares
    
    Share
    
    (In Years)
    
    ValueOutstanding October 1, 2008
    
    
    624,027
    
    
    $
    6.61Granted
    
    
    1,613,110
    
    
    $
    0.53Forfeited
    
    
    (30,539
    )
    
    $
    7.20Expired
    
    
    (2,160
    )
    
    $
    5.22Outstanding June 30, 2009
    
    
    2,204,438
    
    
    $
    2.16
    
    
    
    8.8
    
    
    $
    2,881,000Vested and expected to vest in the future,
June 30, 2009
    
    
    1,453,621
    
    
    $
    2.92
    
    
    
    8.5
    
    
    $
    1,711,000Exercisable, June 30, 2009
    
    
    288,407
    
    
    $
    10.78
    
    
    
    6.0
    
    
    $
    11,000
   18




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##### Table of Contents



2009Expected volatility
    
    
    101
    %Expected term in years
    
    
    5.0Risk-free interest rate (zero coupon U.S. Treasury Note)
    
    
    1.6% -2.3
    %Expected dividend yield
    
    
    0
    %
  Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageNumber
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    Life in Years
    
    Price
    
    Exercisable
    
    Price$0.47-$0.53
    
    
    1,436,510
    
    
    
    9.5
    
    
    $
    0.53
    
    
    
    
    
    
    $
    $0.54-$1.29
    
    
    337,960
    
    
    
    8.8
    
    
    $
    0.88
    
    
    
    11,250
    
    
    $
    1.20$2.41-$11.76
    
    
    349,718
    
    
    
    6.9
    
    
    $
    7.22
    
    
    
    203,938
    
    
    $
    10.00$12.12-$13.60
    
    
    39,000
    
    
    
    4.9
    
    
    $
    12.86
    
    
    
    39,000
    
    
    $
    12.86$15.84-$19.38
    
    
    41,250
    
    
    
    6.1
    
    
    $
    16.16
    
    
    
    34,219
    
    
    $
    16.232,204,438
    
    
    
    8.8
    
    
    $
    2.16
    
    
    
    288,407
    
    
    $
    10.78
 Performance stock options.
  Weighted AverageWeighted Average
    
    Remaining
    
    AggregateNumber
    
    Exercise Price per
    
    Contractual Term
    
    Intrinsicof Shares
    
    Share
    
    (In Years)
    
    ValueOutstanding October 1, 2008
    
    
    2,048,200
    
    
    $
    0.88Forfeited
    
    
    (16,982
    )
    
    $
    0.88Outstanding June 30, 2009
    
    
    2,031,218
    
    
    $
    0.88
    
    
    
    9.0
    
    
    $
    2,722,000Vested and expected to vest in the future,
June 30, 2009
    
    
    988,418
    
    
    $
    0.88
    
    
    
    9.0
    
    
    $
    1,324,000Exercisable, June 30, 2009
    
    
    109,343
    
    
    $
    0.88
    
    
    
    9.0
    
    
    $
    147,000
  Restricted stock units.
 19




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##### Table of Contents



Weighted AverageGrant DateNumber of Shares
    
    Fair ValueUnvested, October 1, 2008
    
    
    2,259,042
    
    
    $
    1.85Granted
    
    
    420,000
    
    
    $
    0.44Vested
    
    
    (398,430
    )
    
    $
    1.32Forfeited
    
    
    (700
    )
    
    $
    2.06Unvested, June 30, 2009
    
    
    2,279,912
    
    
    $
    1.69
    14. COMMITMENTS AND CONTINGENCIES
 Center for Neurologic Study (CNS) 
 Contingencies

 20




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##### Table of Contents



Guarantees
and Indemnities 
  15. SEGMENT INFORMATION
     16. SUBSEQUENT EVENTS
   21




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##### Table of Contents



Item 2.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  EXECUTIVE OVERVIEW
 ®
 Zenvia for the treatment of PBA
 
 
 22




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##### Table of Contents



Zenvia for the treatment of DPN pain
 
   Docosanol 10% Cream
 ® ®
 23




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##### Table of Contents



Macrophage Migration Inhibitory Factor (MIF) Inflammation
  Xenerex Human Antibody Technology  Anthrax/Other Infectious Diseases
   General Information
 info@avanir.com www.avanir.com.
 24




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   RESULTS OF OPERATIONS
 COMPARISON OF THREE MONTHS ENDED JUNE 30, 2009 AND 2008
 Revenues and Cost of Revenues
 Three months endedJune 30,2009
    
    
    2008
    
    
    $ Change
    
    
    % ChangePRODUCT SALESNet revenues
    
    $
    
    
    
    $
    3,550
    
    
    $
    (3,550
    )
    
    
    -100
    %Cost of revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    %Product gross margin
    
    
    
    
    
    
    3,550
    
    
    
    (3,550
    )
    
    
    -100
    %REVENUES AND COST OF RESEARCH SERVICES AND OTHERRevenues:Revenue from royalties and royalty rights
    
    
    420,376
    
    
    
    584,314
    
    
    
    (163,938
    )
    
    
    -28
    %Revenues from license agreements
    
    
    170,549
    
    
    
    1,534,552
    
    
    
    (1,364,003
    )
    
    
    -89
    %Revenues from government research grant services
    
    
    
    
    
    
    527,517
    
    
    
    (527,517
    )
    
    
    -100
    %Revenues from research services and other
    
    
    590,925
    
    
    
    2,646,383
    
    
    
    (2,055,458
    )
    
    
    -78
    %Costs:Cost of research and development services
    
    
    
    
    
    
    155,450
    
    
    
    (155,450
    )
    
    
    100
    %Cost of government research grant services
    
    
    
    
    
    
    358,028
    
    
    
    (358,028
    )
    
    
    100
    %Costs from research services and grants
    
    
    
    
    
    
    513,478
    
    
    
    (513,478
    )
    
    
    100
    %Research services and other gross margin
    
    
    590,925
    
    
    
    2,132,905
    
    
    
    (1,541,980
    )
    
    
    -72
    %Total gross margin
    
    $
    590,925
    
    
    $
    2,136,455
    
    
    $
    (1,545,530
    )
    
    
    -72
    %
 Revenues
  25




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Cost of Revenues
  Operating Expenses
 Three months endedJune 30,2009
    
    
    2008
    
    
    $ Change
    
    
    % ChangeOPERATING EXPENSESResearch and development
    
    $
    3,358,387
    
    
    $
    3,139,685
    
    
    $
    218,702
    
    
    
    7
    %General and administrative
    
    
    2,204,435
    
    
    
    2,350,071
    
    
    
    (145,636
    )
    
    
    -6
    %Total operating expenses
    
    $
    5,562,822
    
    
    $
    5,489,756
    
    
    $
    73,066
    
    
    
    1
    %
 Research and Development Expenses
   General and Administrative Expenses
  Share-Based Compensation
  26




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Other Income (Expenses)
     Loss from Discontinued Operations
  Net Loss
  27




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COMPARISON OF NINE MONTHS ENDED JUNE 30, 2009 AND 2008
 Revenues and Cost of Revenues
 Nine months endedJune 30,2009
    
    
    2008
    
    
    $ Change
    
    
    % ChangePRODUCT SALESNet revenues
    
    $
    
    
    
    $
    129,820
    
    
    $
    (129,820
    )
    
    
    -100
    %Cost of revenues
    
    
    
    
    
    
    21,714
    
    
    
    (21,714
    )
    
    
    -100
    %Product gross margin
    
    
    
    
    
    
    108,106
    
    
    
    (108,106
    )
    
    
    -100
    %REVENUES AND COST OF RESEARCH SERVICES AND OTHERRevenues:Revenue from royalties and royalty rights
    
    
    2,872,827
    
    
    
    2,993,992
    
    
    
    (121,165
    )
    
    
    -4
    %Revenues from license agreements
    
    
    283,834
    
    
    
    1,648,459
    
    
    
    (1,364,625
    )
    
    
    -83
    %Revenues from government research grant services
    
    
    
    
    
    
    1,006,922
    
    
    
    (1,006,922
    )
    
    
    -100
    %Revenues from research services and other
    
    
    3,156,661
    
    
    
    5,649,373
    
    
    
    (2,492,712
    )
    
    
    -44
    %Costs:Cost of research and development services
    
    
    9,746
    
    
    
    232,257
    
    
    
    (222,511
    )
    
    
    96
    %Cost of government research grant services
    
    
    
    
    
    
    915,563
    
    
    
    (915,563
    )
    
    
    100
    %Costs from research services and grants
    
    
    9,746
    
    
    
    1,147,820
    
    
    
    (1,138,074
    )
    
    
    99
    %Research services and other gross margin
    
    
    3,146,915
    
    
    
    4,501,553
    
    
    
    (1,354,638
    )
    
    
    -30
    %Total gross margin
    
    $
    3,146,915
    
    
    $
    4,609,659
    
    
    $
    (1,462,744
    )
    
    
    -32
    %
 Revenues
    Cost of Revenues
  28




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Nine months endedJune 30,2009
    
    
    2008
    
    
    $ Change
    
    
    % ChangeOPERATING EXPENSESResearch and development
    
    $
    11,683,701
    
    
    $
    10,090,610
    
    
    $
    1,593,091
    
    
    
    16
    %General and administrative
    
    
    6,679,027
    
    
    
    7,910,990
    
    
    
    (1,231,963
    )
    
    
    -16
    %Total operating expenses
    
    $
    18,362,728
    
    
    $
    18,001,600
    
    
    $
    361,128
    
    
    
    2
    %
 Research and Development Expenses
  General and Administrative Expenses
  Share-Based Compensation
   Interest Expense and Interest Income
    29




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Loss from Discontinued Operations
  Net Loss
  LIQUIDITY AND CAPITAL RESOURCES
   IncreaseJune 30,
    
    (Decrease)
    
    September 30,2009
    
    During Period
    
    2008Cash, cash equivalents and investment in securities
    
    $
    26,609,650
    
    
    $
    (15,630,877
    )
    
    $
    42,240,527Cash and cash equivalents
    
    $
    26,141,175
    
    
    $
    (15,242,755
    )
    
    $
    41,383,930Net working capital
    
    $
    21,573,617
    
    
    $
    (15,598,019
    )
    
    $
    37,171,636
 Nine Months
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    Change
    
    
    EndedJune 30,
    
    
    Between
    
    
    June 30,2009
    
    
    Periods
    
    
    2008Net cash used in operating activities
    
    $
    (15,583,983
    )
    
    $
    (3,224,817
    )
    
    $
    (12,359,166
    )Net cash provided by investing activities
    
    
    370,899
    
    
    
    (1,917,558
    )
    
    
    2,288,457Net cash (used in) provided by financing activities
    
    
    (29,671
    )
    
    
    (26,609,661
    )
    
    
    26,579,990Net (decrease) increase in cash and cash equivalents
    
    $
    (15,242,755
    )
    
    $
    (31,752,036
    )
    
    $
    16,509,281
 Operating activities.
 Investing activities.
 30




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Financing activities.
    Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsOperating lease obligations (1)
    
    $
    4,961,290
    
    
    $
    1,516,292
    
    
    $
    2,787,702
    
    
    $
    657,296
    
    
    $
    Purchase obligations (2)
    
    
    917,101
    
    
    
    917,101
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    5,878,391
    
    
    $
    2,433,393
    
    
    $
    2,787,702
    
    
    $
    657,296
    
    
    $
    
 
 (1)
    
    Operating leases obligations are exclusive of payments we expect to receive under subleases.(2)
    
    Purchase obligations consist of the total of trade accounts payable and trade related accrued
expenses at June 30, 2009 which approximates our contractual commitments for goods and
services in the normal course of our business. Zenvia License Milestone Payments.
 Off-Balance Sheet Arrangements
  31




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Management Outlook
   
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest rate sensitivity
      
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
 32




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##### Table of Contents



Changes in Internal Controls over Financial Reporting
  
 PART II OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
 Risks Relating to Our Business
 We
need additional positive clinical data from the confirmatory Phase
III trial for Zenvia for PBA and there can be no assurance that the
FDA will approve Zenvia.
  33




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##### Table of Contents



The FDAs safety concerns regarding Zenvia for the treatment of PBA are expected to extend to
other clinical indications that we are pursuing, including DPN pain. Due to these concerns, any
future development of Zenvia for other indications is expected to use an alternative low- dose
quinidine formulation, which may negatively affect efficacy.
  Even if Zenvia receives marketing approval from the FDA, the approval may not be on the terms
that we seek and could limit the marketability of the drug.
  
    
    regulatory authorities may require the addition of labeling statements, such as a
black box warning, which is the strongest type of warning that the FDA can require for
a drug and is generally reserved for warning prescribers about adverse drug reactions
that can cause serious injury or death;
    
    regulatory authorities may withdraw approval of the product after its initial
approval;
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##### Table of Contents




    
    product labeling may be amended to restrict use in certain populations;
    
    physicians may be required to conduct additional tests prior to dispensing product or
monitor patients taking Zenvia;
    
    we may be required to conduct additional studies either post-marketing or before
approval; and
    
    Zenvia may not be approved by the FDA for commercialization as the FDA may perceive
that the benefit does not outweigh the potential risk, particularly if the efficacy is
marginal at the new lower dose currently being tested.
  We have limited capital resources and will need to raise additional funds to support our
operations.
   Any transactions that we may engage in to raise capital could dilute our stockholders and
diminish certain commercial prospects.
   35




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##### Table of Contents



.
 We have licensed out or sold most of our non-core drug development programs and related assets
and these and other possible future dispositions carry certain risks.
  
    
    diversion of managements attention from normal daily operations of the business;
    
    disputes over earn-outs, working capital adjustments or contingent payment
obligations;
    
    insufficient proceeds to offset expenses associated with the transactions; and
    
    the potential loss of key employees following such a transaction.
   Our issued patents may be challenged and our patent applications may be denied. Either result
would seriously jeopardize our ability to compete in the intended markets for our proposed
products.
  
    
    the claims in any pending patent applications will be allowed or that patents will be
granted;
    
    competitors will not develop similar or superior technologies independently, duplicate
our technologies, or design around the patented aspects of our technologies;
    
    our technologies will not infringe on other patents or rights owned by others,
including licenses that may not be available to us;
    
    any of our issued patents will provide us with significant competitive advantages;
    
    challenges will not be instituted against the validity or enforceability of any patent
that we own or, if instituted, that these challenges will not be successful; or
 36




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##### Table of Contents




    
    we will be able to secure additional worldwide intellectual property protection for
our Zenvia patent portfolio.
  We currently have only a limited term of patent coverage and exclusivity protection for Zenvia
in the U.S., which could result in the introduction of generic competition within a few years of
product launch.
    If we fail to obtain regulatory approval in foreign jurisdictions, we would not be able to
market our products abroad and our revenue prospects would be limited.
  37




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We face challenges retaining members of management and other key personnel.
  Risks Relating to Our Industry
 There are a number of difficulties and risks associated with clinical trials and our trials
may not yield the expected results.
   
    
    the results from earlier clinical trials may not be predictive of results that will be
obtained from subsequent clinical trials, particularly larger trials;
    
    institutional review boards or regulators, including the FDA, may hold, suspend or
terminate our clinical research or the clinical trials of our product candidates for
various reasons, including noncompliance with regulatory requirements or if, in their
opinion, the participating subjects are being exposed to unacceptable health risks;
    
    subjects may drop out of our clinical trials;
    
    our preclinical studies or clinical trials may produce negative, inconsistent or
inconclusive results, and we may decide, or regulators may require us, to conduct
additional preclinical studies or clinical trials;
    
    trial results derived from top-line data, which is based on a preliminary analysis of
efficacy and safety data related to primary and secondary endpoints, may change following
a more comprehensive review of the complete data set derived from a particular clinical
trial or may change due to FDA requests to analyze the data differently; and
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##### Table of Contents




    
    the cost of our clinical trials may be greater than we currently anticipate.
    
    
    delays in our ability to submit an NDA;
    
    the refusal by the FDA to accept for file any NDA we may submit;
    
    requests for additional studies or data;
    
    delays of an approval;
    
    the rejection of an application; or
    
    the approval of the drug, but with adverse labeling claims that could adversely affect
the commercial market.
  The pharmaceutical industry is highly competitive and most of our competitors have larger
operations and have greater resources. As a result, we face significant competitive hurdles.
   If we fail to comply with regulatory requirements, regulatory agencies may take action against
us, which could significantly harm our business.
 39




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##### Table of Contents



We rely on insurance companies to mitigate our exposure for business activities, including
developing and marketing pharmaceutical products for human use.
  Risks Related to Reliance on Third Parties
 Because we depend on clinical research centers and other contractors for clinical testing and
for certain research and development activities, the results of our clinical trials and such
research activities are, to a certain extent, beyond our control.
  40




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##### Table of Contents



We depend on third parties to manufacture, package and distribute compounds for our drugs and
drug candidates. The failure of these third parties to perform successfully could harm our
business.
  We generally do not control the development of compounds licensed to third parties and, as a
result, we may not realize a significant portion of the potential value of any such license
arrangements.
  We expect to rely entirely on third parties for international registration, sales and
marketing efforts.
  Risks Relating to Our Stock
 Our stock price has historically been volatile and we expect that this volatility will
continue for the foreseeable future.
  
    
    announcements by us regarding our non-compliance with continued listing standards on
the NASDAQ Stock Market;
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##### Table of Contents




    
    comments made by securities analysts, including changes in their recommendations;
    
    short selling activity by certain investors, including any failures to timely settle
short sale transactions;
    
    announcements by us of financing transactions, including our Controlled Equity
Offering facility, and/or future sales of equity or debt securities;
    
    sales of our common stock by our directors, officers or significant stockholders;
    
    lack of volume of stock trading leading to low liquidity; and
    
    market and economic conditions.
    The trading price for our common stock has been volatile and we have previously had difficulty
satisfying the continued listing standards for the NASDAQ Global Market.
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 42




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Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
 Exhibits5.1
    
    Opinion of Goodwin Procter, LLP10.1
    
    Form of Director and Officer Indemnification Agreement for Avanir Pharmaceuticals, Inc. a
Delaware corporation10.2
    
    Controlled Equity Offering Sales
Agreement, dated July 30, 2009, by and between Avanir
Pharmaceuticals, Inc. and Cantor Fitzgerald & Co.23.1
    
    Consent of Goodwin Procter, LLP (filed as part of Exhibit 5.1)31.1
    
    Certification of Principal Executive Officer Required Under Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.31.2
    
    Certification of Principal Financial Officer Required Under Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.32.1
    
    Certification of Principal Executive Officer and Principal Financial Officer Required Under
Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.
 43




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SIGNATURES
  Signature
    
    Title
    
    Date/s/ Keith A. Katkin

Keith A. Katkin
    
    President and Chief Executive Officer (Principal
Executive Officer)
    
    July 30, 2009/s/ Christine G. Ocampo

Christine G. Ocampo
    
    Vice President, Finance (Principal
Financial and Accounting Officer)
    
    July 30, 2009
 44