##### 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 December 31, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the transition period from
 to .
 Commission File No. 1-15803
 AVANIR PHARMACEUTICALS, INC.
  Delaware
    
    33-0314804(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)101 Enterprise Suite 300, Aliso Viejo, California
    
    92656(Address of principal executive offices)
    
    (Zip Code)
 (949) 389-6700
 þ o
 o o
  Large accelerated filer o
Accelerated filer o
Non-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 StatementsCondensed 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
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    25Item 4T.
    
    Controls and Procedures
    
    25PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    26Item 1A.
    
    Risk Factors
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    34Item 3.
    
    Defaults Upon Senior Securities
    
    34Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    34Item 5.
    
    Other Information
    
    34Item 6.
    
    Exhibits
    
    34Signatures
    
    
    
    35EX-31.1EX-31.2EX-32.1
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PART I. FINANCIAL INFORMATION
 
 Item 1.
    
    FINANCIAL STATEMENTS
 AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 December 31,
    
    
    September 30,2009
    
    
    2009(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,116,320
    
    
    $
    31,486,012Inventories
    
    
    114,098
    
    
    
    114,098Prepaid expenses
    
    
    678,349
    
    
    
    397,100Other current assets
    
    
    934,938
    
    
    
    331,717Current portion of restricted investments in marketable securities
    
    
    66,925
    
    
    
    200,775Total current assets
    
    
    26,910,630
    
    
    
    32,529,702Restricted investments in marketable securities, net of current portion
    
    
    401,550
    
    
    
    267,700Property and equipment, net
    
    
    290,082
    
    
    
    310,677Non-current inventories
    
    
    710,531
    
    
    
    710,531Other assets
    
    
    256,933
    
    
    
    249,462TOTAL ASSETS
    
    $
    28,569,726
    
    
    $
    34,068,072LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    919,369
    
    
    $
    1,214,117Accrued expenses and other liabilities
    
    
    1,238,908
    
    
    
    1,001,599Accrued compensation and payroll taxes
    
    
    530,422
    
    
    
    1,345,859Current portion of deferred revenues
    
    
    2,392,893
    
    
    
    2,282,560Total current liabilities
    
    
    5,081,592
    
    
    
    5,844,135Accrued expenses and other liabilities, net of current portion
    
    
    571,232
    
    
    
    652,395Deferred revenues, net of current portion
    
    
    6,920,867
    
    
    
    7,629,807Total liabilities
    
    
    12,573,691
    
    
    
    14,126,337Commitments and contingenciesStockholders equity:Preferred stock  $0.0001 par value, 10,000,000 shares authorized, no
shares issued
or outstanding as of December 31, 2009 (unaudited) and September 30, 2009
    
    
    
    
    
    
    Common stock  $0.0001 par value, 200,000,000 shares authorized;
83,178,113 and 83,084,182 shares issued and outstanding as of
December 31, 2009 (unaudited) and September 30, 2009, respectively
    
    
    8,318
    
    
    
    8,308Additional paid-in capital
    
    
    298,801,162
    
    
    
    297,923,915Accumulated deficit
    
    
    (282,813,445
    )
    
    
    (277,990,488
    )Total stockholders equity
    
    
    15,996,035
    
    
    
    19,941,735TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    28,569,726
    
    
    $
    34,068,072
  3




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AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months Ended December 31,2009
    
    
    2008REVENUES AND COST OF RESEARCH SERVICES AND OTHERRevenue from royalties and royalty rights
    
    $
    1,484,934
    
    
    $
    1,696,796Revenues from license agreements
    
    
    
    
    
    
    57,265Revenues from research services and other
    
    
    1,484,934
    
    
    
    1,754,061Cost of research and development services
    
    
    
    
    
    
    8,051Research services and other gross profit
    
    
    1,484,934
    
    
    
    1,746,010OPERATING EXPENSESResearch and development
    
    
    3,446,890
    
    
    
    4,724,914General and administrative
    
    
    2,866,478
    
    
    
    2,314,312Total operating expenses
    
    
    6,313,368
    
    
    
    7,039,226Loss from operations
    
    
    (4,828,434
    )
    
    
    (5,293,216
    )OTHER INCOME (EXPENSES)Interest income
    
    
    5,804
    
    
    
    135,696Interest expense
    
    
    
    
    
    
    (480
    )Other, net
    
    
    (327
    )
    
    
    (17,516
    )Loss before provision for income taxes
    
    
    (4,822,957
    )
    
    
    (5,175,516
    )Provision for income taxes
    
    
    
    
    
    
    3,200Net loss
    
    $
    (4,822,957
    )
    
    $
    (5,178,716
    )Basic and diluted net loss per share
    
    $
    (0.06
    )
    
    $
    (0.07
    )Basic and diluted weighted average number of
common shares outstanding
    
    
    83,159,376
    
    
    
    78,225,041
  4




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AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months Ended December 31,2009
    
    
    2008OPERATING ACTIVITIES:Net loss
    
    $
    (4,822,957
    )
    
    $
    (5,178,716
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    52,181
    
    
    
    81,177Share-based compensation expense
    
    
    699,072
    
    
    
    386,134Loss on disposal of assets
    
    
    
    
    
    
    4,792Changes in operating assets and liabilities:Prepaid expenses and other assets
    
    
    (891,941
    )
    
    
    (618,992
    )Accounts payable
    
    
    (294,748
    )
    
    
    1,611,758Accrued expenses and other liabilities
    
    
    156,146
    
    
    
    (474,199
    )Accrued compensation and payroll taxes
    
    
    (815,437
    )
    
    
    (778,065
    )Deferred revenues
    
    
    (598,607
    )
    
    
    (754,969
    )Net cash used in operating activities
    
    
    (6,516,291
    )
    
    
    (5,721,080
    )INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (31,586
    )
    
    
    (19,171
    )Proceeds from disposal of assets
    
    
    
    
    
    
    1,950Net cash used in investing activities
    
    
    (31,586
    )
    
    
    (17,221
    )FINANCING ACTIVITIES:Proceeds from issuances of common stock, net of commissions
    
    
    183,044
    
    
    
    Tax withholding payments reimbursed by restricted stock payments on debt
    
    
    (4,859
    )
    
    
    Payments on notes and capital lease obligations
    
    
    
    
    
    
    (21,622
    )Net cash provided by (used in) financing activities
    
    
    178,185
    
    
    
    (21,622
    )Net decrease in cash and cash equivalents
    
    
    (6,369,692
    )
    
    
    (5,759,923
    )Cash and cash equivalents at beginning of period
    
    
    31,486,012
    
    
    
    41,383,930Cash and cash equivalents at the end of the period
    
    $
    25,116,320
    
    
    $
    35,624,007SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid
    
    $
    
    
    
    $
    480Income taxes paid
    
    $
    3,200
    
    
    $
    4,313
  5




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AVANIR PHARMACEUTICALS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. BASIS OF PRESENTATION
 Avanir Avanir
  2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Description of Business
 Avanir  Avanir
 
 Significant Accounting Policies
  6




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Concentrations
    Fair value of financial instruments
  Revenue Recognition
   Product Sales  Active Pharmaceutical Ingredient docosanol (docosanol).
 7




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##### Table of Contents



Multiple Element Arrangements
   License Arrangements.
   Research Services Arrangements.
 Royalty Arrangements.
 8




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##### Table of Contents



Government Research Grant Revenues.
 Cost of Revenues
  Recognition of Expenses in Outsourced Contracts
  Share-Based Compensation
    9




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For the three months endedDecember 31,2009
    
    
    2008Share-based compensation classified as:General and administrative expense
    
    $
    516,912
    
    
    $
    305,999Research and development expense
    
    
    182,160
    
    
    
    80,135Total
    
    $
    699,072
    
    
    $
    386,134
 For the three months endedDecember 31,2009
    
    
    2008Share-based compensation expense from:Stock options
    
    $
    238,950
    
    
    $
    178,789Restricted stock units
    
    
    460,122
    
    
    
    207,345Total
    
    $
    699,072
    
    
    $
    386,134
  Income Taxes
      10




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Recent Authoritative Guidance
 Multiple-Deliverable Revenue Arrangements.
 Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entitys Own
Stock.
 Noncontrolling Interests in Consolidated Financial Statements.
 Fair Value Measurements.
 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.
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4. RESTRICTED INVESTMENTS IN MARKETABLE SECURITIES
  5. INVENTORIES
   December 31,
    
    
    September 30,2009
    
    
    2009Raw materials
    
    $
    824,629
    
    
    $
    824,629Less: current portion
    
    
    (114,098
    )
    
    
    (114,098
    )Non-current portion
    
    $
    710,531
    
    
    $
    710,531
  6. ACCRUED EXPENSES AND OTHER LIABILITIES
  December 31,
    
    
    September 30,2009
    
    
    2009Accrued research and development expenses
    
    $
    270,866
    
    
    $
    372,494Accrued general and administrative expenses
    
    
    650,598
    
    
    
    270,401Deferred rent
    
    
    18,410
    
    
    
    19,516Lease restructuring liability (1)
    
    
    870,266
    
    
    
    991,583Total accrued expenses and other liabilities
    
    
    1,810,140
    
    
    
    1,653,994Less: current portion
    
    
    (1,238,908
    )
    
    
    (1,001,599
    )Accrued expenses and other liabilities, non-current portion
    
    $
    571,232
    
    
    $
    652,395
 
 (1)
    
    In fiscal 2006, the Company relocated all operations other than research and development
from San Diego, California to Aliso Viejo, California. In fiscal 2007, the Company subleased
a total of approximately 49,000 square feet of laboratory and office space in San Diego and
relocated remaining personnel and clinical trial support functions to the Companys offices
in Aliso Viejo, California. Restructuring expenses included recognition of the estimated
loss due to the exit of the Companys leases of approximately $2.1 million. No further costs
were incurred related to these restructuring events in fiscal 2008. In April 2009, 12




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the
Company entered into a sublease for office space in San Diego, California. Sublease rental payments
commenced in September 2009 pursuant to this sublease.  Balance atSeptember 30,
    
    
    Payments/
    
    
    Balance atDecember 31,2009
    
    
    Reductions
    
    
    2009Accrued RestructuringTotal lease restructuring liability
    
    $
    991,583
    
    
    $
    (121,317
    )
    
    $
    870,266Less current portion
    
    
    (358,704
    )
    
    
    
    
    
    
    (317,444
    )Non-current portion
    
    $
    632,879
    
    
    
    
    
    
    $
    552,822
 7. DEFERRED REVENUES
  TotalNet deferred revenues as of October 1, 2009
    
    $
    9,912,367Changes during the period:Recognized as revenues during period
    
    
    (598,607
    )Net deferred revenues as of December 31, 2009
    
    $
    9,313,760Classified and reported as:Current portion of deferred revenues
    
    $
    2,392,893Deferred revenues, net of current portion
    
    
    6,920,867Total deferred revenues
    
    $
    9,313,760
 8. COMPUTATION OF NET LOSS PER COMMON SHARE
   2009
    
    2008Stock options
    
    
    5,834,106
    
    
    
    4,065,627Stock warrants
    
    
    12,240,437
    
    
    
    12,509,742Restricted stock units (1)
    
    
    2,714,433
    
    
    
    2,419,362
 13




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(1)
    
    Includes 848,023 and 198,714 shares of restricted stock at December 31, 2009 and 2008,
respectively, awarded to directors that have vested but are still restricted until the
directors resign. 9. STOCKHOLDERS EQUITY
    10. EMPLOYEE EQUITY INCENTIVE PLANS
   Stock Options
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Weighted AverageWeighted Average
    
    Remaining
    
    AggregateNumber
    
    Exercise Price per
    
    Contractual Term
    
    Intrinsicof Shares
    
    Share
    
    (In Years)
    
    ValueOutstanding October 1, 2009
    
    
    4,217,156
    
    
    $
    1.55Granted
    
    
    1,616,950
    
    
    $
    1.75Outstanding December 31, 2009
    
    
    5,834,106
    
    
    $
    1.60
    
    
    
    8.8
    
    
    $
    4,613,924Vested and expected to vest in the future,December 31, 2009
    
    
    4,875,857
    
    
    $
    1.69
    
    
    
    8.8
    
    
    $
    3,907,984Exercisable, December 31, 2009
    
    
    1,029,845
    
    
    $
    3.71
    
    
    
    7.8
    
    
    $
    869,412
    Expected volatility
    
    
    105
    %Expected term in years
    
    
    5.6Risk-fee interest rate (zero coupon U.S. Treasury Note)
    
    
    2.5
    %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-$0.79
    
    
    1,605,010
    
    
    
    9.0
    
    
    $
    0.53
    
    
    
    357,253
    
    
    $
    0.53$0.88
    
    
    2,031,218
    
    
    
    8.6
    
    
    $
    0.88
    
    
    
    363,248
    
    
    $
    0.88$1.20-$1.74
    
    
    1,722,910
    
    
    
    9.7
    
    
    $
    1.70
    
    
    
    13,750
    
    
    $
    1.20$2.08-$9.92
    
    
    253,031
    
    
    
    7.4
    
    
    $
    3.82
    
    
    
    76,000
    
    
    $
    6.68$10.24-$19.38
    
    
    221,937
    
    
    
    5.3
    
    
    $
    12.72
    
    
    
    219,594
    
    
    $
    12.685,834,106
    
    
    
    8.8
    
    
    $
    1.60
    
    
    
    1,029,845
    
    
    $
    3.71
 Restricted stock units  service-based (RSU).
 15




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Weighted AverageGrant DateNumber of Shares
    
    Fair ValueUnvested, October 1, 2009
    
    
    1,812,986
    
    
    $
    1.83Granted
    
    
    240,000
    
    
    $
    2.08Vested
    
    
    (166,576
    )
    
    $
    0.87Forfeited
    
    
    (20,000
    )
    
    $
    2.08Unvested, December 31, 2009
    
    
    1,866,410
    
    
    $
    1.93
     Restricted stock units  performance-based (Performance RSU).
 11. COMMITMENTS AND CONTINGENCIES
 Center for Neurologic Study (CNS) 
 16




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Contingencies 
  Guarantees and Indemnities  Avanir Avanir
  12. SEGMENT INFORMATION
   17




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13. SUBSEQUENT EVENTS
   
 Item 2.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  EXECUTIVE OVERVIEW
  ®
 Zenvia for the treatment of PBA
   18




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Zenvia for the treatment of neuropathic pain
    19




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Docosanol 10% Cream
   Xenerex Human Antibody Technology  Anthrax/Other Infectious Diseases
   General Information
 info@avanir.com www.avanir.com .
 20




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www.sec.gov
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   RESULTS OF OPERATIONS
 COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008
 Revenues and Cost of Revenues
 Three months endedDecember 31,2009
    
    
    2008
    
    
    $ Change
    
    
    % ChangeREVENUES AND COST OF RESEARCH SERVICES AND OTHERRevenues:Revenue from royalties and royalty rights
    
    $
    1,484,934
    
    
    $
    1,696,796
    
    
    $
    (211,862
    )
    
    
    -12
    %Revenues from license agreements
    
    
    
    
    
    
    57,265
    
    
    
    (57,265
    )
    
    
    -100
    %Revenues from research services and other
    
    
    1,484,934
    
    
    
    1,754,061
    
    
    
    (269,127
    )
    
    
    -15
    %Costs:Cost of research and development services
    
    
    
    
    
    
    8,051
    
    
    
    (8,051
    )
    
    
    -100
    %Research services and other gross profit
    
    $
    1,484,934
    
    
    $
    1,746,010
    
    
    $
    (261,076
    )
    
    
    -15
    %
 Revenues
   21




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Cost of Revenues
  Operating Expenses
 Three months endedDecember 31,2009
    
    
    2008
    
    
    $ Change
    
    
    % ChangeOPERATING EXPENSESResearch and development
    
    $
    3,446,890
    
    
    $
    4,724,914
    
    
    $
    (1,278,024
    )
    
    
    -27
    %General and administrative
    
    
    2,866,478
    
    
    
    2,314,312
    
    
    
    552,166
    
    
    
    24
    %Total operating expenses
    
    $
    6,313,368
    
    
    $
    7,039,226
    
    
    $
    (725,858
    )
    
    
    -10
    %
 Research and Development Expenses
  General and Administrative Expenses
  Share-Based Compensation
  Other Income (Expenses)
  22




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Net Loss
  LIQUIDITY AND CAPITAL RESOURCES
   Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    Change
    
    
    EndedDecember 31,
    
    
    Between
    
    
    December 31,2009
    
    
    Periods
    
    
    2008Net cash used in operating activities
    
    $
    (6,516,291
    )
    
    $
    (795,211
    )
    
    $
    (5,721,080
    )Net cash used in investing activities
    
    
    (31,586
    )
    
    
    (14,365
    )
    
    
    (17,221
    )Net cash provided by (used in) financing activities
    
    
    178,185
    
    
    
    199,807
    
    
    
    (21,622
    )Net decrease in cash and cash equivalents
    
    $
    (6,369,692
    )
    
    $
    (609,769
    )
    
    $
    (5,759,923
    )
 Operating activities.
 Investing activities.
 Financing activities.
  23




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Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsOperating lease obligations (1)
    
    $
    4,206,767
    
    
    $
    1,544,496
    
    
    $
    2,616,249
    
    
    $
    46,022
    
    
    $
    Purchase obligations (2)
    
    
    859,583
    
    
    
    859,583
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    5,066,350
    
    
    $
    2,404,079
    
    
    $
    2,616,249
    
    
    $
    46,022
    
    
    $
    
 
 (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 December 31, 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
  Management Outlook
   24




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest rate sensitivity
     
 Item 4T. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   25




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Changes in Internal Controls over Financial Reporting
  
 PART II OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
 Risks Relating to Our Business
 There can be no assurance that the FDA will approve Zenvia for PBA or any other indication.
   The FDAs safety concerns regarding Zenvia for the treatment of PBA extend to other clinical
indications that we have been pursuing, including DPN pain. Due to these concerns, any future
development of Zenvia for other indications is expected to use an alternative lower-dose quinidine
formulation, which may negatively affect efficacy.
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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;
    
    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.
  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.
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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.
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
    
    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
    
    we will be able to secure additional worldwide intellectual property protection for our
Zenvia patent portfolio.
  It is unclear whether we would be eligible for patent-term restoration in the U.S. under
applicable law and we therefore do not know whether our patent-term can be extended
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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.
  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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
    
    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 filing any NDA we may submit;
    
    requests for additional studies or data;
    
    delays in obtaining 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.
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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.
  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.
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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.
  
    
    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 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;
    
    market and economic conditions; and
    
    Announcements we may make regarding our compliance with continued listing standards on the NASDAQ Global
Market.
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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
  
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
 Exhibits
 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.
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SIGNATURES
  Signature
    
    Title
    
    Date/s/ Keith A. Katkin
    
    President and Chief Executive Officer
    
    February 2, 2010Keith A. Katkin
    
    (Principal Executive Officer)/s/ Christine G. Ocampo
    
    Vice President, FinanceChristine G. Ocampo
    
    (Principal Financial and Accounting Officer)
    
    February 2, 2010
 35