##### 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 March 31, 2008
 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
  California
(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
  Large accelerated filer oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ o þ




---



##### 



Table of Contents
 PagePART I. FINANCIAL INFORMATION
    
    
    3Item 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
    
    
    21Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    31PART II. OTHER INFORMATION
    
    
    32Item 1.
    
    Legal Proceedings
    
    
    32Item 1A.
    
    Risk Factors
    
    
    32Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 3.
    
    Defaults Upon Senior Securities
    
    
    40Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    40Item 5.
    
    Other Information
    
    
    41Item 6.
    
    Exhibits
    
    
    41Signatures
    
    
    42EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.0
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 
 AVANIR PHARMACEUTICALS
CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    September 30,2008
    
    
    2007(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,416,363
    
    
    $
    30,487,962Short-term investments in marketable securities
    
    
    
    
    
    
    1,747,761Receivables, net
    
    
    815,632
    
    
    
    988,450Inventories
    
    
    17,000
    
    
    
    17,000Prepaid expenses
    
    
    926,383
    
    
    
    1,479,992Other current assets
    
    
    237,752
    
    
    
    Current portion of restricted investments in marketable securities
    
    
    388,122
    
    
    
    688,122Total current assets
    
    
    25,801,252
    
    
    
    35,409,287Investments in marketable securities
    
    
    
    
    
    
    249,078Restricted investments in marketable securities, net of current portion
    
    
    468,475
    
    
    
    468,475Property and equipment, net
    
    
    1,002,645
    
    
    
    1,215,666Intangible assets, net
    
    
    21,005
    
    
    
    41,048Long-term inventories
    
    
    1,316,277
    
    
    
    1,337,991Other assets
    
    
    355,527
    
    
    
    374,348TOTAL ASSETS
    
    $
    28,965,181
    
    
    $
    39,095,893LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    1,208,509
    
    
    $
    307,700Accrued expenses and other liabilities
    
    
    2,001,355
    
    
    
    2,050,864Accrued compensation and payroll taxes
    
    
    772,378
    
    
    
    1,191,677Current portion of deferred revenues
    
    
    2,566,400
    
    
    
    2,267,594Current portion of notes payable
    
    
    99,569
    
    
    
    254,676Current liabilities of discontinued operations
    
    
    867,969
    
    
    
    Total current liabilities
    
    
    7,516,180
    
    
    
    6,072,511Accrued expenses and other liabilities, net of current portion
    
    
    1,016,270
    
    
    
    1,170,396Deferred revenues, net of current portion
    
    
    11,484,804
    
    
    
    13,052,836Notes payable, net of current portion
    
    
    11,806,920
    
    
    
    11,769,916Total liabilities
    
    
    31,824,174
    
    
    
    32,065,659Commitments and contingencies (Note 12)Shareholders equity (deficit):Preferred stock  no par value, 10,000,000 shares authorized, no
shares
issued or outstanding as of March 31, 2008 and September 30,
2007
    
    
    
    
    
    
    Common stock  no par value, 200,000,000 shares authorized;
43,204,802 and 43,117,358 shares issued and outstanding as of
March 31, 2008 and September 30, 2007, respectively
    
    
    246,478,232
    
    
    
    245,531,712Accumulated deficit
    
    
    (249,337,752
    )
    
    
    (238,498,733
    )Accumulated other comprehensive income (loss)
    
    
    527
    
    
    
    (2,745
    )Total shareholders equity (deficit)
    
    
    (2,858,993
    )
    
    
    7,030,234TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)
    
    $
    28,965,181
    
    
    $
    39,095,893
  3




---



##### Table of Contents



AVANIR PHARMACEUTICALS
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months Ended March 31,
    
    
    Six Months Ended March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007REVENUES FROM PRODUCT SALESNet revenues
    
    $
    90,270
    
    
    $
    
    
    
    $
    126,270
    
    
    $
    Cost of revenues
    
    
    15,510
    
    
    
    
    
    
    
    21,714
    
    
    
    Product gross margin
    
    
    74,760
    
    
    
    
    
    
    
    104,556
    
    
    
    REVENUES AND COST OF RESEARCH SERVICES AND OTHERRevenues from research and development services
    
    
    
    
    
    
    920,448
    
    
    
    
    
    
    
    2,190,692Revenues from government research grant services
    
    
    311,758
    
    
    
    266,728
    
    
    
    479,404
    
    
    
    353,076Revenues from license agreements
    
    
    56,643
    
    
    
    56,019
    
    
    
    113,907
    
    
    
    113,284Revenue from royalties and royalty rights
    
    
    571,825
    
    
    
    779,673
    
    
    
    2,409,678
    
    
    
    1,502,713Revenues from research services and other
    
    
    940,226
    
    
    
    2,022,868
    
    
    
    3,002,989
    
    
    
    4,159,765Cost of research and development services
    
    
    (26,817
    )
    
    
    (607,164
    )
    
    
    (76,807
    )
    
    
    (1,771,239
    )Cost of government research grant services
    
    
    (431,948
    )
    
    
    (369,261
    )
    
    
    (557,534
    )
    
    
    (464,988
    )Research services and other gross margin
    
    
    481,461
    
    
    
    1,046,443
    
    
    
    2,368,648
    
    
    
    1,923,538Total gross margin
    
    
    556,221
    
    
    
    1,046,443
    
    
    
    2,473,204
    
    
    
    1,923,538OPERATING EXPENSESResearch and development
    
    
    3,524,665
    
    
    
    5,967,739
    
    
    
    6,950,925
    
    
    
    11,164,992Selling, general and administrative
    
    
    2,418,894
    
    
    
    2,157,245
    
    
    
    5,547,013
    
    
    
    11,415,839Total operating expenses
    
    
    5,943,559
    
    
    
    8,124,984
    
    
    
    12,497,938
    
    
    
    22,580,831Loss from operations
    
    
    (5,387,338
    )
    
    
    (7,078,541
    )
    
    
    (10,024,734
    )
    
    
    (20,657,293
    )OTHER INCOME (EXPENSES)Interest income
    
    
    283,224
    
    
    
    144,862
    
    
    
    710,386
    
    
    
    336,338Interest expense
    
    
    (191,214
    )
    
    
    (134,598
    )
    
    
    (425,215
    )
    
    
    (552,693
    )Other
    
    
    1,889
    
    
    
    161,246
    
    
    
    1,185
    
    
    
    195,323Loss from continuing operations before provision for income taxes
    
    
    (5,293,439
    )
    
    
    (6,907,031
    )
    
    
    (9,738,378
    )
    
    
    (20,678,325
    )Provision for income taxes
    
    
    15,159
    
    
    
    13,404
    
    
    
    15,159
    
    
    
    13,404Loss before discontinued operations
    
    
    (5,308,598
    )
    
    
    (6,920,435
    )
    
    
    (9,753,537
    )
    
    
    (20,691,729
    )Loss from discontinued operations
    
    
    (11,787
    )
    
    
    (3,329,927
    )
    
    
    (1,085,482
    )
    
    
    (3,176,160
    )Net loss
    
    $
    (5,320,385
    )
    
    $
    (10,250,362
    )
    
    $
    (10,839,019
    )
    
    $
    (23,867,889
    )BASIC AND DILUTED NET LOSS PER SHARE:Loss from continuing operations
    
    $
    (0.12
    )
    
    $
    (0.18
    )
    
    $
    (0.23
    )
    
    $
    (0.56
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.08
    )
    
    
    (0.02
    )
    
    
    (0.09
    )Net loss per share
    
    $
    (0.12
    )
    
    $
    (0.26
    )
    
    $
    (0.25
    )
    
    $
    (0.65
    )Basic and diluted weighted average number of common shares
outstanding
    
    
    43,173,143
    
    
    
    39,047,597
    
    
    
    43,139,573
    
    
    
    36,797,202
  4




---



##### Table of Contents



AVANIR PHARMACEUTICALS
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Six Months Ended March 31,2008
    
    
    2007OPERATING ACTIVITIES:Net loss
    
    $
    (10,839,019
    )
    
    $
    (23,867,889
    )Loss from discontinued operations
    
    
    1,085,482
    
    
    
    3,176,160Adjustments to reconcile loss before discontinued operations to net
cash used in operating activities:Depreciation and amortization
    
    
    234,317
    
    
    
    1,294,692Share-based compensation expense
    
    
    906,751
    
    
    
    1,336,894Amortization of debt discount
    
    
    69,833
    
    
    
    122,000Loss on disposal of assets
    
    
    638
    
    
    
    Changes in operating assets and liabilities (net of effects of
acquisition/disposition of FazaClo):Receivables
    
    
    172,818
    
    
    
    55,978Inventories
    
    
    21,714
    
    
    
    2,628,748Prepaid and other assets
    
    
    341,691
    
    
    
    295,384Accounts payable
    
    
    900,809
    
    
    
    (8,815,296
    )Accrued expenses and other liabilities
    
    
    (203,631
    )
    
    
    (82,832
    )Accrued compensation and payroll taxes
    
    
    (419,299
    )
    
    
    (1,598,218
    )Deferred revenue
    
    
    (1,269,226
    )
    
    
    (1,214,790
    )Net cash used in operating activities of continuing operations
    
    
    (8,997,122
    )
    
    
    (26,669,169
    )Net cash used in operating activities of discontinued operations
    
    
    (203,608
    )
    
    
    (6,646,984
    )Net cash used in operating activities
    
    
    (9,200,730
    )
    
    
    (33,316,153
    )INVESTING ACTIVITIES:Investments in securities
    
    
    
    
    
    
    (350,922
    )Proceeds from sales and maturities of investments in securities
    
    
    2,300,107
    
    
    
    16,900,000Purchase of property and equipment
    
    
    (13,804
    )
    
    
    (96,312
    )Proceeds from sales of fixed assets
    
    
    4,900
    
    
    
    Net cash provided by investing activities
    
    
    2,291,203
    
    
    
    16,452,766FINANCING ACTIVITIES:Proceeds from issuances of common stock and warrants, net of
commissions
and offering costs
    
    
    42,956
    
    
    
    22,096,389Tax withholding payments reimbursed by restricted stock
    
    
    (17,092
    )
    
    
    Payments on notes and capital lease obligations
    
    
    (187,936
    )
    
    
    (4,735,729
    )Net cash (used in) provided by financing activities of
continuing operations
    
    
    (162,072
    )
    
    
    17,360,660Net cash used in financing activities of discontinued operations
    
    
    
    
    
    
    (108,688
    )Net cash (used in) provided by financing activities
    
    
    (162,072
    )
    
    
    17,251,972Net (decrease) increase in cash and cash equivalents
    
    
    (7,071,599
    )
    
    
    388,585Cash and cash equivalents at beginning of period
    
    
    30,487,962
    
    
    
    4,898,214Cash and cash equivalents at end of period
    
    $
    23,416,363
    
    
    $
    5,286,799SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid
    
    $
    355,242
    
    
    $
    795,973Income taxes paid
    
    $
    15,159
    
    
    $
    13,404SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:Purchase price adjustment of assumed liabilities
    
    $
    
    
    
    $
    4,067,889Issuance of note payable
    
    $
    
    
    
    $
    2,000,000Accrued liabilities of discontinued operations in connection
with Net Working Capital Adjustment
    
    $
    867,969
    
    
    $
    
  5




---



##### Table of Contents



AVANIR PHARMACEUTICALS
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. BASIS OF PRESENTATION
 Avanir Avanir
  ® Avanir
 2. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Business
 Avanir TM
 
 6




---



##### Table of Contents



Income Taxes
 Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement
No. 109 Accounting for Income Taxes,
    Revenue Recognition
  Revenue Recognition. Revenue Recognition When Right of Return
Exists
 Accounting for Revenue Arrangements
with Multiple Deliverables.
 7




---



##### Table of Contents



Product Sales
 Active Pharmaceutical Ingredient Docosanol (API Docosanol).
 FazaClo. (Sales from Discontinued Operations).
     8




---



##### Table of Contents



Multiple Element Arrangements.
   License Arrangements.
   Research Services Arrangements. Reporting Revenue Gross as a Principal versus Net as an Agent,
 Royalty Arrangements.
  9




---



##### Table of Contents



®
 Government Research Grant Revenues.
 Cost of Revenues
  Recognition of Expenses in Outsourced Contracts
  Capitalization and Valuation of Long-Lived and Intangible Assets
 Business Combinations Goodwill and Other Intangible
Assets
 Accounting for the Impairment or Disposal of Long-Lived Assets
  
    
    A significant underperformance relative to expected historical or projected future
operating results;
    
    A significant change in the manner of our use of the acquired asset or the strategy for
our overall business; and/or
    
    A significant negative industry or economic trend.
 10




---



##### Table of Contents



Share-Based Compensation
 Share-Based
Payment
   For the three months ended
    
    
    For the six months endedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007From Continuing Operations:Selling, general and
administrative expense
    
    $
    283,630
    
    
    $
    420,101
    
    
    $
    572,994
    
    
    $
    1,128,706Research and development expense
    
    
    187,468
    
    
    
    85,381
    
    
    
    333,757
    
    
    
    208,188Share-based compensation expense
related to continuing operations
    
    
    471,098
    
    
    
    505,482
    
    
    
    906,751
    
    
    
    1,336,894From Discontinued Operations:
    
    
    5,649
    
    
    
    167,982
    
    
    
    13,905
    
    
    
    181,087Total
    
    $
    476,747
    
    
    $
    673,464
    
    
    $
    920,656
    
    
    $
    1,517,981
 For the three months ended
    
    
    For the six months endedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Share-based compensation expense from:Stock options
    
    $
    147,052
    
    
    $
    243,053
    
    
    $
    361,176
    
    
    $
    657,901Restricted stock units
    
    
    225,142
    
    
    
    218,194
    
    
    
    442,812
    
    
    
    634,598Restricted stock awards
    
    
    104,553
    
    
    
    212,217
    
    
    
    116,668
    
    
    
    225,482Total
    
    $
    476,747
    
    
    $
    673,464
    
    
    $
    920,656
    
    
    $
    1,517,981
  11




---



##### Table of Contents



Recently Issued Accounting Pronouncements
 Financial Accounting Standards No. 161 (FAS 161). Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FAS
133"
 Financial Accounting Standards No. 160 (FAS 160). Noncontrolling Interests in Consolidated Financials, an Amendment of ARB No. 51"
 Financial Accounting Standards No. 141(R) (FAS 141R). Business Combinations: Applying the Acquisition Method"
 EITF Issue No. 07-1. Accounting for Collaborative Arrangements,
 EITF Issue No. 07-3. Accounting for Nonrefundable Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities
 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
 12




---



##### Table of Contents



3. ACQUISITION OF ALAMO PHARMACEUTICALS, INC. / SALE OF FAZACLO
      Sale of FazaClo, Presentation of Discontinued Operations, and Contingency for Working Capital Adjustment
  Accounting for the Impairment or Disposal of Long-Lived Assets"
  13




---



##### Table of Contents



Accounting for Changes and Error Corrections
 Accounting for
Contingencies"
   For the three
    
    
    For the sixmonths ended
    
    
    months endedMarch 31, 2007
    
    
    March 31, 2007REVENUES FROM PRODUCT SALESNet revenues
    
    $
    3,829,111
    
    
    $
    10,099,815Cost of revenues
    
    
    1,047,604
    
    
    
    2,394,788Product gross margin
    
    
    2,781,507
    
    
    
    7,705,027OPERATING EXPENSESResearch and development
    
    
    949,766
    
    
    
    1,658,514Selling, general and administrative
    
    
    4,980,756
    
    
    
    8,856,828Loss from operations
    
    
    (3,149,015
    )
    
    
    (2,810,315
    )OTHER EXPENSEInterest expense
    
    
    (180,912
    )
    
    
    (365,845
    )Loss before provision for income taxes
    
    
    (3,329,927
    )
    
    
    (3,176,160
    )Provision for income taxes
    
    
    
    
    
    
    NET LOSS
    
    $
    (3,329,927
    )
    
    $
    (3,176,160
    )
 4. RELOCATION OF COMMERCIAL AND GENERAL AND ADMINISTRATIVE OPERATIONS
  14




---



##### Table of Contents



September 30,
    
    
    Payments/
    
    
    March 31,2007
    
    
    Adjustments
    
    
    2008Accrued Restructuring:Employee severance and
relocation benefits
    
    $
    75,790
    
    
    $
    (67,320
    )
    
    $
    8,470Lease restructuring liabilities
    
    
    2,223,802
    
    
    
    (706,545
    )
    
    
    1,517,257Total
    
    
    2,299,592
    
    
    $
    (773,865
    )
    
    
    1,525,727Less: current portion
    
    
    (1,163,627
    )
    
    
    
    
    
    
    (552,379
    )Non-current portion
    
    $
    1,135,965
    
    
    
    
    
    
    $
    973,348
  5. INVENTORIES
  March 31,
    
    
    September 30,2008
    
    
    2007Raw materials
    
    $
    1,333,277
    
    
    $
    1,354,991Less: current portion
    
    
    (17,000
    )
    
    
    (17,000
    )Long-term portion
    
    $
    1,316,277
    
    
    $
    1,337,991
  6. ACCRUED EXPENSES AND OTHER LIABILITIES
  March 31, 2008
    
    
    September 30, 2007Accrued research and development expenses
    
    $
    978,914
    
    
    $
    419,989Accrued sales and marketing expenses
    
    
    75,000
    
    
    
    Accrued general and administrative expenses
    
    
    314,137
    
    
    
    287,517Deferred rent
    
    
    42,922
    
    
    
    34,432Lease restructuring liabilities
    
    
    1,517,257
    
    
    
    2,223,802Other
    
    
    89,395
    
    
    
    255,520Total accrued expenses and other liabilities
    
    
    3,017,625
    
    
    
    3,221,260Less: current portion
    
    
    (2,001,355
    )
    
    
    (2,050,864
    )Non-current total accrued
expenses and other liabilities
    
    $
    1,016,270
    
    
    $
    1,170,396
  15




---



##### Table of Contents



7. DEFERRED REVENUES
 ®
 13. Net Deferred Revenues
 Drug RoyaltyUSA
    
    
    OtherAgreement
    
    
    Agreements
    
    
    TotalDeferred revenues as of October 1, 2007
    
    $
    14,738,509
    
    
    $
    581,921
    
    
    $
    15,320,430Changes during the period:Additions
    
    
    
    
    
    
    250,000
    
    
    
    250,000Recognized as revenues during period
    
    
    (1,335,045
    )
    
    
    (184,181
    )
    
    
    (1,519,226
    )Deferred revenues as of March 31, 2008
    
    $
    13,403,464
    
    
    $
    647,740
    
    
    $
    14,051,204Classified and reported as:Current portion of deferred revenues
    
    $
    2,089,209
    
    
    $
    477,191
    
    
    $
    2,566,400Deferred revenues, net of current portion
    
    
    11,314,255
    
    
    
    170,549
    
    
    
    11,484,804Total deferred revenues
    
    $
    13,403,464
    
    
    $
    647,740
    
    
    $
    14,051,204
 8. COMPUTATION OF NET LOSS PER COMMON SHARE
  9. COMPREHENSIVE LOSS
  For the three months
    
    
    For the six monthsended March 31,
    
    
    ended March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (5,320,385
    )
    
    $
    (10,250,362
    )
    
    $
    (10,839,019
    )
    
    $
    (23,867,889
    )Other comprehensive loss, net of tax:Unrealized (loss) gain on
available-for-sale securities
    
    
    (563
    )
    
    
    11,298
    
    
    
    3,272
    
    
    
    79,299Total comprehensive loss
    
    $
    (5,320,948
    )
    
    $
    (10,239,064
    )
    
    $
    (10,835,747
    )
    
    $
    (23,788,590
    )
 10. SHAREHOLDERS EQUITY
  16




---



##### Table of Contents



11. EMPLOYEE EQUITY INCENTIVE PLANS
   Stock Options
  WeightedWeighted
    
    averageaverage
    
    remainingexercise
    
    contractual
    
    Aggregateprice per
    
    term
    
    intrinsicNumber of shares
    
    share
    
    (in years)
    
    valueOutstanding, October 1, 2007
    
    
    1,040,581
    
    
    $
    7.69Forfeited
    
    
    (363,299
    )
    
    $
    8.72Outstanding, March 31, 2008
    
    
    677,282
    
    
    $
    7.13
    
    
    
    7.4
    
    
    $
    Vested and expected to vest in the future, March 31, 2008
    
    
    506,619
    
    
    $
    8.46
    
    
    
    6.9
    
    
    $
    Exercisable, March 31, 2008
    
    
    297,991
    
    
    $
    10.54
    
    
    
    5.7
    
    
    $
    
  17




---



##### Table of Contents



2007Expected volatility
    
    
    75%-103
    %Weighted-average volatility
    
    
    88
    %Average expected term in years
    
    
    6.0Risk-fee interest rate (zero coupon U.S. Treasury Note)
    
    
    4.7
    %Expected dividend yield
    
    
    0
    %
  Options OutstandingWeighted
    
    
    
    
    
    Options ExercisableAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageRange of
    
    Number
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    Outstanding
    
    Life in Years
    
    Price
    
    Exercisable
    
    Price$1.20 - $1.29
    
    
    150,960
    
    
    
    9.0
    
    
    $
    1.28
    
    
    
    5,000
    
    
    $
    1.20$2.41 - $2.88
    
    
    128,504
    
    
    
    8.9
    
    
    $
    2.44
    
    
    
    7,723
    
    
    $
    2.88$4.50 - $6.80
    
    
    69,085
    
    
    
    5.6
    
    
    $
    5.72
    
    
    
    48,773
    
    
    $
    5.59$6.92 - $9.92
    
    
    67,854
    
    
    
    5.2
    
    
    $
    7.86
    
    
    
    50,667
    
    
    $
    8.18$10.24  $11.76
    
    
    155,479
    
    
    
    7.3
    
    
    $
    11.65
    
    
    
    105,529
    
    
    $
    11.62$12.12  $16.60
    
    
    92,125
    
    
    
    6.7
    
    
    $
    14.39
    
    
    
    67,024
    
    
    $
    14.04$19.38  $19.38
    
    
    13,275
    
    
    
    3.3
    
    
    $
    19.38
    
    
    
    13,275
    
    
    $
    19.38677,282
    
    
    
    7.4
    
    
    $
    7.13
    
    
    
    297,991
    
    
    $
    10.54
 Restricted stock units.
 WeightedNumber of
    
    average grantshares
    
    date fair valueUnvested, October 1, 2007
    
    
    1,914,988
    
    
    $
    2.17Granted
    
    
    866,751
    
    
    $
    1.49Vested
    
    
    (218,086
    )
    
    $
    2.89Forfeited
    
    
    (163,088
    )
    
    $
    1.78Unvested, March 31, 2008
    
    
    2,400,565
    
    
    $
    1.88
    18




---



##### Table of Contents



Restricted stock awards
 WeightedNumber of
    
    average grantshares
    
    date fair valueUnvested, October 1, 2007
    
    
    22,500
    
    
    $
    11.87Vested
    
    
    (14,500
    )
    
    $
    14.79Forfeited
    
    
    (2,000
    )
    
    $
    6.91Unvested, March 31, 2008
    
    
    6,000
    
    
    $
    6.48
   12. COMMITMENTS AND CONTINGENCIES
  Center for Neurologic Study (CNS) 
 Eurand, Inc
 19




---



##### Table of Contents



Contingencies.
   Guarantees and Indemnities.
  13. SEGMENT INFORMATION
     14. LICENSE AGREEMENTS
  20




---



##### Table of Contents



15. SUBSEQUENT EVENTS
    
 Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  EXECUTIVE OVERVIEW
 ®
 Zenvia Status
 
 21




---



##### Table of Contents



Docosanol 10% Cream
 ®
 Inflammation Program
  Xenerex Human Antibody Technology  Anthrax/Other Infectious Diseases
   22




---



##### Table of Contents



Restructuring Activities
 ®
 TM
 info@avanir.com www.avanir.com.
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   23




---



##### Table of Contents



RESULTS OF OPERATIONS
 COMPARISON OF THREE MONTHS ENDED MARCH 31, 2008 AND 2007
 Three Months endedMarch 31,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangePRODUCT SALESNet revenues
    
    $
    90,270
    
    
    $
    
    
    
    $
    90,270
    
    
    
    100
    %Cost of revenues
    
    
    15,510
    
    
    
    
    
    
    
    15,510
    
    
    
    100
    %Gross margin
    
    $
    74,760
    
    
    $
    
    
    
    $
    74,760
    
    
    
    100
    %LICENSES, RESEARCH SERVICES AND GRANTSRevenues:Research services
    
    $
    
    
    
    $
    920,448
    
    
    $
    (920,448
    )
    
    
    -100
    %Government research grant
    
    
    311,758
    
    
    
    266,728
    
    
    
    45,030
    
    
    
    17
    %License agreements
    
    
    56,643
    
    
    
    56,019
    
    
    
    624
    
    
    
    1
    %Royalty and sale of royalty rights
    
    
    571,825
    
    
    
    779,673
    
    
    
    (207,848
    )
    
    
    -27
    %Revenues from licenses, research services
and grants
    
    
    940,226
    
    
    
    2,022,868
    
    
    
    (1,082,642
    )
    
    
    -54
    %Costs:Research services
    
    
    26,817
    
    
    
    607,164
    
    
    
    (580,347
    )
    
    
    -96
    %Government research grant
    
    
    431,948
    
    
    
    369,261
    
    
    
    62,687
    
    
    
    17
    %Costs from research services and grants
    
    
    458,765
    
    
    
    976,425
    
    
    
    (517,660
    )
    
    
    -53
    %Research services and other gross margin
    
    
    481,461
    
    
    
    1,046,443
    
    
    
    (564,982
    )
    
    
    -54
    %Total gross margin
    
    $
    556,221
    
    
    $
    1,046,443
    
    
    $
    (490,222
    )
    
    
    -47
    %
 Revenues
   Cost of Revenues
  24




---



##### Table of Contents



Three Months endedMarch 31,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeOPERATING EXPENSESResearch and development
    
    $
    3,524,665
    
    
    $
    5,967,739
    
    
    $
    (2,443,074
    )
    
    
    -41
    %Selling, general and administrative
    
    
    2,418,894
    
    
    
    2,157,245
    
    
    
    261,649
    
    
    
    12
    %Total Operating Expenses
    
    $
    5,943,559
    
    
    $
    8,124,984
    
    
    $
    (2,181,425
    )
    
    
    -27
    %
 Research and Development Expenses
   Selling, General and Administrative Expenses
   Share-Based Compensation
   Interest Expense and Interest Income
   25




---



##### Table of Contents



Loss from Discontinued Operations
  Net Loss
  COMPARISON OF SIX MONTHS ENDED MARCH 31, 2008 AND 2007
 Six Months endedMarch 31,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangePRODUCT SALESNet revenues
    
    $
    126,270
    
    
    $
    
    
    
    $
    126,270
    
    
    
    100
    %Cost of revenues
    
    
    21,714
    
    
    
    
    
    
    
    21,714
    
    
    
    100
    %Gross margin
    
    $
    104,556
    
    
    $
    
    
    
    $
    104,556
    
    
    
    100
    %LICENSES, RESEARCH SERVICES AND GRANTSRevenues:Research services
    
    $
    
    
    
    $
    2,190,692
    
    
    $
    (2,190,692
    )
    
    
    -100
    %Government research grant
    
    
    479,404
    
    
    
    353,076
    
    
    
    126,328
    
    
    
    36
    %License agreements
    
    
    113,907
    
    
    
    113,284
    
    
    
    623
    
    
    
    1
    %Royalty and sale of royalty rights
    
    
    2,409,678
    
    
    
    1,502,713
    
    
    
    906,965
    
    
    
    60
    %Revenues from licenses, research services and grants
    
    
    3,002,989
    
    
    
    4,159,765
    
    
    
    (1,156,776
    )
    
    
    -28
    %Costs:Research services
    
    
    76,807
    
    
    
    1,771,239
    
    
    
    (1,694,432
    )
    
    
    -96
    %Government research grant
    
    
    557,534
    
    
    
    464,988
    
    
    
    92,546
    
    
    
    20
    %Costs from research services and grants
    
    
    634,341
    
    
    
    2,236,227
    
    
    
    (1,601,886
    )
    
    
    -72
    %Research services and other gross margin
    
    
    2,368,648
    
    
    
    1,923,538
    
    
    
    445,110
    
    
    
    23
    %Total gross margin
    
    $
    2,473,204
    
    
    $
    1,923,538
    
    
    $
    549,666
    
    
    
    29
    %
 Revenues
    26




---



##### Table of Contents



Cost of Revenues
  Six Months endedMarch 31,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeOPERATING EXPENSESResearch and development
    
    $
    6,950,925
    
    
    $
    11,164,992
    
    
    $
    (4,214,067
    )
    
    
    -38
    %Selling, general and administrative
    
    
    5,547,013
    
    
    
    11,415,839
    
    
    
    (5,868,826
     )
    
    
    -51
    %Total Operating Expenses
    
    $
    12,497,938
    
    
    $
    22,580,831
    
    
    $
    (10,082,893
     )
    
    
    -45
    %
 Research and Development Expenses
   Selling, General and Administrative Expenses
   Share-Based Compensation
   27




---



##### Table of Contents



Interest Expense and Interest Income
   Loss from Discontinued Operations
  Net Loss
  LIQUIDITY AND CAPITAL RESOURCES
   IncreaseMarch 31,
    
    (Decrease)
    
    September 30,2008
    
    During Period
    
    2007Cash, cash equivalents and investment in securities
    
    $
    24,272,960
    
    
    $
    (9,368,438
    )
    
    $
    33,641,398Cash and cash equivalents
    
    $
    23,416,363
    
    
    $
    (7,071,599
    )
    
    $
    30,487,962Net working capital
    
    $
    18,285,072
    
    
    $
    (11,051,704
    )
    
    $
    29,336,776
 Six Months
    
    
    
    
    
    
    Six MonthsEnded
    
    
    Change
    
    
    EndedMarch 31,
    
    
    Between
    
    
    March 31,2008
    
    
    Periods
    
    
    2007Net cash used in operating activities
    
    $
    (9,200,730
    )
    
    $
    24,115,423
    
    
    $
    (33,316,153
    )Net cash provided by investing activities
    
    
    2,291,203
    
    
    
    (14,161,563
    )
    
    
    16,452,766Net cash (used in) provided by financing activities
    
    
    (162,072
    )
    
    
    (17,414,044
    )
    
    
    17,251,972Net (decrease) increase in cash and cash equivalents
    
    $
    (7,071,599
    )
    
    $
    (7,460,184
    )
    
    $
    388,585
 28




---



##### Table of Contents



Operating activities.
 Investing activities.
 Financing activities.
    Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsLong-term debt (principal and interest)
    
    $
    12,822,510
    
    
    $
    884,730
    
    
    $
    11,937,780
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    7,137,249
    
    
    
    1,808,802
    
    
    
    3,061,308
    
    
    
    2,267,139
    
    
    
    Purchase obligations (1)
    
    
    13,135,380
    
    
    
    6,831,515
    
    
    
    6,303,865
    
    
    
    
    
    
    
    Total
    
    $
    33,095,139
    
    
    $
    9,525,047
    
    
    $
    21,302,953
    
    
    $
    2,267,139
    
    
    $
    
 
 (1)
    
    Purchase obligations consist of the total of trade accounts payable and trade related accrued
expenses at March 31, 2008 which approximates our contractual commitments for goods and
services in the normal course of our business.  29




---



##### Table of Contents



Contingency on Net Working Capital Adjustment.
 Accounting for Contingencies
 Alamo Earn-Out Payments.
 Eurand Milestone and Royalty Payments.
 30




---



##### Table of Contents



Zenvia License Milestone Payments.
  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
  31




---



##### 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 must conduct additional clinical trials for Zenvia and there can be no assurance that the FDA
will approve Zenvia or that an approval, if granted, will be on terms we may seek.
    32




---



##### Table of Contents



The FDAs safety concerns regarding Zenvia for the treatment of PBA may extend to other
clinical indications that we are pursuing, including DPN pain. Due to these concerns, we expect to
develop Zenvia for other indications using alternative doses, which may negatively affect efficacy.
  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 shareholders and
diminish certain commercial prospects.
  33




---



##### 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 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; or
    
    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.
  34




---



##### Table of Contents



We currently have only a limited term of patent coverage for Zenvia in the U.S., which could
result in the introduction of generic competition within in 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.
  We have recently experienced significant turnover in senior management.
  We face challenges retaining members of management and other key personnel.
  35




---



##### Table of Contents



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 statistically
significant or 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;
and
    
    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; or
    
    the rejection of an application.
 36




---



##### Table of Contents



Clinical trials can be delayed for a variety of reasons. If we experience any such delays, we would
be unable to commercialize our product candidates on a timely basis, which would materially harm
our business.
  
    
    identifying and engaging a sufficient number of clinical trial sites;
    
    negotiating acceptable clinical trial agreement terms with prospective trial sites;
    
    obtaining institutional review board approval to conduct a clinical trial at a
prospective site;
    
    recruiting eligible subjects to participate in clinical trials;
    
    competition in recruiting clinical investigators;
    
    shortage or lack of availability of supplies of drugs for clinical trials;
    
    the need to repeat clinical trials as a result of inconclusive results or poorly
executed testing;
    
    the placement of a clinical hold on a study;
    
    the failure of third parties conducting and overseeing the operations of our
clinical trials to perform their contractual or regulatory obligations in a timely
fashion; and
    
    exposure of clinical trial subjects to unexpected and unacceptable health risks or
noncompliance with regulatory requirements, which may result in suspension of the
trial.
  The pharmaceutical industry is highly competitive and most of our competitors are larger 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.
  37




---



##### Table of Contents



Developing and marketing pharmaceutical products for human use involves product liability
risks, for which we currently have limited insurance coverage.
  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.
  38




---



##### Table of Contents



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 sales and marketing efforts.
  Risks Relating to Our Stock
 Our common stock could be delisted from The NASDAQ Global Market, which could negatively
impact the price of our common stock and our ability to access the capital markets.
 ,
   39




---



##### Table of Contents



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;
    
    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 Class A common stock by our directors, officers, or significant shareholders;
    
    Announcements by our competitors of clinical trial results or product approvals; and
    
    Market and economic conditions.
   
 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
  40




---



##### Table of Contents



Proposal No. 1: Election of Directors
 Director Nominee
    
    For
    
    WithholdStephen G. Austin
    
    
    32,964,663
    
    
    
    2,249,298Dennis G. Podlesak
    
    
    32,959,809
    
    
    
    2,254,152
 Proposal No. 2: Ratification of Selection of KMJ Corbin & Company LLP as Independent Registered
Public Accounting Firm
 For
    
    Against
    
    Abstain33,903,503
    
    
    579,971
    
    
    
    730,486
 
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
 Exhibits10.1
    
    Asset Purchase and License Agreement, dated March 6, 2008, by and among Avanir
Pharmaceuticals, Xenerex Biosicences and Emergent Biosolutions, Inc. *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.32.0
    
    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.
 
 *
    
    Confidential treatment has been requested for certain portions of this document and these
confidential portions have been redacted from the filing made herewith. 41




---



##### Table of Contents



SIGNATURES
  Signature
    
    Title
    
    Date/s/ Keith A. Katkin
    
    President and Chief Executive Officer
    
    May 13, 2008Keith A. Katkin
    
    (Principal Executive Officer)/s/ Christine G. Ocampo
    
    Vice President, FinanceChristine G. Ocampo
    
    (Principal Financial and Accounting Officer)
    
    May 13, 2008
 42