##### 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, 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 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 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
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27PART II. OTHER INFORMATION
    
    
    28Item 1.
    
    Legal Proceedings
    
    
    28Item 1A.
    
    Risk Factors
    
    
    28Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 3.
    
    Defaults Upon Senior Securities
    
    
    38Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    38Item 5.
    
    Other Information
    
    
    38Item 6.
    
    Exhibits
    
    
    38Signatures
    
    
    39EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 AVANIR PHARMACEUTICALS
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 December 31,
    
    
    September 30,2008
    
    
    2008(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    35,624,007
    
    
    $
    41,383,930Inventories
    
    
    17,000
    
    
    
    17,000Prepaid expenses
    
    
    753,107
    
    
    
    1,030,630Other current assets
    
    
    1,141,520
    
    
    
    237,334Current portion of restricted investments in marketable securities
    
    
    388,122
    
    
    
    388,122Total current assets
    
    
    37,923,756
    
    
    
    43,057,016Restricted investments in marketable securities, net of current portion
    
    
    468,475
    
    
    
    468,475Property and equipment, net
    
    
    738,161
    
    
    
    806,909Non-current inventories
    
    
    1,316,277
    
    
    
    1,316,277Other assets
    
    
    249,813
    
    
    
    257,484TOTAL ASSETS
    
    $
    40,696,482
    
    
    $
    45,906,161LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,063,604
    
    
    $
    451,846Accrued expenses and other liabilities
    
    
    1,516,152
    
    
    
    1,881,401Accrued compensation and payroll taxes
    
    
    414,392
    
    
    
    1,192,457Current portion of deferred revenues
    
    
    2,509,129
    
    
    
    2,333,932Notes payable
    
    
    4,122
    
    
    
    25,744Total current liabilities
    
    
    6,507,399
    
    
    
    5,885,380Accrued expenses and other liabilities, net of current portion
    
    
    759,567
    
    
    
    868,517Deferred revenues, net of current portion
    
    
    9,221,934
    
    
    
    10,152,100Total liabilities
    
    
    16,488,900
    
    
    
    16,905,997Commitments and contingenciesShareholders equity:Preferred stock  no par value, 10,000,000 shares authorized, no shares
issued or outstanding as of December 31, 2008 (unaudited) and September 30, 2008
    
    
    
    
    
    
    Class A Common stock  no par value, 200,000,000 shares authorized;
78,227,041 and 78,213,986 shares issued and outstanding as of
December 31, 2008 (unaudited) and September 30, 2008, respectively
    
    
    285,380,770
    
    
    
    284,994,636Accumulated deficit
    
    
    (261,173,188
    )
    
    
    (255,994,472
    )Total shareholders equity
    
    
    24,207,582
    
    
    
    29,000,164TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    40,696,482
    
    
    $
    45,906,161
  3




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AVANIR PHARMACEUTICALS
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months Ended December 31,2008
    
    
    2007REVENUES FROM PRODUCT SALESNet revenues
    
    $
    
    
    
    $
    36,000Cost of revenues
    
    
    
    
    
    
    6,204Product gross margin
    
    
    
    
    
    
    29,796REVENUES AND COST OF RESEARCH SERVICES AND OTHERRevenue from royalties and royalty rights
    
    
    1,696,796
    
    
    
    1,837,853Revenues from license agreements
    
    
    57,265
    
    
    
    57,265Revenues from government research grant services
    
    
    
    
    
    
    167,647Revenues from research services and other
    
    
    1,754,061
    
    
    
    2,062,765Cost of research and development services
    
    
    (8,051
    )
    
    
    (49,991
    )Cost of government research grant services
    
    
    
    
    
    
    (125,587
    )Research services and other gross margin
    
    
    1,746,010
    
    
    
    1,887,187Total gross margin
    
    
    1,746,010
    
    
    
    1,916,983OPERATING EXPENSESResearch and development
    
    
    4,724,914
    
    
    
    3,426,259General and administrative
    
    
    2,314,312
    
    
    
    3,128,120Total operating expenses
    
    
    7,039,226
    
    
    
    6,554,379Loss from continuing operations
    
    
    (5,293,216
    )
    
    
    (4,637,396
    )OTHER INCOME (EXPENSES)Interest income
    
    
    135,696
    
    
    
    427,162Interest expense
    
    
    (480
    )
    
    
    (234,001
    )Other, net
    
    
    (17,516
    )
    
    
    (704
    )Loss from continuing operations before provision for income taxes
    
    
    (5,175,516
    )
    
    
    (4,444,939
    )Provision for income taxes
    
    
    (3,200
    )
    
    
    Loss before discontinued operations
    
    
    (5,178,716
    )
    
    
    (4,444,939
    )Loss from discontinued operations
    
    
    
    
    
    
    (1,073,695
    )Net loss
    
    $
    (5,178,716
    )
    
    $
    (5,518,634
    )BASIC AND DILUTED NET LOSS PER SHARE:Loss before discontinued operations
    
    $
    (0.07
    )
    
    $
    (0.10
    )Loss from discontinued operations
    
    
    

        
    
    (0.03
    )Net loss
    
    $
    (0.07
    )
    
    $
    (0.13
    )Basic and diluted weighted average number of common shares outstanding
    
    
    78,225,041
    
    
    
    43,106,369
  4




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AVANIR PHARMACEUTICALS
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months Ended December 31,2008
    
    
    2007OPERATING ACTIVITIES:Net loss
    
    $
    (5,178,716
    )
    
    $
    (5,518,634
    )Loss from discontinued operations
    
    
    
    
    
    
    1,073,695Adjustments to reconcile net loss before discontinued operations to net cash used in operating
activities:Depreciation and amortization
    
    
    81,177
    
    
    
    137,480Share-based compensation expense
    
    
    386,134
    
    
    
    443,909Amortization of debt discount
    
    
    
    
    
    
    34,917Loss on disposal of assets
    
    
    4,792
    
    
    
    3,464Changes in operating assets and liabilities (net of effects of acquisition/disposition of business):Receivables
    
    
    
    
    
    
    (36,000
    )Inventories
    
    
    
    
    
    
    6,204Prepaid and other assets
    
    
    (618,992
    )
    
    
    (127,268
    )Accounts payable
    
    
    1,611,758
    
    
    
    828,560Accrued expenses and other liabilities
    
    
    (474,199
    )
    
    
    502,047Accrued compensation and payroll taxes
    
    
    (778,065
    )
    
    
    (531,705
    )Deferred revenue
    
    
    (754,969
    )
    
    
    (916,279
    )Net cash used in operating activities
    
    
    (5,721,080
    )
    
    
    (4,099,610
    )INVESTING ACTIVITIES:Proceeds from sales and maturities of investments in securities
    
    
    
    
    
    
    2,050,841Purchase of property and equipment
    
    
    (19,171
    )
    
    
    (13,804
    )Proceeds from disposal of assets
    
    
    1,950
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (17,221
    )
    
    
    2,037,037FINANCING ACTIVITIES:Tax withholding payments reimbursed by restricted stock payments on debt
    
    
    
    
    
    
    (17,092
    )Payments on notes and capital lease obligations
    
    
    (21,622
    )
    
    
    (92,837
    )Net cash used in financing activities
    
    
    (21,622
    )
    
    
    (109,929
    )Net decrease in cash and cash equivalents
    
    
    (5,759,923
    )
    
    
    (2,172,502
    )Cash and cash equivalents at beginning of period
    
    
    41,383,930
    
    
    
    30,487,962Cash and
cash equivalents at the end of the period
    
    $
    35,624,007
    
    
    $
    28,315,460SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid
    
    $
    480
    
    
    $
    199,084Income taxes paid
    
    $
    4,313
    
    
    $
    15,050SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:Accrued liabilities of discontinued operations in connection
with the Working Capital Adjustment
    
    $
    
    
    
    $
    867,000
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AVANIR PHARMACEUTICALS
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. BASIS OF PRESENTATION
 Avanir Avanir
  2. FAIR VALUE OF FINANCIAL INSTRUMENTS
 Fair Value Measurements
 
    
    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.
  3. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Business
 Avanir 
 6




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
 Concentrations
     Income Taxes
  Accounting for Uncertainty in Income Taxes  An Interpretation of
FASB Statement No. 109. Accounting for
Income Taxes,
 7




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Revenue Recognition
  Revenue Recognition. Revenue Recognition When Right
of Return Exists
 Accounting for Revenue Arrangements with Multiple Deliverables.
 8




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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
    For the three months endedDecember 31,2008
    
    
    2007From Continuing Operations:General and administrative expense
    
    $
    305,999
    
    
    $
    297,620Research and development expense
    
    
    80,135
    
    
    
    146,289Total
    
    $
    386,134
    
    
    $
    443,909
 For the three months endedDecember 31,2008
    
    
    2007Share-based compensation expense from:Stock options
    
    $
    178,789
    
    
    $
    214,124Restricted stock units
    
    
    207,345
    
    
    
    217,670Restricted stock awards
    
    
    
    
    
    
    12,115Total
    
    $
    386,134
    
    
    $
    443,909
  11




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Recently Issued Accounting Pronouncements
 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. 162 (FAS 162). The
Hierarchy of Generally Accepted Accounting Principles The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.
 FASB Staff Position No. 142-3 (FSP 142-3). Determination of the Useful Life of Intangible Assets Goodwill and Other
Intangible Assets
 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
 12




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EITF Issue No. 07-1. Accounting for Collaborative Arrangements,
 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 (FAS No. 157)
 Financial Accounting Standards No. 157 (FAS 157-3). Determining the Fair Value of a Financial Asset When the Market for That Asset is Not
Active (FSP 157-3)
 4. DISCONTINUED OPERATIONS  SALE OF FAZACLO
   Accounting for the Impairment or Disposal of Long-Lived Assets
 13




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5. RELOCATION OF COMMERCIAL AND GENERAL AND ADMINISTRATIVE OPERATIONS
   Balance at
    
    
    
    
    
    
    Balance atSeptember 30,
    
    
    Payments/
    
    
    December 31,2008
    
    
    Reductions
    
    
    2008Accrued RestructuringLease restructuring liability
    
    $
    1,135,965
    
    
    $
    (81,906
    )
    
    $
    1,054,059Less current portion
    
    
    (316,086
    )
    
    
    
    
    
    
    (311,611
    )Non-current portion
    
    $
    819,879
    
    
    
    
    
    
    $
    742,448
  6. INVENTORIES
   December 31,
    
    
    September 30,2008
    
    
    2008Raw materials
    
    $
    1,333,277
    
    
    $
    1,333,277Less: current portion
    
    
    (17,000
    )
    
    
    (17,000
    )Non-current portion
    
    $
    1,316,277
    
    
    $
    1,316,277
  14




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7. OTHER ASSETS
  December 31,
    
    
    September 30,2008
    
    
    2008Current receivables from subtenants
    
    $
    99,002
    
    
    $
    167,546Current receivable from license agreements
    
    
    1,042,518
    
    
    
    68,251Deposits
    
    
    241,400
    
    
    
    241,400Other
    
    
    8,413
    
    
    
    17,621Total other assets
    
    
    1,391,333
    
    
    
    494,818Less: current
    
    
    (1,141,520
    )
    
    
    (237,334
    )Non current total other assets
    
    $
    249,813
    
    
    $
    257,484
 8. ACCRUED EXPENSES AND OTHER LIABILITIES
  December 31,
    
    
    September 30,2008
    
    
    2008Accrued research and development expenses
    
    $
    903,704
    
    
    $
    1,404,556Accrued general and administrative expenses
    
    
    300,837
    
    
    
    160,759Deferred rent
    
    
    17,119
    
    
    
    48,638Lease restructuring liability
    
    
    1,054,059
    
    
    
    1,135,965Total accrued expenses and other liabilities
    
    
    2,275,719
    
    
    
    2,749,918Less: current
    
    
    (1,516,152
    )
    
    
    (1,881,401
    )Non-current total accrued expenses and other liabilities
    
    $
    759,567
    
    
    $
    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
    
    
    (697,704
    )
    
    
    (57,265
    )
    
    
    (754,969
    )Net deferred revenues as of December 31,
2008
    
    $
    11,504,494
    
    
    $
    226,569
    
    
    $
    11,731,063Classified and reported as:Current portion of deferred revenues
    
    $
    2,282,560
    
    
    $
    226,569
    
    
    $
    2,509,129Deferred revenues, net of current portion
    
    
    9,221,934
    
    
    
    
    
    
    
    9,221,934Total deferred revenues
    
    $
    11,504,494
    
    
    $
    226,569
    
    
    $
    11,731,063
 10. COMPUTATION OF NET LOSS PER COMMON SHARE
  15




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2008
    
    2007Stock options
    
    
    2,032,057
    
    
    
    867,790Performance stock options
    
    
    2,033,570
    
    
    
    Stock warrants
    
    
    12,509,742
    
    
    
    269,305Restricted stock units
    
    
    2,220,648
    
    
    
    2,350,483Restricted stock awards
    
    
    
    
    
    
    20,500
 11. COMPREHENSIVE LOSS
  For the three monthsended December 31,2008
    
    
    2007Net loss
    
    $
    (5,178,716
    )
    
    $
    (5,518,634
    )Other comprehensive loss, net of tax:Unrealized gain on available-for-sale securities
    
    
    
    
    
    
    3,835Total comprehensive loss
    
    $
    (5,178,716
    )
    
    $
    (5,514,799
    )
 12. SHAREHOLDERS EQUITY
   13. EMPLOYEE EQUITY INCENTIVE PLANS
   16




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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
    
    
    1,436,610
    
    
    $
    0.53Forfeited
    
    
    (28,314
    )
    
    $
    (7.48
    )Expired
    
    
    (266
    )
    
    $
    (6.50
    )Outstanding December 31, 2008
    
    
    2,032,057
    
    
    $
    2.30
    
    
    
    9.2
    
    
    $
    Vested and expected to vest in the future,
December 31, 2008
    
    
    1,178,951
    
    
    $
    3.39
    
    
    
    8.8
    
    
    $
    Exercisable, December 31, 2008
    
    
    263,739
    
    
    $
    10.82
    
    
    
    6.4
    
    
    $
    
    2008Expected volatility
    
    
    101
    %Expected term in years
    
    
    5.0Risk-fee interest rate (zero coupon U.S. Treasury Note)
    
    
    2.3
    %Expected dividend yield
    
    
    0
    %
 17




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Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageNumber
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    Life in Years
    
    Price
    
    Exercisable
    
    Price$0.53
    
    
    1,436,610
    
    
    
    10.0
    
    
    $
    0.53
    
    
    
    
    
    
    $
    $0.79-$4.60
    
    
    293,150
    
    
    
    8.3
    
    
    $
    1.83
    
    
    
    18,159
    
    
    $
    2.90$4.64-$13.16
    
    
    252,922
    
    
    
    6.6
    
    
    $
    10.29
    
    
    
    207,923
    
    
    $
    10.64$13.40
    
    
    6,250
    
    
    
    2.7
    
    
    $
    13.40
    
    
    
    6,250
    
    
    $
    13.40$13.60
    
    
    1,875
    
    
    
    2.3
    
    
    $
    13.60
    
    
    
    1,875
    
    
    $
    13.60$15.84
    
    
    37,500
    
    
    
    7.0
    
    
    $
    15.84
    
    
    
    25,782
    
    
    $
    15.84$19.38
    
    
    3,750
    
    
    
    2.5
    
    
    $
    19.38
    
    
    
    3,750
    
    
    $
    19.382,032,057
    
    
    
    9.2
    
    
    $
    2.30
    
    
    
    263,739
    
    
    $
    10.82
 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
    
    
    (14,630
    )
    
    $
    0.88Outstanding December 31, 2008
    
    
    2,033,570
    
    
    $
    0.88
    
    
    
    9.6
    
    
    $
    Vested and expected to vest in the future,
December 31, 2008
    
    
    828,807
    
    
    $
    0.88
    
    
    
    9.6
    
    
    $
    Exercisable, December 31, 2008
    
    
    12,167
    
    
    $
    0.88
    
    
    
    9.6
    
    
    $
    
  Restricted stock units.
 Weighted AverageGrant DateNumber of Shares
    
    Fair ValueUnvested, October 1, 2008
    
    
    2,259,042
    
    
    $
    1.85Vested
    
    
    (38,394
    )
    
    $
    (0.87
    )Unvested, December 31, 2008
    
    
    2,220,648
    
    
    $
    1.86
  18




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14. COMMITMENTS AND CONTINGENCIES
 Center for Neurologic Study (CNS) 
 Contingencies-
  Guarantees and Indemnities-
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15. SEGMENT INFORMATION
    
 Item 2.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  EXECUTIVE OVERVIEW
 ®
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Zenvia Status
 
 
 
 
   Docosanol 10% Cream
 ®
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Macrophage Migration Inhibitory Factor (MIF) Inflammation
  Xenerex Human Antibody Technology  Anthrax/Other Infectious Diseases
   Restructuring Activities
  General Information
 info@avanir.com www.avanir.com.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   RESULTS OF OPERATIONS
 COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
 Revenues and Cost of Revenues
 Three months endedDecember 31,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangePRODUCT SALESNet revenues
    
    $
    
    
    
    $
    36,000
    
    
    $
    (36,000
    )
    
    
    -100
    %Cost of revenues
    
    
    
    
    
    
    (6,204
    )
    
    
    6,204
    
    
    
    -100
    %Product gross margin
    
    
    
    
    
    
    29,796
    
    
    
    (29,796
    )
    
    
    -100
    %REVENUES AND COST OF RESEARCH SERVICES AND OTHERRevenues:Revenue from royalties and royalty rights
    
    $
    1,696,796
    
    
    $
    1,837,853
    
    
    $
    (141,057
    )
    
    
    -8
    %Revenues from license agreements
    
    
    57,265
    
    
    
    57,265
    
    
    
    
    
    
    
    0
    %Revenues from government research grant services
    
    
    
    
    
    
    167,647
    
    
    
    (167,647
    )
    
    
    -100
    %Revenues from research services and other
    
    
    1,754,061
    
    
    
    2,062,765
    
    
    
    (308,704
    )
    
    
    -15
    %Costs:Cost of research and development services
    
    
    8,051
    
    
    
    49,991
    
    
    
    (41,940
    )
    
    
    -84
    %Cost of government research grant services
    
    
    
    
    
    
    125,587
    
    
    
    (125,587
    )
    
    
    -100
    %Costs from research services and grants
    
    
    8,051
    
    
    
    175,578
    
    
    
    (167,527
    )
    
    
    -95
    %Research services and other gross margin
    
    
    1,746,010
    
    
    
    1,887,187
    
    
    
    (141,177
    )
    
    
    -7
    %Total gross margin
    
    $
    1,746,010
    
    
    $
    1,916,983
    
    
    $
    (170,973
    )
    
    
    -9
    %
 Revenues
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Cost of Revenues
  Operating Expenses
 Three months ended
December 312008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeOPERATING EXPENSESResearch and development
    
    $
    4,724,914
    
    
    $
    3,426,259
    
    
    $
    1,298,655
    
    
    
    38
    %General and administrative
    
    
    2,314,312
    
    
    
    3,128,120
    
    
    
    (813,808
    )
    
    
    -26
    %Total operating expenses
    
    $
    7,039,226
    
    
    $
    6,554,379
    
    
    $
    484,847
    
    
    
    7
    %
 Research and Development Expenses
   General and Administrative Expenses
  Share-Based Compensation
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Other Income (Expenses)
   Loss from Discontinued Operations
  Net Loss
  LIQUIDITY AND CAPITAL RESOURCES
   IncreaseDecember 31,
    
    (Decrease)
    
    September 30,2008
    
    During Period
    
    2008Cash, cash equivalents and investment in securities
    
    $
    36,480,604
    
    
    $
    (5,759,923
    )
    
    $
    42,240,527Cash and cash equivalents
    
    $
    35,624,007
    
    
    $
    (5,759,923
    )
    
    $
    41,383,930Net working capital
    
    $
    31,416,357
    
    
    $
    (5,755,279
    )
    
    $
    37,171,636
 Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    Change
    
    
    EndedDecember 31,
    
    
    Between
    
    
    December 31,2008
    
    
    Periods
    
    
    2007Net cash used in operating activities
    
    $
    (5,721,080
    )
    
    $
    (1,621,470
    )
    
    $
    (4,099,610
    )Net cash (used in) provided by investing activities
    
    
    (17,221
    )
    
    
    (2,054,258
    )
    
    
    2,037,037Net cash used in financing activities
    
    
    (21,622
    )
    
    
    88,307
    
    
    
    (109,929
    )Net decrease in cash and cash equivalents
    
    $
    (5,759,923
    )
    
    $
    (3,587,421
    )
    
    $
    (2,172,502
    )
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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)
    
    $
    4,122
    
    
    $
    4,122
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating lease obligations (1)
    
    
    5,695,605
    
    
    
    1,488,838
    
    
    
    2,938,197
    
    
    
    1,268,570
    
    
    
    Purchase obligations (2)
    
    
    2,676,710
    
    
    
    2,676,710
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    8,376,437
    
    
    $
    4,169,670
    
    
    $
    2,938,197
    
    
    $
    1,268,570
    
    
    $
    
 
 (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, 2008 which approximates our contractual commitments for goods and
services in the normal course of our business. 26




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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
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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
 We must conduct additional clinical trials for Zenvia and there can be no assurance that the
FDA will approve Zenvia.
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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.
  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.
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
    
    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;
    
    we may be required to change the way the product is administered, monitor patients
taking Zenvia, conduct additional clinical trials or change the labeling of the
product; and
    
    Zenvia may not be approved for commercialization.
  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.
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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 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
    
    We will be able to secure additional worldwide intellectual property protection for our
Zenvia patent portfolio.
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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.
   
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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 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.
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
    
    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.
  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 or patients, particularly if others are pursuing
trials at the same time in the same patient population (whether or not for the same indication);
    
    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.
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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.
    We rely on insurance companies to mitigate our exposure for business activities, including
developing and marketing pharmaceutical products for human use.
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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.
  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.
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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.
   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;
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
    
    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 shareholders;
    
    Lack of volume of stock trading leading to low liquidity; 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
  
 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.32.0
    
    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.
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SIGNATURES
  Signature
    
    Title
    
    Date/s/ Keith A. Katkin

Keith A. Katkin
    
    President and Chief Executive Officer
(Principal Executive Officer)
    
    February 17, 2009/s/ Christine G. Ocampo

Christine G. Ocampo
    
    Vice President, Finance
(Principal Financial and Accounting Officer)
    
    February 17, 2009
 39