##### 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, 2010
 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(State or other jurisdiction of
    
    33-0314804incorporation or organization)
    
    (I.R.S. Employer Identification No.)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 þ
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company o 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
    
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    26PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3.
    
    Defaults Upon Senior Securities
    
    
    41Item 4.
    
    Removed and Reserved
    
    
    41Item 5.
    
    Other Information
    
    
    41Item 6.
    
    Exhibits
    
    
    42Signatures
    
    
    43EX-31.1EX-31.2EX-32.1
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 December 31,
    
    
    September 30,2010
    
    
    2010(unaudited)
    
    
    (audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    117,664,701
    
    
    $
    38,771,469Stock subscriptions receivable
    
    
    
    
    
    
    580,910Royalty receivable
    
    
    1,430,245
    
    
    
    29,471Inventories
    
    
    536,599
    
    
    
    652,628Prepaid expenses
    
    
    500,188
    
    
    
    432,705Other current assets
    
    
    301,903
    
    
    
    23,396Current portion of restricted investments in marketable securities
    
    
    466,925
    
    
    
    200,000Total current assets
    
    
    120,900,561
    
    
    
    40,690,579Restricted investments in marketable securities, net of current portion
    
    
    884,625
    
    
    
    401,550Property and equipment, net
    
    
    607,541
    
    
    
    449,712Non-current inventories
    
    
    228,207
    
    
    
    228,207Other assets
    
    
    370,025
    
    
    
    371,150TOTAL ASSETS
    
    $
    122,990,959
    
    
    $
    42,141,198LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    896,955
    
    
    $
    2,106,110Accrued expenses and other liabilities
    
    
    2,224,924
    
    
    
    1,070,061Accrued compensation and payroll taxes
    
    
    1,405,870
    
    
    
    2,147,371Current portion of deferred revenues
    
    
    2,087,226
    
    
    
    2,399,849Total current liabilities
    
    
    6,614,975
    
    
    
    7,723,391Accrued expenses and other liabilities, net of current portion
    
    
    340,441
    
    
    
    334,269Deferred revenues, net of current portion
    
    
    5,972,592
    
    
    
    6,076,982Total liabilities
    
    
    12,928,008
    
    
    
    14,134,642Commitments and contingenciesStockholders equity:Preferred stock  $0.0001 par value, 10,000,000 shares authorized,
no shares issued
or outstanding as of December 31, 2010 and September 30, 2010
    
    
    
    
    
    
    Common stock  $0.0001 par value, 200,000,000 shares authorized;
121,571,517 and 95,965,572 shares issued and outstanding as of
December 31, 2010 and September 30, 2010
    
    
    12,157
    
    
    
    9,597Common stock subscribed but unissued
    
    
    
    
    
    
    580,910Additional paid-in capital
    
    
    426,847,349
    
    
    
    332,100,685Accumulated deficit
    
    
    (316,796,555
    )
    
    
    (304,684,636
    )Total stockholders equity
    
    
    110,062,951
    
    
    
    28,006,556TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    122,990,959
    
    
    $
    42,141,198
  3




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AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months Ended December 31,2010
    
    
    2009REVENUESRevenues from royalties
    
    $
    1,818,487
    
    
    $
    1,484,934OPERATING EXPENSESResearch and development
    
    
    3,843,789
    
    
    
    3,446,890Selling, general and administrative
    
    
    10,093,438
    
    
    
    2,866,478Total operating expenses
    
    
    13,937,227
    
    
    
    6,313,368Loss from operations
    
    
    (12,118,740
    )
    
    
    (4,828,434
    )OTHER INCOME (EXPENSES)Interest income
    
    
    7,132
    
    
    
    5,804Other, net
    
    
    (311
    )
    
    
    (327
    )Net loss
    
    $
    (12,111,919
    )
    
    $
    (4,822,957
    )Basic and diluted net loss per share
    
    $
    (0.11
    )
    
    $
    (0.06
    )Basic and diluted weighted average
number of common shares
outstanding
    
    
    108,396,709
    
    
    
    83,159,376
  4




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AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months Ended December 31,2010
    
    
    2009OPERATING ACTIVITIES:Net loss
    
    $
    (12,111,919
    )
    
    $
    (4,822,957
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    87,171
    
    
    
    52,181Share-based compensation expense
    
    
    833,608
    
    
    
    699,072Changes in operating assets and liabilities:Royalty receivables
    
    
    (1,400,774
    )
    
    
    (884,265
    )Inventories
    
    
    116,029
    
    
    
    Prepaid expenses and other assets
    
    
    (344,865
    )
    
    
    (7,676
    )Accounts payable
    
    
    (1,078,533
    )
    
    
    (294,748
    )Accrued expenses and other liabilities
    
    
    952,170
    
    
    
    156,146Accrued compensation and payroll taxes
    
    
    (741,501
    )
    
    
    (815,437
    )Deferred revenues
    
    
    (417,013
    )
    
    
    (598,607
    )Net cash used in operating activities
    
    
    (14,105,627
    )
    
    
    (6,516,291
    )INVESTING ACTIVITIES:Purchase of investments in securities
    
    
    (750,000
    )
    
    
    Purchase of property and equipment
    
    
    (166,757
    )
    
    
    (31,586
    )Net cash used in investing activities
    
    
    (916,757
    )
    
    
    (31,586
    )FINANCING ACTIVITIES:Proceeds from issuances of common stock, net of commissions
and offering costs
    
    
    87,739,893
    
    
    
    183,044Proceeds from exercise of stock options and warrants
    
    
    5,594,813
    
    
    
    Collection of stock subscriptions receivable
    
    
    580,910
    
    
    
    Tax withholding payments reimbursed by surrender of restricted stock
    
    
    
    
    
    
    (4,859
    )Net cash provided by financing activities
    
    
    93,915,616
    
    
    
    178,185Net increase (decrease) in cash and cash equivalents
    
    
    78,893,232
    
    
    
    (6,369,692
    )Cash and cash equivalents at beginning of period
    
    
    38,771,469
    
    
    
    31,486,012Cash and cash equivalents at end of period
    
    $
    117,664,701
    
    
    $
    25,116,320SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Income taxes paid
    
    $
    3,200
    
    
    $
    3,200SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:Purchase of property and equipment in accrued expenses and other liabilities
    
    $
    208,865
    
    
    $
    
  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
    6




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Avanir
 Significant Accounting Policies
  Concentrations
    Fair value of financial instruments
  Revenue recognition
   7




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##### Table of Contents



Product Sales  Active Pharmaceutical Ingredient docosanol (docosanol).
 Multiple Element Arrangements.
  License Arrangements.
   8




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##### Table of Contents



Royalty Arrangements.
   Cost of revenues
  Share-Based Compensation
    9




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For the three months endedDecember 31,2010
    
    
    2009Share-based compensation classified as:Selling, general and administrative
expense
    
    $
    686,910
    
    
    $
    516,912Research and development expense
    
    
    146,698
    
    
    
    182,160Total
    
    $
    833,608
    
    
    $
    699,072
 For the three months endedDecember 31,2010
    
    
    2009Share-based compensation expense from:Stock options
    
    $
    491,353
    
    
    $
    238,950Restricted stock units
    
    
    342,255
    
    
    
    460,122Total
    
    $
    833,608
    
    
    $
    699,072
  Income Taxes
       10




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Recent Authoritative Guidance
 Fees Paid to the Federal Government by Pharmaceutical Manufacturers.
 Milestone Method of Revenue Recognition.
 Multiple-Deliverable Revenue Arrangements.
 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.
 11




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4. RESTRICTED INVESTMENTS IN MARKETABLE SECURITIES
  5. INVENTORIES
   December 31,
    
    
    September 30,2010
    
    
    2010(audited)Raw materials
    
    $
    645,508
    
    
    $
    554,465Work in progress
    
    
    5,130
    
    
    
    326,370Finished goods
    
    
    114,168
    
    
    
    Total inventory
    
    
    764,806
    
    
    
    880,835Less: current portion
    
    
    (536,599
    )
    
    
    (652,628
    )Non-current portion
    
    $
    228,207
    
    
    $
    228,207
  12




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##### Table of Contents



6. ACCRUED EXPENSES AND OTHER LIABILITIES
  December 31,
    
    
    September 30,2010
    
    
    2010(audited)Accrued research and development expenses
    
    $
    81,305
    
    
    $
    221,956Accrued selling, general and administrative expenses
    
    
    1,714,273
    
    
    
    537,347Deferred rent
    
    
    8,099
    
    
    
    12,148Other liabilities
    
    
    208,865
    
    
    
    Lease restructuring liability (1)
    
    
    552,823
    
    
    
    632,879Total accrued expenses and other liabilities
    
    
    2,565,365
    
    
    
    1,404,330Less: Current portion
    
    
    (2,224,924
    )
    
    
    (1,070,061
    )Non-current total accrued expenses and other liabilities
    
    $
    340,441
    
    
    $
    334,269
 
 (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, 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 at
    
    
    
    
    
    
    Balance atSeptember 30,
    
    
    Payments/
    
    
    December 31,2010
    
    
    Reductions
    
    
    2010(audited)Accrued RestructuringTotal lease restructuring
liability
    
    $
    632,879
    
    
    $
    (80,056
    )
    
    $
    552,823Less current portion
    
    
    (298,610
    )
    
    
    
    
    
    
    (292,382
    )Non-current portion
    
    $
    334,269
    
    
    
    
    
    
    $
    260,441
 7. DEFERRED REVENUES
 ®
 Net deferred revenues as of October 1, 2010
    
    $
    8,476,831Changes during the period:Recognized as revenues during period
    
    
    (417,013
    )Net deferred revenues as of December 31, 2010
    
    $
    8,059,818Classified and reported as:Current portion of deferred revenues
    
    $
    2,087,226Deferred revenues, net of current portion
    
    
    5,972,592Total deferred revenues
    
    $
    8,059,818
 13




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8. COMPUTATION OF NET LOSS PER COMMON SHARE
   2010
    
    2009Stock options
    
    
    7,452,843
    
    
    
    5,834,106Stock warrants
    
    
    8,541,212
    
    
    
    12,240,437Restricted stock units (1)
    
    
    1,594,941
    
    
    
    2,714,433
 
 (1)
    
    Includes 1,246,590 and 848,023 shares of restricted stock at December 31, 2010 and
2009, respectively, awarded to directors that have vested but are still restricted until
the directors resign. 9. STOCKHOLDERS EQUITY
     14




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10. EMPLOYEE EQUITY INCENTIVE PLANS
   Stock Options
  Weighted AverageWeighted Average
    
    Remaining
    
    AggregateNumber
    
    Exercise Price per
    
    Contractual Term
    
    Intrinsicof Shares
    
    Share
    
    (In Years)
    
    ValueOutstanding October 1, 2010
    
    
    6,364,265
    
    
    $
    1.69Granted
    
    
    1,513,700
    
    
    $
    4.10Exercised
    
    
    (420,507
    )
    
    $
    0.73Forfeited
    
    
    (4,615
    )
    
    $
    4.80Outstanding December 31, 2010
    
    
    7,452,843
    
    
    $
    2.24
    
    
    
    8.4
    
    
    $
    15,968,901Vested and expected to vest in the future,
December 31, 2010
    
    
    6,993,639
    
    
    $
    2.20
    
    
    
    8.3
    
    
    $
    15,352,600Exercisable, December 31, 2010
    
    
    2,158,654
    
    
    $
    2.49
    
    
    
    7.3
    
    
    $
    5,544,298
  15




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##### Table of Contents



Expected volatility
    
    
    104% - 108
    %Weighted-average volatility
    
    
    108
    %Expected term in years
    
    
    5.8Risk-fee interest rate (zero coupon U.S. Treasury Note)
    
    
    1.5% - 2.2
    %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
    
    
    1,292,072
    
    
    
    8.0
    
    
    $
    0.53
    
    
    
    483,262
    
    
    $
    0.53$0.88
    
    
    1,905,343
    
    
    
    7.6
    
    
    $
    0.88
    
    
    
    752,039
    
    
    $
    0.88$1.20-$1.74
    
    
    1,662,460
    
    
    
    8.7
    
    
    $
    1.70
    
    
    
    486,635
    
    
    $
    1.62$1.80-$4.18
    
    
    2,288,281
    
    
    
    9.6
    
    
    $
    3.55
    
    
    
    132,031
    
    
    $
    2.38$4.60-$19.38
    
    
    304,687
    
    
    
    4.5
    
    
    $
    11.00
    
    
    
    304,687
    
    
    $
    11.007,452,843
    
    
    
    8.4
    
    
    $
    2.24
    
    
    
    2,158,654
    
    
    $
    2.49
 Restricted stock units (RSU).
  Weighted AverageGrant DateNumber of Shares
    
    Fair ValueUnvested, October 1, 2010
    
    
    521,203
    
    
    $
    3.46Granted
    
    
    166,813
    
    
    $
    4.18Vested
    
    
    (339,665
    )
    
    $
    1.70Unvested, December 31, 2010
    
    
    348,351
    
    
    $
    5.52
  16




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##### Table of Contents



(Performance RSUs)
   11. COMMITMENTS AND CONTINGENCIES
 Center for Neurologic Study (CNS) 
   Legal Contingencies 
 17




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##### Table of Contents



Guarantees and Indemnities 
  12. SEGMENT INFORMATION
    13. SUBSEQUENT EVENTS
    18




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##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  EXECUTIVE OVERVIEW
 Avanir
  ®
 NUEDEXTA for the Treatment of PBA
    19




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AVP-923 for the Potential Treatment of Neuropathic Pain
 AVP-923 for the treatment of MS-related pain
    AVP-923 for the treatment of diabetic neuropathic pain
  Avanir
 Docosanol 10% Cream  Cold Sore Treatment
 ®
  20




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##### Table of Contents



Xenerex Human Antibody Technology  Anthrax/Other Infectious Diseases
   General Information
 info@avanir.com www.avanir.com . www.sec.gov
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  21




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##### Table of Contents



RESULTS OF OPERATIONS
 COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2010 AND 2009
 Revenues
   Operating Expenses
 Three months endedDecember 31,2010
    
    
    2009
    
    
    $ ChangeOPERATING EXPENSESResearch and development
    
    $
    3,843,789
    
    
    $
    3,446,890
    
    
    $
    396,899Selling, general and administrative
    
    
    10,093,438
    
    
    
    2,866,478
    
    
    
    7,226,960Total operating expenses
    
    $
    13,937,227
    
    
    $
    6,313,368
    
    
    $
    7,623,859
 Research and Development Expenses
  Selling, General and Administrative Expenses
  22




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Share-Based Compensation
  Other Income (Expenses)
  Net Loss
  LIQUIDITY AND CAPITAL RESOURCES
   Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    Change
    
    
    EndedDecember 31,
    
    
    Between
    
    
    December 31,2010
    
    
    Periods
    
    
    2009Net cash used in operating activities
    
    $
    (14,105,627
    )
    
    $
    (7,589,336
    )
    
    $
    (6,516,291
    )Net cash used in investing activities
    
    
    (916,757
    )
    
    
    (885,171
    )
    
    
    (31,586
    )Net cash provided by financing activities
    
    
    93,915,616
    
    
    
    93,737,431
    
    
    
    178,185Net increase (decrease) in cash and cash equivalents
    
    $
    78,893,232
    
    
    $
    85,262,924
    
    
    $
    (6,369,692
    )
 Operating activities.
 Investing activities.
 23




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##### Table of Contents



Financing activities.
       Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsOperating lease
obligations (1)
    
    $
    2,751,795
    
    
    $
    1,483,225
    
    
    $
    1,268,570
    
    
    $
    
    
    
    $
    Purchase obligations (2)
    
    
    2,901,536
    
    
    
    2,821,536
    
    
    
    80,000
    
    
    
    
    
    
    
    Total
    
    $
    5,653,331
    
    
    $
    4,304,760
    
    
    $
    1,348,570
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Operating lease 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, 2010 which approximates our contractual commitments for goods and
services in the normal course of our business. 24




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NUEDEXTA License Milestone Payments.
   Off-Balance Sheet Arrangements
  Management Outlook
   
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest rate sensitivity
   25




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Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Controls over Financial Reporting
  
 PART II OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  26




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Risks Relating to Our Business
 Our near-term prospects are dependent on NUEDEXTA. If we are unable to successfully
commercialize NUEDEXTA, including successfully maintaining adequate sales, marketing or
distribution capabilities or entering into agreements with third parties to perform some of these
functions, we will not be able to commercialize NUEDEXTA effectively and our ability to generate
significant revenue or achieve profitability will be adversely affected. For example, because
NUEDEXTA contains quinidine, which is a known pro-arrhythmic drug, it is possible that medical
information systems may incorrectly identify NUEDEXTA as contraindicated or otherwise inappropriate for
a patient, even in situations where the risks are substantially less than indicated.
  
    
    recruit and retain adequate numbers of effective sales personnel;
    
    effectively train our sales personnel on NUEDEXTA;
    
    establish and maintain successful sales and marketing and education programs for our
targeted physicians;
    
    manage geographically dispersed sales and marketing operations; and
    
    maintain and defend our patent protection and maintain regulatory exclusivity for
NUEDEXTA.
   We have a history of net losses and an accumulated deficit, and we may be unable to generate
sufficient revenue to achieve or maintain profitability in the future.
  27




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PBA is a new market and estimates vary significantly over the potential market size and our
anticipated revenues over the near and long term.
  We have limited capital resources and may need to raise additional funds to support our
operations.
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Significant safety or drug interaction problems could arise with respect to NUEDEXTA, which
could result in restrictions in NUEDEXTAs label, recalls, withdrawal of NUEDEXTA from the market,
an adverse impact on potential sales of NUEDEXTA, or cause us to alter or terminate current or
future NUEDEXTA clinical development programs, any of which would adversely impact our future
business prospects.
    We have licensed 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
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
    
    the potential loss of key employees following such a transaction.
   The FDAs safety concerns regarding our prior formulation of NUEDEXTA, known as AVP-923, 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 AVP-923 for other indications is expected to
use an alternative lower-dose quinidine formulation, which may negatively affect efficacy.
  We rely on market research to evaluate the potential commercial acceptance of NUEDEXTA.
  Our issued patents may be challenged and our patent applications may be denied. Either result
would seriously jeopardize our ability to compete in the intended markets for our proposed
products.
  
    
    the claims in any pending patent applications will be allowed or that patent
applications will be granted;
    
    competitors will not develop similar or superior technologies independently, duplicate
our technologies, or design around the patented aspects of our technologies;
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
    
    our technologies will not infringe on other patents or rights owned by others,
including licenses to other intellectual property 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 have licensed, and, if challenged, that we will be successful in defending
ourselves against these challenges; or
    
    we will be able to secure additional worldwide intellectual property protection for our
NUEDEXTA 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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NUEDEXTA may face competition from lower cost generic or follow-on products.
    We may be unable to protect our unpatented proprietary technology and information.
  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.
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We face challenges recruiting and retaining members of management and other key personnel.
  Our operations might be interrupted by the occurrence of a natural disaster or other
catastrophic event.
  Future acquisitions could disrupt our business and harm our financial condition.
  
    
    we may have to issue convertible debt or equity securities to complete
an acquisition, which would dilute our stockholders and could
adversely affect the market price of our common stock;
    
    an acquisition may negatively impact our results of operations because
it may require us to amortize or write down amounts related to
goodwill and other intangible assets, or incur or assume substantial
debt or liabilities, or it may cause adverse tax consequences,
substantial depreciation or deferred compensation charges;
    
    we may encounter difficulties in assimilating and integrating the
business, products, technologies, personnel or operations of companies
that we acquire;
    
    certain acquisitions may impact our relationship with existing or
potential partners who are competitive with the acquired business,
products or technologies;
    
    acquisitions may require significant capital infusions and the
acquired businesses, products or technologies may not generate
sufficient value to justify acquisition costs;
    
    an acquisition may disrupt our ongoing business, divert resources,
increase our expenses and distract our management;
    
    acquisitions may involve the entry into a geographic or business
market in which we have little or no prior experience; and
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
    
    key personnel of an acquired company may decide not to work for us.
  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
    
    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 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 face uncertainty related to healthcare reform, pricing and reimbursement, which could
reduce our revenue.
  
    
    Establish annual, non-deductible fees on any entity that manufactures or imports
certain branded prescription drugs and biologics, beginning in 2011;
    
    Increase minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate
Program;
    
    Extend manufacturers Medicaid rebate liability to covered drugs dispensed to
individuals who are enrolled in Medicaid managed care organizations;
    
    Establish a new Patient-Centered Outcomes Research Institute to oversee, identify
priorities in and conduct comparative clinical effectiveness research;
    
    Require manufacturers to participate in a coverage gap discount program, under which
they must agree to offer 50 percent point-of-sale discounts off negotiated prices of
applicable brand drugs to eligible beneficiaries during their coverage gap period, as a
condition for the manufacturers outpatient drugs to be covered under Medicare Part D,
beginning in 2011; and
    
    Increase the number of entities eligible for discounts under the Public Health Service
pharmaceutical pricing program, effective January 2010.
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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.
  If we market products in a manner that violates health care fraud and abuse laws, we may be
subject to civil or criminal penalties.
  
    
    the federal healthcare programs Anti-Kickback Law, which prohibits, among other
things, persons from knowingly and willfully soliciting, receiving, offering or paying
remuneration, directly or indirectly, in exchange for or to induce either the referral of
an individual for, or the purchase, order or recommendation of, any good or service for
which payment may be made under federal healthcare programs such as the Medicare and
Medicaid programs;
    
    federal false claims laws which prohibit, among other things, individuals or entities
from knowingly presenting, or causing to be presented, claims for payment from Medicare,
Medicaid, or other third-party payors that are false or fraudulent;
    
    the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA,
which created federal criminal laws that prohibit executing a scheme to defraud any
healthcare benefit program or making false statements relating to healthcare matters; and
    
    state law equivalents of each of the above federal laws, such as anti-kickback and
false claims laws that may apply to items or services reimbursed by any third-party payor,
including commercial insurers.
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We may incur significant liability if it is determined that we are promoting the off-label use
of drugs.
  Risks Related to Reliance on Third Parties
 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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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 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;
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
    
    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,
including sales effected pursuant to predetermined trading plans adopted under the
safe-harbor afforded by Rule 10b5-1;
    
    regulatory developments in the U.S. and foreign countries;
    
    lack of volume of stock trading leading to low liquidity; and
    
    market and economic conditions.
    If our internal controls over financial reporting are not considered effective, our business
and stock price could be adversely affected.
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Because we do not expect to pay dividends in the foreseeable future, you must rely on stock
appreciation for any return on your investment.
  Our corporate governance documents, rights agreement and Delaware law may delay or prevent an
acquisition of us that stockholders may consider favorable, which could decrease the value of our
common stock.
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. REMOVED AND RESERVED
 
 Item 5. OTHER INFORMATION
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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

Keith A. Katkin
    
    President and Chief Executive Officer (Principal
Executive Officer)
    
    February 4, 2011/s/ Christine G. Ocampo

Christine G. Ocampo
    
    Vice President, Finance (Principal
Financial Officer and
Principal Accounting Officer)
    
    February 4, 2011
 43