##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended June 30, 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 
incorporation or organization)
    
    33-0314804
(I.R.S. Employer Identification No.)
 101 Enterprise Suite 300, Aliso Viejo, California
(Address of principal executive offices)
    
    92656
(Zip Code)
 (949) 389-6700
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 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
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3. Defaults Upon Senior Securities
    
    
    41Item 5. Other Information
    
    
    41Item 6. Exhibits
    
    
    41Signatures
    
    
    42EX-31.1EX-31.2EX-32.1
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PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    September 30,2010
    
    
    2009(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    41,324,077
    
    
    $
    31,486,012Inventories
    
    
    114,098
    
    
    
    114,098Prepaid expenses
    
    
    316,062
    
    
    
    397,100Other current assets
    
    
    168,775
    
    
    
    331,717Current portion of restricted investments in marketable securities
    
    
    
    
    
    
    200,775Total current assets
    
    
    41,923,012
    
    
    
    32,529,702Restricted investments in marketable securities, net of current portion
    
    
    401,550
    
    
    
    267,700Property and equipment, net
    
    
    315,250
    
    
    
    310,677Non-current inventories
    
    
    630,531
    
    
    
    710,531Other assets
    
    
    341,400
    
    
    
    249,462TOTAL ASSETS
    
    $
    43,611,743
    
    
    $
    34,068,072LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    707,225
    
    
    $
    1,214,117Accrued expenses and other liabilities
    
    
    1,547,677
    
    
    
    1,001,599Accrued compensation and payroll taxes
    
    
    1,091,185
    
    
    
    1,345,859Current portion of deferred revenues
    
    
    2,399,849
    
    
    
    2,282,560Total current liabilities
    
    
    5,745,936
    
    
    
    5,844,135Accrued expenses and other liabilities, net of current portion
    
    
    418,977
    
    
    
    652,395Deferred revenues, net of current portion
    
    
    5,976,907
    
    
    
    7,629,807Total liabilities
    
    
    12,141,820
    
    
    
    14,126,337Commitments and contingenciesStockholders equity:Preferred stock  $0.0001 par value, 10,000,000 shares
authorized, no shares issued
or outstanding as of June 30, 2010 (unaudited) and September
30, 2009
    
    
    
    
    
    
    Common stock  $0.0001 par value, 200,000,000 shares authorized;
93,968,532 and 83,084,182 shares issued and outstanding as of
June 30, 2010 (unaudited) and September 30, 2009, respectively
    
    
    9,397
    
    
    
    8,308Additional paid-in capital
    
    
    326,436,016
    
    
    
    297,923,915Accumulated deficit
    
    
    (294,975,490
    )
    
    
    (277,990,488
    )Total stockholders equity
    
    
    31,469,923
    
    
    
    19,941,735TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    43,611,743
    
    
    $
    34,068,072
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AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months Ended June 30,
    
    
    Nine Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues from royalties
    
    $
    487,350
    
    
    $
    420,376
    
    
    $
    2,966,778
    
    
    $
    2,872,827Revenues from license agreements
    
    
    
    
    
    
    170,549
    
    
    
    
    
    
    
    283,834Total revenues
    
    
    487,350
    
    
    
    590,925
    
    
    
    2,966,778
    
    
    
    3,156,661Cost of revenues
    
    
    80,000
    
    
    
    
    
    
    
    80,000
    
    
    
    9,746Gross profit
    
    
    407,350
    
    
    
    590,925
    
    
    
    2,886,778
    
    
    
    3,146,915OPERATING EXPENSESResearch and development
    
    
    2,788,132
    
    
    
    3,358,387
    
    
    
    10,050,635
    
    
    
    11,683,701Selling, general and administrative
    
    
    3,733,151
    
    
    
    2,204,435
    
    
    
    10,222,333
    
    
    
    6,679,027Total operating expenses
    
    
    6,521,283
    
    
    
    5,562,822
    
    
    
    20,272,968
    
    
    
    18,362,728Loss from operations
    
    
    (6,113,933
    )
    
    
    (4,971,897
    )
    
    
    (17,386,190
    )
    
    
    (15,215,813
    )OTHER INCOME (EXPENSES)Interest income
    
    
    2,661
    
    
    
    15,492
    
    
    
    10,822
    
    
    
    196,338Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (516
    )Other, net
    
    
    389,689
    
    
    
    436
    
    
    
    390,366
    
    
    
    (21,465
    )Loss before provision for income taxes
    
    
    (5,721,583
    )
    
    
    (4,955,969
    )
    
    
    (16,985,002
    )
    
    
    (15,041,456
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,200Net loss
    
    $
    (5,721,583
    )
    
    $
    (4,955,969
    )
    
    $
    (16,985,002
    )
    
    $
    (15,044,656
    )Basic and diluted net loss per share
    
    $
    (0.06
    )
    
    $
    (0.06
    )
    
    $
    (0.20
    )
    
    $
    (0.19
    )Basic and diluted weighted average
number of common shares outstanding
    
    
    89,347,783
    
    
    
    78,236,153
    
    
    
    85,307,980
    
    
    
    78,225,891
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AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Nine Months Ended June 30,2010
    
    
    2009OPERATING ACTIVITIES:Net loss
    
    $
    (16,985,002
    )
    
    $
    (15,044,656
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    147,989
    
    
    
    203,761Share-based compensation expense
    
    
    1,946,706
    
    
    
    1,224,182Loss on disposal of assets
    
    
    
    
    
    
    4,792Changes in operating assets and liabilities:Inventories
    
    
    80,000
    
    
    
    Prepaid expenses and other assets
    
    
    152,042
    
    
    
    805,384Accounts payable
    
    
    (506,892
    )
    
    
    573,244Accrued expenses and other liabilities
    
    
    312,660
    
    
    
    (1,226,029
    )Accrued compensation and payroll taxes
    
    
    (254,674
    )
    
    
    (314,581
    )Deferred revenues
    
    
    (1,535,611
    )
    
    
    (1,810,080
    )Net cash used in operating activities
    
    
    (16,642,782
    )
    
    
    (15,583,983
    )INVESTING ACTIVITIES:Proceeds from sales and maturities of investments in securities
    
    
    66,925
    
    
    
    388,122Purchase of property and equipment
    
    
    (152,562
    )
    
    
    (19,173
    )Proceeds from disposal of assets
    
    
    
    
    
    
    1,950Net cash (used in) provided by investing activities
    
    
    (85,637
    )
    
    
    370,899FINANCING ACTIVITIES:Proceeds from issuances of common stock, net of offering costs,
including commissions
    
    
    26,748,758
    
    
    
    Proceeds from exercise of stock options
    
    
    15,416
    
    
    
    Shares surrendered to pay for tax withholding
    
    
    (197,690
    )
    
    
    (3,927
    )Payments on notes and capital lease obligations
    
    
    
    
    
    
    (25,744
    )Net cash provided by (used in) financing activities
    
    
    26,566,484
    
    
    
    (29,671
    )Net increase (decrease) in cash and cash equivalents
    
    
    9,838,065
    
    
    
    (15,242,755
    )Cash and cash equivalents at beginning of period
    
    
    31,486,012
    
    
    
    41,383,930Cash and cash equivalents at the end of the period
    
    $
    41,324,077
    
    
    $
    26,141,175SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid
    
    $
    
    
    
    $
    516Income taxes paid
    
    $
    3,200
    
    
    $
    6,208
  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 Zenvia
)
 ® Avanir
 
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Significant Accounting Policies
  Concentrations
    Fair value of financial instruments
  Revenue Recognition
   7




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




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®
 Cost of Revenues
  Recognition of Expenses in Outsourced Contracts
  Share-Based Compensation
    9




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For the three months ended
    
    
    For the nine months endedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Share-based compensation classified as:Selling, general and administrative expense
    
    $
    477,537
    
    
    $
    311,142
    
    
    $
    1,513,145
    
    
    $
    973,598Research and development expense
    
    
    105,332
    
    
    
    84,802
    
    
    
    433,561
    
    
    
    250,584Total
    
    $
    582,869
    
    
    $
    395,944
    
    
    $
    1,946,706
    
    
    $
    1,224,182
 For the three months ended
    
    
    For the nine months endedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Share-based compensation expense from:Stock options
    
    $
    285,179
    
    
    $
    184,442
    
    
    $
    860,412
    
    
    $
    557,750Restricted stock units
    
    
    297,690
    
    
    
    211,502
    
    
    
    1,086,294
    
    
    
    666,432Total
    
    $
    582,869
    
    
    $
    395,944
    
    
    $
    1,946,706
    
    
    $
    1,224,182
  Income Taxes
       10




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Recent Authoritative Guidance
 Milestone Method of Revenue Recognition.
 Multiple-Deliverable Revenue Arrangements.
 Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entitys Own
Stock.
 Noncontrolling Interests in Consolidated Financial Statements.
 Fair Value Measurements.
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3. FAIR VALUE OF FINANCIAL INSTRUMENTS
  
    
    Level 1-Quoted prices in active markets for identical assets and liabilities.
    
    Level 2-Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets and liabilities, quoted
prices in the markets that are not active, or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
    
    Level 3-Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.
  4. RESTRICTED INVESTMENTS IN MARKETABLE SECURITIES
  5. INVENTORIES
   June 30,
    
    
    September 30,2010
    
    
    2009Raw materials
    
    $
    744,629
    
    
    $
    824,629Less: current portion
    
    
    (114,098
    )
    
    
    (114,098
    )Non-current portion
    
    $
    630,531
    
    
    $
    710,531
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6. ACCRUED EXPENSES AND OTHER LIABILITIES
  June 30,
    
    
    September 30,2010
    
    
    2009Accrued research and development expenses
    
    $
    667,380
    
    
    $
    372,494Accrued selling, general and administrative expenses
    
    
    575,738
    
    
    
    270,401Deferred rent
    
    
    16,198
    
    
    
    19,516Lease restructuring liability (1)
    
    
    707,338
    
    
    
    991,583Total accrued expenses and other liabilities
    
    
    1,966,654
    
    
    
    1,653,994Less: current portion
    
    
    (1,547,677
    )
    
    
    (1,001,599
    )Accrued expenses and other liabilities, non-current portion
    
    $
    418,977
    
    
    $
    652,395
 
 (1)
    
    In fiscal 2006, the Company relocated all operations other than research and development
from San Diego, California to Aliso Viejo, California. In fiscal 2007, the Company subleased
a total of approximately 49,000 square feet of laboratory and office space in San Diego and
relocated remaining personnel and clinical trial support functions to the Companys offices
in Aliso Viejo, California. Restructuring expenses included recognition of the estimated
loss due to the exit of the Companys leases of approximately $2.1 million. No further costs
were incurred related to these restructuring events in fiscal 2008. In April 2009, 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/
    
    
    June 30,2009
    
    
    Reductions
    
    
    2010Accrued RestructuringTotal lease restructuring liability
    
    $
    991,583
    
    
    $
    (284,245
    )
    
    $
    707,338Less current portion
    
    
    (358,704
    )
    
    
    
    
    
    
    (304,559
    )Non-current portion
    
    $
    632,879
    
    
    
    
    
    
    $
    402,779
 7. DEFERRED REVENUES
 ®
 TotalNet deferred revenues as of October 1, 2009
    
    $
    9,912,367Changes during the period:Recognized as revenues during period
    
    
    (1,535,611
    )Net deferred revenues as of June 30, 2010
    
    $
    8,376,756Classified and reported as:Current portion of deferred revenues
    
    $
    2,399,849Deferred revenues, net of current portion
    
    
    5,976,907Total deferred revenues
    
    $
    8,376,756
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8. COMPUTATION OF NET LOSS PER COMMON SHARE
   2010
    
    
    2009Stock options
    
    
    6,257,087
    
    
    
    4,235,656Stock warrants
    
    
    12,240,437
    
    
    
    12,240,437Restricted stock units (1)
    
    
    2,050,644
    
    
    
    2,816,780
 
 (1)
    
    Includes 1,069,680 and 536,868 shares of restricted stock at June 30, 2010 and 2009,
respectively, awarded to directors that have vested but are still restricted until the
directors resign. 9. STOCKHOLDERS EQUITY
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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, 2009
    
    
    4,217,156
    
    
    $
    1.55Granted
    
    
    2,088,950
    
    
    $
    1.89Exercised
    
    
    (27,586
    )
    
    $
    0.56Forfeited
    
    
    (21,433
    )
    
    $
    2.28Outstanding, June 30, 2010
    
    
    6,257,087
    
    
    $
    1.66
    
    
    
    8.5
    
    
    $
    8,265,641Vested and expected to vest in the future,
June 30, 2010
    
    
    5,435,975
    
    
    $
    1.71
    
    
    
    8.4
    
    
    $
    7,257,329Exercisable, June 30, 2010
    
    
    1,629,567
    
    
    $
    2.69
    
    
    
    7.5
    
    
    $
    2,380,183
  15




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Expected volatility
    
    
    105
    %Expected term in years
    
    
    5.6Risk-fee interest rate (zero coupon U.S. Treasury Note)
    
    
    2.4
    %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
    
    
    1,574,541
    
    
    
    8.5
    
    
    $
    0.53
    
    
    
    565,195
    
    
    $
    0.53$0.88
    
    
    2,021,018
    
    
    
    8.1
    
    
    $
    0.88
    
    
    
    614,225
    
    
    $
    0.88$1.20-$1.74
    
    
    1,717,060
    
    
    
    9.2
    
    
    $
    1.70
    
    
    
    147,210
    
    
    $
    1.28$1.80-$2.58
    
    
    637,781
    
    
    
    9.3
    
    
    $
    2.34
    
    
    
    
    
    
    $
    $4.60-$19.38
    
    
    306,687
    
    
    
    5.0
    
    
    $
    11.00
    
    
    
    302,937
    
    
    $
    11.056,257,087
    
    
    
    8.5
    
    
    $
    1.66
    
    
    
    1,629,567
    
    
    $
    2.69
 Restricted stock units (RSU).
 Weighted AverageGrant DateNumber of Shares
    
    
    Fair ValueUnvested, October 1, 2009
    
    
    1,812,986
    
    
    $
    1.83Granted
    
    
    480,000
    
    
    $
    2.00Vested
    
    
    (1,251,491
    )
    
    $
    1.32Forfeited
    
    
    (60,531
    )
    
    $
    2.08Unvested, June 30, 2010
    
    
    980,964
    
    
    $
    2.54
  16




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




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Contingencies 
   Guarantees and Indemnities 
  12. SEGMENT INFORMATION
     18




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13. SUBSEQUENT EVENTS
   
 Item 2.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  EXECUTIVE OVERVIEW
  ®
 AVP-923 for the treatment of PBA
   19




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AVP-923 for the treatment of neuropathic pain
    20




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##### Table of Contents



Docosanol 10% Cream
 ®
   Xenerex Human Antibody Technology  Anthrax/Other Infectious Diseases
   21




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##### Table of Contents



General Information
 info@avanir.com www.avanir.com. www.sec.gov
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   RESULTS OF OPERATIONS
 COMPARISON OF THREE MONTHS ENDED JUNE 30, 2010 AND 2009
 Revenues and Cost of Revenues
 Three months endedJune 30,2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeRevenues:Revenue from royalties
    
    $
    487,350
    
    
    $
    420,376
    
    
    $
    66,974
    
    
    
    16
    %Revenues from license agreements
    
    
    
    
    
    
    170,549
    
    
    
    (170,549
    )
    
    
    -100
    %Total revenues
    
    
    487,350
    
    
    
    590,925
    
    
    
    (103,575
    )
    
    
    -18
    %Costs:Cost of revenues
    
    
    80,000
    
    
    
    
    
    
    
    80,000
    
    
    
    100
    %Gross profit
    
    $
    407,350
    
    
    $
    590,925
    
    
    $
    (183,575
    )
    
    
    -31
    %
 Revenues
  22




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Cost of Revenues
  Operating Expenses
 Three months endedJune 30,2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeOPERATING EXPENSESResearch and development
    
    $
    2,788,132
    
    
    $
    3,358,387
    
    
    $
    (570,255
    )
    
    
    -17
    %Selling, general and administrative
    
    
    3,733,151
    
    
    
    2,204,435
    
    
    
    1,528,716
    
    
    
    69
    %Total operating expenses
    
    $
    6,521,283
    
    
    $
    5,562,822
    
    
    $
    958,461
    
    
    
    17
    %
 Research and Development Expenses
  Selling, General and Administrative Expenses
  Share-Based Compensation
  23




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Other Income (Expenses)
   Net Loss
  COMPARISON OF NINE MONTHS ENDED JUNE 30, 2010 AND 2009
 Revenues and Cost of Revenues
 Nine months endedJune 30,2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeRevenues:Revenue from royalties
    
    $
    2,966,778
    
    
    $
    2,872,827
    
    
    $
    93,951
    
    
    
    3
    %Revenues from license agreements
    
    
    
    
    
    
    283,834
    
    
    
    (283,834
    )
    
    
    -100
    %Total revenues
    
    
    2,966,778
    
    
    
    3,156,661
    
    
    
    (189,883
    )
    
    
    -6
    %Costs:Cost of revenues
    
    
    80,000
    
    
    
    9,746
    
    
    
    70,254
    
    
    
    721
    %Gross profit
    
    $
    2,886,778
    
    
    $
    3,146,915
    
    
    $
    (260,137
    )
    
    
    -8
    %
 Revenues
   Cost of Revenues
  24




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Nine months endedJune 30,2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeOPERATING EXPENSESResearch and development
    
    $
    10,050,635
    
    
    $
    11,683,701
    
    
    $
    (1,633,066
    )
    
    
    -14
    %General and administrative
    
    
    10,222,333
    
    
    
    6,679,027
    
    
    
    3,543,306
    
    
    
    53
    %Total operating expenses
    
    $
    20,272,968
    
    
    $
    18,362,728
    
    
    $
    1,910,240
    
    
    
    10
    %
 Research and Development Expenses
  Selling, general and Administrative Expenses
  Share-Based Compensation
  Other Income (Expenses)
   Net Loss
  LIQUIDITY AND CAPITAL RESOURCES
  25




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##### Table of Contents



Nine Months
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    Change
    
    
    EndedJune 30,
    
    
    Between
    
    
    June 30,2010
    
    
    Periods
    
    
    2009Net cash used in operating activities
    
    $
    (16,642,782
    )
    
    $
    (1,058,799
    )
    
    $
    (15,583,983
    )Net cash (used in) provided by investing activities
    
    
    (85,637
    )
    
    
    (456,536
    )
    
    
    370,899Net cash provided by (used in) financing activities
    
    
    26,566,484
    
    
    
    26,596,155
    
    
    
    (29,671
    )Net increase (decrease) in cash and cash equivalents
    
    $
    9,838,065
    
    
    $
    25,080,820
    
    
    $
    (15,242,755
    )
 Operating
activities.
 Investing activities.
 Financing activities.
     26




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##### Table of Contents



Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsOperating lease obligations (1)
    
    $
    3,727,577
    
    
    $
    1,855,569
    
    
    $
    1,872,008
    
    
    $
    
    
    
    $
    Purchase obligations (2)
    
    
    1,638,376
    
    
    
    1,638,376
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    5,365,953
    
    
    $
    3,493,945
    
    
    $
    1,872,008
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Operating lease obligations are exclusive of payments we expect to receive under subleases.(2)
    
    Purchase obligations consist of a total of $638,000 of trade accounts payable and trade
related accrued expenses at June 30, 2010, and a $1 million contingent contractual commitment
for achievement of certain milestones, which approximates our contractual commitments for
goods and services in the normal course of our business. AVP-923 License Milestone Payments.
 Off-Balance Sheet Arrangements
  Management Outlook
   27




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest rate sensitivity
     
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   28




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##### Table of Contents



Changes in Internal Controls over Financial Reporting
  
 PART II OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
 Risks Relating to Our Business
 There can be no assurance that the FDA will approve AVP-923 for PBA or any other indication.
   Even if AVP-923 receives marketing approval from the FDA,
the approval may be delayed and/or may not be on the terms that we seek and could limit
the marketability of the drug.
  
    
    product labeling may restrict use to certain patient populations (e.g. ALS and MS only);
    
    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;
    
    physicians may be required to conduct tests prior to dispensing product or monitor patients taking AVP-923;
    
    we may be required to conduct additional studies either post-marketing or before approval;
    
    we may be subject to an extensive Risk Evaluation Mitigation Strategies (REMS)
program that includes Elements to Assure Safe Use; and
    
    AVP-923 may not be approved by the FDA for commercialization as
the FDA may perceive that the benefit does not outweigh the potential risk.
  Our near-term prospects are dependent on AVP-923. If we are unable to successfully develop and
obtain regulatory approval for AVP-923 for the treatment of patients with PBA, or if approved, to
commercialize AVP-923, our ability to generate significant revenue or achieve profitability will be
adversely affected.
  We have a history of net losses and an accumulated deficit, and we may never generate
sufficient revenue to achieve or maintain profitability in the future.
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The FDAs safety concerns regarding 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.
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If we are unable to maintain adequate sales, marketing or distribution capabilities or enter
into agreements with third parties to perform some of these functions, we will not be able to
commercialize AVP-923 effectively.
  
    
    recruit and retain adequate numbers of effective sales personnel;
    
    effectively train our sales personnel on AVP-923;
    
    establish and maintain successful sales and marketing and education
programs for our targeted physicians; and
    
    manage geographically dispersed sales and marketing operations.
  We have limited capital resources and will need to raise additional funds to support our
operations.
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Any transactions that we may engage in to raise capital could dilute our stockholders and
diminish certain commercial prospects.
   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.
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Our issued patents may be challenged and our patent applications may be denied. Either result
would seriously jeopardize our ability to compete in the intended markets for our proposed
products.
  
    
    the claims in any pending patent applications will be allowed or that patents will be granted;
    
    competitors will not develop similar or superior technologies independently, duplicate our
technologies, or design around the patented aspects of our technologies;
    
    our technologies will not infringe on other patents or rights owned by others, including
licenses that may not be available to us;
    
    any of our issued patents will provide us with significant competitive advantages;
    
    challenges will not be instituted against the validity or enforceability of any patent that
we own or, if instituted, that these challenges will not be successful; or
    
    we will be able to secure additional worldwide intellectual property protection for our
AVP-923 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
  33




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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.
  We face challenges recruiting and retaining members of management and other key personnel.
  34




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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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##### Table of Contents




    
    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.
    36




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We face uncertainty related to healthcare reform, pricing and reimbursement which could reduce
our revenue.
    We rely on insurance companies to mitigate our exposure for business activities, including
developing and marketing pharmaceutical products for human use.
  37




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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.
  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.
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Risks Relating to Our Stock
 Our stock price has historically been volatile and we expect that this volatility will
continue for the foreseeable future.
  
    
    comments made by securities analysts, including changes in their recommendations;
    
    short selling activity by certain investors, including any failures to timely settle short sale transactions;
    
    announcements by us of financing transactions and/or future sales of equity or debt securities;
    
    sales of our common stock by our directors, officers or significant stockholders;
    
    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.
  40




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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
  
 Item 6. EXHIBITS
 Exhibits
 10.1
    
    Underwriting Agreement, dated May 6, 2010, between Avanir Pharmaceuticals, Inc. and Jefferies
& Company, Inc. (1)31.1
    
    Certification of Principal Executive Officer Required Under Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.31.2
    
    Certification of Principal Financial Officer Required Under Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.32.1
    
    Certification of Principal Executive Officer and Principal Financial Officer Required Under
Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.
 
 (1)
    
    Incorporated by reference to Current Report on Form 8-K filed on May 6, 2010, as Exhibit 1.1 41




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SIGNATURES
  Signature
    
    Title
    
    Date/s/ Keith A. Katkin
    
    President and Chief Executive Officer
    
    August 5, 2010Keith A. Katkin
    
    (Principal Executive Officer)/s/ Christine G. Ocampo
    
    Vice President, FinanceChristine G. Ocampo
    
    (Principal Financial Officer and Principal Accounting Officer)
    
    August 5, 2010
 42