##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
 For the quarterly period ended June 30, 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
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



Table of Contents
 PagePART I. FINANCIAL INFORMATIONItem 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
    
    
    23Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    44Item 3. Defaults Upon Senior Securities
    
    
    44Item 4. Submission of Matters to a Vote of Security Holders
    
    
    44Item 5. Other Information
    
    
    44Item 6. Exhibits
    
    
    44Signatures
    
    
    45EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 AVANIR PHARMACEUTICALS
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    September 30,2008
    
    
    2007(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    46,997,243
    
    
    $
    30,487,962Short-term investments in marketable securities
    
    
    
    
    
    
    1,747,761Receivables, net
    
    
    1,710,980
    
    
    
    988,450Inventories
    
    
    17,000
    
    
    
    17,000Prepaid expenses
    
    
    745,007
    
    
    
    1,479,992Other current assets
    
    
    636,053
    
    
    
    Current portion of restricted investments in marketable securities
    
    
    388,122
    
    
    
    688,122Total current assets
    
    
    50,494,405
    
    
    
    35,409,287Investments in marketable securities
    
    
    
    
    
    
    249,078Restricted investments in marketable securities, net of current portion
    
    
    468,475
    
    
    
    468,475Property and equipment, net
    
    
    904,659
    
    
    
    1,215,666Intangible assets, net
    
    
    21,005
    
    
    
    41,048Long-term inventories
    
    
    1,316,277
    
    
    
    1,337,991Other assets
    
    
    345,444
    
    
    
    374,348TOTAL ASSETS
    
    $
    53,550,265
    
    
    $
    39,095,893LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,651,722
    
    
    $
    307,700Accrued expenses and other liabilities
    
    
    1,341,019
    
    
    
    2,050,864Accrued compensation and payroll taxes
    
    
    955,294
    
    
    
    1,191,677Current portion of deferred revenues
    
    
    2,571,103
    
    
    
    2,267,594Current portion of notes payable
    
    
    46,818
    
    
    
    254,676Current liabilities of discontinued operations
    
    
    1,351,649
    
    
    
    Total current liabilities
    
    
    7,917,605
    
    
    
    6,072,511Accrued expenses and other liabilities, net of current portion
    
    
    941,078
    
    
    
    1,170,396Deferred revenues, net of current portion
    
    
    10,843,035
    
    
    
    13,052,836Notes payable, net of current portion
    
    
    
    
    
    
    11,769,916Total liabilities
    
    
    19,701,718
    
    
    
    32,065,659Commitments and contingencies (Note 13)Shareholders equity:Preferred stock  no par value, 10,000,000 shares authorized, no shares
issued or outstanding as of June 30, 2008 and September 30, 2007
    
    
    
    
    
    
    Common stock  no par value, 200,000,000 shares authorized;
78,202,560 and 43,117,358 shares issued and outstanding as of
June 30, 2008 and September 30, 2007, respectively
    
    
    284,626,146
    
    
    
    245,531,712Accumulated deficit
    
    
    (250,778,126
    )
    
    
    (238,498,733
    )Accumulated other comprehensive income (loss)
    
    
    527
    
    
    
    (2,745
    )Total shareholders equity
    
    
    33,848,547
    
    
    
    7,030,234TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    53,550,265
    
    
    $
    39,095,893
  3




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AVANIR PHARMACEUTICALS
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months Ended June 30,
    
    
    Nine Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007REVENUES FROM PRODUCT SALESNet revenues
    
    $
    3,550
    
    
    $
    
    
    
    $
    129,820
    
    
    $
    Cost of revenues
    
    
    
    
    
    
    
    
    
    
    21,714
    
    
    
    Product gross margin
    
    
    3,550
    
    
    
    
    
    
    
    108,106
    
    
    
    REVENUES AND COST OF RESEARCH SERVICES AND OTHERRevenues from research and development services
    
    
    
    
    
    
    181,692
    
    
    
    
    
    
    
    2,372,384Revenues from government research grant services
    
    
    527,517
    
    
    
    122,398
    
    
    
    1,006,922
    
    
    
    475,474Revenues from license agreements
    
    
    1,534,552
    
    
    
    1,443,543
    
    
    
    1,648,459
    
    
    
    1,556,827Revenue from royalties
    
    
    584,314
    
    
    
    453,091
    
    
    
    2,993,992
    
    
    
    1,955,804Revenues from research services and other
    
    
    2,646,383
    
    
    
    2,200,724
    
    
    
    5,649,373
    
    
    
    6,360,489Cost of research and development services
    
    
    (155,450
    )
    
    
    (1,202,476
    )
    
    
    (232,257
    )
    
    
    (2,973,715
    )Cost of government research grant services
    
    
    (358,028
    )
    
    
    (201,178
    )
    
    
    (915,563
    )
    
    
    (666,166
    )Research services and other gross margin
    
    
    2,132,905
    
    
    
    797,070
    
    
    
    4,501,553
    
    
    
    2,720,608Total gross margin
    
    
    2,136,455
    
    
    
    797,070
    
    
    
    4,609,659
    
    
    
    2,720,608OPERATING EXPENSESResearch and development
    
    
    3,139,685
    
    
    
    2,604,294
    
    
    
    10,090,610
    
    
    
    13,769,286Selling, general and administrative
    
    
    2,350,071
    
    
    
    7,469,784
    
    
    
    7,897,085
    
    
    
    18,885,623Total operating expenses
    
    
    5,489,756
    
    
    
    10,074,078
    
    
    
    17,987,695
    
    
    
    32,654,909Loss from operations
    
    
    (3,353,301
    )
    
    
    (9,277,008
    )
    
    
    (13,378,036
    )
    
    
    (29,934,301
    )OTHER INCOME (EXPENSES)Interest income
    
    
    315,818
    
    
    
    88,916
    
    
    
    1,026,204
    
    
    
    425,254Interest expense
    
    
    (114,375
    )
    
    
    (232,939
    )
    
    
    (539,589
    )
    
    
    (785,632
    )Gain on early extinguishment of debt
    
    
    967,547
    
    
    
    
    
    
    
    967,547
    
    
    
    Other, net
    
    
    1,249,764
    
    
    
    1,418,725
    
    
    
    1,250,950
    
    
    
    1,614,048Loss from continuing operations before provision for income taxes
    
    
    (934,547
    )
    
    
    (8,002,306
    )
    
    
    (10,672,924
    )
    
    
    (28,680,631
    )Provision for income taxes
    
    
    22,148
    
    
    
    8,097
    
    
    
    37,307
    
    
    
    21,501Loss before discontinued operations
    
    
    (956,695
    )
    
    
    (8,010,403
    )
    
    
    (10,710,231
    )
    
    
    (28,702,132
    )Loss from discontinued operations
    
    
    (483,680
    )
    
    
    (1,139,976
    )
    
    
    (1,569,162
    )
    
    
    (4,316,136
    )Net loss
    
    $
    (1,440,375
    )
    
    $
    (9,150,379
    )
    
    $
    (12,279,393
    )
    
    $
    (33,018,268
    )BASIC AND DILUTED NET LOSS PER SHARE:Loss from continuing operations
    
    $
    (0.01
    )
    
    $
    (0.20
    )
    
    $
    (0.20
    )
    
    $
    (0.81
    )Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.03
    )
    
    
    (0.03
    )
    
    
    (0.12
    )Net loss per share
    
    $
    (0.02
    )
    
    $
    (0.23
    )
    
    $
    (0.23
    )
    
    $
    (0.93
    )Basic and diluted weighted average number of common shares outstanding
    
    
    71,069,841
    
    
    
    40,580,326
    
    
    
    52,418,695
    
    
    
    35,546,976
  4




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AVANIR PHARMACEUTICALS
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Nine Months Ended June 30,2008
    
    
    2007OPERATING ACTIVITIES:Net loss
    
    $
    (12,279,393
    )
    
    $
    (33,018,268
    )Loss from discontinued operations
    
    
    1,569,162
    
    
    
    4,316,136Adjustments to reconcile loss before discontinued operations to net cash used in operating
activities:Depreciation and amortization
    
    
    335,049
    
    
    
    2,718,065Share-based compensation expense
    
    
    1,257,538
    
    
    
    1,702,826Amortization of debt discount
    
    
    232,776
    
    
    
    183,000Gain on extinguishment of debt
    
    
    (967,547
    )
    
    
    Loss on disposal of assets
    
    
    638
    
    
    
    163,570Changes in operating assets and liabilities (net of effects of acquisition/disposition of FazaClo):Receivables
    
    
    (722,528
    )
    
    
    375,998Inventories
    
    
    21,714
    
    
    
    (1,071,254
    )Prepaid and other assets
    
    
    134,849
    
    
    
    960,523Accounts payable
    
    
    1,344,022
    
    
    
    (9,622,311
    )Accrued expenses and other liabilities
    
    
    (939,163
    )
    
    
    2,514,054Accrued compensation and payroll taxes
    
    
    (236,383
    )
    
    
    (1,119,331
    )Deferred revenue
    
    
    (1,906,292
    )
    
    
    (3,303,885
    )Net cash used in operating activities of continuing operations
    
    
    (12,155,558
    )
    
    
    (35,200,877
    )Net cash (used in) provided by operating activities of discontinued operations
    
    
    (203,608
    )
    
    
    3,706,605Net cash used in operating activities
    
    
    (12,359,166
    )
    
    
    (31,494,272
    )INVESTING ACTIVITIES:Investments in securities
    
    
    
    
    
    
    (351,403
    )Proceeds from sales and maturities of investments in securities
    
    
    2,300,107
    
    
    
    16,900,000Purchase of property and equipment
    
    
    (16,550
    )
    
    
    (137,254
    )Proceeds from sales of fixed assets
    
    
    4,900
    
    
    
    457,420Net cash provided by investing activities
    
    
    2,288,457
    
    
    
    16,868,763FINANCING ACTIVITIES:Proceeds from issuances of common stock and warrants, net of commissions
and offering costs
    
    
    37,851,772
    
    
    
    30,829,882Tax withholding payments reimbursed by restricted stock
    
    
    (28,779
    )
    
    
    Payments on notes and capital lease obligations
    
    
    (11,243,003
    )
    
    
    (6,694,582
    )Net cash provided by financing activities of continuing operations
    
    
    26,579,990
    
    
    
    24,135,300Net cash used in financing activities of discontinued operations
    
    
    
    
    
    
    (6,869,435
    )Net cash provided by financing activities
    
    
    26,579,990
    
    
    
    17,265,865Net increase in cash and cash equivalents
    
    
    16,509,281
    
    
    
    2,640,356Cash and cash equivalents at beginning of period
    
    
    30,487,962
    
    
    
    4,898,214Cash and cash equivalents at end of period
    
    $
    46,997,243
    
    
    $
    7,538,570SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid
    
    $
    446,058
    
    
    $
    1,151,361Income taxes paid
    
    $
    37,307
    
    
    $
    21,501SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:Purchase price adjustment of assumed liabilities
    
    $
    
    
    
    $
    4,067,889Issuance of note payable
    
    $
    
    
    
    $
    4,000,000Accrued liabilities of discontinued operations in connection
with Net Working Capital Adjustment
    
    $
    1,351,649
    
    
    $
    
  5




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




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




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##### Table of Contents



Accounting for Revenue
Arrangements with Multiple Deliverables.
 Product Sales
 Active Pharmaceutical Ingredient Docosanol (API Docosanol).
 FazaClo. (Sales from Discontinued Operations).
   8




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##### Table of Contents



Multiple Element Arrangements.
   License Arrangements.
  9




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##### Table of Contents



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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##### Table of Contents



Capitalization and Valuation of Long-Lived and Intangible Assets
 Business Combinations Goodwill and Other Intangible
Assets
 Accounting for the Impairment or Disposal of Long-Lived Assets
  
    
    A significant underperformance relative to expected historical or projected future
operating results;
    
    A significant change in the manner of the Companys use of the acquired asset or the
strategy for its overall business; and/or
    
    A significant negative industry or economic trend.
  Share-Based Compensation
 Share-Based
Payment
  11




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For the three months ended
    
    
    For the nine months endedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007From Continuing Operations:Selling, general and administrative expense
    
    $
    279,074
    
    
    $
    247,078
    
    
    $
    852,068
    
    
    $
    1,365,874Research and development expense
    
    
    71,713
    
    
    
    118,853
    
    
    
    405,470
    
    
    
    336,952Share-based compensation expense related
to continuing operations
    
    
    350,787
    
    
    
    365,931
    
    
    
    1,257,538
    
    
    
    1,702,826From Discontinued Operations:
    
    
    
    
    
    
    171,712
    
    
    
    13,905
    
    
    
    352,799Total
    
    $
    350,787
    
    
    $
    537,643
    
    
    $
    1,271,443
    
    
    $
    2,055,625
 For the three months ended
    
    
    For the nine months endedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Share-based compensation expense from:Stock options
    
    $
    139,010
    
    
    $
    302,505
    
    
    $
    500,186
    
    
    $
    960,407Restricted stock units
    
    
    200,066
    
    
    
    199,708
    
    
    
    642,878
    
    
    
    670,028Restricted stock awards
    
    
    11,711
    
    
    
    35,430
    
    
    
    128,379
    
    
    
    425,190Total
    
    $
    350,787
    
    
    $
    537,643
    
    
    $
    1,271,443
    
    
    $
    2,055,625
  Recently Issued Accounting Pronouncements
 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"
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Financial Accounting Standards No. 160 (FAS 160). Noncontrolling Interests in Consolidated Financials, an
Amendment of ARB No. 51
 Financial Accounting Standards No. 141(R) (FAS 141R). Business Combinations: Applying the Acquisition Method
 EITF Issue No. 07-1. Accounting for Collaborative Arrangements,
 EITF Issue No. 07-3. Accounting for Nonrefundable Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities
 Financial Accounting Standards No. 159 (FAS 159). The
Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB
Statement 115
 Financial Accounting Standards No. 157 (FAS 157). Fair Value Measurements Effective Date of FASB
Statement No. 157
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3. ACQUISITION OF ALAMO PHARMACEUTICALS, INC. / SALE OF FAZACLO
     $
 Sale of FazaClo, Presentation of Discontinued Operations, and Working Capital Adjustment
  14




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Accounting for the Impairment or Disposal of Long-Lived Assets
 Accounting for Changes and Error Corrections
   For the three months
    
    
    For the nine monthsended June 30, 2007
    
    
    ended June 30, 2007REVENUES FROM PRODUCT SALESNet revenues
    
    $
    4,938,708
    
    
    $
    15,038,523Cost of revenues
    
    
    1,535,535
    
    
    
    3,930,323Product gross margin
    
    
    3,403,173
    
    
    
    11,108,200OPERATING EXPENSESResearch and development
    
    
    1,301,730
    
    
    
    2,960,244Selling, general and administrative
    
    
    3,058,497
    
    
    
    11,915,325Loss from operations
    
    
    (957,054
    )
    
    
    (3,767,369
    )OTHER EXPENSEInterest expense
    
    
    (182,922
    )
    
    
    (548,767
    )Loss before provision for income taxes
    
    
    (1,139,976
    )
    
    
    (4,316,136
    )Provision for income taxes
    
    
    
    
    
    
    NET LOSS
    
    $
    (1,139,976
    )
    
    $
    (4,316,136
    )
 15




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4. RELOCATION OF COMMERCIAL AND GENERAL AND ADMINISTRATIVE OPERATIONS
   September 30,
    
    
    Payments/
    
    
    June 30,2007
    
    
    Adjustments
    
    
    2008Accrued Restructuring:Employee severance and relocation benefits
    
    $
    75,790
    
    
    $
    (75,790
    )
    
    $
    Lease restructuring liabilities
    
    
    2,223,802
    
    
    
    (991,594
    )
    
    
    1,232,208Total
    
    
    2,299,592
    
    
    $
    (1,058,914
    )
    
    
    1,240,678Less: current portion
    
    
    (1,163,627
    )
    
    
    
    
    
    
    (346,765
    )Non-current portion
    
    $
    1,135,965
    
    
    
    
    
    
    $
    893,913
  5. INVENTORIES
  June 30,
    
    
    September 30,2008
    
    
    2007Raw materials
    
    $
    1,333,277
    
    
    $
    1,354,991Less: current portion
    
    
    (17,000
    )
    
    
    (17,000
    )Long-term portion
    
    $
    1,316,277
    
    
    $
    1,337,991
  16




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6. ACCRUED EXPENSES AND OTHER LIABILITIES
  June 30, 2008
    
    
    September 30, 2007Accrued research and development expenses
    
    $
    629,775
    
    
    $
    419,989Accrued general and administrative expenses
    
    
    283,993
    
    
    
    287,517Deferred rent
    
    
    47,166
    
    
    
    34,432Lease restructuring liabilities
    
    
    1,232,208
    
    
    
    2,223,802Other
    
    
    88,955
    
    
    
    255,520Total accrued expenses and other liabilities
    
    
    2,282,097
    
    
    
    3,221,260Less: current portion
    
    
    (1,341,019
    )
    
    
    (2,050,864
    )Non-current total accrued expenses and other liabilities
    
    $
    941,078
    
    
    $
    1,170,396
  7. DEFERRED REVENUES
  Drug RoyaltyUSA
    
    
    OtherAgreement
    
    
    Agreements
    
    
    TotalDeferred revenues as of October 1, 2007
    
    $
    14,738,509
    
    
    $
    581,921
    
    
    $
    15,320,430Changes during the period:Additions
    
    
    
    
    
    
    250,000
    
    
    
    250,000Recognized as revenues during period
    
    
    (1,915,469
    )
    
    
    (240,823
    )
    
    
    (2,156,292
    )Deferred revenues as of June 30, 2008
    
    $
    12,823,040
    
    
    $
    591,098
    
    
    $
    13,414,138Classified and reported as:Current portion of deferred revenues
    
    $
    2,093,912
    
    
    $
    477,191
    
    
    $
    2,571,103Deferred revenues, net of current portion
    
    
    10,729,128
    
    
    
    113,907
    
    
    
    10,843,035Total deferred revenues
    
    $
    12,823,040
    
    
    $
    591,098
    
    
    $
    13,414,138
 8. COMPUTATION OF NET LOSS PER COMMON SHARE
  17




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##### Table of Contents



9. COMPREHENSIVE LOSS
  For the three months
    
    
    For the nine monthsended June 30,
    
    
    ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (1,440,375
    )
    
    $
    (9,150,379
    )
    
    $
    (12,279,393
    )
    
    $
    (33,018,268
    )Other comprehensive loss, net of tax:Unrealized (loss) gain on available-for-sale securities
    
    
    
    
    
    
    3,042
    
    
    
    3,272
    
    
    
    82,341Total comprehensive loss
    
    $
    (1,440,375
    )
    
    $
    (9,147,337
    )
    
    $
    (12,276,121
    )
    
    $
    (32,935,927
    )
 10. NOTES PAYABLE
 $
 11. SHAREHOLDERS EQUITY
      18




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12. EMPLOYEE EQUITY INCENTIVE PLANS
   Stock Options
  WeightedWeighted
    
    
    averageaverage
    
    
    remainingexercise
    
    
    contractual
    
    
    AggregateNumber of
    
    
    price per
    
    
    term
    
    
    intrinsicshares
    
    
    share
    
    
    (in years)
    
    
    valueOutstanding, October 1, 2007
    
    
    1,040,581
    
    
    $
    7.69Forfeited
    
    
    (391,778
    )
    
    $
    8.74Outstanding, June 30, 2008
    
    
    648,803
    
    
    $
    7.05
    
    
    
    7.2
    
    
    $
    Vested and expected to vest in the future, June 30, 2008
    
    
    497,440
    
    
    $
    8.31
    
    
    
    6.7
    
    
    $
    Exercisable, June 30, 2008
    
    
    294,232
    
    
    $
    10.73
    
    
    
    5.5
    
    
    $
    
  19




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##### Table of Contents



2007Expected volatility
    
    
    75%-103
    %Weighted-average volatility
    
    
    88
    %Average expected term in years
    
    
    6.0Risk-fee interest rate (zero coupon U.S. Treasury Note)
    
    
    4.7
    %Expected dividend yield
    
    
    0
    %
  Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageRange of
    
    Number
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    Outstanding
    
    Life in Years
    
    Price
    
    Exercisable
    
    Price$1.20  $1.29
    
    
    150,960
    
    
    
    8.7
    
    
    $
    1.28
    
    
    
    6,250
    
    
    $
    1.20$2.41  $2.88
    
    
    128,504
    
    
    
    8.7
    
    
    $
    2.44
    
    
    
    7,723
    
    
    $
    2.88$4.50  $6.80
    
    
    68,251
    
    
    
    5.4
    
    
    $
    5.72
    
    
    
    50,126
    
    
    $
    5.60$6.92  $9.92
    
    
    47,125
    
    
    
    7.0
    
    
    $
    7.91
    
    
    
    31,500
    
    
    $
    8.41$10.24  $11.76
    
    
    151,688
    
    
    
    6.6
    
    
    $
    11.66
    
    
    
    114,847
    
    
    $
    11.63$12.12  $16.60
    
    
    89,000
    
    
    
    6.0
    
    
    $
    14.34
    
    
    
    70,511
    
    
    $
    14.04$19.38  $19.38
    
    
    13,275
    
    
    
    0.9
    
    
    $
    19.38
    
    
    
    13,275
    
    
    $
    19.38648,803
    
    
    
    7.2
    
    
    $
    7.05
    
    
    
    294,232
    
    
    $
    10.73
 Restricted stock units.
 WeightedNumber of
    
    
    average grantshares
    
    
    date fair valueUnvested, October 1, 2007
    
    
    1,914,988
    
    
    $
    2.17Granted
    
    
    867,351
    
    
    $
    1.49Vested
    
    
    (254,279
    )
    
    $
    2.89Forfeited
    
    
    (231,250
    )
    
    $
    1.75Unvested, June 30, 2008
    
    
    2,296,810
    
    
    $
    1.87
   20




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##### Table of Contents



Restricted stock awards
 WeightedNumber of
    
    
    average grantshares
    
    
    date fair valueUnvested, October 1, 2007
    
    
    22,500
    
    
    $
    11.87Vested
    
    
    (17,500
    )
    
    $
    13.29Forfeited
    
    
    (2,000
    )
    
    $
    6.91Unvested, June 30, 2008
    
    
    3,000
    
    
    $
    6.91
   13. COMMITMENTS AND CONTINGENCIES
 Center for Neurologic Study (CNS) 
 21




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##### Table of Contents



Eurand, Inc
 Contingencies.
   Guarantees and Indemnities.
  14. SEGMENT INFORMATION
   22




---



##### Table of Contents



15. LICENSE AGREEMENTS
  16. SUBSEQUENT EVENTS
   
 Item 2.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  23




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##### Table of Contents



EXECUTIVE OVERVIEW
  Zenvia Status
 
 
 
 Docosanol 10% Cream
  24




---



##### Table of Contents



Inflammation Program
  Xenerex Human Antibody Technology  Anthrax/Other Infectious Diseases
   Restructuring Activities
 
 25




---



##### Table of Contents



TM
 info@avanir.com www.avanir.com.
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   26




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##### Table of Contents



RESULTS OF OPERATIONS
 COMPARISON OF THREE MONTHS ENDED JUNE 30, 2008 AND 2007
 Revenues and Cost of Revenues
 Three Months endedJune 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangePRODUCT SALESNet revenues
    
    $
    3,550
    
    
    $
    
    
    
    $
    3,550
    
    
    
    100
    %Cost of revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    %Gross margin
    
    $
    3,550
    
    
    $
    
    
    
    $
    3,550
    
    
    
    100
    %LICENSES, RESEARCH SERVICES AND GRANTSRevenues:Research services
    
    $
    
    
    
    $
    181,692
    
    
    $
    (181,692
    )
    
    
    -100
    %Government research grant
    
    
    527,517
    
    
    
    122,398
    
    
    
    405,119
    
    
    
    331
    %License agreements
    
    
    1,534,552
    
    
    
    1,443,543
    
    
    
    91,009
    
    
    
    6
    %Royalty and sale of royalty rights
    
    
    584,314
    
    
    
    453,091
    
    
    
    131,223
    
    
    
    29
    %Revenues from licenses, research services
and grants
    
    
    2,646,383
    
    
    
    2,200,724
    
    
    
    445,659
    
    
    
    20
    %Costs:Research services
    
    
    155,450
    
    
    
    1,202,476
    
    
    
    (1,047,026
    )
    
    
    -87
    %Government research grant
    
    
    358,028
    
    
    
    201,178
    
    
    
    156,850
    
    
    
    78
    %Costs from research services and grants
    
    
    513,478
    
    
    
    1,403,654
    
    
    
    (890,176
    )
    
    
    -63
    %Research services and other gross margin
    
    
    2,132,905
    
    
    
    797,070
    
    
    
    1,335,835
    
    
    
    168
    %Total gross margin
    
    $
    2,136,455
    
    
    $
    797,070
    
    
    $
    1,339,385
    
    
    
    168
    %
 Revenues
   Cost of Revenues
  27




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Operating Expenses
 Three Months endedJune 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeOPERATING EXPENSESResearch and development
    
    $
    3,139,685
    
    
    $
    2,604,294
    
    
    $
    535,391
    
    
    
    21
    %Selling, general and administrative
    
    
    2,350,071
    
    
    
    7,469,784
    
    
    
    (5,119,713
    )
    
    
    -69
    %Total Operating Expenses
    
    $
    5,489,756
    
    
    $
    10,074,078
    
    
    $
    (4,584,322
    )
    
    
    -46
    %
 Research and Development Expenses
   Selling, General and Administrative Expenses
  Share-Based Compensation
   Other Income (Expenses)
   28




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$
  Loss from Discontinued Operations
  Net Loss
  COMPARISON OF NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 Revenues and Cost of Revenues
 Nine Months endedJune 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangePRODUCT SALESNet revenues
    
    $
    129,820
    
    
    $
    
    
    
    $
    129,820
    
    
    
    100
    %Cost of revenues
    
    
    21,714
    
    
    
    
    
    
    
    21,714
    
    
    
    100
    %Gross margin
    
    $
    108,106
    
    
    $
    
    
    
    $
    108,106
    
    
    
    100
    %LICENSES, RESEARCH SERVICES AND GRANTSRevenues:Research services
    
    $
    
    
    
    $
    2,372,384
    
    
    $
    (2,372,384
    )
    
    
    -100
    %Government research grant
    
    
    1,006,922
    
    
    
    475,474
    
    
    
    531,448
    
    
    
    112
    %License agreements
    
    
    1,648,459
    
    
    
    1,556,827
    
    
    
    91,632
    
    
    
    6
    %Royalty and sale of royalty rights
    
    
    2,993,992
    
    
    
    1,955,804
    
    
    
    1,038,188
    
    
    
    53
    %Revenues from licenses, research services and grants
    
    
    5,649,373
    
    
    
    6,360,489
    
    
    
    (711,116
    )
    
    
    -11
    %Costs:Research services
    
    
    232,257
    
    
    
    2,973,715
    
    
    
    (2,741,458
    )
    
    
    -92
    %Government research grant
    
    
    915,563
    
    
    
    666,166
    
    
    
    249,397
    
    
    
    37
    %Costs from research services and grants
    
    
    1,147,820
    
    
    
    3,639,881
    
    
    
    (2,492,061
    )
    
    
    -68
    %Research services and other gross margin
    
    
    4,501,553
    
    
    
    2,720,608
    
    
    
    1,780,945
    
    
    
    65
    %Total gross margin
    
    $
    4,609,659
    
    
    $
    2,720,608
    
    
    $
    1,889,051
    
    
    
    69
    %
 Revenues
  29




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##### Table of Contents



Cost of Revenues
  Operating Expenses
 Nine Months endedJune 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeOPERATING EXPENSESResearch and development
    
    $
    10,090,610
    
    
    $
    13,769,286
    
    
    $
    (3,678,676
    )
    
    
    -27
    %Selling, general and administrative
    
    
    7,897,085
    
    
    
    18,885,623
    
    
    
    (10,988,538
    )
    
    
    -58
    %Total Operating Expenses
    
    $
    17,987,695
    
    
    $
    32,654,909
    
    
    $
    (14,667,214
    )
    
    
    -45
    %
 Research and Development Expenses
   Selling, General and Administrative Expenses
  Share-Based Compensation
  30




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Other Income (Expenses)
   $
  Loss from Discontinued Operations
  Net Loss
  LIQUIDITY AND CAPITAL RESOURCES
  31




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##### Table of Contents



IncreaseJune 30,
    
    (Decrease)
    
    September 30,2008
    
    During Period
    
    2007Cash, cash equivalents and investment in securities
    
    $
    47,853,840
    
    
    $
    14,212,442
    
    
    $
    33,641,398Cash and cash equivalents
    
    $
    46,997,243
    
    
    $
    16,509,281
    
    
    $
    30,487,962Net working capital
    
    $
    42,576,800
    
    
    $
    13,240,024
    
    
    $
    29,336,776
 Nine Months
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    Change
    
    
    EndedJune 30,
    
    
    Between
    
    
    June 30,2008
    
    
    Periods
    
    
    2007Net cash used in operating activities
    
    $
    (12,359,166
    )
    
    $
    19,135,106
    
    
    $
    (31,494,272
    )Net cash provided by investing activities
    
    
    2,288,457
    
    
    
    (14,580,306
    )
    
    
    16,868,763Net cash provided by financing activities
    
    
    26,579,990
    
    
    
    9,314,125
    
    
    
    17,265,865Net increase in cash and cash equivalents
    
    $
    16,509,281
    
    
    $
    13,868,925
    
    
    $
    2,640,356
 Operating activities.
 Investing activities.
 Financing activities.
   32




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Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsLong-term debt (principal and interest)
    
    $
    46,818
    
    
    $
    46,818
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    6,567,098
    
    
    
    1,605,808
    
    
    
    3,089,282
    
    
    
    1,872,008
    
    
    
    Purchase obligations (1)
    
    
    1,719,782
    
    
    
    1,719,782
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    8,333,698
    
    
    $
    3,372,408
    
    
    $
    3,089,282
    
    
    $
    1,872,008
    
    
    $
    
 
 (1)
    
    Purchase obligations consist of the total of trade accounts payable and trade related accrued
expenses at June 30, 2008 which approximates our contractual commitments for goods and
services in the normal course of our business. $
 Net Working Capital Adjustment.
  Alamo Earn-Out Payments.
 33




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##### Table of Contents



Eurand Milestone and Royalty Payments.
 Zenvia License Milestone Payments.
  Management Outlook
   34




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##### Table of Contents



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest rate sensitivity
  
 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
  35




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##### Table of Contents



Item 1A. RISK FACTORS
 Risks Relating to Our Business
 We must conduct additional clinical trials for Zenvia and there can be no assurance that the FDA
will approve Zenvia or that an approval, if granted, will be on terms we may seek.
    The FDAs safety concerns regarding Zenvia for the treatment of PBA may extend to other clinical
indications that we are pursuing, including DPN pain. Due to these concerns, we expect to develop
Zenvia for other indications using alternative doses, which may negatively affect efficacy.
  We have limited capital resources and will need to raise additional funds to support our
operations.
  36




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##### Table of Contents



Any transactions that we may engage in to raise capital could dilute our shareholders 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.
   37




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##### Table of Contents



Our patents may be challenged and our patent applications may be denied. Either result would
seriously jeopardize our ability to compete in the intended markets for our proposed products.
  
    
    The claims in any pending patent applications will be allowed or that patents will be
granted;
    
    Competitors will not develop similar or superior technologies independently, duplicate
our technologies, or design around the patented aspects of our technologies;
    
    Our technologies will not infringe on other patents or rights owned by others, including
licenses that may not be available to us;
    
    Any of our issued patents will provide us with significant competitive advantages; or
    
    Challenges will not be instituted against the validity or enforceability of any patent
that we own or, if instituted, that these challenges will not be successful.
    
    We will be able to secure additional worldwide intellectual property protection for our
Zenvia patent portfolio.
  We currently have only a limited term of patent coverage for Zenvia in the U.S., which could result
in the introduction of generic competition within in a few years of product launch.
  38




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##### Table of Contents



If we fail to obtain regulatory approval in foreign jurisdictions, we would not be able to market
our products abroad and our revenue prospects would be limited.
  We have experienced turnover in senior management.
  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;
 39




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##### Table of Contents




    
    institutional review boards or regulators, including the FDA, may hold, suspend or
terminate our clinical research or the clinical trials of our product candidates for
various reasons, including noncompliance with regulatory requirements or if, in their
opinion, the participating subjects are being exposed to unacceptable health risks;
    
    subjects may drop out of our clinical trials;
    
    our preclinical studies or clinical trials may produce negative, inconsistent or
inconclusive results, and we may decide, or regulators may require us, to conduct
additional preclinical studies or clinical trials; and
    
    the cost of our clinical trials may be greater than we currently anticipate.
    
    
    delays in our ability to submit an NDA;
    
    the refusal by the FDA to accept for file any NDA we may submit;
    
    requests for additional studies or data;
    
    delays of an approval; or
    
    the rejection of an application.
  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;
 40




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##### Table of Contents




    
    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.
  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.
    41




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Developing and marketing pharmaceutical products for human use involves product liability risks,
for which we currently have limited insurance coverage.
  Risks Related to Reliance on Third Parties
 Because we depend on clinical research centers and other contractors for clinical testing and for
certain research and development activities, the results of our clinical trials and such research
activities are, to a certain extent, beyond our control.
  We depend on third parties to manufacture, package and distribute compounds for our drugs and drug
candidates. The failure of these third parties to perform successfully could harm our business.
  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.
  42




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##### Table of Contents



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;
 43




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##### Table of Contents




    
    Announcements by us of financing transactions and/or future sales of equity or debt
securities;
    
    Sales of our Class A common stock by our directors, officers, or significant
shareholders;
    
    Announcements by our competitors of clinical trial results or product approvals; and
    
    Market and economic conditions.
   
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Maximum Number (orTotal Number of
    
    
    Approximate DollarShares (or Units)
    
    
    Value) of SharesPurchased as Part
    
    
    (or Units) that MayTotal Number of
    
    
    
    
    
    
    of Publicly
    
    
    Yet Be PurchasedShares (or Units)
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    Under the Plans orPeriod
    
    Purchased(1)
    
    
    per Share (or Unit)
    
    
    Programs
    
    
    ProgramsApril 1 to 30, 2008
    
    
    0
    
    
    $
    0
    
    
    
    N/A
    
    
    
    N/AMay 1 to 31, 2008
    
    
    0
    
    
    $
    0
    
    
    
    N/A
    
    
    
    N/AJune 1 to 30, 2008
    
    
    2,504
    
    
    $
    1.11
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    2,504
    
    
    $
    1.11
    
    
    
    N/A
    
    
    
    N/A
 
 (1)
    
    Includes the redemption of 1,287 shares from Keith Katkin at $1.11 per
share on June 13, 2008 and 1,217 shares from Randall Kaye at $1.11 per
share on June 13, 2008. 
 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
     44




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SIGNATURES
  Signature
    
    Title
    
    Date/s/ Keith A. Katkin
    
    President and Chief Executive Officer
    
    August 8, 2008Keith A. Katkin
    
    (Principal Executive Officer)/s/ Christine G. Ocampo
    
    Vice President, FinanceChristine G. Ocampo
    
    (Principal Financial and Accounting Officer)
    
    August 8, 2008
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