##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
 For the quarterly period ended March 31, 2009
 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 o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ




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##### 



Table of Contents
 PagePART I. FINANCIAL 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
    
20Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
29Item 4. Controls and Procedures
    
30PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
31Item 1A. Risk Factors
    
31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
40Item 3. Defaults Upon Senior Securities
    
40Item 4. Submission of Matters to a Vote of Security Holders
    
40Item 5. Other Information
    
40Item 6. Exhibits
    
41Signatures
    
42EX-10.1EX-31.1EX-31.2EX-32.1
  2




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PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    September 30,2009
    
    
    2008(unaudited)Current assets:Cash and cash equivalents
    
    $
    30,501,204
    
    
    $
    41,383,930Inventories
    
    
    17,000
    
    
    
    17,000Prepaid expenses
    
    
    490,517
    
    
    
    1,030,630Other current assets
    
    
    341,137
    
    
    
    237,334Current portion of restricted investments in marketable securities
    
    
    
    
    
    
    388,122Total current assets
    
    
    31,349,858
    
    
    
    43,057,016Restricted investments in marketable securities, net of current portion
    
    
    468,475
    
    
    
    468,475Property and equipment, net
    
    
    674,713
    
    
    
    806,909Non-current inventories
    
    
    1,299,504
    
    
    
    1,316,277Other assets
    
    
    241,400
    
    
    
    257,484TOTAL ASSETS
    
    $
    34,033,950
    
    
    $
    45,906,161LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    924,434
    
    
    $
    451,846Accrued expenses and other liabilities
    
    
    707,157
    
    
    
    1,881,401Accrued compensation and payroll taxes
    
    
    710,838
    
    
    
    1,192,457Current portion of deferred revenues
    
    
    2,453,109
    
    
    
    2,333,932Notes payable
    
    
    
    
    
    
    25,744Total current liabilities
    
    
    4,795,538
    
    
    
    5,885,380Accrued expenses and other liabilities, net of current portion
    
    
    685,577
    
    
    
    868,517Deferred revenues, net of current portion
    
    
    8,813,768
    
    
    
    10,152,100Total liabilities
    
    
    14,294,883
    
    
    
    16,905,997Commitments and contingencies
Stockholders equity:Preferred
stock  $0.0001 par value, 10,000,000 shares authorized,
no shares issued or outstanding as of March 31, 2009 (unaudited) and
September 30, 2008, respectively
    
    
    
    
    
    
    Common stock -$0.0001 par value, 200,000,000 shares authorized;
78,236,546 and 78,213,986 shares issued and outstanding as of
March 31, 2009 (unaudited) and September 30, 2008, respectively
    
    
    7,824
    
    
    
    7,821Additional paid-in-capital
    
    
    285,814,402
    
    
    
    284,986,815Accumulated deficit
    
    
    (266,083,159
    )
    
    
    (255,994,472
    )Total stockholders equity
    
    
    19,739,067
    
    
    
    29,000,164TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    34,033,950
    
    
    $
    45,906,161
  3




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AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months Ended March 31,
    
    
    Six Months Ended March 31,2009
    
    
    2008
    
    
    2009
    
    
    2008REVENUES FROM PRODUCT SALESNet revenues
    
    $
    
    
    
    $
    90,270
    
    
    $
    
    
    
    $
    126,270Cost of revenues
    
    
    
    
    
    
    15,510
    
    
    
    
    
    
    
    21,714Product gross margin
    
    
    
    
    
    
    74,760
    
    
    
    
    
    
    
    104,556REVENUES AND COST OF RESEARCH SERVICES AND OTHERRevenue from royalties and royalty rights
    
    
    755,655
    
    
    
    571,825
    
    
    
    2,452,451
    
    
    
    2,409,678Revenues from license agreements
    
    
    56,020
    
    
    
    56,643
    
    
    
    113,285
    
    
    
    113,907Revenues from government research grant services
    
    
    
    
    
    
    311,758
    
    
    
    
    
    
    
    479,404Revenues from research services and other
    
    
    811,675
    
    
    
    940,226
    
    
    
    2,565,736
    
    
    
    3,002,989Cost of research and development services
    
    
    1,695
    
    
    
    26,817
    
    
    
    9,746
    
    
    
    76,807Cost of government research grant services
    
    
    
    
    
    
    431,948
    
    
    
    
    
    
    
    557,534Research services and other gross margin
    
    
    809,980
    
    
    
    481,461
    
    
    
    2,555,990
    
    
    
    2,368,648Total gross margin
    
    
    809,980
    
    
    
    556,221
    
    
    
    2,555,990
    
    
    
    2,473,204OPERATING EXPENSESResearch and development
    
    
    3,600,400
    
    
    
    3,524,665
    
    
    
    8,325,314
    
    
    
    6,950,925General and administrative
    
    
    2,160,280
    
    
    
    2,418,894
    
    
    
    4,474,592
    
    
    
    5,560,918Total operating expenses
    
    
    5,760,680
    
    
    
    5,943,559
    
    
    
    12,799,906
    
    
    
    12,511,843Loss from continuing operations
    
    
    (4,950,700
    )
    
    
    (5,387,338
    )
    
    
    (10,243,916
    )
    
    
    (10,038,639
    )OTHER INCOME (EXPENSES)Interest income
    
    
    45,150
    
    
    
    283,224
    
    
    
    180,846
    
    
    
    710,386Interest expense
    
    
    (36
    )
    
    
    (191,214
    )
    
    
    (516
    )
    
    
    (425,215
    )Other, net
    
    
    (4,385
    )
    
    
    1,889
    
    
    
    (21,901
    )
    
    
    1,185Loss from continuing operations before provision for income taxes
    
    
    (4,909,971
    )
    
    
    (5,293,439
    )
    
    
    (10,085,487
    )
    
    
    (9,752,283
    )Provision for income taxes
    
    
    
    
    
    
    15,159
    
    
    
    3,200
    
    
    
    15,159Loss before discontinued operations
    
    
    (4,909,971
    )
    
    
    (5,308,598
    )
    
    
    (10,088,687
    )
    
    
    (9,767,442
    )Loss from discontinued operations
    
    
    
    
    
    
    (11,787
    )
    
    
    
    
    
    
    (1,071,577
    )Net loss
    
    $
    (4,909,971
    )
    
    $
    (5,320,385
    )
    
    $
    (10,088,687
    )
    
    $
    (10,839,019
    )BASIC AND DILUTED NET LOSS PER SHARE:Continuing operations
    
    $
    (0.06
    )
    
    $
    (0.12
    )
    
    $
    (0.13
    )
    
    $
    (0.23
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Net loss
    
    $
    (0.06
    )
    
    $
    (0.12
    )
    
    $
    (0.13
    )
    
    $
    (0.25
    )Basic and diluted weighted average number of common shares
outstanding
    
    
    78,226,972
    
    
    
    43,173,143
    
    
    
    78,215,281
    
    
    
    43,139,573
  4




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AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Six Months Ended March 31,2009
    
    
    2008OPERATING ACTIVITIES:Net loss
    
    $
    (10,088,687
    )
    
    $
    (10,839,019
    )Loss from discontinued operations
    
    
    
    
    
    
    1,071,577Adjustments to reconcile loss from continuing operations to net cash used
in operating activities:Depreciation and amortization
    
    
    144,625
    
    
    
    234,317Share-based compensation expense
    
    
    828,238
    
    
    
    920,656Amortization of debt discount
    
    
    
    
    
    
    69,833Loss on disposal of assets
    
    
    4,792
    
    
    
    638Changes in operating assets and liabilities (net of effects of
acquisition/disposition of business):Receivables
    
    
    
    
    
    
    172,818Inventories
    
    
    16,773
    
    
    
    21,714Prepaid expenses and other assets
    
    
    452,394
    
    
    
    341,691Accounts payable
    
    
    472,588
    
    
    
    900,809Accrued expenses and other liabilities
    
    
    (1,357,184
    )
    
    
    (203,631
    )Accrued compensation and payroll taxes
    
    
    (481,619
    )
    
    
    (419,299
    )Deferred revenues
    
    
    (1,219,155
    )
    
    
    (1,269,226
    )Net cash used in operating activities of continuing operations
    
    
    (11,227,235
    )
    
    
    (8,997,122
    )Net cash used in operating activities of discontinued operations
    
    
    
    
    
    
    (203,608
    )Net cash used in operating activities
    
    
    (11,227,235
    )
    
    
    (9,200,730
    )INVESTING ACTIVITIES:Proceeds from sales and maturities of investments in securities
    
    
    388,122
    
    
    
    2,300,107Purchases of property and equipment
    
    
    (19,171
    )
    
    
    (13,804
    )Proceeds from disposal of assets
    
    
    1,950
    
    
    
    4,900Net cash provided by investing activities
    
    
    370,901
    
    
    
    2,291,203FINANCING ACTIVITIES:Proceeds from issuances of common stock and warrants, net of commissions
and offering costs
    
    
    
    
    
    
    42,956Tax withholding payments reimbursed by restricted stock payments on debt
    
    
    (648
    )
    
    
    (17,092
    )Payments on notes and capital lease obligations
    
    
    (25,744
    )
    
    
    (187,936
    )Net cash used in financing activities
    
    
    (26,392
    )
    
    
    (162,072
    )Net decrease in cash and cash equivalents
    
    
    (10,882,726
    )
    
    
    (7,071,599
    )Cash and cash equivalents at beginning of period
    
    
    41,383,930
    
    
    
    30,487,962Cash and cash equivalents at end of period
    
    $
    30,501,204
    
    
    $
    23,416,363SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid
    
    $
    516
    
    
    $
    355,242Income taxes paid
    
    $
    4,963
    
    
    $
    15,159SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:Accrued liabilities of discontinued operations in connection
with the Working Capital Adjustment
    
    $
    
    
    
    $
    867,969
  5




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AVANIR PHARMACEUTICALS, INC.
 
  1. BASIS OF PRESENTATION
 Avanir Avanir
  Avanir Avanir Avanir Avanir Avanir Avanir Avanir Avanir Avanir Avanir Avanir
 2. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Business
 Avanir Avanir  ®
 6




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




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Revenue Recognition
  Revenue Recognition. Revenue Recognition When Right
of Return Exists
 Accounting for Revenue Arrangements with Multiple Deliverables.
 Product Sales
 Active Pharmaceutical Ingredient Docosanol (API Docosanol).
 8




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




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®
 ®
 Government Research Grant Revenues-
 Cost of Revenues
  Recognition of Expenses in Outsourced Contracts
  Share-Based Compensation
 Share-Based Payment
  10




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For the three months ended
    
    
    For the six months endedMarch 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2009
    
    
    2008From Continuing Operations:General and administrative expense
    
    $
    356,457
    
    
    $
    289,279
    
    
    $
    662,456
    
    
    $
    586,899Research and development expense
    
    
    85,647
    
    
    
    187,468
    
    
    
    165,782
    
    
    
    333,757Total
    
    $
    442,104
    
    
    $
    476,747
    
    
    $
    828,238
    
    
    $
    920,656
 For the three months ended
    
    
    For the six months endedMarch 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Share-based compensation expense from:Stock options
    
    $
    194,519
    
    
    $
    147,052
    
    
    $
    373,308
    
    
    $
    361,176Restricted stock units
    
    
    247,585
    
    
    
    225,142
    
    
    
    454,930
    
    
    
    442,812Restricted stock awards
    
    
    
    
    
    
    104,553
    
    
    
    
    
    
    
    116,668Total
    
    $
    442,104
    
    
    $
    476,747
    
    
    $
    828,238
    
    
    $
    920,656
  Recently Issued Accounting Pronouncements
 Financial
Accounting Standard No. 157-4 (FAS 157-4). Determining Fair Value when
the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and
Identifying Transactions that are not Orderly
 11




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FASB Staff Position No. 115-2 (FSP 115-2). Recognition and Presentation of Other-Than-Temporary Impairments
 FASB Staff Position No. 107-1 (FSP 107-1). Interim Disclosures about Fair Value of Financial Instruments
 EITF Issue No. 07-5. Determining Whether
an Instrument (or an Embedded Feature) Is Indexed to an Entitys Own Stock
 Financial
Accounting Standards No. 160 (FAS 160) Noncontrolling Interests
in Consolidated Financials, an Amendment of ARB No. 51
 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,
 3. FAIR VALUE OF FINANCIAL INSTRUMENTS
 Fair Value Measurements
 
    
    Level 1-Quoted prices in active markets for identical assets and liabilities.
    
    Level 2- Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets and liabilities, quoted prices in
the markets that are not active; or other inputs
that are observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities.
    
    Level 3-Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities.
 12




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Determining Fair Value when the Volume and Level of Activity for the Asset or
Liability have Significantly Decreased and Identifying Transactions that are not Orderly
  4. DISCONTINUED OPERATIONS  SALE OF FAZACLO
   Accounting for the Impairment or Disposal of Long-Lived Assets,
  5. RELOCATION OF COMMERCIAL AND GENERAL AND ADMINISTRATIVE OPERATIONS
   13




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Balance at
    
    
    
    
    
    
    Balance atSeptember 30,
    
    
    Payments/
    
    
    March  31,2008
    
    
    Reductions
    
    
    2009Accrued RestructuringLease restructuring liability
    
    $
    1,135,965
    
    
    $
    (162,616
    )
    
    $
    973,349Less current portion
    
    
    (316,086
    )
    
    
    
    
    
    
    (306,642
    )Non-current portion
    
    $
    819,879
    
    
    
    
    
    
    $
    666,707
  6. INVENTORIES
   March 31,
    
    
    September 30,2009
    
    
    2008Raw materials
    
    $
    1,316,504
    
    
    $
    1,333,277Less: current portion
    
    
    (17,000
    )
    
    
    (17,000
    )Non-current portion
    
    $
    1,299,504
    
    
    $
    1,316,277
  7. OTHER ASSETS
  March 31,
    
    
    September 30,2009
    
    
    2008Current receivables from subtenants
    
    $
    122,428
    
    
    $
    167,546Current receivable from license and royalty agreements
    
    
    218,709
    
    
    
    68,251Deposits
    
    
    241,400
    
    
    
    241,400Other
    
    
    
    
    
    
    17,621Total other assets
    
    
    582,537
    
    
    
    494,818Less: current
    
    
    (341,137
    )
    
    
    (237,334
    )Non current total other assets
    
    $
    241,400
    
    
    $
    257,484
 14




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8. ACCRUED EXPENSES AND OTHER LIABILITIES
  March 31,
    
    
    September 30,2009
    
    
    2008Accrued research and development expenses
    
    $
    197,183
    
    
    $
    1,404,556Accrued general and administrative expenses
    
    
    118,730
    
    
    
    160,759Deferred rent
    
    
    18,871
    
    
    
    48,638Lease restructuring liability
    
    
    973,349
    
    
    
    1,135,965Other
    
    
    84,601
    
    
    
    Total accrued expenses and other liabilities
    
    
    1,392,734
    
    
    
    2,749,918Less: current
    
    
    (707,157
    )
    
    
    (1,881,401
    )Non-current total accrued expenses and other liabilities
    
    $
    685,577
    
    
    $
    868,517
 9. DEFERRED REVENUES
 ®
 Drug RoyaltyUSA
    
    
    OtherAgreement
    
    
    Agreements
    
    
    TotalNet deferred revenues as of October 1, 2008
    
    $
    12,202,198
    
    
    $
    283,834
    
    
    $
    12,486,032Changes during the period:Recognized as revenues during period
    
    
    (1,105,870
    )
    
    
    (113,285
    )
    
    
    (1,219,155
    )Net deferred revenues as of March 31, 2009
    
    $
    11,096,328
    
    
    $
    170,549
    
    
    $
    11,266,877Classified and reported as:Current portion of deferred revenues
    
    $
    2,282,560
    
    
    $
    170,549
    
    
    $
    2,453,109Deferred revenues, net of current portion
    
    
    8,813,768
    
    
    
    
    
    
    
    8,813,768Total deferred revenues
    
    $
    11,096,328
    
    
    $
    170,549
    
    
    $
    11,266,877
 10. COMPUTATION OF NET LOSS PER COMMON SHARE
   15




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2009
    
    2008Stock options
    
    
    2,205,063
    
    
    
    677,282Performance stock options
    
    
    2,031,233
    
    
    
    Stock warrants
    
    
    12,509,742
    
    
    
    269,305Restricted stock units (1)
    
    
    2,827,721
    
    
    
    2,400,565Restricted stock awards
    
    
    
    
    
    
    6,000
 
 (1)
    
    Includes 381,293 shares of restricted stock awarded to directors that have vested but
are still restricted until the directors resign. 11. COMPREHENSIVE LOSS
  For the three months
    
    
    For the six monthsended March 31,
    
    
    ended March 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (4,909,971
    )
    
    $
    (5,320,385
    )
    
    $
    (10,088,687
    )
    
    $
    (10,839,019
    )Other comprehensive loss, net of tax:Unrealized
(loss) gain on available-for-sale securities
    
    
    
    
    
    
    (563
    )
    
    
    
    
    
    
    3,272Total comprehensive loss
    
    $
    (4,909,971
    )
    
    $
    (5,320,948
    )
    
    $
    (10,088,687
    )
    
    $
    (10,835,747
    )
 12. STOCKHOLDERS EQUITY
   13. EMPLOYEE EQUITY INCENTIVE PLANS
   Stock Options
 16




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Weighted AverageWeighted Average
    
    Remaining
    
    AggregateNumber
    
    Exercise Price per
    
    Contractual Term
    
    Intrinsicof Shares
    
    Share
    
    (In Years)
    
    ValueOutstanding October 1, 2008
    
    
    624,027
    
    
    $
    6.61Granted
    
    
    1,613,110
    
    
    $
    0.53Forfeited
    
    
    (29,914
    )
    
    $
    7.10Expired
    
    
    (2,160
    )
    
    $
    5.22Outstanding March 31, 2009
    
    
    2,205,063
    
    
    $
    2.16
    
    
    
    9.0
    
    
    $
    60Vested and expected to vest in the future, March 31, 2009
    
    
    1,350,476
    
    
    $
    3.05
    
    
    
    8.7
    
    
    $
    31Exercisable, March 31, 2009
    
    
    275,438
    
    
    $
    10.82
    
    
    
    6.2
    
    
    $
    
    2009Expected volatility
    
    
    101
    %Expected term in years
    
    
    5.0Risk-fee interest rate (zero coupon U.S. Treasury Note)
    
    
    1.6% -2.3
    %Expected dividend yield
    
    
    0
    %
 17




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##### Table of Contents



Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageNumber
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    Life in Years
    
    Price
    
    Exercisable
    
    Price$0.47-$0.53
    
    
    1,436,510
    
    
    
    9.7
    
    
    $
    0.53
    
    
    
    
    
    
    $
    $0.54-$1.29
    
    
    337,960
    
    
    
    9.0
    
    
    $
    0.88
    
    
    
    10,000
    
    
    $
    1.20$2.41-$11.76
    
    
    350,343
    
    
    
    7.1
    
    
    $
    7.23
    
    
    
    194,563
    
    
    $
    10.02$12.12-$13.60
    
    
    39,000
    
    
    
    5.2
    
    
    $
    12.86
    
    
    
    39,000
    
    
    $
    12.86$15.84-$19.38
    
    
    41,250
    
    
    
    6.4
    
    
    $
    16.16
    
    
    
    31,875
    
    
    $
    16.162,205,063
    
    
    
    9.0
    
    
    $
    2.16
    
    
    
    275,438
    
    
    $
    10.82
 Performance stock options.
  Weighted AverageWeighted Average
    
    Remaining
    
    AggregateNumber
    
    Exercise Price per
    
    Contractual Term
    
    Intrinsicof Shares
    
    Share
    
    (In Years)
    
    ValueOutstanding October 1, 2008
    
    
    2,048,200
    
    
    $
    0.88Forfeited
    
    
    (16,967
    )
    
    $
    0.88Outstanding March 31, 2009
    
    
    2,031,233
    
    
    $
    0.88
    
    
    
    9.3
    
    
    $
    Vested and expected to vest in the future, March 31, 2009
    
    
    912,438
    
    
    $
    0.88
    
    
    
    9.3
    
    
    $
    Exercisable, March 31, 2009
    
    
    60,763
    
    
    $
    0.88
    
    
    
    9.3
    
    
    $
    
  Restricted stock units.
 Weighted AverageGrant DateNumber of Shares
    
    Fair ValueUnvested, October 1, 2008
    
    
    2,259,042
    
    
    $
    1.85Granted
    
    
    420,000
    
    
    $
    0.44Vested
    
    
    (231,914
    )
    
    $
    1.65Forfeited
    
    
    (700
    )
    
    $
    2.06Unvested, March 31, 2009
    
    
    2,446,428
    
    
    $
    1.63
  18




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14. COMMITMENTS AND CONTINGENCIES
 Center for Neurologic Study (CNS) 
 Contingencies-
  Guarantees and Indemnities-
 19




---



##### Table of Contents



15. SEGMENT INFORMATION
    16. SUBSEQUENT EVENT
   
 Item 2.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  EXECUTIVE OVERVIEW
 ®
 20




---



##### Table of Contents



Zenvia Status
 
 
 
 
    Docosanol 10% Cream
  21




---



##### Table of Contents



®
   Macrophage Migration Inhibitory Factor (MIF) Inflammation
  Xenerex Human Antibody Technology  Anthrax/Other Infectious Diseases
   General Information
 info@avanir.com www.avanir.com.
 22




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   RESULTS OF OPERATIONS
 COMPARISON OF THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 Revenues and Cost of Revenues
 Three months endedMarch 31,2009
    
    
    2008
    
    
    $ Change
    
    
    % ChangePRODUCT SALESNet revenues
    
    $
    
    
    
    $
    90,270
    
    
    $
    (90,270
    )
    
    
    -100
    %Cost of revenues
    
    
    
    
    
    
    15,510
    
    
    
    (15,510
    )
    
    
    -100
    %Product gross margin
    
    
    
    
    
    
    74,760
    
    
    
    (74,760
    )
    
    
    -100
    %REVENUES AND COST OF RESEARCH SERVICES AND OTHERRevenues:Revenue from royalties and royalty rights
    
    $
    755,655
    
    
    $
    571,825
    
    
    $
    183,830
    
    
    
    32
    %Revenues from license agreements
    
    
    56,020
    
    
    
    56,643
    
    
    
    (623
    )
    
    
    -1
    %Revenues from government research grant services
    
    
    
    
    
    
    311,758
    
    
    
    (311,758
    )
    
    
    -100
    %Revenues from research services and other
    
    
    811,675
    
    
    
    940,226
    
    
    
    (128,551
    )
    
    
    -14
    %Costs:Cost of research and development services
    
    
    1,695
    
    
    
    26,817
    
    
    
    (25,122
    )
    
    
    -94
    %Cost of government research grant services
    
    
    
    
    
    
    431,948
    
    
    
    (431,948
    )
    
    
    -100
    %Costs from research services and grants
    
    
    1,695
    
    
    
    458,765
    
    
    
    (457,070
    )
    
    
    -100
    %Research services and other gross margin
    
    
    809,980
    
    
    
    481,461
    
    
    
    328,519
    
    
    
    68
    %Total gross margin
    
    $
    809,980
    
    
    $
    556,221
    
    
    $
    253,759
    
    
    
    46
    %
 23




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##### Table of Contents



Revenues
    Cost of Revenues
  Operating Expenses
 Three months endedMarch 31,2009
    
    
    2008
    
    
    $ Change
    
    
    % ChangeOPERATING EXPENSESResearch and development
    
    $
    3,600,400
    
    
    $
    3,524,665
    
    
    $
    75,735
    
    
    
    2
    %General and administrative
    
    
    2,160,280
    
    
    
    2,418,894
    
    
    
    (258,614
    )
    
    
    -11
    %Total operating expenses
    
    $
    5,760,680
    
    
    $
    5,943,559
    
    
    $
    (182,879
    )
    
    
    -3
    %
 Research and Development Expenses
   General and Administrative Expenses
  24




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Share-Based Compensation
  Other Income (Expenses)
   Loss from Discontinued Operations
  Net Loss
  25




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COMPARISON OF SIX MONTHS ENDED MARCH 31, 2009 AND 2008
 Six months endedMarch 31,2009
    
    
    2008
    
    
    $ Change
    
    
    % ChangePRODUCT SALESNet revenues
    
    $
    
    
    
    $
    126,270
    
    
    $
    (126,270
    )
    
    
    -100
    %Cost of revenues
    
    
    
    
    
    
    21,714
    
    
    
    (21,714
    )
    
    
    -100
    %Product gross margin
    
    
    
    
    
    
    104,556
    
    
    
    (104,556
    )
    
    
    -100
    %REVENUES AND COST OF RESEARCH SERVICES AND OTHERRevenues:Revenue from royalties and royalty rights
    
    $
    2,452,451
    
    
    $
    2,409,678
    
    
    $
    42,773
    
    
    
    2
    %Revenues from license agreements
    
    
    113,285
    
    
    
    113,907
    
    
    
    (622
    )
    
    
    -1
    %Revenues from government research grant services
    
    
    
    
    
    
    479,404
    
    
    
    (479,404
    )
    
    
    -100
    %Revenues from research services and other
    
    
    2,565,736
    
    
    
    3,002,989
    
    
    
    (437,253
    )
    
    
    -15
    %Costs:Cost of research and development services
    
    
    9,746
    
    
    
    76,807
    
    
    
    (67,061
    )
    
    
    -87
    %Cost of government research grant services
    
    
    
    
    
    
    557,534
    
    
    
    (557,534
    )
    
    
    -100
    %Costs from research services and grants
    
    
    9,746
    
    
    
    634,341
    
    
    
    (624,595
    )
    
    
    -98
    %Research services and other gross margin
    
    
    2,555,990
    
    
    
    2,368,648
    
    
    
    187,342
    
    
    
    8
    %Total gross margin
    
    $
    2,555,990
    
    
    $
    2,473,204
    
    
    $
    82,786
    
    
    
    3
    %
 Revenues
    Cost of Revenues
  26




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Six months endedMarch 31,2009
    
    
    2008
    
    
    $ Change
    
    
    % ChangeOPERATING EXPENSESResearch and development
    
    $
    8,325,314
    
    
    $
    6,950,925
    
    
    $
    1,374,389
    
    
    
    20
    %General and administrative
    
    
    4,474,592
    
    
    
    5,560,918
    
    
    
    (1,086,326
    )
    
    
    -20
    %Total operating expenses
    
    $
    12,799,906
    
    
    $
    12,511,843
    
    
    $
    288,063
    
    
    
    2
    %
 Research and Development Expenses
  General and Administrative Expenses
  Share-Based Compensation
   Interest Expense and Interest Income
   Loss from Discontinued Operations
  27




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Net Loss
  LIQUIDITY AND CAPITAL RESOURCES
   IncreaseMarch 31,
    
    (Decrease)
    
    September 30,2009
    
    During Period
    
    2008Cash, cash equivalents and investment in securities
    
    $
    30,969,679
    
    
    $
    (11,270,848
    )
    
    $
    42,240,527Cash and cash equivalents
    
    $
    30,501,204
    
    
    $
    (10,882,726
    )
    
    $
    41,383,930Net working capital
    
    $
    26,554,320
    
    
    $
    (10,617,316
    )
    
    $
    37,171,636
 Six Months
    
    
    
    
    
    
    Six MonthsEnded
    
    
    Change
    
    
    EndedMarch 31,
    
    
    Between
    
    
    March 31,2009
    
    
    Periods
    
    
    2008Net cash used in operating activities
    
    $
    (11,227,235
    )
    
    $
    (2,026,505
    )
    
    $
    (9,200,730
    )Net cash provided by investing activities
    
    
    370,901
    
    
    
    (1,920,302
    )
    
    
    2,291,203Net cash used in financing activities
    
    
    (26,392
    )
    
    
    135,680
    
    
    
    (162,072
    )Net decrease in cash and cash equivalents
    
    $
    (10,882,726
    )
    
    $
    (3,811,127
    )
    
    $
    (7,071,599
    )
 Operating activities.
 Investing activities.
 Financing activities.
   28




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Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsOperating lease obligations (1)
    
    $
    5,695,604
    
    
    $
    1,869,722
    
    
    $
    2,862,949
    
    
    $
    962,933
    
    
    $
    Purchase obligations (2)
    
    
    976,943
    
    
    
    976,943
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    6,672,547
    
    
    $
    2,846,665
    
    
    $
    2,862,949
    
    
    $
    962,933
    
    
    $
    
 
 (1)
    
    Operating leases obligations are exclusive of payments we expect to receive under subleases.(2)
    
    Purchase obligations consist of the total of trade accounts payable and trade related accrued
expenses at March 31, 2009 which approximates our contractual commitments for goods and
services in the normal course of our business. Zenvia License Milestone Payments.
 Off-Balance Sheet Arrangements
  Management Outlook
   
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  29




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Interest rate sensitivity
      
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   30




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Changes in Internal Controls over Financial Reporting
  
 PART II OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
 Risks Relating to Our Business
 We must conduct additional clinical trials for Zenvia and there can be no assurance that the
FDA will approve Zenvia.
   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.
  31




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##### Table of Contents



Even if Zenvia receives marketing approval from the FDA, the approval may not be on the terms
that we seek and could limit the marketability of the drug.
  
    
    regulatory authorities may require the addition of labeling statements, such as a black box
warning, which is the strongest type of warning that the FDA can require for a drug and is
generally reserved for warning prescribers about adverse drug reactions that can cause
serious injury or death;
    
    regulatory authorities may withdraw approval of the product after its initial approval;
    
    product labeling may be amended to restrict use in certain populations;
    
    physicians may be required to conduct additional tests prior to dispensing product or monitor
patients taking Zenvia;
    
    we may be required to conduct additional studies either post-marketing or before approval; and
    
    Zenvia may not be approved by the FDA for commercialization as they may perceive that the
benefit does not outweigh the potential risk.
  We have limited capital resources and will need to raise additional funds to support our
operations.
   32




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##### Table of Contents



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.
   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.
  33




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##### Table of Contents




    
    The claims in any pending patent applications will be allowed or that patents will be granted;
    
    Competitors will not develop similar or superior technologies independently, duplicate our
technologies, or design around the patented aspects of our technologies;
    
    Our technologies will not infringe on other patents or rights owned by others, including
licenses that may not be available to us;
    
    Any of our issued patents will provide us with significant competitive advantages;
    
    Challenges will not be instituted against the validity or enforceability of any patent that
we own or, if instituted, that these challenges will not be successful; or
    
    We will be able to secure additional worldwide intellectual property protection for our
Zenvia patent portfolio.
  We currently have only a limited term of patent coverage and exclusivity protection for Zenvia
in the U.S., which could result in the introduction of generic competition within a few years of
product launch.
    34




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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 face challenges retaining members of management and other key personnel.
  Risks Relating to Our Industry
 There are a number of difficulties and risks associated with clinical trials and our trials
may not yield the expected results.
   
    
    the results from earlier clinical trials may not be statistically
significant or predictive of results that will be obtained from subsequent
clinical trials, particularly larger trials;
    
    institutional review boards or regulators, including the FDA, may hold,
suspend or terminate our clinical research or the clinical trials of our
product candidates for various reasons, including noncompliance with
regulatory requirements or if, in their opinion, the participating subjects
are being exposed to unacceptable health risks;
    
    subjects may drop out of our clinical trials;
 35




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##### Table of Contents




    
    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;
    
    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 are larger and
have greater resources. As a result, we face significant competitive hurdles.
   36




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If we fail to comply with regulatory requirements, regulatory agencies may take action against
us, which could significantly harm our business.
    We rely on insurance companies to mitigate our exposure for business activities, including
developing and marketing pharmaceutical products for human use.
  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.
  37




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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.
  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.
  38




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##### Table of Contents



Our stock price has historically been volatile and we expect that this volatility will
continue for the foreseeable future.
  
    
    Announcements by us regarding our non-compliance with continued listing standards on the
NASDAQ stock market;
    
    Comments made by securities analysts, including changes in their recommendations;
    
    Short selling activity by certain investors, including any failures to timely settle short
sale transactions;
    
    Announcements by us of financing transactions and/or future sales of equity or debt securities;
    
    Sales of our common stock by our directors, officers, or significant stockholders;
    
    Lack of volume of stock trading leading to low liquidity; and
    
    Market and economic conditions.
   39




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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Proposal No. 1: Election of Directors
 Director
Nominee
    
    For
    

WithheldKeith A. Katkin
    
    
    68,166,923
    
    
    
    1,825,976Charles A. Mathews
    
    
    67,590,075
    
    
    
    2,402,825Nicholas J. Simon
    
    
    68,225,476
    
    
    
    1,767,423
  Proposal No. 2: Ratification of Selection of KMJ Corbin & Company LLP as Independent Registered
Public Accounting Firm
 For
    
    Against
    
    Abstain68,263,001
    
    1,166,570
    
    563,327
 Proposal No. 3: Proposed Change in Corporate Domicile from California to Delaware
 For
    
    Against
    
    Abstain41,190,680
    
    4,682,056
    
    19,994
 
 Item 5. OTHER INFORMATION
 Termination of Docosanol License
  Completion of Advanced Cardiac Safety Study
  40




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Item 6. EXHIBITS
 Exhibits
 10.1
    
    Sublease Agreement, dated April 21, 2009, by and between Avanir Pharmaceuticals, Inc. and
Halozyme, Inc.31.1
    
    Certification of Principal Executive Officer Required Under Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.31.2
    
    Certification of Principal Financial Officer Required Under Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.32.1
    
    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.
 41




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##### Table of Contents



SIGNATURES
  Signature
    
    Title
    
    Date/s/ Keith A. Katkin

Keith A. Katkin
    
    President and Chief Executive Officer
(Principal Executive Officer)
    
    May 8, 2009/s/ Christine G. Ocampo

Christine G. Ocampo
    
    Vice President, Finance
(Principal Financial and Accounting Officer)
    
    May 8, 2009
 42