##### 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, 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
    
    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




---



##### 



Table of Contents
  
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4T. Controls and Procedures
    
    
    28PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3. Defaults Upon Senior Securities
    
    
    37Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    38Signatures
    
    
    39EX-10.1EX-10.2EX-31.1EX-31.2EX-32.1
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1.
    
    FINANCIAL STATEMENTS
 AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    September 30,2010
    
    
    2009(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20,304,807
    
    
    $
    31,486,012Inventories
    
    
    114,098
    
    
    
    114,098Prepaid expenses
    
    
    404,861
    
    
    
    397,100Other current assets
    
    
    957,771
    
    
    
    331,717Current portion of restricted investments in marketable securities
    
    
    
    
    
    
    200,775Total current assets
    
    
    21,781,537
    
    
    
    32,529,702Restricted investments in marketable securities, net of current portion
    
    
    401,569
    
    
    
    267,700Property and equipment, net
    
    
    259,870
    
    
    
    310,677Non-current inventories
    
    
    710,531
    
    
    
    710,531Other assets
    
    
    356,933
    
    
    
    249,462TOTAL ASSETS
    
    $
    23,510,440
    
    
    $
    34,068,072LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,858,325
    
    
    $
    1,214,117Accrued expenses and other liabilities
    
    
    1,486,879
    
    
    
    1,001,599Accrued compensation and payroll taxes
    
    
    804,526
    
    
    
    1,345,859Current portion of deferred revenues
    
    
    2,399,849
    
    
    
    2,282,560Total current liabilities
    
    
    6,549,579
    
    
    
    5,844,135Accrued expenses and other liabilities, net of current portion
    
    
    494,019
    
    
    
    652,395Deferred revenues, net of current portion
    
    
    6,436,341
    
    
    
    7,629,807Total liabilities
    
    
    13,479,939
    
    
    
    14,126,337Commitments and contingenciesStockholders equity:Preferred stock  $0.0001 par value, 10,000,000 shares
authorized, no shares issued
or outstanding as of March 31, 2010 (unaudited) and September 30, 2009
    
    
    
    
    
    
    Common stock  $0.0001 par value, 200,000,000 shares authorized;
83,636,178 and 83,084,182 shares issued and outstanding as of
March 31, 2010 (unaudited) and September 30, 2009, respectively
    
    
    8,363
    
    
    
    8,308Additional paid-in capital
    
    
    299,276,045
    
    
    
    297,923,915Accumulated deficit
    
    
    (289,253,907
    )
    
    
    (277,990,488
    )Total stockholders equity
    
    
    10,030,501
    
    
    
    19,941,735TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    23,510,440
    
    
    $
    34,068,072
  3




---



##### Table of Contents



AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months Ended March 31,
    
    
    Six Months Ended March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues from royalties
    
    $
    994,494
    
    
    $
    755,655
    
    
    $
    2,479,428
    
    
    $
    2,452,451Revenues from license agreements
    
    
    
    
    
    
    56,020
    
    
    
    
    
    
    
    113,285Total revenues
    
    
    994,494
    
    
    
    811,675
    
    
    
    2,479,428
    
    
    
    2,565,736Cost of revenues
    
    
    
    
    
    
    1,695
    
    
    
    
    
    
    
    9,746Gross profit
    
    
    994,494
    
    
    
    809,980
    
    
    
    2,479,428
    
    
    
    2,555,990OPERATING EXPENSESResearch and development
    
    
    3,815,613
    
    
    
    3,600,400
    
    
    
    7,262,503
    
    
    
    8,325,314General and administrative
    
    
    3,622,704
    
    
    
    2,160,280
    
    
    
    6,489,182
    
    
    
    4,474,592Total operating expenses
    
    
    7,438,317
    
    
    
    5,760,680
    
    
    
    13,751,685
    
    
    
    12,799,906Loss from operations
    
    
    (6,443,823
    )
    
    
    (4,950,700
    )
    
    
    (11,272,257
    )
    
    
    (10,243,916
    )OTHER INCOME (EXPENSES)Interest income
    
    
    2,357
    
    
    
    45,150
    
    
    
    8,161
    
    
    
    180,846Interest expense
    
    
    
    
    
    
    (36
    )
    
    
    
    
    
    
    (516
    )Other, net
    
    
    1,004
    
    
    
    (4,385
    )
    
    
    677
    
    
    
    (21,901
    )Loss before provision for income taxes
    
    
    (6,440,462
    )
    
    
    (4,909,971
    )
    
    
    (11,263,419
    )
    
    
    (10,085,487
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,200Net loss
    
    $
    (6,440,462
    )
    
    $
    (4,909,971
    )
    
    $
    (11,263,419
    )
    
    $
    (10,088,687
    )Basic and diluted net loss per share
    
    $
    (0.08
    )
    
    $
    (0.06
    )
    
    $
    (0.14
    )
    
    $
    (0.13
    )Basic and diluted weighted average
number of common shares outstanding
    
    
    83,419,640
    
    
    
    78,226,972
    
    
    
    83,288,078
    
    
    
    78,215,281
  4




---



##### Table of Contents



AVANIR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Six Months Ended March 31,2010
    
    
    2009OPERATING ACTIVITIES:Net loss
    
    $
    (11,263,419
    )
    
    $
    (10,088,687
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    99,397
    
    
    
    144,625Share-based compensation expense
    
    
    1,363,837
    
    
    
    828,238Loss on disposal of assets
    
    
    
    
    
    
    4,792Changes in operating assets and liabilities:Prepaid expenses and other assets
    
    
    (741,286
    )
    
    
    469,167Accounts payable
    
    
    644,208
    
    
    
    472,588Accrued expenses and other liabilities
    
    
    326,904
    
    
    
    (1,357,184
    )Accrued compensation and payroll taxes
    
    
    (541,333
    )
    
    
    (481,619
    )Deferred revenues
    
    
    (1,076,177
    )
    
    
    (1,219,155
    )Net cash used in operating activities
    
    
    (11,187,869
    )
    
    
    (11,227,235
    )INVESTING ACTIVITIES:Proceeds from sales and maturities of investments in securities
    
    
    66,906
    
    
    
    388,122Purchase of property and equipment
    
    
    (48,590
    )
    
    
    (19,171
    )Proceeds from disposal of assets
    
    
    
    
    
    
    1,950Net cash provided by investing activities
    
    
    18,316
    
    
    
    370,901FINANCING ACTIVITIES:Proceeds from issuances of common stock, net of offering costs,
including commissions
    
    
    183,044
    
    
    
    Proceeds from exercise of stock options
    
    
    2,994
    
    
    
    Shares surrendered to pay for tax withholding
    
    
    (197,690
    )
    
    
    (648
    )Payments on notes and capital lease obligations
    
    
    
    
    
    
    (25,744
    )Net cash used in financing activities
    
    
    (11,652
    )
    
    
    (26,392
    )Net decrease in cash and cash equivalents
    
    
    (11,181,205
    )
    
    
    (10,882,726
    )Cash and cash equivalents at beginning of period
    
    
    31,486,012
    
    
    
    41,383,930Cash and cash equivalents at the end of the period
    
    $
    20,304,807
    
    
    $
    30,501,204SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid
    
    $
    
    
    
    $
    516Income taxes paid
    
    $
    3,200
    
    
    $
    4,963
 
 5




---



##### Table of Contents



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  ® Avanir
 
 6




---



##### Table of Contents



Significant Accounting Policies
  Concentrations
    Fair value of financial instruments
  Revenue Recognition
   7




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



For the three months ended
    
    
    For the six months endedMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Share-based compensation classified as:General and administrative expense
    
    $
    518,696
    
    
    $
    356,457
    
    
    $
    1,035,608
    
    
    $
    662,456Research and development expense
    
    
    146,069
    
    
    
    85,647
    
    
    
    328,229
    
    
    
    165,782Total
    
    $
    664,765
    
    
    $
    442,104
    
    
    $
    1,363,837
    
    
    $
    828,238
 For the three months ended
    
    
    For the six months endedMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Share-based compensation expense from:Stock options
    
    $
    336,283
    
    
    $
    194,519
    
    
    $
    575,233
    
    
    $
    373,308Restricted stock units
    
    
    328,482
    
    
    
    247,585
    
    
    
    788,604
    
    
    
    454,930Total
    
    $
    664,765
    
    
    $
    442,104
    
    
    $
    1,363,837
    
    
    $
    828,238
  Income Taxes
       10




---



##### Table of Contents



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.
 11




---



##### Table of Contents



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
   March 31,
    
    
    September 30,2010
    
    
    2009Raw materials.
    
    $
    824,629
    
    
    $
    824,629Less: current portion
    
    
    (114,098
    )
    
    
    (114,098
    )Non-current portion
    
    $
    710,531
    
    
    $
    710,531
  12




---



##### Table of Contents



6. ACCRUED EXPENSES AND OTHER LIABILITIES
  March 31,
    
    
    September 30,2010
    
    
    2009Accrued research and development expenses
    
    $
    820,008
    
    
    $
    372,494Accrued sales and marketing expenses
    
    
    199,187
    
    
    
    Accrued general and administrative expenses
    
    
    157,835
    
    
    
    270,401Deferred rent
    
    
    17,303
    
    
    
    19,516Lease restructuring liability (1)
    
    
    786,565
    
    
    
    991,583Total accrued expenses and other liabilities
    
    
    1,980,898
    
    
    
    1,653,994Less: current portion
    
    
    (1,486,879
    )
    
    
    (1,001,599
    )Accrued expenses and other liabilities, non-current portion
    
    $
    494,019
    
    
    $
    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/
    
    
    March 31,2009
    
    
    Reductions
    
    
    2010Accrued RestructuringTotal lease restructuring liability
    
    $
    991,583
    
    
    $
    (205,018
    )
    
    $
    786,565Less current portion
    
    
    (358,704
    )
    
    
    
    
    
    
    (309,849
    )Non-current portion
    
    $
    632,879
    
    
    
    
    
    
    $
    476,716
 7. DEFERRED REVENUES
  TotalNet deferred revenues as of October 1, 2009
    
    $
    9,912,367Changes during the period:Recognized as revenues during period
    
    
    (1,076,177
    )Net deferred revenues as of March 31, 2010
    
    $
    8,836,190Classified and reported as:Current portion of deferred revenues
    
    $
    2,399,849Deferred revenues, net of current portion
    
    
    6,436,341Total deferred revenues
    
    $
    8,836,190
 13




---



##### Table of Contents



8. COMPUTATION OF NET LOSS PER COMMON SHARE
   2010
    
    
    2009Stock options
    
    
    5,882,458
    
    
    
    4,236,296Stock warrants
    
    
    12,240,437
    
    
    
    12,509,742Restricted stock units (1)
    
    
    2,382,857
    
    
    
    2,827,721
 
 (1)
    
    Includes 981,228 and 381,293 shares of restricted stock at March 31, 2010 and 2009,
respectively, awarded to directors that have vested but are still restricted until the
directors resign. 9. STOCKHOLDERS EQUITY
    10. EMPLOYEE EQUITY INCENTIVE PLANS
  14




---



##### Table of Contents



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
    
    
    1,671,950
    
    
    $
    1.75Exercised
    
    
    (4,148
    )
    
    $
    0.72Forfeited
    
    
    (2,500
    )
    
    $
    11.62Outstanding, March 31, 2010
    
    
    5,882,458
    
    
    $
    1.60
    
    
    
    8.6
    
    
    $
    6,894,832Vested and
expected to vest in the future, March 31, 2010
    
    
    5,038,339
    
    
    $
    1.67
    
    
    
    8.5
    
    
    $
    5,938,065Exercisable, March 31, 2010
    
    
    1,421,861
    
    
    $
    2.95
    
    
    
    7.7
    
    
    $
    1,728,621
  15




---



##### Table of Contents



Expected volatility
    
    
    105
    %Expected term in years
    
    
    5.6Risk-fee interest rate (zero coupon U.S. Treasury Note)
    
    
    2.5
    %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
    
    
    1,603,135
    
    
    
    8.7
    
    
    $
    0.53
    
    
    
    488,788
    
    
    $
    0.53$0.88
    
    
    2,028,945
    
    
    
    8.3
    
    
    $
    0.88
    
    
    
    487,925
    
    
    $
    0.88$1.20-$1.74
    
    
    1,722,910
    
    
    
    9.4
    
    
    $
    1.70
    
    
    
    145,960
    
    
    $
    1.28$1.80-$9.92
    
    
    308,031
    
    
    
    7.7
    
    
    $
    3.46
    
    
    
    79,751
    
    
    $
    6.67$10.24-$19.38
    
    
    219,437
    
    
    
    5.2
    
    
    $
    12.73
    
    
    
    219,437
    
    
    $
    12.735,882,458
    
    
    
    8.6
    
    
    $
    1.60
    
    
    
    1,421,861
    
    
    $
    2.95
 Restricted stock units (RSU).
 Weighted AverageGrant DateNumber of Shares
    
    
    Fair ValueUnvested, October 1, 2009
    
    
    1,812,986
    
    
    $
    1.83Granted
    
    
    480,000
    
    
    $
    2.00Vested
    
    
    (851,357
    )
    
    $
    1.28Forfeited
    
    
    (40,000
    )
    
    $
    2.08Unvested, March 31, 2010.
    
    
    1,401,629
    
    
    $
    2.21
   16




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



Item 2.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  EXECUTIVE OVERVIEW
  ®
 Zenvia for the treatment of PBA
     19




---



##### Table of Contents



Zenvia for the treatment of neuropathic pain
     20




---



##### Table of Contents



Docosanol 10% Cream
 ®
   Xenerex Human Antibody Technology  Anthrax/Other Infectious Diseases
   General Information
 info@avanir.com www.avanir.com. www.sec.gov
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  21




---



##### Table of Contents



RESULTS OF OPERATIONS
 COMPARISON OF THREE MONTHS ENDED MARCH 31, 2010 AND 2009
 Revenues and Cost of Revenues
 Three months endedMarch 31,2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeRevenues:Revenue from royalties
    
    $
    994,494
    
    
    $
    755,655
    
    
    $
    238,839
    
    
    
    32
    %Revenues from license agreements
    
    
    
    
    
    
    56,020
    
    
    
    (56,020
    )
    
    
    -100
    %Total revenues
    
    
    994,494
    
    
    
    811,675
    
    
    
    182,819
    
    
    
    23
    %Costs:Cost of revenues
    
    
    
    
    
    
    1,695
    
    
    
    (1,695
    )
    
    
    -100
    %Gross profit
    
    $
    994,494
    
    
    $
    809,980
    
    
    $
    184,514
    
    
    
    23
    %
 Revenues
   Cost of Revenues
  22




---



##### Table of Contents



Operating Expenses
 Three months endedMarch 31,2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeOPERATING EXPENSESResearch and development
    
    $
    3,815,613
    
    
    $
    3,600,400
    
    
    $
    215,213
    
    
    
    6
    %General and administrative
    
    
    3,622,704
    
    
    
    2,160,280
    
    
    
    1,462,424
    
    
    
    68
    %Total operating expenses
    
    $
    7,438,317
    
    
    $
    5,760,680
    
    
    $
    1,677,637
    
    
    
    29
    %
 Research and Development Expenses
  General and Administrative Expenses
  Share-Based Compensation
  Other Income (Expenses)
  Net Loss
  23




---



##### Table of Contents



COMPARISON OF SIX MONTHS ENDED MARCH 31, 2010 AND 2009
 Revenues and Cost of Revenues
 Six months endedMarch 31,2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeRevenues:Revenue from royalties
    
    $
    2,479,428
    
    
    $
    2,452,451
    
    
    $
    26,977
    
    
    
    1
    %Revenues from license
agreements
    
    
    
    
    
    
    113,285
    
    
    
    (113,285
    )
    
    
    -100
    %Total revenues
    
    
    2,479,428
    
    
    
    2,565,736
    
    
    
    (86,308
    )
    
    
    -3
    %Costs:Cost of revenues
    
    
    
    
    
    
    9,746
    
    
    
    (9,746
    )
    
    
    -100
    %Gross profit
    
    $
    2,479,428
    
    
    $
    2,555,990
    
    
    $
    (76,562
    )
    
    
    -3
    %
 Revenues
   Cost of Revenues
  Six months endedMarch 31,2010
    
    
    2009
    
    
    $ Change
    
    
    % ChangeOPERATING EXPENSESResearch and development
    
    $
    7,262,503
    
    
    $
    8,325,314
    
    
    $
    (1,062,811
    )
    
    
    -13
    %General and administrative
    
    
    6,489,182
    
    
    
    4,474,592
    
    
    
    2,014,590
    
    
    
    45
    %Total operating expenses
    
    $
    13,751,685
    
    
    $
    12,799,906
    
    
    $
    951,779
    
    
    
    7
    %
 Research and Development Expenses
  General and Administrative Expenses
  24




---



##### Table of Contents



Share-Based Compensation
  Other Income (Expenses)
  Net Loss
  LIQUIDITY AND CAPITAL RESOURCES
   March 31,
    
    
    Decrease
    
    
    September 30,2010
    
    
    During Period
    
    
    2009Cash, cash equivalents and investment in securities
    
    $
    20,706,376
    
    
    $
    (11,248,111
    )
    
    $
    31,954,487Cash and cash equivalents
    
    $
    20,304,807
    
    
    $
    (11,181,205
    )
    
    $
    31,486,012Net working capital
    
    $
    15,231,958
    
    
    $
    (11,453,609
    )
    
    $
    26,685,567
 Six Months
    
    
    
    
    
    
    Six MonthsEnded
    
    
    Change
    
    
    EndedMarch 31,
    
    
    Between
    
    
    March 31,2010
    
    
    Periods
    
    
    2009Net cash used in operating activities
    
    $
    (11,187,869
    )
    
    $
    39,366
    
    
    $
    (11,227,235
    )Net cash provided by investing activities
    
    
    18,316
    
    
    
    (352,585
    )
    
    
    370,901Net cash used in financing activities
    
    
    (11,652
    )
    
    
    14,740
    
    
    
    (26,392
    )Net decrease in cash and cash equivalents
    
    $
    (11,181,205
    )
    
    $
    (298,479
    )
    
    $
    (10,882,726
    )
 25




---



##### Table of Contents



Operating activities.
 Investing activities.
 Financing activities.
    Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsOperating lease obligations (1)
    
    $
    3,825,882
    
    
    $
    1,558,743
    
    
    $
    2,267,139
    
    
    $
    
    
    
    $
    Purchase obligations (2)
    
    
    823,259
    
    
    
    823,259
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,649,141
    
    
    $
    2,382,002
    
    
    $
    2,267,139
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Operating lease obligations are exclusive of payments we expect to receive under subleases.(2)
    
    Purchase obligations consist of the total of trade accounts payable and trade related accrued
expenses at March 31, 2010, which approximates our contractual commitments for goods and
services in the normal course of our business. Zenvia License Milestone Payments.
 26




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Management Outlook
   
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest rate sensitivity
     27




---



##### Table of Contents



Item 4T. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Controls over Financial Reporting
  
 PART II OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
 Risks Relating to Our Business
 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.
   There can be no assurance that the FDA will approve Zenvia for PBA or any other indication.
  28




---



##### Table of Contents



The FDAs safety concerns regarding Zenvia 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 Zenvia for other indications is expected to use an alternative lower-dose quinidine
formulation, which may negatively affect efficacy.
  Our near-term prospects are dependent on Zenvia. If we are unable to successfully develop and
obtain regulatory approval for Zenvia for the treatment of patients with PBA, or if approved, to
commercialize Zenvia, our ability to generate significant revenue or achieve profitability will be
adversely affected.
  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 patient populations;
    

    physicians may be required to conduct tests prior to dispensing product or monitor patients taking Zenvia;
    

    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
    

    Zenvia may not be approved by the FDA for commercialization as the FDA may perceive that the benefit does
not outweigh the potential risk.
 29




---



##### Table of Contents



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 Zenvia effectively.
  
    
    recruit and retain adequate numbers of effective sales personnel;
    
    effectively train our sales personnel in the benefits of Zenvia;
    
    establish and maintain successful sales and marketing and education programs that
encourage physicians to recommend Zenvia to their patients; and
 
    
    manage geographically dispersed sales and marketing operations.
  We have limited capital resources and will need to raise additional funds to support our
operations.
   Any transactions that we may engage in to raise capital could dilute our stockholders and
diminish certain commercial prospects.
   30




---



##### Table of Contents



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 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
Zenvia patent portfolio.
  31




---



##### Table of Contents



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
    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 retaining members of management and other key personnel.
  32




---



##### Table of Contents



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.
   33




---



##### 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.
    34




---



##### Table of Contents



We face uncertainty related tohealthcare 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.
  35




---



##### Table of Contents



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.
  We expect to rely entirely on third parties for international registration, sales and
marketing efforts.
  36




---



##### Table of Contents



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;

    
    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.
   Because we do not expect to pay dividends in the foreseeable future, you must rely on stock
appreciation for any return on your investment.
  Our corporate governance documents, rights agreement and Delaware law may delay or prevent an
acquisition of us that stockholders may consider favorable, which could decrease the value of our
common stock.
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 5. OTHER INFORMATION
  37




---



##### Table of Contents



Item 6. EXHIBITS
 Exhibits10.1
    
    Amendment #1 to Manufacturing Services Agreement, dated as of January 19, 2010, by and
between the Company and Patheon Inc.10.2
    
    Quality Agreement, dated as of January 19, 2010, by and between the Company and Patheon 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.
    
    Confidential treatment has been granted with respect to portions of this exhibit pursuant to
an application requesting confidential treatment under Rule 24b-2 of the Securities Exchange
Act of 1934. A complete copy of this exhibit, including the redacted terms, has been
separately filed with the Securities and Exchange Commission.
 38




---



##### Table of Contents



SIGNATURES
  Signature
    
    Title
    
    Date/s/ Keith A. Katkin

Keith A. Katkin
    
    President and Chief Executive Officer

(Principal Executive Officer)
    
    May 3, 2010/s/ Christine G. Ocampo

Christine G. Ocampo
    
    Vice President, Finance
(Principal Financial Officer and
Principal Accounting Officer)
    
    May 3, 2010
 39