EXHIBIT10.39**EMPLOYMENT AGREEMENT**     This EMPLOYMENT AGREEMENT (“Agreement”), dated as of May 4, 2006 (the “EffectiveDate”), is made by and between AVANIR Pharmaceuticals, a California corporation (the“Company”), and Michael J. Puntoriero (“Employee”).AGREEMENT     1. Commencement Date. Employee’s employment with the Company, which initiallycommenced on May 1, 2006, shall commence under the terms of this Agreement on the Effective Date(the “Commencement Date”).     2. At-will Employment. Employee’s employment relationship with the Company(“Employment”) is at-will, terminable at any time and for any reason by either the Companyor Employee. While certain sections of this Agreement describe events that could occur at aparticular time in the future, nothing in this Agreement shall be construed as a guarantee ofemployment of any length.     3. Employment Duties.          (a) Title/Responsibilities. Employee shall serve as a Senior Vice President and asChief Financial Officer of the Company upon election by the Board of Directors (or at a defineddate specified by the Board). Employee shall perform all of the duties and responsibilities ofsuch offices set forth in the Bylaws of the Company and those commonly associated with such officesand such further duties and responsibilities as may from time to time be assigned to him by thePresident and Chief Executive Officer or the Board of Directors of the Company (the“Board”).          (b) Full-Time Attention. Employee shall devote his full time, attention, energy andskills to the Company during the period he is employed under this Agreement.          (c) Policy Compliance. Employee shall comply with all of the Company’s policies,practices and procedures, including the terms of the Confidentiality Agreement (defined below).     4. Compensation.          (a) Base Salary. The Company shall pay Employee a base salary of $25,000 per month(an annual rate of $300,000), or such higher amount as the Board may determine from time to time(“Base Salary”), payable in accordance with the Company’s regular payroll practices.          (b) Bonus Compensation. In addition to the Base Salary, Employee shall be eligiblefor the following bonus compensation:
 

 
               (i) Signing Bonus. Employee shall receive a signing bonus upon the Commencement Datein the amount of $40,000, but which amount shall be immediately repaid to the Company if, withinone year from the Commencement Date, Employee is terminated with Cause or resigns and suchresignation is not a “Resignation for Good Reason” (as defined in the Change of Control Agreement).               (ii) Annual Bonus. Employee shall receive an annual target bonus equal to 35% of thethen-current annual Base Salary, which bonus is payable in October 2006 (pro-rated for 2006 fromthe Commencement Date) and annually thereafter, provided that the actual bonus may be higher orlower than the target amount, depending on the Employee’s satisfaction of performance criteria(which may include Company overall performance criteria) established by the President and ChiefExecutive Officer and the Compensation Committee of the Board. Employee must be employed by theCompany when bonuses are distributed in order to be eligible to receive any portion of such bonus.          (c) Equity Compensation. Employee shall be granted the following equity awards asadditional compensation:               (i) Restricted Stock Award. On the Commencement Date, Employee shall be awarded theright to purchase 10,000 shares of Class A common stock (the “Restricted Shares”) at aprice of $0.001 per share. The Restricted Shares will be subject to a right of repurchase in favorof the Company. The Restricted Stock will vest, and the Company’s right of repurchase will lapse,with respect to one-third of the shares of Restricted Stock on the first anniversary of theCommencement Date and then with respect to one-twelfth of the shares quarterly thereafter so thatthe Restricted Stock will be fully vested upon the third anniversary of the Commencement Date.               (ii) Initial Option Grant. On the Commencement Date, Employee will receive aninducement option to purchase up to 100,000 shares of Class A common stock at an exercise priceequal to 100% of the fair market value of the underlying shares on the date of grant (the“Initial Option”). The Initial Option will have a ten-year term and will be subject to afour-year vesting schedule, vesting with respect to 25% of the underlying shares one year after thegrant and the with respect to the remaining shares in 12 equal installments on a quarterly basisthereafter. The Initial Option will be granted outside of the Company’s equity incentive plans,but will be subject in all material respects to the terms and conditions set forth in the Company’s2005 Equity Incentive Plan (the “Plan”) and the Company’s form of non-qualified stockoption agreement adopted for use under the Plan.               (iii) Annual Option Grant. Commencing in November 2006, Employee will be eligible toreceive an annual target option grant equal to the greater of 25,000 shares of Class A common stockor the amount set for other Senior Vice Presidents of the Company (“SVPs”) (the “AnnualOption”), with an exercise price equal to 100% of the fair market value of the underlyingshares on the date of grant, subject to a four-year vesting schedule, vesting with respect to 25%of the underlying shares one year after the grant and vesting with respect to the remaining sharesin 12 equal installments on a quarterly basis thereafter. Each Annual Option will be subject tothe terms and conditions of the Company’s equity incentive plans. The size of the option grantsshall be established by the Compensation Committee and may be larger or
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smaller than the target size, depending on the Employee’s satisfaction of performance criteria(which may include Company overall performance criteria) established by the President and ChiefExecutive Officer or Compensation Committee of the Board. The Annual Option granted in November2006 shall be prorated from the Commencement Date.               (iv) Award Adjustments. The foregoing share amounts and share purchase prices shallbe adjusted, as necessary, to give effect to: (A) any stock split, reverse stock split, stockdividend, recapitalization or similar transaction affecting the Company’s Class A common stock thatis effected after the Effective Date, or (B) any change in the aggregate compensation payable toexecutive officers of the Company, as determined by the Compensation Committee of the Board ofDirectors.          (d) Employee Benefits. Employee shall be entitled to participate in all employeebenefit plans, programs and arrangements maintained by the Company and made available to employeesgenerally, including, without limitation, retirement, profit sharing and savings plans and medical,disability, dental, life and accidental death and dismemberment insurance plans and vacation(“Benefit Plans”). The Employee’s participation in Benefit Plans shall be on the samebasis and terms as are applicable to other SVPs. Notwithstanding any contrary terms of theCompany’s Benefit Plans: (i) the Company shall, subject to the last sentence of this Section 4(d)and during the term of this Agreement, either provide Employee with term life insurance in theamount of $2.5 million or reimburse Employee for the premium costs of such a policy, and (ii)Employee shall be entitled to 5 weeks of vacation per year of service (subject to the Company’sapplicable vacation accrual limits), with the first 2 weeks to accrue immediately upon theCommencement Date and the remaining 3 weeks for the first year of service to accrue ratably over aperiod of one year from the Commencement Date. Notwithstanding clause (i) of this Section 4(d), ifthe Company subsequently agrees to provide Employee with death benefits substantially similar tothe benefits payable in connection with a termination without Cause (including cash severancepayments and treatment of equity awards), the Company shall thereafter only be required to maintainor reimburse Employee for a term life insurance policy in the amount of $1 million.          (e) Reimbursement of Expenses. During his Employment with the Company, Employee shallbe entitled to reimbursement for all reasonable and necessary business expenses incurred on behalfof the Company, including without limitation, travel and entertainment expenses, business suppliesand cellular phone expenses, in each case in accordance with the Company’s then-existing policiesand procedures.     5. Confidentiality Agreement. Employee shall, on the Commencement Date, execute anddeliver to the Company the Employee Confidentiality and Inventions Agreement (“ConfidentialityAgreement”) in the form attached hereto as Exhibit 1.     6. Non-Solicitation. During his Employment, and for a period of 12 months thereafter,whether for Employee’s own account or the account of any other person, Employee shall not solicit,directly or indirectly, any employee to leave his or her employment with the Company. For purposesof this Agreement, the phrase, “shall not solicit, directly or indirectly,” includes, withoutlimitation, that Employee shall not: (i) identify any Company employees to any third party aspotential candidates for employment, such as by disclosing the names,
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backgrounds, compensation or qualifications of any Company employees; (ii) personally orthrough any other person approach, recruit or otherwise solicit employees of Company to work forany other employer; or (iii) participate in any pre-employment interview with any person who wasemployed by the Company while Employee was employed by the Company whether under this Agreement orotherwise. It shall not be a violation of this Agreement for Employee to respond if any employeeor former employee of Company initiates contact with Employee for the purposes discussed in thisparagraph.     7. Agreement with Previous Employers. Employee represents and warrants to the Companythat he does not have any agreement (other than customary confidentiality agreements) with anyprevious employer that prevents him from performing his duties and responsibilities under thisAgreement or that in any way limits his performance hereunder.8. Voluntary Resignation or Termination for “Cause.”          (a) Payment upon Voluntary Resignation or Termination for Cause. If Employeevoluntarily resigns his Employment, and such resignation is not a “Resignation for Good Reason” (asdefined in the Change of Control Agreement), or if Employee is terminated for Cause (definedbelow), the Company shall pay Employee all accrued and unpaid Base Salary through the date oftermination and any vacation that is accrued but unused as of such date. Employee shall not beeligible for Severance Payments, as defined below, or any continuation of benefits (other thanthose provided for under the Federal Consolidated Omnibus Budget Reconciliation Act(“COBRA”)), or any other compensation pursuant to this Agreement or otherwise.          (b) Definition of “Cause.” As set forth above, the Employment relationship betweenthe parties is at-will, terminable at any time by either party for any reason or no reason. Thetermination may nonetheless be for “Cause.” For purposes of this Agreement,“Cause” means:               (i) Employee’s material breach of this Agreement or any confidentiality agreement between theCompany and Employee; or               (ii) Employee’s willful and intentional failure or refusal to comply with the Company’sEmployee Manual, the Company’s Code of Business Conduct and Ethics, or other policies or proceduresestablished by the Company; or               (iii) Employee’s willful and intentional appropriation (or attempted appropriation) of amaterial business opportunity of the Company, including attempting to secure or securing anypersonal profit in connection with any transaction entered into on behalf of the Company; or               (iv) Employee’s misappropriation (or attempted misappropriation) of any of the Company’s fundsor material property; or               (v) Employee’s conviction of, or the entering of a guilty plea or plea of no contest withrespect to a felony, the equivalent thereof, or any other crime with respect to which imprisonmentis a possible punishment; or
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               (vi) Employee’s willful and intentional misconduct or incompetence; or               (vii) Employee’s physical or mental Disability, as defined in Section 9 below, resulting inhis inability to perform the essential functions of his position, with reasonable accommodation; or               (viii) Employee’s death.     In each case, “Cause” shall be determined conclusively by the Board, acting in good faith.Notwithstanding the foregoing, no event described in Section 8(b)(i), (ii), (iii) and (vi) abovewill give rise to “Cause” unless it is communicated by the Company to Employee in writing andunless it is not corrected by the Employee in a manner that is reasonable satisfactory to Companywithin 30 days of the Employee’s receipt of such written notice.          (c) Termination Without Cause or Resignation for Good Reason. Subject to Section 10,if Employee: (i) is terminated without “Cause,” or (ii) resigns in a “Resignation for Good Reason,”(as defined in the Change of Control Agreement), then Employee shall be paid all accrued and unpaidBase Salary and any accrued but unused vacation through the date of termination. In addition, inexchange for Employee’s execution of a release of all claims against the Company and itssubsidiaries and affiliates effective as of the date of termination and in the form attached heretoas Exhibit 2:               (i) Employee shall be eligible to receive severance payments under this Agreement in an amountequal to 9 months Base Salary and an amount equal to the greater of (x) 26.25% of Base Salary or(y) 75% of the last bonus, if any, paid to Employee pursuant to Section 4(b)(ii) (the“Severance Payments”), payable on the earliest of (A) the date which is six (6) months anda day after Employee’s “separation from service” for any reason, other than death or becoming“disabled” (as such terms are used in Section 409A(a)(2) of the Code), (B) the date of Employee’sdeath or on which Employee becomes “disabled” (as such term is used in Section 409A(a)(2)(C) of theCode), (C) the effective date of a “change in the ownership or effective control” of the Company(as such term is used in Section 409A(a)(2)(A)(v) of the Code) or (D) the date such payments orbenefits are no longer deemed by the Code to be subject to penalty tax or interest. The provisionsof this paragraph shall only apply to the extent required to avoid Employee’s incurrence of anypenalty tax or interest under Section 409A of the Code or any regulations or Treasury guidancepromulgated thereunder. In addition, if any provision of this Agreement would cause Employee toincur any penalty tax or interest under Section 409A of the Code or any regulations or Treasuryguidance promulgated thereunder, the Company shall, upon the written request of Employee, reformsuch provision to maintain to the maximum extent practicable the original intent of the applicableprovision without violating the provisions of Section 409A of the Code and without creatingadditional cost for the Company; and               (ii) the Company’s right to repurchase the Restricted Shares under the Restricted StockAgreement shall lapse and Employee’s ownership of the Restricted Shares shall be fully vested.     9. Employee’s Disability or Death. Employee’s Employment shall terminateautomatically in the event of Employee’s death or “Disability.” In the event of Employee’s death
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or Disability, the Company shall pay Employee’s estate or Employee all accrued and unpaid BaseSalary through the date of death or Disability and any vacation that is accrued but unused as ofthe date of death or Disability. For purposes of this Agreement, “Disability” shall mean theEmployee’s failure or inability to perform his duties hereunder, for a period of not less than 90days within any 120-day period because of Employee’s incapacitation due to physical or mentalinjury, disability, or illness.     10. Change of Control Benefits.          (a) Severance Benefits. Employee will have the ability to participate in theCompany’s standard form of Change of Control Agreement, which will be substantially in the formattached hereto as Exhibit 5 (the “Change of Control Agreement”) once approved by theCompensation Committee of the Company’s Board of Directors. In the event of a “Change of ControlTermination,” as defined in the Change of Control Agreement, Employee shall be entitled to theseverance and other benefits set forth in the Change of Control Agreement (subject to theconditions set forth therein), provided, however, that in such case, the Employee will not also beentitled to severance benefits provided for under Section 8(c) of this Agreement.          (b) Change of Control Benefits. Pursuant to the terms and conditions of the Plan, theemployee’s equity grants (restricted stock and options) will become immediately vested upon theconsummation of a Change of Control.     11. Dispute Resolution Procedures. Except as expressly provided in this Agreement,Employee agrees that any dispute or controversy arising out of, relating to, or in connection withthis Agreement, or the interpretation, validity, construction, performance, breach, or terminationthereof shall be settled by arbitration, to the extent permitted by law, to be held in OrangeCounty, California in accordance with the National Rules for the Resolution of Employment Disputesthen in effect of the American Arbitration Association (the “Rules”) and in accordance withthe accompanying Mutual Arbitration Agreement attached hereto as Exhibit 3. Thearbitrator’s decision shall be final, conclusive and binding on the parties to the arbitrationpursuant to the Mutual Arbitration Agreement. Judgment may be entered on the decision of thearbitrator in any court having competent jurisdiction.     12. Notices. Any reports, notices or other communications required or permitted to begiven by either party hereto, shall be given in writing by personal delivery, overnight courierservice, or by registered or certified mail, postage prepaid, return receipt requested, addressedto each respective party at the address shown below or other current address:     If to AVANIR:Avanir Pharmaceuticals