10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended 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.

(Exact name of registrant as specified in its charter)

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
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

As of April 29, 2010, the registrant had 84,936,410 shares of common stock issued and outstanding.

Table of Contents

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets		3
Condensed Consolidated Statements of Operations		4
Condensed Consolidated Statements of Cash Flows		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3. Quantitative and Qualitative Disclosures about Market Risk		27
Item 4T. Controls and Procedures		28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		28
Item 1A. Risk Factors		28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3. Defaults Upon Senior Securities		37
Item 5. Other Information		37
Item 6. Exhibits		38
Signatures		39
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1

2

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

AVANIR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			September 30,
	2010			2009
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	20,304,807		$	31,486,012
Inventories		114,098			114,098
Prepaid expenses		404,861			397,100
Other current assets		957,771			331,717
Current portion of restricted investments in marketable securities		—			200,775
Total current assets		21,781,537			32,529,702
Restricted investments in marketable securities, net of current portion		401,569			267,700
Property and equipment, net		259,870			310,677
Non-current inventories		710,531			710,531
Other assets		356,933			249,462
TOTAL ASSETS	$	23,510,440		$	34,068,072
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,858,325		$	1,214,117
Accrued expenses and other liabilities		1,486,879			1,001,599
Accrued compensation and payroll taxes		804,526			1,345,859
Current portion of deferred revenues		2,399,849			2,282,560
Total current liabilities		6,549,579			5,844,135
Accrued expenses and other liabilities, net of current portion		494,019			652,395
Deferred revenues, net of current portion		6,436,341			7,629,807
Total liabilities		13,479,939			14,126,337
Commitments and contingencies
Stockholders’ 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			8,308
Additional paid-in capital		299,276,045			297,923,915
Accumulated deficit		(289,253,907	)		(277,990,488	)
Total stockholders’ equity		10,030,501			19,941,735
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	23,510,440		$	34,068,072

The accompanying notes to condensed consolidated financial statements are an integral part of this statement.

3

AVANIR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended March 31,						Six Months Ended March 31,
	2010			2009			2010			2009
Revenues from royalties	$	994,494		$	755,655		$	2,479,428		$	2,452,451
Revenues from license agreements		—			56,020			—			113,285
Total revenues		994,494			811,675			2,479,428			2,565,736
Cost of revenues		—			1,695			—			9,746
Gross profit		994,494			809,980			2,479,428			2,555,990
OPERATING EXPENSES
Research and development		3,815,613			3,600,400			7,262,503			8,325,314
General and administrative		3,622,704			2,160,280			6,489,182			4,474,592
Total operating expenses		7,438,317			5,760,680			13,751,685			12,799,906
Loss 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			180,846
Interest 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		—			—			—			3,200
Net 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

The accompanying notes to condensed consolidated financial statements are an integral part of this statement.

4

AVANIR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended March 31,
	2010			2009
OPERATING 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			144,625
Share-based compensation expense		1,363,837			828,238
Loss on disposal of assets		—			4,792
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(741,286	)		469,167
Accounts payable		644,208			472,588
Accrued 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			388,122
Purchase of property and equipment		(48,590	)		(19,171	)
Proceeds from disposal of assets		—			1,950
Net cash provided by investing activities		18,316			370,901
FINANCING 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			41,383,930
Cash and cash equivalents at the end of the period	$	20,304,807		$	30,501,204
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	—		$	516
Income taxes paid	$	3,200		$	4,963

The accompanying notes to condensed consolidated financial statements are an integral part of
this statement.

5

AVANIR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements of Avanir Pharmaceuticals, Inc. (“Avanir”, “we”, or the “Company”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting including the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. These condensed consolidated financial statements do not include all disclosures for annual audited financial statements required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) and should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2009. The Company believes these condensed consolidated financial statements reflect all adjustments (consisting only of normal, recurring adjustments) that are necessary for a fair presentation of the financial position and results of operations for the periods presented. Results of operations for the interim periods presented are not necessarily indicative of results to be expected for the year.

     The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosures of commitments and contingencies in the financial statements and accompanying notes. Actual results could differ from those estimates.

2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

     Avanir is a pharmaceutical company focused on acquiring, developing and commercializing novel therapeutic products for the treatment of central nervous system disorders. The Company’s lead product candidate, Zenvia™ (dextromethorphan hydrobromide/quinidine sulfate), has successfully completed three Phase III clinical trials for the treatment of pseudobulbar affect (“PBA”) and has successfully completed a Phase III trial for the treatment of patients with diabetic peripheral neuropathic pain (“DPN pain”). In addition to the Company’s focus on products for the central nervous system, the Company also has partnered programs in other therapeutic areas which may generate future income. The Company’s first commercialized product, docosanol 10% cream, (sold in the United States and Canada as Abreva^® by its marketing partner GlaxoSmithKline Consumer Healthcare) is the only over-the-counter treatment for cold sores that has been approved by the U.S. Food and Drug Administration (“FDA”). In 2008, the Company out-licensed its monoclonal antibody programs and remains eligible to receive milestone payments and royalties related to the sale of these assets. Avanir was incorporated in California in August 1988 and was reincorporated in Delaware in March 2009.

     The Company’s operations are subject to certain risks and uncertainties frequently encountered by companies in the early stages of operations, particularly in the evolving market for small biotech and specialty pharmaceuticals companies. Such risks and uncertainties include, but are not limited to, timing and uncertainty of achieving milestones in clinical trials and in obtaining approvals by the FDA and regulatory agencies in other countries.The Company’s ability to generate revenues in the future will depend on license arrangements, the timing and success of reaching development milestones, and obtaining regulatory approvals and ultimately market acceptance of Zenvia for the treatment of PBA, assuming the FDA approves the Company’s new drug application. The Company’s operating expenses depend substantially on the level of expenditures for clinical development and regulatory activities for Zenvia for the treatment of PBA, expenditures resulting from commercial readiness activities, and the rate of progress being made on such activities.

6

Significant Accounting Policies

     The following represents an update for the six months ended March 31, 2010 to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

Concentrations

     As of March 31, 2010, approximately $19.6 million of the Company’s cash and cash equivalents were maintained in six separate money market mutual funds, and approximately $739,000 of the Company’s cash and cash equivalents were maintained at two major financial institutions in the United States. At times, deposits held with the financial institution may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation (“FDIC”), which provides deposit coverage with limits up to $250,000 per owner through January 1, 2014. At March 31, 2010, such uninsured deposits totaled approximately $19.8 million. Generally, these deposits may be redeemed upon demand and, therefore, are believed to bear minimal risk.

     Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents. The Company’s cash and cash equivalents are placed in various money market mutual funds and at financial institutions of high credit standing.

     The Company performs ongoing credit evaluations of its customers’ financial condition and would limit the amount of credit extended if necessary; however the Company has usually required no collateral.

Fair value of financial instruments

     At March 31, 2010 and September 30, 2009, the Company’s financial instruments included cash and cash equivalents, restricted investments in marketable securities, accounts payable, accrued expenses and other liabilities, and accrued compensation and payroll taxes. The carrying amount of cash and cash equivalents, accounts payable, accrued expenses and other liabilities, and accrued compensation and payroll taxes approximates fair value due to the short-term maturities of these instruments. The Company’s short-term and long-term restricted investments in marketable securities are valued at quoted prices or other inputs that are observable or can be corroborated by observable market data generated by market transactions involving similar assets.

Revenue Recognition

     The Company has historically generated revenues from product sales, collaborative research and development arrangements, and other commercial arrangements such as royalties, the sale of royalty rights and sales of technology rights. Payments received under such arrangements may include non-refundable fees at the inception of the arrangements, milestone payments for specific achievements designated in the agreements, royalties on sales of products resulting from collaborative arrangements, and payments for the sale of rights to future royalties.

     The Company recognizes revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the Company’s price to the buyer is fixed and determinable; and (4) collectability is reasonably assured. Certain product sales are subject to rights of return. For products sold where the buyer has the right to return the product, the Company recognizes revenue at the time of sale only if (1) the Company’s price to the buyer is substantially fixed or determinable at the date of sale, (2) the buyer has paid the Company, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product, (3) the buyer’s obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product, (4) the buyer acquiring the product for resale has economic substance apart from that provided by the seller, (5) the Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (6) the amount of future returns can be reasonably estimated. The Company recognizes such product revenues when either it has met all the above criteria, including the ability to reasonably estimate future returns, when it can reasonably estimate that the return privilege has substantially expired, or when the return privilege has substantially expired, whichever occurs first.

7

     Product Sales — Active Pharmaceutical Ingredient docosanol (“docosanol”). Revenue from sales of the Company’s docosanol is recorded when title and risk of loss have passed to the buyer and provided the criteria for revenue recognition are met. The Company sells the docosanol to various licensees upon receipt of a written order for the materials. Shipments generally occur fewer than three times a year. The Company’s contracts for sales of the docosanol include buyer acceptance provisions that give the Company’s buyers the right of replacement if the delivered product does not meet specified criteria. That right requires that they give the Company notice within 30 days after receipt of the product. The Company has the option to refund or replace any such defective materials; however, it has historically demonstrated that the materials shipped from the same pre-inspected lot have consistently met the specified criteria and no buyer has rejected any of the Company’s shipments from the same pre-inspected lot to date. Therefore, the Company recognizes revenue at the time of delivery without providing any returns reserve.

     Multiple Element Arrangements. The Company has arrangements whereby it delivers to the customer multiple elements including technology and/or services. Such arrangements have generally included some combination of the following: antibody generation services; licensed rights to technology, patented products, compounds, data and other intellectual property; and research and development services. The Company analyzes its multiple element arrangements to determine whether the elements can be separated. The Company performs its analysis at the inception of the arrangement and as each product or service is delivered. If a product or service is not separable, the combined deliverables will be accounted for as a single unit of accounting.

     A delivered element can be separated from other elements when it meets all of the following criteria: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item; and (3) if the arrangement includes a general right of return relative to the delivered item, delivery, or performance of the undelivered item is considered probable and substantially in the Company’s control. If an element can be separated the Company allocates amounts based upon the relative fair values of each element. The Company determines the fair value of a separate deliverable using the price it charges other customers when it sells that product or service separately; however, if the Company does not sell the product or service separately, it uses third-party evidence of fair value. The Company considers licensed rights or technology to have standalone value to its customers if it or others have sold such rights or technology separately or its customers can sell such rights or technology separately without the need for the Company’s continuing involvement.

     License Agreements. License arrangements may consist of non-refundable upfront license fees, data transfer fees, research reimbursement payments, exclusive licensed rights to patented or patent pending compounds, technology access fees, various performance or sales milestones. These arrangements are often multiple element arrangements.

     Non-refundable, up-front fees that are not contingent on any future performance by the Company, and require no consequential continuing involvement on its part, are recognized as revenue when the license term commences and the licensed data, technology and/or compound is delivered. Such deliverables may include physical quantities of compounds, design of the compounds and structure-activity relationships, the conceptual framework and mechanism of action, and rights to the patents or patents pending for such compounds. The Company defers recognition of non-refundable upfront fees if it has continuing performance obligations without which the technology, right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee that is separate and independent of the Company’s performance under the other elements of the arrangement. In addition, if the Company has required continuing involvement through research and development services that are related to its proprietary know-how and expertise of the delivered technology, or can only be performed by the Company, then such up-front fees are deferred and recognized over the period of continuing involvement.

     Payments related to substantive, performance-based milestones in a research and development arrangement are recognized as revenues upon the achievement of the milestones as specified in the underlying agreements when they represent the culmination of the earnings process.

     Royalty Arrangements. The Company recognizes royalty revenues from licensed products when earned in accordance with the terms of the license agreements. Net sales amounts generally required to be used for calculating royalties include deductions for returned product, pricing allowances, cash discounts, freight and warehousing. These arrangements are often multiple element arrangements.

8

     Certain royalty arrangements require that royalties are earned only if a sales threshold is exceeded. Under these types of arrangements, the threshold is typically based on annual sales. For royalty revenue generated from the license agreement with GlaxoSmithKline, the Company recognizes royalty revenue in the period in which the threshold is exceeded. For royalty revenue generated from the license agreement with Azur Pharma, the Company recognizes revenue when it has confirmed that the threshold has been exceeded.

     When the Company sells its rights to future royalties under license agreements and also maintains continuing involvement in earning such royalties, it defers recognition of any upfront payments and recognizes them as revenues over the life of the license agreement. The Company recognizes revenues for the sale of an undivided interest of its Abreva® license agreement to Drug Royalty USA under the “units-of-revenue method.” Under this method, the amount of deferred revenues to be recognized in each period is calculated by multiplying the ratio of the royalty payments due to Drug Royalty USA by GlaxoSmithKline for the period to the total remaining royalties the Company expects GlaxoSmithKline will pay Drug Royalty USA over the remaining term of the agreement by the unamortized deferred revenues.

Cost of Revenues

     Cost of revenues includes direct and indirect costs to manufacture product sold, including the write-off of obsolete inventory, and to provide research and development services.

Recognition of Expenses in Outsourced Contracts

     Pursuant to management’s assessment of the services that have been performed on clinical trials and other contracts, the Company recognizes expenses as the services are provided. Such management assessments include, but are not limited to: (1) an evaluation by the project manager of the work that has been completed during the period, (2) measurement of progress prepared internally and/or provided by the third-party service provider, (3) analyses of data that justify the progress, and (4) management’s judgment. Several of the Company’s contracts, including subsequent amendments, extend across multiple reporting periods.

Share-Based Compensation

     The Company grants options, restricted stock units and restricted stock awards to purchase its common stock to its employees, directors and consultants under its stock option plans. The benefits provided under these plans are share-based payments that the Company accounts for using the fair value method.

     The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option pricing model (“Black-Scholes model”) that uses assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Expected volatilities are based on historical volatility of the Company’s common stock and other factors. The expected terms of options granted are based on analyses of historical employee termination rates and option exercises. The risk-free interest rates are based on the U.S. Treasury yield in effect at the time of the grant. Since the Company does not expect to pay dividends on its common stock in the foreseeable future, the Company estimated the dividend yield to be 0%.

     Share-based compensation expense recognized during a period is based on the value of the portion of share-based payment awards that is ultimately expected to vest amortized under the straight-line attribution method. As share-based compensation expense recognized in the consolidated statements of operations for periods in fiscal 2010 and 2009 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The fair value method requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on its historical experience.

9

     Total compensation expense related to all of the Company’s share-based awards for the three and six month periods ended March 31, 2010 and 2009 was comprised of the following:

	For the three months ended				For the six months ended
	March 31,				March 31,
	2010		2009		2010		2009
Share-based compensation classified as:
General and administrative expense	$	518,696	$	356,457	$	1,035,608	$	662,456
Research and development expense		146,069		85,647		328,229		165,782
Total	$	664,765	$	442,104	$	1,363,837	$	828,238

	For the three months ended				For the six months ended
	March 31,				March 31,
	2010		2009		2010		2009
Share-based compensation expense from:
Stock options	$	336,283	$	194,519	$	575,233	$	373,308
Restricted stock units		328,482		247,585		788,604		454,930
Total	$	664,765	$	442,104	$	1,363,837	$	828,238

     Since the Company has a net operating loss carryforward as of March 31, 2010, no excess tax benefits for the tax deductions related to share-based awards were recognized in the condensed consolidated statements of operations. Additionally, no incremental tax benefits were recognized from stock options exercised in the three and six month periods ended March 31, 2010 and 2009 that would have resulted in a reclassification to reduce net cash used in operating activities with an offsetting increase in net cash used in financing activities. (See Note 10, “Employee Equity Incentive Plans.”)

Income Taxes

     The Company accounts for income taxes and the related accounts under the liability method. Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the income tax bases of assets and liabilities. A valuation allowance is applied against any net deferred tax asset if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

     The Company recognizes any uncertain income tax positions on the income tax returns at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

     The total amount of unrecognized tax benefits as of the date of adoption was approximately $3.0 million. At March 31, 2010, the total unrecognized tax benefit resulting in a decrease in deferred tax assets and corresponding decrease in the valuation allowance is approximately $3.3 million. There are no unrecognized tax benefits included in the consolidated balance sheet that would, if recognized, affect the effective tax rate.

     The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had $0 accrued for interest and penalties on the Company’s condensed consolidated balance sheets at March 31, 2010 and September 30, 2009.

     The Company is subject to taxation in the U.S. and various state jurisdictions. The Company’s tax years for 1992 and forward are subject to examination by the U.S. and California tax authorities due to the carryforward of unutilized net operating losses and research and development credits.

     The Company does not foresee material changes to its gross uncertain income tax liability within the next twelve months.

10

Recent Authoritative Guidance

     Milestone Method of Revenue Recognition. In March 2010, the Financial Accounting Standard Board (“FASB”) ratified a consensus of the Emerging Issues Task Force related to the milestone method of revenue recognition. The consensus will codify a method of revenue recognition that has been common practice. Under this method, contingent consideration from research and development activities that is earned upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. This guidance is effective for annual periods beginning on or after June 15, 2010 but may be early adopted as of the beginning of an annual period. The Company is currently evaluating the effect that this guidance will have on its consolidated financial position, results of operations and cash flows.

     Multiple-Deliverable Revenue Arrangements. In September 2009, the FASB issued authoritative guidance regarding multiple-deliverable revenue arrangements. This guidance addresses how to measure and allocate consideration to one or more units of accounting. Specifically, the guidance requires that consideration be allocated among multiple deliverables based on relative selling prices. The guidance establishes a selling price hierarchy of (1) vendor-specific objective evidence, (2) third-party evidence and (3) estimated selling price. This guidance is effective for annual periods beginning on or after June 15, 2010 but may be early adopted as of the beginning of an annual period. The Company is currently evaluating the effect that this guidance will have on its consolidated financial position, results of operations and cash flows.

     Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock. In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or an embedded feature) is indexed to an entity’s own stock. This guidance provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. The Company adopted this guidance effective October 1, 2009. The adoption of this guidance did not have a material impact on its consolidated financial position, results of operations and cash flows.

     Noncontrolling Interests in Consolidated Financial Statements. In December 2007, the FASB issued authoritative guidance on noncontrolling interests in consolidated financial statements, which is intended to improve the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing certain required accounting and reporting standards. This guidance is effective for fiscal years beginning on or after December 15, 2008. The Company adopted this guidance effective October 1, 2009. The adoption of this guidance did not have a material impact on its consolidated financial position, results of operations and cash flows.

     Fair Value Measurements. In September 2006, the FASB issued authoritative guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance was effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB delayed the effective date of this guidance for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those years. The Company adopted certain provisions of this guidance effective October 1, 2008 and the delayed provisions of this guidance effective October 1, 2009. The adoption of this guidance did not have a material impact on its consolidated financial position, results of operations and cash flows.

11

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Company measures the fair value of certain of its financial assets on a recurring basis. A fair value hierarchy is used to rank the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

• 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.

     As of March 31, 2010, the Company’s cash equivalents held in money market mutual funds of approximately $19.6 million are all valued using quoted prices generated by market transactions involving identical assets, or Level 1, as defined by the fair value hierarchy noted above. The Company’s restricted investments in marketable securities are all valued using quoted prices or other inputs that are observable or can be corroborated by observable market data generated by market transactions involving similar assets, or Level 2, as defined by the fair value hierarchy noted above.

4. RESTRICTED INVESTMENTS IN MARKETABLE SECURITIES

     Restricted investments in marketable securities at March 31, 2010 and September 30, 2009 consist of certificates of deposits, which are classified as held-to-maturity. At March 31, 2010 and September 30, 2009, the fair value of these investments approximated their cost basis. At March 31, 2010, restricted investments in marketable securities totaling approximately $402,000 are recorded as non-current assets in the condensed consolidated balance sheet. These investments will mature throughout 2011 and 2013. At September 30, 2009, restricted investments in marketable securities totaling approximately $201,000 and $268,000 were recorded as current and non-current assets, respectively, in the consolidated balance sheet.

5. INVENTORIES

     Inventories relate to the active pharmaceutical ingredient docosanol and the active pharmaceutical ingredients of Zenvia, dextromethorphan and quinidine.

     The composition of inventories is as follows:

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

     The amount classified as non-current inventories is comprised of docosanol and the raw material components for Zenvia, dextromethorphan and quinidine, which will be used in the manufacture of Zenvia capsules in the future.

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6. ACCRUED EXPENSES AND OTHER LIABILITIES

     Accrued expenses and other liabilities are as follows:

	March 31,			September 30,
	2010			2009
Accrued research and development expenses	$	820,008		$	372,494
Accrued sales and marketing expenses		199,187			—
Accrued general and administrative expenses		157,835			270,401
Deferred rent		17,303			19,516
Lease restructuring liability (1)		786,565			991,583
Total accrued expenses and other liabilities		1,980,898			1,653,994
Less: 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.

     The following table presents the restructuring activities in fiscal 2010:

	Balance at						Balance at
	September 30,			Payments/			March 31,
	2009			Reductions			2010
Accrued Restructuring
Total lease restructuring liability	$	991,583		$	(205,018	)	$	786,565
Less current portion		(358,704	)					(309,849	)
Non-current portion	$	632,879					$	476,716

7. DEFERRED REVENUES

     The following table sets forth as of March 31, 2010 the deferred revenue balances for the Company’s sale of future Abreva® royalty rights to Drug Royalty USA:

	Total
Net deferred revenues as of October 1, 2009	$	9,912,367
Changes during the period:
Recognized as revenues during period		(1,076,177	)
Net deferred revenues as of March 31, 2010	$	8,836,190
Classified and reported as:
Current portion of deferred revenues	$	2,399,849
Deferred revenues, net of current portion		6,436,341
Total deferred revenues	$	8,836,190

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8. COMPUTATION OF NET LOSS PER COMMON SHARE

     Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period, excluding restricted stock that has been issued but is not yet vested. Diluted net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period plus additional weighted average common equivalent shares outstanding during the period. Common equivalent shares result from the assumed exercise of outstanding stock options and warrants (the proceeds of which are then presumed to have been used to repurchase outstanding stock using the treasury stock method) and the vesting of restricted shares of common stock. In loss periods, certain of the common equivalent shares have been excluded from the computation of diluted net loss per share, because their effect would have been anti-dilutive.

     For the six-month periods ended March 31, 2010 and 2009, the following options and warrants to purchase shares of common stock and restricted stock units were excluded from the computation of diluted net loss per share, as the inclusion of such shares would be anti-dilutive:

	2010		2009
Stock options		5,882,458		4,236,296
Stock warrants		12,240,437		12,509,742
Restricted 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

     On July 30, 2009, the Company entered into a Controlled Equity Offering Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”), providing for the sale of up to 12,500,000 shares of common stock from time to time into the open market at prevailing prices. Pursuant to the Sales Agreement, sales of common stock will be made in such quantities and on such minimum price terms as the Company may set from time to time. During the six month period ended March 31, 2010, the Company issued 85,600 shares of common stock under the Sales Agreement raising proceeds of approximately $183,000, net of offering costs, including commissions. As of March 31, 2010, a total of 4,698,950 shares of common stock have been issued under the Sales Agreement at an average price of $2.34 per share raising gross proceeds of approximately $11.0 million ($10.4 million, net of offering costs, including commissions). No shares have been sold under this facility since October 2009.

     During the six month period ended March 31, 2010, the Company issued 562,577 shares of common stock in connection with the vesting of restricted stock units. During the six months ended March 31, 2010, 288,780 shares of restricted stock units awarded to directors were deferred and restricted until the directors resign. In connection with the vesting, two officers and three employees elected to pay for minimum required withholding taxes associated with the vesting of restricted stock by surrendering 100,329 shares of common stock at an average market price of $1.97 per share. No shares have been sold under this facility since October 2009.

     As of March 31, 2010, warrants to purchase 12,240,437 shares of the Company’s common stock at a weighted-average exercise price per share of $1.43 remained outstanding, all of which are exercisable.

10. EMPLOYEE EQUITY INCENTIVE PLANS

     The Company currently has five equity incentive plans under which awards are outstanding (the “Plans”), two of which are currently in active use as described below. The Plans are: the 2005 Equity Incentive Plan (the “2005 Plan”), the 2003 Equity Incentive Plan (the “2003 Plan”), the 2000 Stock Option Plan (the “2000 Plan”), the 1998 Stock Option Plan (the “1998 Plan”) and the 1994 Stock Option Plan (the “1994 Plan”), which are described in the Company’s Annual Report on Form 10-K for the year ended September 30, 2009. All of the Plans were approved by the stockholders, except for the 2003 Equity Incentive Plan, which was approved solely by the Board of Directors. Share-based awards are subject to terms and conditions established by the Compensation Committee of the

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Company’s Board of Directors. The Company’s policy is to issue new common shares upon the exercise of stock options, conversion of share units/RSUs or purchase of restricted stock.

     During the six month periods ended March 31, 2010 and 2009, the Company granted share-based awards under the 2003 Plan. Under the 2003 Plan and 2005 Plan, options to purchase shares, restricted stock units, restricted stock and other share-based awards may be granted to the Company’s directors, employees and consultants. Under the Plans, as of March 31, 2010, the Company had an aggregate of 15,188,173 shares of its common stock reserved for future issuance. Of those shares, 8,265,315 were subject to outstanding options and other awards and 6,922,858 shares were available for future grants of share-based awards. As of March 31, 2010, 120,000 restricted stock units were outstanding to consultants. The Company may also, from time to time, issue share-based awards outside of the Plans to the extent permitted by NASDAQ rules. As of March 31, 2010, there were no options to purchase shares of the Company’s common stock that were issued outside of the Plans (inducement option grants) outstanding. None of the share-based awards are classified as a liability as of March 31, 2010.

     Stock Options. Stock options are granted with an exercise price equal to the current market price of the Company’s common stock at the grant date and have 10-year contractual terms. For option grants to employees in general, 25% of the option shares vest and become exercisable on the first anniversary of the grant date and the remaining 75% of the option shares vest and become exercisable quarterly in equal installments thereafter over three years; for option grants to non-employee directors, one-third of the option shares vest and become exercisable on the first anniversary of the grant date and the remaining two-thirds of the option shares vest and become exercisable daily or quarterly in equal installments thereafter over two years; and for certain option grants to non-employee directors, options have been granted as fully vested and exercisable at the date of grant. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans). During fiscal 2008, the Company granted performance stock options to purchase 2,048,000 shares of common stock from the 2003 Equity Incentive Plan at a grant price of $0.88 per share. The grant price represents the market price of the Company’s common stock on the date of grant. During fiscal 2009, the performance criteria related to 2,031,218 shares of performance stock options granted in fiscal 2008 were met and vesting began. The performance stock options are included in the equity compensation tables below.

     Summaries of stock options outstanding and changes during the six-month period ended March 31, 2010 are presented below.

						Weighted Average
				Weighted Average		Remaining		Aggregate
	Number			Exercise Price per		Contractual Term		Intrinsic
	of Shares			Share		(In Years)		Value
Outstanding, October 1, 2009		4,217,156		$	1.55
Granted		1,671,950		$	1.75
Exercised		(4,148	)	$	0.72
Forfeited		(2,500	)	$	11.62
Outstanding, March 31, 2010		5,882,458		$	1.60		8.6	$	6,894,832
Vested and expected to vest in the future, March 31, 2010		5,038,339		$	1.67		8.5	$	5,938,065
Exercisable, March 31, 2010		1,421,861		$	2.95		7.7	$	1,728,621

     The weighted average grant-date fair value of options granted during the six-month periods ended March 31, 2010 and 2009 was $1.40 and $0.40 per share, respectively. The total intrinsic value of options exercised during the six months ended March 31, 2010 was approximately $6,000 based on the differences in market prices on the dates of exercise and the option exercise prices. There were no options exercised in the six month period ended March 31, 2009. As of March 31, 2010, the total unrecognized compensation cost related to unvested options was approximately $3,650,000 which is expected to be recognized over the weighted-average period of 3.1 years, based on the vesting schedules.

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     The fair value of each option award is estimated on the date of grant using the Black-Scholes model, which uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s common stock and other factors. The expected term of options granted is based on analyses of historical employee termination rates and option exercises. The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant.

     Assumptions used in the Black-Scholes model for options granted during the six-month period ended March 31, 2010 were as follows:

Expected volatility	105	%
Expected term in years	5.6
Risk-fee interest rate (zero coupon U.S. Treasury Note)	2.5	%
Expected dividend yield	0	%

     The following table summarizes information concerning outstanding and exercisable stock options as of March 31, 2010:

	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
	Number		Contractual		Exercise		Number		Exercise
Range 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	$	12.73
		5,882,458		8.6	$	1.60		1,421,861	$	2.95

     Restricted stock units (“RSU”). RSUs granted to employees generally vest based on three years of continuous service. RSUs granted to non-employee directors generally vest over the term of one year from the grant date and are not released until the awardee’s termination of service. The following table summarizes the RSU activities for the six-months ended March 31, 2010:

				Weighted Average
				Grant Date
	Number of Shares			Fair Value
Unvested, October 1, 2009		1,812,986		$	1.83
Granted		480,000		$	2.00
Vested		(851,357	)	$	1.28
Forfeited		(40,000	)	$	2.08
Unvested, March 31, 2010.		1,401,629		$	2.21

     The grant-date fair value of RSUs granted during the six month period ended March 31, 2010 was approximately $960,000. As of March 31, 2010, the total unrecognized compensation cost related to unvested shares was approximately $1,078,000 which is expected to be recognized over a weighted-average period of 0.7 years, based on the vesting schedules. The Company received no cash from restricted stock awards under all share-based payment arrangements during the six-month periods ended March 31, 2010 and 2009. No tax benefit was realized for the tax deductions from option exercise of the share-based payment arrangements in the six month periods ended March 31, 2010 and 2009.

     At March 31, 2010, there were 981,228 shares of restricted stock with a weighted-average grant date fair value of $1.55 per share awarded to directors that have vested but are still restricted until the directors resign.

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     During the six-month period ended March 31, 2010, the Company awarded 120,000 shares of restricted stock units to a non-employee. The grant date fair value of this award was $2.08 per share and it is exercisable at a purchase price of $0.0001 per share. The restricted stock units vest on the earlier of October 15, 2011 or the completion of a performance target, and it is re-measured at each balance sheet date until vested. There were no restricted stock units granted during the six-month period ended March 31, 2009.

     In November 2009, the Company’s compensation committee approved a modification to the vesting schedule of RSUs originally granted on December 4, 2007 (“Modified Awards”). The Modified Awards originally were to vest 50% upon the earlier of the completion of a Company milestone or December 4, 2010, and the remaining 50% on December 4, 2010. The awards’ vesting was modified to vest equally over two specified dates, March 15, 2010 and December 4, 2010. The Modified Awards are for an aggregate of 480,785 RSUs held by eight employees, including officers. The modification did not change the probability of vesting and did not result in any incremental share-based compensation. At the date of modification, no RSUs were vested and the remaining unamortized share-based compensation expense will be amortized over the remaining vesting periods of the Modified Awards.

     During the six-month period ended March 31, 2010, the Company awarded performance-based RSUs (“Performance RSUs”) to purchase up to 120,000 shares of the Company’s common stock. The grant date fair value of this award was $2.08 per share and it is exercisable at a price of $0.0001 per share. The RSU has a performance goal that determines when vesting begins and the actual number of shares to be awarded up to 120,000 shares. For every quarter that the performance goal is not achieved, 20,000 RSU shares are forfeited. For the six months ended March 31, 2010, 40,000 Performance RSU shares were forfeited. Vesting is over 3.75 years beginning on the date the performance goal is achieved (“Achievement Date”), with 6.25% vesting on the Achievement Date and 6.25% quarterly from the Achievement Date for the following fifteen quarters. At March 31, 2010, the performance goal has not been achieved. As of March 31, 2010, the total unrecognized compensation cost related to the unvested performance RSU was approximately $166,000, which is expected to be recognized over the weighted-average period of 4.2 years, based on the vesting schedules and Company estimates regarding the likelihood of meeting the performance criterion.

11. COMMITMENTS AND CONTINGENCIES

     Center for Neurologic Study (“CNS”) — The Company holds the exclusive worldwide marketing rights to Zenvia for certain indications pursuant to an exclusive license agreement with CNS. The Company will be obligated to pay CNS up to $400,000 in the aggregate in milestones to continue to develop Zenvia for both PBA and DPN pain, assuming they are both approved for marketing by the FDA. The Company is not currently developing, nor does it have an obligation to develop, any other indications under the CNS license agreement. In fiscal 2005, the Company paid $75,000 to CNS under the CNS license agreement, and will need to pay an additional $75,000 milestone if the FDA approves Zenvia for the treatment of PBA. In addition, the Company is obligated to pay CNS a royalty on commercial sales of Zenvia with respect to each indication, if and when the drug is approved by the FDA for commercialization. Under certain circumstances, the Company may have the obligation to pay CNS a portion of net revenues received if it sublicenses Zenvia to a third party. Under the agreement with CNS, the Company is required to make payments on achievements of up to a maximum of ten milestones, based upon five specific medical indications. Maximum payments for these milestone payments could total approximately $1.1 million if the Company pursued the development of Zenvia for all of the licensed indications. Of the clinical indications that the Company currently plans to pursue, expected milestone payments could total $800,000. In general, individual milestones range from $150,000 to $250,000 for each accepted new drug application (“NDA”) and a similar amount for each approved NDA. In addition, the Company is obligated to pay CNS a royalty ranging from approximately 5% to 8% of net revenues.

     Contingencies — In the ordinary course of business, the Company may face various claims brought by third parties and it may, from time to time, make claims or take legal actions to assert the Company’s rights, including intellectual property rights as well as claims relating to employment and the safety or efficacy of its products. Any of these claims could subject the Company to costly litigation and, while the Company generally believes that it has adequate insurance to cover many different types of liabilities, the Company’s insurance carriers may deny coverage or the Company’s policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on the Company’s operations, cash

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flows and financial position. Additionally, any such claims, whether or not successful, could damage the Company’s reputation and business. Management believes the outcomes of currently pending claims and lawsuits are not likely to have a material effect on the Company’s operations or financial position.

     In addition, it is possible that the Company could incur termination fees and penalties if it elected to terminate contracts with certain vendors, including clinical research organizations.

     Guarantees and Indemnities — The Company indemnifies its directors and officers to the maximum extent permitted under the laws of the State of Delaware, and various lessors in connection with facility leases for certain claims arising from such facilities or leases. Additionally, the Company periodically enters into contracts that contain indemnification obligations, including contracts for the purchase and sale of assets, clinical trials, pre-clinical development work and securities offerings. These indemnification obligations provide the contracting parties with the contractual right to have Avanir pay for the costs associated with the defense and settlement of claims, typically in circumstances where Avanir has failed to meet its contractual performance obligations in some fashion.

     The maximum amount of potential future payments under such indemnifications is not determinable. The Company has not incurred significant costs related to these guarantees and indemnifications, and no liability has been recorded in the condensed consolidated financial statements for guarantees and indemnifications as of March 31, 2010.

12. SEGMENT INFORMATION

     The Company operates its business on the basis of a single reportable segment, which is the business of discovery, development and commercialization of novel therapeutics for chronic diseases. The Company’s chief operating decision-maker is the Chief Executive Officer, who evaluates the Company as a single operating segment.

     The Company categorizes revenues by geographic area based on selling location. All the Company’s operations are currently located in the United States; therefore, total revenues for the six-month periods ended March 31, 2010 and 2009 are attributed to the United States. All long-lived assets at March 31, 2010 and September 30, 2009 are located in the United States.

     For the three-month periods ended March 31, 2010 and 2009, the revenues from prior sale of rights to royalties under the GlaxoSmithKline (“GSK”) license agreement were 48% and 47% of total net revenues, respectively. For the three-month periods ended March 31, 2010 and 2009, royalty revenues from Azur Pharma were 52% and 46% of total net revenues, respectively.

     For the six-month periods ended March 31, 2010 and 2009, the revenues from prior sale of rights to royalties under the GlaxoSmithKline (“GSK”) license agreement were 79% and 80% of total net revenues, respectively. For the six-month periods ended March 31, 2010 and 2009, royalty revenues from Azur Pharma were 21% and 15% of total net revenues, respectively.

     As of March 31, 2010, a royalty receivable of approximately $886,000 related to the GSK license agreement was recorded in other current assets.

13. SUBSEQUENT EVENTS

     The Company has evaluated subsequent events through the filing date of this Form 10-Q, and determined that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto other than as noted below or discussed in the accompanying notes.

     From April 1, 2010 through April 29, 2010, 300,232 shares of common stock were issued pursuant to the vesting of restricted stock units.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This Quarterly Report on Form 10-Q contains forward-looking statements concerning future events and performance of the Company. When used in this report, the words “intend,” “estimate,” “anticipate,” “believe,” “plan” or “expect” and similar expressions are included to identify forward-looking statements. These forward-looking statements are based on our current expectations and assumptions and many factors could cause our actual results to differ materially from those indicated in these forward-looking statements. You should review carefully the factors identified in this report in Part II, Item 1A. “Risk Factors” and in our most recent Annual Report on Form 10-K filed with the SEC. We disclaim any intent to update or announce revisions to any forward-looking statements to reflect actual events or developments. Except as otherwise indicated herein, all dates referred to in this report represent periods or dates fixed with reference to the calendar year, rather than our fiscal year ending September 30. The three-month period ended March 31, 2010 is also referred to as the second quarter of fiscal 2010.

EXECUTIVE OVERVIEW

     We are a pharmaceutical company focused on acquiring, developing and commercializing novel therapeutic products for the treatment of central nervous system disorders. Our lead product candidate, Zenvia™ (dextromethorphan hydrobromide/quinidine sulfate), has successfully completed three Phase III clinical trials for the treatment of pseudobulbar affect (“PBA”) and has successfully completed a Phase III trial for the treatment of patients with diabetic peripheral neuropathic pain (“DPN pain”). In addition to our focus on products for the central nervous system, we also have partnered programs in other therapeutic areas which may generate future income for us. Our first commercialized product, docosanol 10% cream; (sold in the United States and Canada as Abreva^® by our marketing partner GlaxoSmithKline Consumer Healthcare), is the only over-the-counter treatment for cold sores that has been approved by the U.S. Food and Drug Administration (“FDA”). In 2008, we out-licensed our monoclonal antibody programs and we remain eligible to receive milestone payments and royalties related to the sale of these assets.

Zenvia for the treatment of PBA

     Zenvia has successfully completed three Phase III clinical trials in the treatment of patients with PBA, also known as emotional lability, and has successfully completed a Phase III trial for the treatment of patients with DPN pain.

     In August 2009, we reported top line safety and efficacy data from the STAR trial. The STAR trial (Safety, Tolerability and Efficacy Results of AVP-923 in PBA) is a confirmatory Phase III trial of Zenvia in patients with PBA, testing two doses (20/10 mg and 30/10 mg). The study results demonstrated that both doses of Zenvia met the primary efficacy endpoint in the treatment of PBA and were generally safe and well tolerated. Both doses of Zenvia provided a statistically significant reduction in episode rates over the course of the study when compared to placebo (p<0.0001). In an additional analysis of the primary endpoint, at week twelve (end of study), patients in the Zenvia 30/10 mg group reported a statistically significant mean reduction of 88% from baseline in PBA episode rates (p=0.01).

     In November 2009, we reported safety and efficacy and tolerability data from the 12-week open-label extension phase of the STAR trial. The study results demonstrated that patients maintained on Zenvia 30/10 mg demonstrated statistically significant incremental improvement in their CNS-LS scores over the additional 12-week treatment period of the open-label study (p<0.0001). In addition, patients who were titrated from Zenvia 20/10 mg to Zenvia 30/10 mg demonstrated statistically significant improvement in their CNS-LS scores (p<0.0001) and patients originally on placebo who initiated Zenvia 30/10 mg demonstrated statistically significant improvement in their CNS-LS scores as well.

     The STAR trial was conducted as a result of an approvable letter we received from the FDA for Zenvia in October 2006. The approvable letter raised certain safety and efficacy concerns that have required additional clinical development to resolve. Based on discussions with the FDA, we were able to successfully resolve the outstanding

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efficacy concern relating to the original dose formulation that was tested in our earlier trials. However, to address the remaining safety concerns, we agreed to re-formulate Zenvia at a lower quinidine dose and conduct one additional confirmatory Phase III clinical trial using lower quinidine dose formulations. The goal of this study was to demonstrate improved safety while maintaining significant efficacy at a lower quinidine exposure.

     In October 2007, we reached agreement with the FDA under the Special Protocol Assessment (“SPA”) process on the design of the STAR trial. We enrolled our first patient in the STAR trial in December 2007, and in March 2009, we completed enrollment with a total of 326 patients.

     After completion of the STAR trial and pre-clinical and clinical safety studies, we engaged in constructive written communication with the FDA. In the second calendar quarter of 2010, we filed the complete response to the October 30, 2006 NDA Approvable Letter with data from the double blind and open-label phases of the STAR trial as well as previous clinical and non-clinical trials of Zenvia. Following our submission of the response, no additional clinical trial costs are expected to be incurred. Any additional development expenditures for Zenvia for PBA are expected to be related to responding to FDA questions following the submission which, for the year ending September 30, 2010, we estimate to be approximately $2 to $3 million. From October 1, 2007 through March 31, 2010, we have spent a total of approximately $37.3 million in the development of Zenvia for PBA.

     In addition to conducting the STAR trial, we have conducted various pre-clinical and clinical safety studies to enhance our complete response and to assist with planned label discussions with the FDA. We expect that the FDA’s approval decision for Zenvia will depend on the agency’s overall assessment of benefits versus potential risks. (See additional information included in this report in Part II, Item 1A, “Risk Factors.”)

Zenvia for the treatment of neuropathic pain

     In April 2007, we announced positive top-line data from our first Phase III clinical trial of Zenvia for DPN pain. Before discussing a second Phase III trial with the FDA, we made the decision to conduct a formal pharmacokinetic (“PK”) study to identify a lower quinidine dose formulation that may have similar efficacy to the doses tested in the Phase III study, anticipating that some of the concerns with the quinidine component that were raised in the PBA approvable letter could affect the clinical development of this indication as well.

     In May 2008, we reported a positive outcome of the formal PK study and announced that we identified alternative lower quinidine dose formulations of Zenvia for the next DPN pain phase III clinical trial. The new dose is intended to deliver similar efficacy and improved safety/tolerability versus the formulations previously tested in DPN pain.

     In September 2008, we submitted our Phase III protocol and related program questions for Zenvia in the treatment of patients with DPN pain to the FDA under the SPA process. In recent communications regarding the continued development of Zenvia for DPN pain, the FDA has indicated that the safety concerns and questions raised in the PBA approvable letter would require the testing of a lower quinidine dose formulation in the DPN pain indication, as we had expected. Additionally, based on feedback we have received from the FDA on the proposed continued development of Zenvia for DPN pain, it is possible that two large well controlled Phase III trials utilizing a new lower quinidine dose formulation would be needed to generate substantial evidence supporting a New Drug Application (“NDA”) filing for this indication. Due to our limited capital resources and current focus on gaining approval for the PBA indication, we do not expect that we will be able to initiate the trials needed for this indication without additional capital or a development partner for Zenvia. Accordingly, we are evaluating our options to fund this program, including the potential for a development partner.

     In September 2009, we reported on secondary efficacy endpoints from the double-blind phase of the Zenvia STAR trial in PBA, including an endpoint measuring reduction of pain in patients with underlying multiple sclerosis (“MS”). Zenvia 30/10 mg demonstrated statistically significant relief of MS-related pain compared to placebo in the subset of MS patients with moderate-to-severe pain. Based on these data and the previous proof-of-concept pain data in MS patients with PBA, we are conducting a strategic assessment of the optimal clinical development path for Zenvia to obtain marketing approval for a pain indication. From March 2005 through March 31, 2010, we have spent a total of approximately $9 million in the development of Zenvia for DPN pain.

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Docosanol 10% Cream

     Docosanol 10% cream is a topical treatment for cold sores. In 2000, we received FDA approval for marketing docosanol 10% cream as an over-the-counter product. Since that time, docosanol 10% cream has been approved by regulatory agencies in Asia, North America, and Europe. In March 2000, we granted a subsidiary of GlaxoSmithKline, SB Pharmco Puerto Rico, Inc. (“GSK”), the exclusive rights under a license to market docosanol 10% cream in the United States and Canada. GSK markets the product under the name Abreva^® in these markets. Under the terms of the GSK license agreement, GSK is responsible for all sales and marketing activities and the manufacturing and distribution of docosanol 10% cream. The Company received a total of $25 million in milestone payments from GSK. Under the GSK license agreement, the Company was entitled to receive an 8% royalty on net sales by GSK. From the effective date of the GSK license agreement up to the sale of the Company’s royalty rights to Drug Royalty USA, Inc. (“DRC”) the Company received a total of approximately $5.9 million in royalty payments from GSK attributed to the 8% royalty on net sales by GSK.

     In fiscal 2003, we sold an undivided interest in the GSK license agreement to DRC for $24.1 million. We retained the right to receive 50% of all royalties (i.e., a net of 4%) under the GSK license agreement for annual net sales of Abreva in the U.S. and Canada in excess of $62 million. Royalty revenues received from GSK subsequent to the agreement with DRC total approximately $2.1 million. The term of the GSK license agreement expires on the later of December 13, 2013 or the date of expiration or invalidity of U.S. Patent Number 4,874,794, unless earlier terminated. In addition, we currently have several other collaborations for docosanol around the world.

     Under the terms of our docosanol license agreements, our partners are generally responsible for all regulatory approvals, sales and marketing activities, and manufacturing and distribution of the product in the licensed territories. The terms of the license agreements typically provide for us to receive a data transfer fee, potential milestone payments and royalties on product sales. We purchase the active pharmaceutical ingredient docosanol, from a large supplier in Western Europe and sell the material to our licensees for commercialization. We currently store our docosanol in the United States. Any material disruption in manufacturing could cause a delay in shipments and possible loss of sales.

Xenerex Human Antibody Technology — Anthrax/Other Infectious Diseases

     In March 2008, we entered into an Asset Purchase and License Agreement with Emergent Biosolutions for the sale of our anthrax antibodies and license to use our proprietary Xenerex Technology platform, which was used to generate fully human antibodies to target antigens. Under the terms of the Agreement, we completed the remaining work under our NIH/NIAID grant (“NIH grant”) and transferred all materials to Emergent. Under the terms of the agreement, we are eligible to receive milestone payments and royalties on any product sales generated from this program. In connection with the sale of the anthrax antibody program, we also ceased all future research and development work related to other infectious diseases on June 30, 2008.

     In September 2008, we entered into an Asset Purchase Agreement with a privately held San Diego based biotechnology company for the sale of our non-anthrax related antibodies as well as the remaining equipment and supplies associated with the Xenerex Technology platform. In connection with this sale, we received an upfront payment of $210,000 and are eligible to receive future royalties on potential product sales, if any.

General Information

     Our principal executive offices are located at 101 Enterprise, Suite 300, Aliso Viejo, California 92656. Our telephone number is (949) 389-6700 and our e-mail address is info@avanir.com. Our Internet website address is www.avanir.com. We make our periodic and current reports available on our Internet website, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. No portion of our website is incorporated by reference into this Quarterly Report on Form 10-Q. The public may read and copy the materials we file with the SEC at the SEC’s Public Reference Room, located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information regarding the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The public may also read and copy the materials we file with the SEC by visiting the SEC’s website, www.sec.gov.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     To understand our financial statements, it is important to understand our critical accounting policies and estimates. The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in the determination of revenue recognition and allowances, certain royalties and returns and losses. Significant estimates and assumptions are also required in the appropriateness of amounts recognized for

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inventories, income taxes, contingencies, and share-based compensation. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. For any given individual estimate or assumption made by us, there may also be other estimates or assumptions that are also reasonable. Although we believe that our estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions are made. Actual results may differ significantly from our estimates.

     A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in Part II, Item 7 of our Annual Report on Form 10-K for the year ended September 30, 2009 in the “Critical Accounting Policies and Estimates” section, as updated and amended in Note 2 of the Notes to our Condensed Consolidated Financial Statements included herein.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2010 AND 2009

Revenues and Cost of Revenues

	Three months ended
	March 31,
	2010		2009		$ Change			% Change
Revenues:
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

     Total revenues were approximately $994,000 for the three months ended March 31, 2010 compared to approximately $812,000 for the three months ended March 31, 2009. The increase in revenues of approximately $183,000, or 23%, is primarily attributed to an increase of approximately $122,000 in non GSK-related royalty revenue, as well as an increase of approximately $117,000 in GSK revenue compared to the same period in the prior year. The increase was offset by approximately $56,000 related to the license agreement with Kobayashi Pharmaceutical Co. Ltd. which was terminated in fiscal 2009.

     Potential revenue-generating contracts that remained active as of March 31, 2010 include licensing revenue from our agreement with GSK, potential royalties from our agreements with Azur Pharma and Emergent Biosolutions, Inc. and modest revenue generated from various other licensing agreements. Partnering, licensing and research collaborations have been, and may continue to be, an important part of our business development strategy. We may continue to seek partnerships with pharmaceutical companies that can help fund our operations in exchange for sharing in the success of any licensed compounds or technologies.

Cost of Revenues

     There were no costs of revenues for the second quarter of fiscal 2010 compared with approximately $1,700 or 0.2% of total revenues for the second quarter of fiscal 2009.

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Operating Expenses

	Three months ended
	March 31,
	2010		2009		$ Change		% Change
OPERATING EXPENSES
Research 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

     Research and development expenses increased by approximately $215,000 from approximately $3.6 million in the second quarter of fiscal 2009 to approximately $3.8 million for the second quarter of fiscal 2010. The increase is primarily due to final wind-down costs incurred related to the STAR trial, as well as regulatory costs related to the submission of the complete response. We expect these expenses to decrease in the second half of fiscal 2010 after submission to the FDA of the complete response to the Zenvia approvable letter. The complete response was submitted to the FDA in the second calendar quarter of 2010.

General and Administrative Expenses

     General and administrative expenses increased by approximately $1.4 million from approximately $2.2 million for the second quarter of fiscal 2009 compared to approximately $3.6 million for the second quarter of fiscal 2010. The increase is primarily attributed to costs associated with preparation for commercial readiness as well as higher share-based compensation costs.

Share-Based Compensation

     Total share-based compensation expense in the three month periods ended March 31, 2010 and 2009 was approximately $665,000 and $442,000, respectively. General and administrative expense in the three-month periods ended March 31, 2010 and 2009 include share-based compensation expense of approximately $519,000 and $356,000, respectively. Research and development expense in the three-month periods ended March 31, 2010 and 2009 include share-based compensation expense of approximately $146,000 and $86,000, respectively. As of March 31, 2010, approximately $4.7 million of total unrecognized compensation costs related to nonvested options and awards is expected to be recognized over a weighted average period of 2.1 years. See Note 10, “Employee Equity Incentive Plans” in the Notes to Condensed Consolidated Financial Statements (Unaudited) for further discussion.

Other Income (Expenses)

     For the three-month period ended March 31, 2010, interest income decreased to approximately $2,000, compared to approximately $45,000 for the same period in the prior year. The decrease is due to an approximate 32% decrease in the average balance of cash, cash equivalents and investments in securities for the quarter ended March 31, 2010, compared to the same period in the prior year. In addition, our investment accounts earned a lower yield in the second quarter of 2010 as compared to the same period in the prior year.

Net Loss

     Net loss was approximately $6.4 million or $0.08 per share in the three month period ended March 31, 2010 compared to a net loss of approximately $4.9 million, or $0.06 per share, for the three month period ended March 31, 2009.

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COMPARISON OF SIX MONTHS ENDED MARCH 31, 2010 AND 2009

Revenues and Cost of Revenues

	Six months ended
	March 31,
	2010		2009		$ Change			% Change
Revenues:
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

     Total revenues declined by approximately $86,000 to approximately $2.5 million for the first six months of fiscal 2010 compared to approximately $2.6 million in the first six months of fiscal 2009. The decrease is primarily related to the license agreement with Kobayashi Pharmaceutical Co. Ltd. which was terminated in fiscal 2009.

     Potential revenue-generating contracts that remained active as of March 31, 2010 include licensing revenue from our agreement with GSK, potential royalties from our agreements with Azur Pharma and Emergent Biosolutions, Inc. and modest revenue generated from various other licensing agreements. Partnering, licensing and research collaborations have been, and may continue to be, an important part of our business development strategy. We may continue to seek partnerships with pharmaceutical companies that can help fund our operations in exchange for sharing in the success of any licensed compounds or technologies.

Cost of Revenues

     There were no costs of revenues for the first six months of fiscal 2010 compared to approximately $10,000 for the first six months of fiscal 2009.

	Six months ended
	March 31,
	2010		2009		$ Change			% Change
OPERATING EXPENSES
Research 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

     Research and development expenses decreased by approximately $1.0 million from approximately $8.3 million in the first six months of fiscal 2009 to approximately $7.3 million for the first six months of fiscal 2010. The decrease was primarily due to the STAR trial which was completed in the fourth quarter of fiscal 2009.

General and Administrative Expenses

     General and administrative expenses increased by approximately $2.0 million from approximately $4.5 million for the first six months of fiscal 2009 compared to approximately $6.5 million for the first six months of fiscal 2010. The increase was primarily attributed to costs associated with preparation for commercial readiness as well as higher share-based compensation costs.

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Share-Based Compensation

     Compensation expense for our share-based payments in the six month period ended March 31, 2010 and the same period in 2009 was approximately $1.4 million and $828,000, respectively. General and administrative expense in the six month periods ended March 31, 2010 and 2009 include share-based compensation expense of approximately $1.0 million and $662,000, respectively. Research and development expense in the six month periods ended March 31, 2010 and 2009 include share-based compensation expense of approximately $328,000 and $166,000, respectively. As of March 31, 2010, approximately $4.7 million of total unrecognized compensation costs related to unvested options and awards is expected to be recognized over a weighted average period of 2.1 years. See Note 10, “Employee Equity Incentive Plans” in the Notes to Condensed Consolidated Financial Statements (Unaudited) for further discussion.

Other Income (Expenses)

     For the six month period ended March 31, 2010, interest income decreased to approximately $8,000, compared to approximately $181,000 for the same period in the prior year. The decrease is due to an approximate 29% decrease in the average balance of cash, cash equivalents and investments in securities for the six months ended March 31, 2010, compared to the same period in the prior year. In addition, our investment accounts earned a lower yield as compared to the same period in the prior year.

Net Loss

     Net loss was approximately $11.3 million, or $0.14 per share, in the six months ended March 31, 2010, compared to a net loss of approximately $10.1 million, or $0.13 per share for the six months ended March 31, 2009.

LIQUIDITY AND CAPITAL RESOURCES

     We assess our liquidity by our ability to utilize existing cash and to generate additional cash to fund future operations. Key factors in the management of our liquidity are: cash required to fund operating activities including expected operating losses and the levels of inventories, accounts payable and capital expenditures; the timing and extent of cash received from milestone payments under license agreements; adequate credit facilities; and financial flexibility to attract long-term equity capital on favorable terms. Historically, cash required to fund on-going business operations has been provided by financing activities and used to fund operations, working capital requirements and investing activities.

     Cash, cash equivalents and restricted investments, as well as net cash provided by or used in operating, investing and financing activities, are summarized in the table below.

	March 31,		Decrease			September 30,
	2010		During Period			2009
Cash, cash equivalents and investment in securities	$	20,706,376	$	(11,248,111	)	$	31,954,487
Cash and cash equivalents	$	20,304,807	$	(11,181,205	)	$	31,486,012
Net working capital	$	15,231,958	$	(11,453,609	)	$	26,685,567

	Six Months						Six Months
	Ended			Change			Ended
	March 31,			Between			March 31,
	2010			Periods			2009
Net cash used in operating activities	$	(11,187,869	)	$	39,366		$	(11,227,235	)
Net cash provided by investing activities		18,316			(352,585	)		370,901
Net 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	)

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     Operating activities. Net cash used in operating activities amounted to approximately $11.2 million in each of the first six months of fiscal 2010 and 2009.

     Investing activities. Net cash provided by investing activities was approximately $18,000 in the first six months of fiscal 2010, compared to net cash provided by investing activities of approximately $371,000 in the first six months of fiscal 2009. The decrease in cash provided by investing activities was primarily related to a decrease in proceeds from sales and maturities of investments in securities.

     Financing activities. Net cash used in financing activities was approximately $12,000 in the first six months of fiscal 2010 compared to net cash used in financing activities of approximately $26,000 in the first six months of fiscal 2009. In the first quarter of fiscal 2010, we raised approximately $183,000 in proceeds, net of offering costs, including commissions, from our at-the-market offering facility. This was offset by approximately $198,000 in tax withholding payments resulting from share exchanges performed by employees in connection with the vesting of restricted stock units that occurred during the second fiscal quarter of 2010.

     In April 2009, we filed a shelf registration statement on Form S-3 with the SEC to sell an aggregate of up to $35.0 million in common stock, preferred stock, debt securities and warrants. On May 6, 2009, the registration statement was declared effective. On July 30, 2009 we entered into a financing facility with Cantor Fitzgerald & Co., providing for the sale of up to 12,500,000 shares of our common stock from time to time into the open market at prevailing prices. As of April 30, 2010, approximately 4.7 million shares of common stock had been sold under this facility for total gross proceeds of approximately $11.0 million. We may or may not sell additional shares under this facility, depending on the volume and price of our common stock, as well as our capital needs and potential alternative sources of capital, such as a development partner for Zenvia.

     In September 2009, we filed a shelf registration statement on Form S-3 with the SEC to sell an aggregate of up to $75.0 million in common stock, preferred stock, debt securities and warrants. On September 23, 2009, the registration statement was declared effective. No offerings have been made pursuant to this registration statement to date.

     As of March 31, 2010 we have contractual obligations for long-term debt and operating lease obligations, as summarized in the table that follows.

	Payments Due by Period
			Less than						More than
	Total		1 Year		1-3 Years		3-5 Years		5 Years
Operating 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. We hold the exclusive worldwide marketing rights to Zenvia for certain indications pursuant to an exclusive license agreement with the Center for Neurologic Study (“CNS”). We will be obligated to pay CNS up to $400,000 in the aggregate in milestone payments to continue to develop Zenvia for both PBA and DPN pain, assuming they are both approved for marketing by the FDA. We are not currently developing, nor do we have an obligation to develop, any other indications under the CNS license agreement. Included in this $400,000 of aggregate milestone payments is a one-time $75,000 milestone payment that will be due to CNS if the FDA approves Zenvia for the treatment of PBA. In addition, as described below, we are obligated to pay CNS a royalty on commercial sales of Zenvia with respect to each indication, if the drug is approved by the FDA for commercialization. Under certain circumstances, we may have the obligation to pay CNS a portion of net revenues received if we sublicense Zenvia to a third party. Under the agreement with CNS, we are required to make payments

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on achievements of up to a maximum of ten milestones, based upon five specific clinical indications. Maximum payments for these milestone payments could total approximately $1.1 million if we pursue the development of Zenvia for all of the licensed indications. Of the clinical indications that we currently believe may be of interest, expected milestone payments could total $800,000. In general, individual milestone payments range from $150,000 to $250,000 for each accepted new drug application (“NDA”) and a similar amount for each approved NDA. In addition, we are obligated to pay CNS a royalty ranging from approximately 5% to 8% of net revenues.

Off-Balance Sheet Arrangements

     We have no off-balance sheet arrangements.

Management Outlook

     We believe that cash and cash equivalents and restricted investments of approximately $20.7 million at March 31, 2010 will be sufficient to sustain our planned level of operations for at least the next twelve months and through the anticipated FDA approval decision for Zenvia for PBA. However, we cannot provide assurances that our planned level of expenditures will not change, or that changed circumstances or delays in clinical development will not result in the depletion of capital resources more rapidly than anticipated.

     For information regarding the risks associated with our need to raise capital to fund our ongoing and planned operations, please see Part II, Item 1A, “Risk Factors.”

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As described below, we are exposed to market risks related to changes in interest rates. Because substantially all of our revenue, expenses and capital purchasing activities are transacted in U.S. dollars, our exposure to foreign currency exchange rates is immaterial. However, in the future we could face increasing exposure to foreign currency exchange rates as we expand international distribution of docosanol 10% cream and purchase additional services from outside the U.S. Until such time as we are faced with material amounts of foreign currency exchange rate risks, we do not plan to use derivative financial instruments, which can be used to hedge such risks. We will evaluate the use of derivative financial instruments to hedge our exposure as the needs and risks should arise.

Interest rate sensitivity

     Our investment portfolio consists primarily of cash fixed income instruments invested in government money market funds. The primary objective of our investments in these securities is to preserve principal. We classify our restricted investments, which are primarily certificates of deposit, as of March 31, 2010 as held-to-maturity. These held to maturity securities are subject to interest rate risk. Based on the average duration of our investments as of March 31, 2010 and 2009, an increase of one percentage point in the interest rates would have resulted in an annual increase in interest income of approximately $204,000 and $303,000, respectively.

     As of March 31, 2010, approximately $19.6 million of the Company’s cash and cash equivalents were maintained in six separate money market mutual funds, and approximately $739,000 of the Company’s cash and cash equivalents were maintained at two major financial institutions in the United States. At times, deposits held with the financial institution may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation (“FDIC”), which provides deposit coverage with limits up to $250,000 per owner through January 1, 2014. At March 31, 2010, such uninsured deposits totaled approximately $19.8 million. Generally, these deposits may be redeemed upon demand and, therefore, are believed to bear minimal risk.

     Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents. However, we seek to mitigate this risk by placing our cash and cash equivalents in various money market mutual funds and at financial institutions of high credit standing.

     We perform ongoing credit evaluations of our customers’ financial condition and would limit the amount of credit extended if necessary; however, we have usually required no collateral.

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Item 4T. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Vice President, Finance, of the effectiveness of our “disclosure controls and procedures” as of the end of the period covered by this report, pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.

     In connection with that evaluation, our CEO and Vice President, Finance concluded that our disclosure controls and procedures were effective and designed to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms as of March 31, 2010. For the purpose of this review, disclosure controls and procedures means controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that we file or submit is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that we file or submit is accumulated and communicated to management, including our principal executive officer, principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Controls over Financial Reporting

     There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during our fiscal quarter ended March 31, 2010, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

     In the ordinary course of business, we may face various claims brought by third parties. Any of these claims could subject us to costly litigation. Management believes the outcome of currently identified claims and lawsuits will not have a material adverse effect on our financial condition or results of operations.

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.

     We have experienced significant net losses and negative cash flows from operations. For the years ended September 30, 2009 and 2008, we had net losses of $22.0 million and $17.5 million, respectively. As of September 30, 2009, we had an accumulated deficit of $278.0 million, and as of March 31, 2010, we had an accumulated deficit of approximately $289.3 million. We have incurred these losses principally from costs incurred in funding the research, development and clinical testing of our drug candidates and from our general and administrative expenses. We may continue incurring net losses for the foreseeable future.

     Our ability to generate revenue and achieve profitability is dependent on our ability, alone or with partners, to successfully complete the development of Zenvia, obtain the necessary regulatory approvals and, if approved, manufacture and market Zenvia for the treatment of patients with PBA. We are also developing Zenvia for use in other indications, which may or may not lead to obtaining the necessary regulatory approvals to market Zenvia for additional indications. We expect to continue to spend substantial amounts on research and development, including amounts spent on conducting clinical trials and seeking additional regulatory approvals for Zenvia, and preparing for the potential commercial launch of Zenvia. As a result, we may never generate sufficient revenue from product sales to become profitable or generate positive cash flows.

     There can be no assurance that the FDA will approve Zenvia for PBA or any other indication.

     In October 2006, we received an “approvable letter” from the FDA for our NDA submission for Zenvia in the treatment of patients with PBA. The approvable letter raised certain safety and efficacy concerns. Based on discussions with the FDA, we were able to successfully resolve the outstanding efficacy concern of the original dose formulation that was tested in earlier clinical trials. However, the safety concerns require additional clinical development to resolve. To address the safety concerns, we re-formulated Zenvia and conducted one additional confirmatory Phase III clinical trial using new lower quinidine dose formulations. Although we believe that the data from the confirmatory trial, combined with additional clinical and pre-clinical data, should be sufficient to address the issues outlined in the FDA approvable letter, it is possible that the FDA will continue to have safety or other concerns that could prevent or delay approval. Accordingly, there can be no assurance that the FDA will approve Zenvia for commercialization.

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     Additionally, although we have a Special Protocol Assessment (“SPA”) from the FDA for our recently completed confirmatory Phase III trial for Zenvia in patients with PBA, there can be no assurance that the terms of the SPA will ultimately be binding on the FDA. An SPA is intended to serve as a binding agreement with the FDA on the adequacy of the planned design, conduct and analysis of a clinical trial. Even where an SPA has been granted, however, additional data may subsequently become available that causes the FDA to reconsider the previously agreed upon SPA and the FDA may have subsequent safety or efficacy concerns that override this agreement. As a result, even with positive data obtained under an SPA, we cannot be certain that the trial results will be found to be adequate to demonstrate a favorable risk/benefit profile required for product approval.

     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.

     We have successfully completed a single Phase III trial for Zenvia in the treatment of DPN pain. In communications regarding the continued development of Zenvia for this indication, the FDA has expressed that the safety concerns and questions raised in the PBA approvable letter necessitate the testing of a low-dose quinidine formulation in the DPN pain indication as well. Additionally, based on feedback we have received from the FDA on the proposed continued development of Zenvia for this indication, we believe it is likely that two large well-controlled Phase III trials would be needed to support an NDA filing for this indication. Due to our limited capital resources and current focus on gaining approval for the PBA indication, we do not expect that we will be able to conduct the trials needed for this indication without additional capital or a development partner for Zenvia. Moreover, although we achieved positive results in our initial Phase III trial, an alternative low-dose quinidine formulation may not yield the same levels of efficacy as seen in the earlier trials or as predicted based on our subsequent PK study. Any decrease in efficacy may be so great that the drug does not demonstrate a statistically significant improvement over placebo. Additionally, any alternative low-dose quinidine formulation that we develop may not sufficiently satisfy the FDA’s safety concerns. If this were to happen, we may not be able to pursue the development of Zenvia for other indications or may need to undertake significant additional clinical trials, which would be costly and cause potentially substantial delays.

     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.

     Zenvia is currently not approved for marketing by the FDA and our ability to generate significant revenue in the near to medium term is entirely dependent upon our ability to receive FDA approval of Zenvia for PBA, and if successful, to commercialize Zenvia. If we are unable to successfully develop, obtain regulatory approval for and commercialize Zenvia for the treatment of patients with PBA, our ability to generate revenue from product sales will be significantly delayed and our stock price would likely decline.

     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.

     Even if the FDA approves Zenvia for marketing in one or more indications, approval could be granted on terms less favorable than those we are seeking. This may, in turn, limit our ability to commercialize Zenvia and generate substantial revenues from its sales. In addition to the confirmatory Phase III trial in PBA, we completed additional pre-clinical and clinical cardiac safety studies designed to enhance our complete response to the FDA’s approvable letter and to support planned label discussions with the FDA. Although we believe these studies showed an improvement in the margin of cardiac safety with the new lower dose of quinidine, it did show mean QTc prolongation of a duration that is above the FDA’s threshold of concern (5 ms mean increase) in approving new drugs. As a result, we could face one or more of the following risks:

• 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.

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     Additionally, a total of seven deaths were reported during the double-blind phase of the STAR trial, all among ALS patients. Although the overall ALS mortality rate in the trial is consistent with published ALS mortality rates, it is possible that these deaths may negatively affect the FDA decision on our PBA application. Any of these events could prevent us from achieving or maintaining market acceptance of our product, even if it receives marketing approval, or could substantially increase the cost of commercialization, which in turn could impair our ability to generate revenues from the product candidate.

     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.

     If Zenvia is approved for marketing, we may not be able to adequately build or maintain the necessary sales, marketing, supply chain management and reimbursement capabilities on our own or enter into arrangements with third parties to perform these functions in a timely manner or on acceptable terms. Additionally, maintaining sales, marketing and distribution capabilities may be more expensive than we anticipate, requiring us to divert capital from other intended purposes or preventing us from building our sales, marketing and distribution capabilities to the desired levels. To be successful we must:

• 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.

     The potential commercialization of Zenvia requires us to manage relationships with an increasing number of collaborative partners, suppliers and third-party contractors. If we are unable to successfully establish and maintain the required infrastructure, either internally or through third parties, and successfully manage an increasing number of relationships, we will have difficulty growing our business. In addition, we may enter into co-promotion or out-licensing arrangements with other pharmaceutical or biotechnology partners where necessary to reach foreign market segments and when deemed strategically and economically advisable. To the extent that we enter into co-promotion or other licensing arrangements, our product revenues are likely to be lower than if we directly marketed and sold Zenvia, and some or all of the revenues we receive will depend upon the efforts of third parties, which may not be successful. If we are unable to develop and maintain adequate sales, marketing and distribution capabilities, independently or with others, we may not be able to generate significant product revenue or become profitable.

     We have limited capital resources and will need to raise additional funds to support our operations.

     We have experienced significant operating losses in funding the research, development and clinical testing of our drug candidates, accumulating losses totaling approximately $289.3 million as of March 31, 2010, and we expect to continue to incur substantial operating losses for the foreseeable future. As of March 31, 2010, we had approximately $20.7 million in cash and cash equivalents and restricted investments in marketable securities. Additionally, we currently do not have any meaningful sources of recurring revenue or cash flow from operations.

     In light of our current capital resources, lack of near-term revenue opportunities and substantial long-term capital needs, including significant costs relating to the expected launch of Zenvia in early 2011 (assuming a favorable approval decision from the FDA), we will need to partner (either in the U.S. or ex-U.S.) or raise additional capital in the future to finance our long-term operations, including the planned launch of Zenvia, until we expect to be able to generate meaningful amounts of revenue from product sales. Based on our current loss rate and existing capital resources as of the date of this filing, we estimate that we have sufficient funds to sustain our operations at their current levels through calendar 2010, which includes the anticipated timing of the FDA approval decision for Zenvia in PBA in the second half of calendar year 2010. Although we expect to be able to raise additional capital, there can be no assurance that we will be able to do so or that the available terms of any financing would be acceptable to us. If we are unable to raise additional capital to fund future operations, then we may be unable to fully execute our development plans for Zenvia. This may result in significant delays in the development of Zenvia and may force us to further curtail our operations.

     Any transactions that we may engage in to raise capital could dilute our stockholders and diminish certain commercial prospects.

     Although we believe that we will have adequate capital reserves to fund operations beyond the anticipated timing of the FDA approval decision for Zenvia in PBA, we expect that we will need to raise additional capital in the future. We may do so through various financing alternatives, including licensing or sales of our technologies, drugs and/or drug candidates, selling shares of common or preferred stock, through the acquisition of other companies, or through the issuance of debt. Each of these financing alternatives carries certain risks. Raising capital through the issuance of common stock may depress the market price of our stock. Any such financing will dilute our existing stockholders and, if our stock price is relatively depressed at the time of any such offering, the levels of dilution would be greater. In addition, debt financing, to the extent available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as making capital expenditures or entering into licensing transactions. If we seek to raise capital through licensing transactions or sales of one or more of our technologies, drugs or drug candidates, as we have previously done with certain investigational compounds and docosanol 10% cream, then we will likely need to share a significant portion of future revenues from these drug candidates with our licensees. Additionally, the development of any drug candidates licensed or sold to third parties will no longer be in our control and thus we may not realize the full value of any such relationships.

     In July 2009, we entered into a financing facility with Cantor Fitzgerald & Co., providing for the sale of up to 12.5 million shares of our common stock from time to time into the open market at prevailing prices. As of April 30, 2010, we had sold a total of approximately 4.7 million shares under this facility. We may or may not sell additional shares under this facility, depending on the volume and price of our common stock, as well as our capital needs and potential alternative sources of capital, such as a development partner for Zenvia. If we actively sell shares under this facility, a significant number of shares of common stock could be issued in a short period of time, although we would attempt to structure the volume and price thresholds in a way that minimizes market impact. Notwithstanding these control efforts, these sales, or the perceived risk of dilution from potential sales of stock through this facility, may depress our stock price or cause holders of our common stock to sell their shares, or it may encourage short selling by market participants, which could contribute to a decline in our stock price. A decline in our stock price might impede our ability to raise capital through the issuance of additional shares of common stock or other equity securities, and may cause our stockholders to lose part or all of the value of their investment in our stock.

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     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.

     We have entered into agreements for the licensing out or sale of our non-core assets, including FazaClo, our anthrax antibody program, and other antibodies in our infectious disease program, as well as docosanol in major markets worldwide. As a result, we do not currently have a diversified pipeline of product candidates and our long-term success is currently dependent on Zenvia. From time to time, we have been and will continue to be engaged in discussions with potential licensing or development partners for Zenvia for PBA and/or other indications and we may choose to pursue a partnership or license involving Zenvia, if the terms are attractive. However, these transactions involve numerous risks, including:

• 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.

     Transactions such as these may result in disputes regarding representations and warranties, indemnities, earn-outs, and other provisions in the transaction agreements. If disputes are resolved unfavorably, our financial condition and results of operations may be adversely affected and we may not realize the anticipated benefits from the transactions.

     Disputes relating to these transactions can lead to expensive and time-consuming litigation and may subject us to unanticipated liabilities or risks, disrupt our operations, divert management’s attention from day-to-day operations, and increase our operating expenses.

     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.

     We have invested in an extensive patent portfolio and we rely substantially on the protection of our intellectual property through our ownership or control of issued patents and patent applications. Because of the competitive nature of the biopharmaceutical industry, we cannot assure you that:

• 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.

     Even if we successfully secure our intellectual property rights, third parties, including other biotechnology or pharmaceutical companies, may allege that our technology infringes on their rights or that our patents are invalid. Intellectual property litigation is costly, and even if we were to prevail in such a dispute, the cost of litigation could adversely affect our business, financial condition, and results of operations. Litigation is also time consuming and would divert management’s attention and resources away from our operations and other activities. If we were to lose any litigation, in addition to any damages we would have to pay, we could be required to stop the infringing activity or obtain a license. Any required license might not be available to us on acceptable terms, or at all. Some licenses might be non-exclusive, and our competitors could have access to the same technology licensed to us. If we were to

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fail to obtain a required license or were unable to design around a competitor’s patent, we would be unable to sell or continue to develop some of our products, which would have a material adverse effect on our business, financial condition and results of operations.

     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.

     Depending upon the timing, duration and specifics of FDA approval, if any, of Zenvia, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. If Zenvia is approved, the Hatch-Waxman Amendments may permit a patent restoration term of up to five years for one of our patents covering Zenvia as compensation for the patent term lost during product development and the regulatory review process. The patent term restoration period is generally one-half the time between the effective date of an IND and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application. We intend to apply for patent term restoration. However, because Zenvia is not a new chemical entity, but is a combination of two previously approved products, it is uncertain whether Zenvia will be granted any patent term restoration under the U.S. Patent and Trademark Office guidelines. In addition, the patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years after the product’s approval date.

     Market exclusivity provisions under the Federal Food, Drug and Cosmetic Act, or the FDCA, also may delay the submission or the approval of certain applications for competing product candidates. The FDCA provides three years of non-patent marketing exclusivity for an NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application. This three-year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving abbreviated NDAs for drugs containing the original active agent.

     Once the three-year FDCA exclusivity period has passed and after the patents (including the patent restoration term, if any) that cover Zenvia expire, generic drug companies would be able to introduce competing versions of the drug. If we are unsuccessful in defending our patents against generic competition, our long-term revenues from Zenvia sales may be less than expected, we may have greater difficulty finding a development partner or licensee for Zenvia and the costs to defend the patents would be significant.

     We may be unable to protect our unpatented proprietary technology and information.

     In addition to our patented intellectual property, we also rely on trade secrets and confidential information. We may be unable to effectively protect our rights to such proprietary technology or information. Other parties may independently develop or gain access to equivalent technologies or information and disclose it for others to use. Disputes may arise about inventorship and corresponding rights to know-how and inventions resulting from the joint creation or use of intellectual property by us and our corporate partners, licensees, scientific and academic collaborators and consultants. In addition, confidentiality agreements and material transfer agreements we have entered into with these parties and with employees and advisors may not provide effective protection of our proprietary technology or information or, in the event of unauthorized use or disclosure, may not provide adequate remedies.

     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 may seek to have our products or product candidates marketed outside the United States. In order to market our products in the European Union and many other foreign jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and jurisdictions and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval processes may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. For example, our development partner in Japan encountered significant difficulty in seeking approval of docosanol in that country and was forced to abandon efforts to seek approval in that country. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations.

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

     The industry in which we compete has a high level of employee mobility and aggressive recruiting of skilled employees. This type of environment creates intense competition for qualified personnel, particularly in clinical and regulatory affairs, research and development and accounting and finance. Because we have a relatively small organization, the loss of any executive officers, including the Chief Executive Officer, key members of senior management or other key employees, could adversely affect our operations. For example, if we were to lose one or more of the senior members of our clinical and regulatory affairs team, the pace of clinical development for Zenvia could be slowed significantly.

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Risks Relating to Our Industry

     There are a number of difficulties and risks associated with clinical trials and our trials may not yield the expected results.

     There are a number of difficulties and risks associated with conducting clinical trials. For instance, we may discover that a product candidate does not exhibit the expected therapeutic results, may cause harmful side effects or have other unexpected characteristics that may delay or preclude regulatory approval or limit commercial use if approved. It typically takes several years to complete a late-stage clinical trial and a clinical trial can fail at any stage of testing. If clinical trial difficulties or failures arise, our product candidates may never be approved for sale or become commercially viable.

     In addition, the possibility exists that:

• 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.

     It is possible that earlier clinical and pre-clinical trial results may not be predictive of the results of subsequent clinical trials. If earlier clinical and/or pre-clinical trial results cannot be replicated or are inconsistent with subsequent results, our development programs may be cancelled or deferred. In addition, the results of these prior clinical trials may not be acceptable to the FDA or similar foreign regulatory authorities because the data may be incomplete, outdated or not otherwise acceptable for inclusion in our submissions for regulatory approval.

     Additionally, the FDA has substantial discretion in the approval process and may reject our data or disagree with our interpretations of regulations or draw different conclusions from our clinical trial data or ask for additional information at any time during their review. For example, the use of different statistical methods to analyze the efficacy data from our Phase III trial of Zenvia in DPN pain results in significantly different conclusions about the efficacy of the drug. Although we believe we have legitimate reasons to use the methods that we have adopted as outlined in our SPA with the FDA, the FDA may not agree with these reasons and may disagree with our conclusions regarding the results of these trials.

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     Although we would work to be able to fully address any such FDA concerns, we may not be able to resolve all such matters favorably, if at all. Disputes that are not resolved favorably could result in one or more of the following:

• 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.

     If we do not receive regulatory approval to sell our product candidates or cannot successfully commercialize our product candidates, we would not be able to generate meaningful levels of sustainable revenues.

     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.

     The pharmaceutical and biotechnology industries are highly competitive and subject to significant and rapid technological change. We compete with hundreds of companies that develop and market products and technologies in areas similar to those in which we are performing our research. For example, we expect that Zenvia will face competition from antidepressants, atypical anti-psychotic agents and other agents in the treatment of PBA and from a variety of pain medications and narcotic agents for the treatment of DPN pain.

     Our competitors may have specific expertise and development technologies that are better than ours and many of these companies, which include large pharmaceutical companies, either alone or together with their research partners, have substantially greater financial resources, larger research and development capabilities and substantially greater experience than we do. Accordingly, our competitors may successfully develop competing products. We are also competing with other companies and their products with respect to manufacturing efficiencies and marketing capabilities, areas where we have limited or no direct experience.

     If we fail to comply with regulatory requirements, regulatory agencies may take action against us, which could significantly harm our business.

     Marketed products, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for these products, are subject to continual requirements and review by the FDA and other regulatory bodies. Even if we receive regulatory approval for one of our product candidates, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product.

     In addition, regulatory authorities subject a marketed product, its manufacturer and the manufacturing facilities to ongoing review and periodic inspections. We will be subject to ongoing FDA requirements, including required submissions of safety and other post-market information and reports, registration requirements, current Good Manufacturing Practices (“cGMP”) regulations, requirements regarding the distribution of samples to physicians and recordkeeping requirements.

     The cGMP regulations also include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. We rely on the compliance by our contract manufacturers with cGMP regulations and other regulatory requirements relating to the manufacture of products. We are also subject to state laws and registration requirements covering the distribution of our products. Regulatory agencies may change existing requirements or adopt new requirements or policies. We may be slow to adapt or may not be able to adapt to these changes or new requirements.

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     We face uncertainty related tohealthcare reform, pricing and reimbursement which could reduce our revenue.

     The U.S. Congress recently adopted legislation regarding health insurance, which has been signed into law. As a result of this new legislation, substantial changes could be made to the current system for paying for healthcare in the United States, including changes made in order to extend medical benefits to those who currently lack insurance coverage. Extending coverage to a large population could substantially change the structure of the health insurance system and the methodology for reimbursing medical services, drugs and devices. These structural changes could entail modifications to the existing system of private payors and government programs, such as Medicare, Medicaid and State Children’s Health Insurance Program, creation of a government-sponsored healthcare insurance source, or some combination of both, as well as other changes. Restructuring the coverage of medical care in the United States could impact the reimbursement for prescribed drugs, biopharmaceuticals, medical devices, or our product candidates. If reimbursement for our approved product candidates, if any, is substantially less that we expect in the future, or rebate obligations associated with them are substantially increased, our business could be materially and adversely impacted.

     Sales of Zenvia, if approved for commercialization, will depend in part on the availability of coverage and reimbursement from third-party payors such as government insurance programs, including Medicare and Medicaid, private health insurers, health maintenance organizations and other health care related organizations. If Zenvia is approved for commercialization, pricing and reimbursement may be uncertain. Both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation affecting coverage and reimbursement policies, which are designed to contain or reduce the cost of health care. Further federal and state proposals and healthcare reforms are likely which could limit the prices that can be charged for the product candidates that we develop and may further limit our commercial opportunity. There may be future changes that result in reductions in current coverage and reimbursement levels for our products, if commercialized, and we cannot predict the scope of any future changes or the impact that those changes would have on our operations.

     Adoption of Zenvia by the medical community may be limited if third-party payors will not offer coverage. Cost control initiatives may decrease coverage and payment levels for Zenvia and, in turn, the price that we will be able to charge. We are unable to predict all changes to the coverage or reimbursement methodologies that will be applied by private or government payors to Zenvia. Any denial of private or government payor coverage or inadequate reimbursement for procedures performed using Zenvia, if commercialized, could harm our business and reduce our revenue.

     We rely on insurance companies to mitigate our exposure for business activities, including developing and marketing pharmaceutical products for human use.

     The conduct of our business, including the testing, marketing and sale of pharmaceutical products, involves the risk of liability claims by consumers, stockholders, and other third parties. Although we maintain various types of insurance, including product liability and director and officer liability, claims can be high and our insurance may not sufficiently cover our actual liabilities. If liability claims were made against us, it is possible that our insurance carriers may deny, or attempt to deny, coverage in certain instances. If a lawsuit against us is successful, then the lack or insufficiency of insurance coverage could materially and adversely affect our business and financial condition. Furthermore, various distributors of pharmaceutical products require minimum product liability insurance coverage before their purchase or acceptance of products for distribution. Failure to satisfy these insurance requirements could impede our ability to achieve broad distribution of our proposed products and the imposition of higher insurance requirements could impose additional costs on us. Additionally, we are potentially at risk if our insurance carriers become insolvent. Although we have historically obtained coverage through highly rated and capitalized firms, the ongoing financial crisis may affect our ability to obtain coverage under existing policies or purchase insurance under new policies at reasonable rates.

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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.

     The nature of clinical trials and our business strategy of outsourcing a substantial portion of our research require that we rely on clinical research centers and other contractors to assist us with research and development, clinical testing activities, patient enrollment and regulatory submissions to the FDA. As a result, our success depends partially on the success of these third parties in performing their responsibilities. Although we pre-qualify our contractors and we believe that they are fully capable of performing their contractual obligations, we cannot directly control the adequacy and timeliness of the resources and expertise that they apply to these activities. Additionally, the current global economic slowdown may affect our development partners and vendors, which could adversely affect their ability to timely perform their tasks. If our contractors do not perform their obligations in an adequate and timely manner, the pace of clinical development, regulatory approval and commercialization of our drug candidates could be significantly delayed and our prospects could be adversely affected.

     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 have utilized, and intend to continue utilizing, third parties to manufacture, package and distribute Zenvia and the Active Pharmaceutical Ingredient (“API”) for docosanol 10% cream and to provide clinical supplies of our drug candidates. We have no experience in manufacturing and do not have any manufacturing facilities. Currently, we have sole suppliers for the API for docosanol and Zenvia, and a sole manufacturer for the finished form of Zenvia. In addition, these materials are custom and available from only a limited number of sources. Any material disruption in manufacturing could cause a delay in shipments and possible loss of sales. We do not have any long-term agreements in place with our current docosanol supplier or Zenvia supplier. If we are required to change manufacturers, we may experience delays associated with finding an alternate manufacturer that is properly qualified to produce supplies of our products and product candidates in accordance with FDA requirements and our specifications. Any delays or difficulties in obtaining APIs or in manufacturing, packaging or distributing Zenvia could delay our clinical trials of this product candidate for DPN pain. The third parties we rely on for manufacturing and packaging are also subject to regulatory review, and any regulatory compliance problems with these third parties could significantly delay or disrupt our commercialization activities. Additionally, the ongoing economic crisis creates risk for us if any of these third parties suffer liquidity or operational problems. If a key third party vendor becomes insolvent or is forced to lay off workers assisting with our projects, our results and development timing could suffer.

     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.

     Under our typical license arrangement we have no direct control over the development of drug candidates and have only limited, if any, input on the direction of development efforts. These development efforts are made by our licensing partner, and if the results of their development efforts are negative or inconclusive, it is possible that our licensing partner could elect to defer or abandon further development of these programs. We similarly rely on licensing partners to obtain regulatory approval for docosanol in foreign jurisdictions. Because much of the potential value of these license arrangements is contingent upon the successful development and commercialization of the licensed technology, the ultimate value of these licenses will depend on the efforts of licensing partners. If our licensing partners do not succeed in developing the licensed technology for whatever reason, or elect to discontinue the development of these programs, we may be unable to realize the potential value of these arrangements. If we were to license Zenvia to a third party or a development partner, it is likely that much of the long-term success of that drug will similarly depend on the efforts of the licensee.

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

     In the event that we attempt to enter into international markets, we expect to rely on collaborative partners to obtain regulatory approvals and to market and sell our product(s) in those markets. We have not yet entered into any collaborative arrangement with respect to marketing or selling Zenvia, with the exception of one such agreement relating to Israel. We may be unable to enter into any other arrangements on terms favorable to us, or at all, and even

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if we are able to enter into sales and marketing arrangements with collaborative partners, we cannot assure you that their sales and marketing efforts will be successful. If we are unable to enter into favorable collaborative arrangements with respect to marketing or selling Zenvia in international markets, or if our collaborators’ efforts are unsuccessful, our ability to generate revenues from international product sales will suffer.

Risks Relating to Our Stock

     Our stock price has historically been volatile and we expect that this volatility will continue for the foreseeable future.

     The market price of our common stock has been, and is likely to continue to be, highly volatile. This volatility can be attributed to many factors independent of our operating results, including the following:

• 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 a substantial number of shares are sold into the market at any given time, particularly following any significant announcements or large swings in our stock price (whether sales are through the financing facility with Cantor Fitzgerald & Co. or from an existing stockholder), there may not be sufficient demand in the market to purchase the shares without a decline in the market price for our common stock. Moreover, continuous sales into the market of a number of shares in excess of the typical trading volume for our common stock, or even the availability of such a large number of shares, could depress the trading market for our common stock over an extended period of time.

     Additionally, our stock price has been volatile as a result of announcements of regulatory actions and decisions relating to our product candidates, including Zenvia, and periodic variations in our operating results. We expect that our operating results will continue to vary from quarter to quarter. Our operating results and prospects may also vary depending on the status of our partnering arrangements.

     As a result of these factors, we expect that our stock price may continue to be volatile and investors may be unable to sell their shares at a price equal to, or above, the price paid. Additionally, any significant drops in our stock price, such as the one we experienced following the announcement of the Zenvia approvable letter, could give rise to stockholder lawsuits, which are costly and time consuming to defend against and which may adversely affect our ability to raise capital while the suits are pending, even if the suits are ultimately resolved in favor of the Company. We have, from time to time, been a party to such suits and although none have been material to date, there can be no assurance that any such suit will not have an adverse effect on the Company.

     If our internal controls over financial reporting are not considered effective, our business and stock price could be adversely affected.

     Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal controls over financial reporting in our annual report on Form 10-K for that fiscal year. Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of our internal controls over financial reporting.

     Our management, including our chief executive officer and principal financial officer, does not expect that our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud involving a company have been, or will be, detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become ineffective because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future. A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to consider our internal controls as ineffective. If our internal controls over financial reporting are not considered effective, we may experience a loss of public confidence, which could have an adverse effect on our business and on the market price of our common stock.

     Because we do not expect to pay dividends in the foreseeable future, you must rely on stock appreciation for any return on your investment.

     We have paid no cash dividends on our common stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future, and payment of cash dividends, if any, will also depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends. Accordingly, the success of your investment in our common stock will likely depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value after the offering or even maintain the price at which you purchased your shares, and you may not realize a return on your investment in our common stock.

     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.

     Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include restrictions on the ability of our stockholders to remove directors and supermajority voting requirements for stockholders to amend our organizational documents and a classified board of directors. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Delaware law, for instance, also imposes some restrictions on mergers and other business combinations between any holder of 15% or more of our outstanding common stock and us. Although we believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics and thereby provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some stockholders. We have also adopted a stockholder rights agreement intended to deter hostile or coercive attempts to acquire us. Under the agreement, if a person becomes an “acquiring person,” each holder of a right (other than the acquiring person) will be entitled to purchase, at the then-current exercise price, such number of shares of our preferred stock which are equivalent to shares of common stock having twice the exercise price of the right. If we are acquired in a merger or other business combination transaction after any such event, each holder of a right will then be entitled to purchase, at the then-current exercise price, shares of the acquiring company’s common stock having a value of twice the exercise price of the right. Our stockholder rights agreement could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, us or a large block of our common stock without the support of our board of directors. Therefore, the agreement makes an acquisition much more costly to a potential acquirer.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 5. OTHER INFORMATION

Not applicable.

37

Item 6. EXHIBITS

Exhibits
10.1†	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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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

EX-10.1

Exhibit 10.1

CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934.

Amendment #1 to
Manufacturing Services Agreement
Between Patheon Inc. and Avanir Pharmaceuticals, Inc.

     WHEREAS Patheon Inc. (“Patheon”) and Avanir Pharmaceuticals , a California corporation, entered into a Manufacturing Services Agreement (the “MSA”) effective as of January 4, 2006;

     WHEREAS, in March 2009, Avanir Pharmaceuticals reincorporated as Avanir Pharmaceuticals, Inc., a corporation existing under the laws of Delaware (“Avanir”);

     AND WHEREAS Patheon and Avanir wish to amend the MSA as set forth in this Amendment #1;

     NOW THEREFORE in consideration of the premises hereof and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledges by the parties, the parties hereby agree that the MSA is amended as follows:

1. Amendments to MSA

The parties agree to the following amendments:

(i)	All references to “Avanir Pharmaceuticals, a corporation existing under the laws of California” shall be replaced by “Avanir Pharmaceuticals Inc., a corporation existing under the laws of Delaware.”
(ii)	All references in the MSA to “Neurodex” shall be deleted and replaced with “Zenvia.” For clarity, the definition of “Product” in Section 1.1 shall not be amended.
(iii)	In Section 1.1, the definition “Manufacturing Site” shall be deleted and replaced with the following:
	“Manufacturing Site” means the facility owned and operated by Patheon that is located at [***].
(iv)	In Section 13.11, the addresses for the parties shall be amended as follows:

Avanir Pharmaceuticals, Inc.	Patheon Inc.
101 Enterprise Ct, Suite 300	2100 Syntex Court
Aliso Viejo, CA 92656	Mississauga, Ontario L5N 7K9
Attention:	Attention: Legal Department
Fax No:	Fax No: 905 812-6613

(v)	Schedule B shall be deleted in its entirety and replaced with the Schedule B attached hereto.
(vi)	Schedule G (the Form of Quality Agreement) shall be deleted in its entirety and replaced with the Quality Agreement attached hereto, which has been revised and executed effective as of January 19, 2010.

(vii) Schedule I shall be deleted in its entirety and replaced with the Schedule I attached hereto.

2.	Conflicts, Use of Terms. In the event of conflict between the terms and conditions of the MSA and the terms and conditions of this Amendment # 1, the terms of conditions of this Amendment # 1 shall control. Terms not otherwise defined herein shall have the meanings set forth in the MSA.
3.	No Other Modifications. Except as provided above, the terms and conditions of the MSA remain unchanged.
4.	Execution in Counterparts. This Amendment #1 may be executed in two counterparts, by original or facsimile signature, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
5.	Governing Law. This Amendment #1 shall be construed and enforced in accordance with the laws of the State of New York. The parties expressly agree that the UN Convention of Contracts for the International Sale of Goods shall not apply to this Amendment #1.

     IN WITNESS WHEREOF, the parties have caused this Amendment # 1 to be duly executed, effective as of the 19th day of January, 2010.

ACCEPTED AND ACKNOWLEDGED

AVANIR PHARMACEUTICALS, INC.		PATHEON INC.
Per:	/s/ Christine G. Ocampo	Per:	/s/ Deborah Rak
	Name: Christine G. Ocampo		Name: Deborah Rak
	Title: Vice President, Finance		Title: Vice President, Toronto Regional Operations

Schedule B
to the Manufacturing Services Agreement
between Patheon Inc. and Avanir Pharmaceuticals, Inc.

Annual Volume, Run Quantity and Fees

Bulk packaged Capsules

[***]

Scenario	1				2
Year	1	2	3		1	2		3
Annual Qty ([***] capsules)	[***]	[***]	[***]		[***]	[***]		[***]
Run Qty ([***] capsules)	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
Run Qty (batches)	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
Price per [***] Bulk capsules (USD)	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]

[***] Strength

Scenario	2
Year	1	2	3
Annual Qty ([***] capsules)	[***]	[***]	[***]
Run Qty ([***]capsules)	[***]	[***]	[***]
Run Qty (batches)	[***]	[***]	[***]
Price per [***] Bulk capsules (USD)	[***]	[***]	[***]

Schedule G
to the Manufacturing Services Agreement
between Patheon Inc. and Avanir Pharmaceuticals, Inc.

SCHEDULE G

QUALITY AGREEMENT

Schedule I
to the Manufacturing Services Agreement
between Patheon Inc. and Avanir Pharmaceuticals, Inc.

SCHEDULE I

ACTIVE MATERIAL REIMBURSEMENT VALUE

For the purposes of the Agreement, the parties agree that the Active Material Reimbursement Value shall be as follows:

PRODUCT	ACTIVE MATERIAL	ACTIVE MATERIAL
		REIMBURSEMENT VALUE ($USD)*
[***] Bulk [***]	Dextromethorphan Hydrobromide	$[***] per kilogram
	Quinidine Sulfate	$[***] per kilogram

* These prices are subject to change. The parties shall amend this Schedule I to reflect any change in the price of the Active Materials charged by Avanir’s suppliers, provided satisfactory documentation of such change is provided to and accepted by Patheon.

EX-10.2

Exhibit 10.2

CERTAIN CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND REPLACED WITH “[***]”. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE SECRETARY OF THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO AN APPLICATION REQUESTING CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934.

Quality Agreement
Commercial Product

Between

Avanir Pharmaceuticals, Inc.
a corporation existing under the laws of Delaware,
(hereinafter referred to as the “Client”)

-and-

Patheon Inc.,
a corporation existing under the laws of Ontario,

Specific sites covered by this Agreement:

[***]

(hereinafter referred to as “Patheon”)

Effective Date: January 19, 2010

               WHEREAS Patheon and Avanir have entered into a manufacturing services agreement dated January 4, 2006, as amended (the “MSA”), to which this Quality Agreement will form part of, wherein Patheon agrees to provide pharmaceutical manufacturing services in respect of certain Products (as described in Schedule A hereto);

               AND WHEREAS pursuant to the MSA, Avanir is required to provide the Specifications to Patheon in order for Patheon to provide Manufacturing Services;

               AND WHEREAS pursuant to the MSA, Patheon is required to perform the Manufacturing Services in accordance with the Specifications as provided;

               AND WHEREAS the parties desire to allocate the responsibility for procedures and specifications impacting on the identity, strength, quality and purity of the Products;

               NOW THEREORE in consideration of the rights conferred and the obligations assumed under the MSA and herein, and for other good and valuable consideration (the receipt and sufficiency of which are acknowledged by each party), and intending to be legally bound the parties agree as follows:

SECTION I: RESPONSIBILITIES

1.1 Subject to the terms and conditions hereinafter set out the parties agree that Patheon shall be responsible for all the operations that are marked with “X” in the column titled “Patheon” and that Avanir shall be responsible for all the operations that are marked with “X” in the column titled “Avanir.” If marked with “(X)”, cooperation is required from the designated party.

(a) General

		Avanir	Patheon
1.	Provide Specifications	X
2.	Manufacture and package Product in strict adherence to the Specifications.		X
3.	Permit audits of all relevant premises, procedures and documentation by Avanir, and permit inspection by regulatory authorities.		X
4.	Patheon may arrange for subcontractors to perform specific testing services for Products and Components; provided that (1) all such subcontractors will be duly qualified by Patheon under GMP and applicable Laws to perform such testing; (2) Patheon will at all times remain fully responsible to Avanir for the performance of all obligations pursuant to the MSA related to such subcontracted testing services; and (3) no subcontractors will be utilized to perform release testing of the Product.		X
5.	Provide copies of all information and correspondence regarding Annual Product Reviews when requested by Avanir.		X
6.	Notify and obtain approval from Avanir prior to implementation of any proposed changes to the process, materials, testing, equipment or premises that may affect the Product, such Avanir approval not to be unreasonably withheld.		X
7.	Notify Avanir within [***] of receipt of any Form 483’s, warning letters or the like from applicable regulatory agencies relating to: (i) the Product, or (ii) if the supply of Products will be affected, the facilities used to produce, test or package the Product. Responses related to the product shall be reviewed and approved by Avanir prior to submission to the applicable regulatory agency, provided that Patheon reserves the right to respond to such regulatory agencies without approval, if, in the reasonable opinion of Patheon’s counsel, it is required to do so.		X
8.	Notify Avanir within [***] of any regulatory authority requests for Product samples, Batch documentation, or other information related to the Product.		X
9.	Conduct operations in compliance with applicable environmental, occupational health and safety laws and cGMP regulations.		X
10.	Investigate and resolve all medical and non-medical Product complaints.	X	(X)
11.	Investigate all manufacturing type Product complaints.	X	X
12.	Initiate and control a Product recall.	X	(X)
13.	Liaise with Regulatory Authorities for approval, maintenance and updating of marketing approval in a timely manner.	X	(X)

(b) Validation and Process Testing Activities

		Avanir	Patheon
1.	Establish applicable master validation plans and maintain a validation program for the Product.	X	X
2.	Qualify (IQ/OQ) facilities, utilities and process equipment.		X
3.	Calibrate instrumentation and qualify computer systems used in the manufacture and testing of the Product.		X
4.	Prepare and approve all performance qualification and process validation protocols and reports, for manufacturing, packaging, and analytical testing operations.	(X)	X
5.	Review and approve master validation plan, performance qualification and process validation protocols and reports for the Product.	X	X
6.	Maintain an appropriate cleaning and cleaning validation program.		X
7.	Provide toxicological information to be used in the development of a cleaning program.	X
8.	Validate analytical test methods for finished Product.	(X)	X

(c) Raw Materials

		Avanir	Patheon
1.	Provide the master formula.	X
2.	Provide approved supplier list. Avanir to audit and approve Component and Active Material supplies and ensure cGMP compliance where Avanir stipulates the supplier. Avanir stipulated supplier shall be included on Avanir’s approved supplier list (attached hereto as Schedule D). Patheon to audit and approve Component and Active Material suppliers and ensure cGMP compliance as per Patheon SOP where Patheon stipulates the supplier. Patheon stipulated supplier shall be included on Patheon’s approved supplier list (Schedule C). Avanir to audit and approve, in its sole discretion, all Patheon stipulated suppliers.	X	X
3.	Qualify and approve Active Materials supplier(s).	X	(X)
4.	Provide Active Materials specifications (including Certificates of Analysis).	X
5.	Procure Active Materials (including Certificates of Analysis).	X
6.	Provide test methods for Active Materials (if non-Compendial).	X	X

		Avanir	Patheon
7.	Validate non-Compendial testing methods for Active Materials.	X	X
8.	Analyze and release Active Materials (including documentation and Certificates of Analysis).	(X)	X
9.	Retain reference sample of Active Material for [***] past the expiration date of the last Batch of Product manufactured with that material in the Product or such longer period required by law.		X
10.	Procure inactive ingredients (including Certificates of Analysis).		X
11.	Provide test methods and method validation for inactive ingredients (if non-Compendial).	X	(X)
12.	Analyze and release inactive ingredients (including documentation and Certificates of Analyses).		X
13.	Retain reference samples of inactive ingredients for [***] past the expiration date of the last Batch manufactured with that material in the Product or such longer period as required by law.		X
14.	Provide to Avanir, at Avanir’s request, by means of aBSE/TSE or melamine certificate of compliance from the raw material vendor, confirmation of any bovine, caprine, or ovine derived raw materials purchased by Patheon for the manufacture of Products.		X

(d) Bulk Manufacture

		Avanir	Patheon
1.	Create, control, issue and execute master batch record.		X
2.	Approve master batch record.	X	X
3.	Document, investigate and resolve deviations from approved manufacturing instructions or Specifications. Report and obtain approval from Avanir representative regarding Quality Deviation Report (“DR”) type deviations (incidents where there is a potential to affect Product quality). Provide copies of all DR’s to Avanir as part of the executed master batch record.		X

(e) Bulk Packaging

		Avanir	Patheon
1.	Create, control, issue and execute master batch record.		X
2.	Approve master packaging batch record.	X	X
3.	Provide specifications for packaging components.	X	X
4.	Qualify and approve packaging component suppliers. Patheon to audit and approve packaging component suppliers and ensure cGMP compliance as per Patheon SOP where Patheon stipulates the supplier.	(X)	X

		Avanir	Patheon
	Patheon stipulated supplier shall be included on its approved supplier list (Schedule C). Avanir to audit and approve, in its sole discretion, all Patheon stipulated suppliers
5.	Provide test methods and method validation for packaging components. Where applicable, Patheon will provide such test methods and validation for packaging components purchased from suppliers on the Patheon approved supplier list only (Schedule C).	(X)	X
6.	Procure packaging components.		X
7.	Analyze and release packaging components.		X
8.	Retain reference samples of bulk Product for [***] past Product expiry or such longer period as required by law.	(X)	X
9.	Document, investigate and resolve any deviation from approved packaging instructions or specifications. Report and obtain approval from Avanir representative regarding DR type deviations. Provide copies of all DRs to Avanir as part of the executed master batch packaging record.	(X)	X

(f) Testing & Release of Finished Product

		Avanir	Patheon
1.	Provide finished Product specifications.	X
2.	Supply/develop analytical test methods for finished Product.	X	X
3.	Test finished Product.		X
4.	Maintain all Batch records for a minimum of [***] past Product expiry date and supply all such records to Avanir upon request.		X
5.	Maintain records and evidence on the testing of raw materials and packaging/labelling materials for [***] after the materials were last used in the manufacture or packaging/labelling of the Product.		X
6.	Notify Avanir representative of confirmed out-of-Specification results (“OOS”) within [***]; Patheon to generate DR and obtain approval of the DR from Avanir representative.	(X)	X
7	Retain reference samples of finished Product for two years past Product expiry or such longer period as required by law.	(X)	X

(g) Stability Testing (if required)

		Avanir	Patheon
1.	Store stability samples.		X
2.	Develop and validate stability indicating assay.	(X)	X

		Avanir	Patheon
3.	Provide stability testing protocol for finished Product.	X	(X)
4.	Perform stability testing.		X
5.	Notify Avanir of any stability failure for Product supplied to Avanir within one business day.		X

ARTICLE 2: COMPLIANCE BETWEEN PRODUCT REGISTRATION AND THE MANUFACTURING PROCESS

2.1 Technical Changes

(a)

All proposed process changes shall be communicated to Avanir for initial review and approval, such Avanir approval not to be unreasonably withheld. Avanir shall be responsible for determining whether or not to initiate registration variation procedures and for maintaining adequate control over the quality commitments of the marketing authorization made to the regulatory authorities by Avanir for Products.

(b)

Following validation of a process change, Patheon shall deliver a copy of the related validation report to Avanir and the associated stability data, if applicable, as it becomes available.

2.2 Labeling / Packaging Material Changes

Avanir may initiate changes and shall review and approve all Patheon-proposed changes to labeling or packaging, including a change in the supplier of any labeling or packaging materials before any such change may be implemented.

2.3 Other Changes

Patheon will not make any changes in storage, shipping, facilities or equipment that affect the Product, or process or procedure used to manufacture the Product, without first obtaining written approval from Avanir (such approval not to be unreasonably withheld).

2.4 Permits

Avanir shall be solely responsible for obtaining and maintaining, on a timely basis, any permits or other regulatory approvals in respect of the Products or the Specifications, including, without limitation, all marketing and post-marketing approvals.

SECTION 3: GENERAL

3.1	Any communications about the subject matter of this Agreement will be directed, in the first instance, to the person(s) identified in Appendix B.
3.2	Capitalized terms not otherwise defined herein will have the meaning specified in the MSA.
3.3	If any provision of this Agreement should be or found invalid, or unenforceable by law, the rest of the Agreement will remain valid and binding and the parties will negotiate a valid provision which meets as close as possible the objective of the invalid provision.
3.4	If this Agreement requires modification such that either party affected cannot be reasonably expected to continue to perform under this Agreement, then the parties will negotiate and revise the Agreement accordingly
3.5	Any amendment of this Agreement will be made in writing and signed by both parties.
3.6	This Agreement will start on the Effective Date that is set forth on the cover page of this Agreement and will remain valid until all Quality obligations under all applicable MSA’s have been fulfilled.

SECTION 4: DESCRIPTION OF RESPONSIBILITIES

4.1 Quality Management

4.1.1	GMP, Health and Safety Compliance
	Patheon will conduct operations in compliance with applicable environmental, occupational health and safety laws, and cGMP regulations.
4.1.2	Client Audit Rights
	Patheon will permit audits on reasonable prior written notice, of all relevant premises, procedures and documentation by the Client; to the extent such audits are related to Client’s Product. Client audits are limited to [***] per [***] unless for cause.
4.1.3	Subcontracting
	Patheon will not subcontract tasks to a third party without Client’s consent. Patheon may subcontract raw material testing to other Patheon facilities and to other qualified third party laboratories.
4.1.4	Self-Inspection
	Patheon will perform self-inspections of its premises, facilities, and processes used to manufacture, package, test, and store the Client’s starting, intermediate, and/or finished products in accordance with Patheon’s written standard operating procedures (“SOP’s”) to ensure compliance with cGMP and this Quality Agreement.

4.2 Regulatory Requirements

4.2.1	Permits
	The Client will be solely responsible for obtaining or maintaining, on a timely basis, any permits or other regulatory approvals for the Products or the Specifications, including, without limitation, all marketing and post-marketing approvals.
	Patheon will obtain and maintain the appropriate manufacturing license(s) to allow for the Manufacturing services.
4.2.2	Regulatory Filing / Registration Change Control
	The Client will determine whether changes to the Product or related to the Product will impact a regulatory filing and will apply for and receive approval for any required manufacturing amendment, change or addition to their Product marketing authorization. Upon request, Patheon will provide assistance in the preparation and review of pertinent sections of new or supplemental regulatory applications before filing. The Client will provide Patheon copy of sections of product registration/regulatory submissions that

	are relevant to the manufacture of the Product. The Client is responsible for all communications with Regulatory Authorities as well as for the approval, maintenance, and updating of marketing approval in a timely manner.
4.2.3	Regulatory Compliance
	Patheon will ensure that Product(s) are manufactured and tested in strict compliance with current US Federal and EC regulatory and statutory requirements relating to Good Manufacturing Practices (GMP) (US 21 CFR parts 210 and 211 for the manufacture of finished medicinal product) as applicable, regulatory approvals and local laws and regulations applicable at the site(s) of manufacture and/or testing.
4.2.4	Government Agency Inspections, Communication and Requisitions
	Patheon will permit all relevant inspections by regulatory authorities of premises, procedures, and documentation.
	Patheon will notify the Client within [***] of receipt of any notice of inspection from a regulatory authority and within [***] of any regulatory authority request for Product samples, batch documentation, or other information related to the Product.
	Patheon will notify the Client within [***] of receipt of any Form 483’s warning letter or the like from any regulatory agency that relates to the Product; or if the supply of Product will be affected, or if the facilities used to produce, test or package the Product will be affected.
	The responses from Patheon related to the Product will be reviewed and approved by the Client prior to submission to the regulatory agency. Notwithstanding, Patheon reserves the right to respond to the regulatory agency without approval, if, in the reasonable opinion of Patheon’s Legal counsel, it is required to do so.

4.3 Material Control

4.3.1	Test Methods and Specifications
	The Client will give Patheon a copy of the Specifications and test methods used if the Client issues raw material Specifications.
4.3.2	Material Destruction
	Patheon has the right to either return to the Client or dispose of any outdated or rejected material. If the material is disposed of, disposal will be consistent with the nature of the material and sent to a permitted waste disposal facility. Prior to such disposal:

(i.)	Patheon will send notice to the Client about Patheon’s intent to dispose of the material. If no direction is received from the Client, Patheon will dispose of the material no sooner than [***] after the date of the notice.
(ii.)	The materials will be disposed and destroyed in compliance with local environmental regulations and performed in a secure and legal manner that prevents unauthorized use or diversion.

Patheon will maintain destruction records in accordance with Patheon SOP’s.

4.3.3 Vendor Audit Responsibility

4.3.3.1 Excipient and API Vendors:

(i.)	If the Client stipulates an excipient or API vendor, the Client will audit and approve the manufacturers and ensure cGMP compliance in accordance with Section 4.3.4 of this Agreement. The Client stipulated vendor(s) will be included on the Client’s approved vendor list (attached hereto as Appendix D).
(ii.)	If Patheon stipulates the excipient vendor, Patheon will audit and approve the manufacturers and ensure cGMP compliance in accordance with Patheon’s SOP. The Patheon stipulated vendor(s) will be included on Patheon’s approved vendor list (attached hereto as Appendix C).

4.3.3.2 Packaging Component Vendors::

(i.)	If the Client stipulates a packaging component vendor, the Client will audit and approve the manufacturer and ensure cGMP compliance. The Client stipulated vendor(s) will be included on the approved vendor list (attached hereto as Appendix D).
(ii.)	If Patheon stipulates the packaging component vendor, Patheon will audit and approve the manufacturer and ensure cGMP compliance in accordance with Patheon’s SOP. The Patheon stipulated vendor(s) will be included on the approved supplier list (Appendix C).

4.3.4		Client Furnished Materials
	The Client is responsible for vendor qualification of Client furnished materials and for providing a certificate of compliance confirming the following:

(i) That the materials are compliant with the provisions outlined in the “Note for Guidance on minimizing the risk of transmitting spongiform encephalopathy agents via human and veterinary medicinal products” (EMEA/410/01, Rev.2 or update) and

(ii) A residual solvent certificate confirming that there is no potential for specific toxic solvents listed in the EP / USP / ICH residual solvents Class I, Class II or Class III to be present and the material, if tested, will comply with established EP / USP / ICH requirements. If any of the solvents listed in the EP / USP / ICH residual solvents Class I, Class II or Class III are used in the manufacture or are generated in the manufacturing process, solvents of concern will be indicated.

4.3.5		In-Coming Material Release
	Prior to its use in the manufacture of any Product all material(s) will be inspected, tested and released by Patheon against the Specification approved by the Client.

4.4 Building, Facilities, Utilities and Equipment

4.4.1		General
	All buildings and facilities used in the manufacturing, packaging, testing and storage of any materials and/or Product will be of suitable size, construction and location to facilitate cleaning, and will be maintained in a good state of repair. Maintenance and cleaning records will be kept in accordance with Patheon’s SOP’s.
4.4.2		Equipment, Calibration and Preventative Maintenance
	All equipment used in the manufacturing, packaging, testing and stage of any materials and/or Product will be suitable for its intended use and appropriately located to allow for cleaning and maintenance. Calibration and maintenance records will be kept according to Patheon SOP’s for all critical equipment. Patheon will calibrate instrumentation and qualify computer systems used in the manufacture and testing of the Product in accordance with Patheon’s SOP’s.
4.4.3		Environmental Monitoring Program
	Patheon will perform and maintain an environmental monitoring program. The collected data will be reviewed and interpreted by the responsible person within Patheon’s quality unit. Any out of limit results will be managed appropriately in accordance with Patheon SOP’s.

4.5 Production Controls

4.5.1	Master Batch Record
	The Client will provide the Specifications to Patheon and Patheon will manufacture Product in accordance with the Specifications.

Patheon is responsible for preparing the master batch records for the Product, however, the Client is responsible to review and approve such master batch records prior to the manufacture of the Product.

Patheon will not make changes to master batch records except through the established Patheon change control system, and all master document revisions will be approved by the Client . Any changes made to issued batch records (prior to master revisions) must be reviewed and approved by the Client’s quality unit prior to implementation unless otherwise agreed to in writing.

4.5.2		Reprocessing and Rework
	Patheon will not reprocess or rework the Product without the prior written consent from the Client.
	Reprocessing is defined as the introduction of material back into the process and repeating a step, (e.g. redrying, remilling) using the same equipment and techniques of the established manufacturing process.
	Rework is defined as the introduction of material to one or more processing steps that are different from the established manufacturing process.
4.5.3		Personnel Training
	Patheon will provide appropriate training for all employees. Each person engaged in the manufacture, packaging, testing, storage, and shipping of the Product will have the education, training, and experience necessary, consistent with current GMP and safety training requirements.

4.6 Packaging, Labeling and Printed Materials

4.6.1		Master Batch Packaging Records
	The Client will provide Patheon with the Specifications for all packaging components. Patheon will create, control, issue, and execute in accordance with the master batch packaging record and the Specifications.
	Patheon will not make changes to master batch packaging records except through the established Patheon change control system, and all master document revisions will be approved by the Client. Any changes made to issued batch records (prior to Master revisions) must be reviewed and approved by the Client prior to implementation unless agreed to in writing.
4.6.2		Printed Material and Artwork
	The Client will provide artwork and labelling text (blister, carton, leaflet, label etc.) Specifications to Patheon. The labelling proofs must be reviewed and approved by the Client.

4.6.3	Test Methods and Method Validation
	The Client will provide test methods and method validation for packaging components to Patheon. Where applicable, Patheon will provide test methods and validation for packaging components purchased from vendors on the Patheon approved vendor list only (Appendix C).

4.7 Exception Reports (Deviations / Investigations)

4.7.1	Manufacturing Instruction Deviations
	Patheon will document, investigate and resolve deviations from approved manufacturing instructions or Specifications in accordance with Patheon’s SOP’s. Patheon will report and obtain approval from the Client’s responsible person for deviation report (“DR”) type deviations where there is a potential to affect Product quality. Such Client approval will not be unreasonably withheld. Patheon will provide copies of all DR’s to the Client as part of the executed batch record.
4.7.2	Packaging Instructions Deviations
	Patheon will document, investigate, and resolve any deviation from approved packaging instructions or Specifications according to Patheon SOP’s. Patheon will report and obtain approval from the Client’s responsible person for DR type deviations where there is a potential to affect Product quality. Such Client approval will not be unreasonably withheld. Patheon will provide copies of all DR’s to the Client as part of the executed batch packaging record.
4.7.3	Notification of Deviations
	Patheon will notify the Client within [***] if any significant deviation occurs during manufacture of the Product, where such deviation affects the quality, efficacy or availability of the Product.

4.8 Release of Product

4.8.1	Test Methods and Specifications
	The Client will provide to Patheon the finished Product Specifications and will develop and supply validated analytical test methods to Patheon for the finished Product.
4.8.2	Batch Release for Shipment
	Batch review and release for shipment to the Client will be the responsibility of Patheon’s Quality Assurance department who will act in accordance with Patheon’s SOP’s.

4.8.3	Certificate of Compliance
	For each batch released by Patheon for shipment to the Client, Patheon will deliver to the Client a certificate of compliance that will include a statement that the batch has been manufactured in accordance with cGMPs and the Specifications.
4.8.4	Product Release
	The Client will have sole responsibility for release of the Product to the market. When Patheon qualified person (“QP”) services are employed, Patheon QP may release the Product for distribution on behalf of the Client.

4.9 Validation

4.9.1	Master Validation Plan
	Patheon will establish applicable master validation plans and maintain a validation program for the Product. The Client will review and approve the master validation plan, performance qualification and process validation protocols and reports for the Product.
4.9.2	Cleaning Validation Program
	The Client will provide to Patheon toxicological information to be used in the development of a cleaning program. Patheon will maintain an appropriate cleaning and cleaning validation program.
4.9.3	Analytical Method and Procedure Validation
	The Client must ensure that its analytical methods and manufacturing procedures (including packaging procedures) are validated. If the methods and procedures are not validated by the Client, then Patheon may assist in validation development with the costs being borne by the Client.

4.10 change control

4.10.1	General
	Patheon will notify and obtain approval from the Client before implementing any proposed changes to the process, materials, testing, equipment or premises, where such changes may directly affect the Product. This Client approval will not to be unreasonably withheld.
	The Client will be responsible for determining whether or not to initiate registration variation procedures and for maintaining adequate control over the quality commitments of the marketing authorization made to the regulatory authorities by the Client for the Products.

Following validation of a process change, Patheon will deliver a copy of the related validation report to the Client and the associated stability data, if applicable, as it becomes available.

4.11 Documentation

4.11.1	Record Retention
	Patheon will maintain all batch records for a minimum of [***] past Product expiry date and supply all these records to the Client upon request.
	Patheon will maintain records and evidence on the testing of raw materials and packaging/labeling materials for [***] after the materials were last used in the manufacture or packaging/labeling of the Product.
	At the end of the above noted retention period, the Client will be contacted concerning the future storage or destruction of the documents.
4.11.2	Batch Document Requisition
	At the request of the Client, Patheon will provide a copy of any of the executed batch documents relating to Products to the Client within [***] of such request.

4.12 Laboratory Controls

4.12.1	Specifications and Test Methods
	Patheon will test and approve starting material, intermediate, and the finished Product in accordance with the approved Specifications, analytical methods, and Patheon’s SOP’s.
	The Client will provide to Patheon the Active Material Specifications including a certificate of analysis
	The Client will provide to Patheon test methods for Active Material and excipients (if non-compendial). The Client is responsible for validating non-compendial testing methods. If these methods are not validated by the Client, then Patheon may assist in validation development with the costs being borne by the Client.
4.12.2	Out of Specifications (OOS) / Out of Trend (OOT)
	Patheon will notify Client of confirmed out-of-Specification (“OOS”) or out-of-trend (“OOT”) results within [***]. Patheon will generate a DR type deviation as per Patheon SOP’s and obtain approval of the DR from the Client’s responsible person within their quality unit. This Client approval will not be unreasonably withheld.

4.13 Stability

4.13.1	Sample Storage
	Patheon will store stability samples as required.
4.13.2	Stability Studies and Protocol
	The Client will develop and validate stability indicating assay(s) prior to process validation. If required, Patheon may assist with the cost being borne by the Client.
	If applicable, Patheon will conduct stability studies in accordance with the agreed and validated stability testing analytical methods at the agreed upon testing points in accordance with the approved stability protocol.
	Patheon will perform the stability testing described in a stability protocol agreed to by both Patheon and the Client. Stability data will be provided by Patheon to the Client on an ongoing basis as agreed to by both parties.
4.13.3	Stability Failures
	Patheon will notify the Client of any stability failure for Product supplied to the Client. If a result indicates that a Product has failed to remain within stability Specifications, Patheon will notify the Client within [***].
4.13.4	Termination of MSA
	If the MSA is terminated, Patheon will continue to provide the Client with stability data supporting the acceptability of the Product until all Product distributed by the Client has reached the end of its shelf-life.

4.14 Annual Product Review

4.14.1	General
	The Client will complete the annual product review in accordance with regulatory requirements of the Product marketed authorization. Patheon will provide copies of all information and correspondence necessary to support the annual product reviews when requested by the Client.

4.15 Storage and Distribution

4.15.1	General
	Patheon will ship Product in accordance with the agreed qualified transportation requirements provided by the Client to Patheon.

4.15.2	Product Storage and Shipment Changes
	Patheon will communicate any proposed changes in storage or shipping to the Client for review and approval. The Client approval will not be unreasonably withheld.
4.15.3	Product Quarantine
	Patheon will have a system in place for assuring that unreleased Product is not shipped unless authorized by the Client’s representative.

4.16 Product Complaints

4.16.1	Complaint Investigation
	The Client will investigate and resolve all medical and non-medical Product complaints. Patheon will investigate all Patheon manufacturing and packaging type Product complaints related to the Manufacturing Services provided. The Client will retrieve complaint sample(s) and forward them to Patheon in a timely manner to facilitate a complete and comprehensive investigation.

4.17 Product Recall

4.17.1	Product Recall Notification
	The Client will notify Patheon about a Product recall or other regulatory type product notification (e.g. field alert) as soon as possible, but, in any event, prior to informing the appropriate regulatory authorities. The Client will be responsible for all related recall activities.
4.17.2	Government Agency Notification
	The Client will perform the Product recall and will inform the appropriate regulatory authorities. Where legislated, Patheon reserves the right to notify regulatory authorities of Product quality issues. Patheon will inform the Client prior to any notification to the regulatory authorities.

4.18 Reference and retention Samples

4.18.1	Excipient and Active Ingredient Reference Sample
	Patheon will keep a reference sample of each material received by Patheon and used to manufacture the Product. The reference sample will consist of at least [***] the necessary quantity for all Quality Control tests required to determine whether the materials meet required Specifications.
	The reference samples will be stored by Patheon under controlled conditions in accordance with GMP storage requirements for [***] beyond the expiration date of the last batch of the product containing the

     materials. The reference samples will be made available by Patheon to the Client, if requested

4.18.2	Finished Product Retention Sample
	Retention samples of finished Product will be retained by Patheon for one (1) year past Product expiry or such longer period as required by law. Where applicable, the legal sample(s) of finished Product must be retained by the Client.

* * *

IN WITNESS WHEREOF, the parties have caused their duly authorized officer to execute and deliver this Quality Agreement as of the Effective Date identified on the first page:

AVANIR PHARMACEUTICALS, INC		PATHEON, INC
Name:    Randall E. Kaye		Name:    Brian Dale
Signature:	/s/ Randall E. Kaye	Signature:	/s/ Brian Dale
Date:    January 9, 2010		Date:    January 19, 2010

SECTION 5: APPENDES

• Appendix A: Product(s)

• Appendix B: Avanir Contacts

• Appendix C: Patheon Approved Supplier List

• Appendix D: Client Approved Supplier List

• Appendix E: Patheon Approved Contract Laboratories List

APPENDIX A: PRODUCT(S)

Products (s)	Galenic Form	Dosage (Strength)
[***]	[***]	Dextromethorphan HBr/Quinidine Sulfate [***]
[***]	[***]	Dextromethorphan HBr/Quinidine Sulfate [***]

Quality Agreement
QG01-05-T001-01

APPENDIX B: QUALITY CONTACTS

	Patheon	Avanir
Responsibility	Quality Assurance	General
Name	[***]
Title	[***]
Phone	[***]
Fax
E-mail	[***]
Address
Responsibility	Regulatory Affairs	Regulatory Affairs
Name	[***]	[***]
Title	[***]	[***]
Phone	[***]	[***]
Fax
E-mail	[***]	[***]
Address
Responsibility	Product Complaints	Audits
Name	[***]
Address
Responsibility	Product Release
Name	[***]
Title
Phone
Fax
E-mail
Address
Responsibility	Account Manager
Name
Title
Phone
Fax
E-mail
Address

Quality Agreement
QG01-05-T001-01

APPENDIX C: PATHEON APPROVED VENDOR LIST

SAP Code	Material Description	Manufacturer
[***]	[***]	[***]
[***]	[***]	[***]
[***]	[***]	[***]
[***]	[***]	[***]
[***]	[***]	[***]
[***]	[***]	[***]
[***]	[***]	[***]
[***]	[***]	[***]
[***]	[***]	[***]
[***]	[***]	[***]
[***]	[***]	[***]
[***]	[***]	[***]
[***]	[***]	[***]
[***]	[***]	[***]

Quality Agreement
QG01-05-T001-01

APPENDIX D: CLIENT APPROVED VENDOR LIST

SAP Code	Material Description	Supplier/Manufacturer
[***]	[***]	[***]
		[***]
[***]	[***]	[***]
		[***]

Quality Agreement
QG01-05-T001-01

APPENDIX E: PATHEON APPROVED CONTRACT LABORATORIES LIST

Contract Laboratory	Location
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]

Quality Agreement
QG01-05-T001-01

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Keith A. Katkin, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Avanir Pharmaceuticals, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: May 3, 2010	/s/ Keith A. Katkin
	Keith A. Katkin
	President and Chief Executive Officer [Principal Executive Officer]

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Christine G. Ocampo, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Avanir Pharmaceuticals, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: May 3, 2010	/s/ Christine G. Ocampo
	Christine G. Ocampo
	Vice President, Finance [Principal Financial Officer and Principal Accounting Officer]

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)

In connection with the accompanying Quarterly Report of Avanir Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the fiscal quarter ended March 31, 2010 (the “Report”), I, Keith A. Katkin, as Chief Executive Officer of the Company, and Christine G. Ocampo, as Vice President, Finance of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: May 3, 2010	/s/ Keith A. Katkin
	Keith A. Katkin
	President and Chief Executive Officer [Principal Executive Officer]
Dated: May 3, 2010	/s/ Christine G. Ocampo
	Christine G. Ocampo
	Vice President, Finance
	[Principal Financial Officer and Principal Accounting Officer]