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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended September 30, 2014

¨	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		33-0314804
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

30 Enterprise Suite 400, Aliso Viejo, California		92656
(Address of principal executive offices)		(Zip Code)

(949) 389-6700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. YES ¨ NO þ

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 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 ¨

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 þ NO ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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):

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of March 31, 2014 was approximately $586.5 million, based upon the closing price on the NASDAQ Global Market reported for such date. Shares of common stock held by each officer and director and by each person who is known to own 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates of the Company. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of December 1, 2014, the registrant had 193,758,703 shares of common stock issued and outstanding.

Table of Contents


		Page
PART I
Item 1.	Business		3
Item 1A.	Risk Factors		13
Item 1B.	Unresolved Staff Comments		36
Item 2.	Properties		36
Item 3.	Legal Proceedings		36
Item 4.	Mine Safety Disclosures		38

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		38
Item 6.	Selected Financial Data		39
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		40
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		56
Item 8.	Financial Statements and Supplementary Data		56
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		56
Item 9A.	Controls and Procedures		57
Item 9B.	Other Information		57

PART III
Item 10.	Directors, Executive Officers and Corporate Governance		58
Item 11.	Executive Compensation		64
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		87
Item 13.	Certain Relationships and Related Transactions, and Director Independence		89
Item 14.	Principal Accountant Fees and Services		91

PART IV
Item 15.	Exhibits and Financial Statement Schedules		92
SIGNATURES			97

PART I

Item 1.

Business

Except for the historical information contained herein, the matters set forth in this Annual Report on Form 10-K, including statements regarding the Company’s plans, potential opportunities, financial or other expectations, projections, goals objectives, milestones, strategies, market growth, timelines, legal matters, product pipeline, clinical studies, product development and the potential benefits of its commercialized products and products under development are forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from the anticipated or estimated future results, including the risks and uncertainties associated with Avanir’s future operating performance and financial position, developments in Avanir’s ongoing NUEDEXTA patent litigation, the market demand for and acceptance of Avanir’s products domestically and internationally, research, development and commercialization of new products domestically and internationally, obtaining and maintaining regulatory approvals domestically and internationally, including, but not limited to potential regulatory delays or rejections, risks associated with meeting the objectives of clinical studies, including, but not limited to, delays or failures in enrollment, and the occurrence of adverse safety events, risks relating to our ability to accomplish our business development objectives, and realize the anticipated benefit of any such transactions, and other risks set forth below under Item 1A, “Risk Factors” and other documents subsequently filed with or furnished to the Securities and Exchange Commission. These forward-looking statements are based on current information that may change and you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update any forward-looking statement to reflect events or circumstances after the date hereof.

References in this report to Avanir, the Company, we, our and us refer to Avanir Pharmaceuticals, Inc. and its subsidiaries, on a consolidated basis. “Avanir” and “NUEDEXTA” are registered trademarks of Avanir Pharmaceuticals, Inc. or its subsidiaries in the U.S. and/or other countries. Other trademarks or service marks appearing in this report may be trademarks or service marks of other owners.

EXECUTIVE OVERVIEW

Avanir is a biopharmaceutical company focused on acquiring, developing and commercializing novel therapeutic products for the treatment of central nervous system disorders. Our lead product NUEDEXTA^® (referred to as AVP-923 during clinical development) is a first-in-class dual N-methyl-D-aspartate (“NMDA”) receptor antagonist and sigma-1 agonist. NUEDEXTA, 20/10 mg (dextromethorphan hydrobromide 20 mg/quinidine sulfate 10 mg), is approved in the United States for the treatment of pseudobulbar affect (“PBA”). It is also approved for the symptomatic treatment of PBA in the European Union in two dose strengths, NUEDEXTA 20/10 mg and NUEDEXTA 30/10 mg. We commercially launched NUEDEXTA in the United States in February 2011 and we are currently assessing plans regarding the potential commercialization of NUEDEXTA in the European Union.

We are studying the clinical utility of AVP-923 in other mood/behavior disorders and movement disorders, including the potential treatment of agitation in patients with Alzheimer’s disease and the potential treatment of levodopa-induced dyskinesia in Parkinson’s disease (“LID”). Our Phase 2 LID study is supported by a grant from the Michael J. Fox Foundation. Our Phase 2 study of agitation in Alzheimer’s disease was recently completed and, on September 15, 2014, we announced positive results for this study (see “AVP-923 for the Treatment of Agitation in Patients with Alzheimer’s Disease,” below).

only a limited non-clinical package as part of the Investigational New Drug (“IND”) application. In August 2014, we initiated a Phase 2 study for AVP-786 as an adjunctive therapy to antidepressants for the treatment of Major Depressive Disorder (“MDD”.)

We are also developing a novel Breath Powered™ intranasal delivery system containing low-dose sumatriptan powder for the acute treatment of migraine, AVP-825. If approved, this product would be the first and only fast-acting dry-powder nasal delivery form of sumatriptan. AVP-825 is licensed from OptiNose AS (“OptiNose”). Under the terms of the agreement, we assumed responsibility for regulatory, manufacturing, supply-chain and commercialization activities for the investigational product. In March 2014, the FDA accepted our New Drug Application (“NDA”) of AVP-825. In November 2014, we received a Complete Response Letter from the FDA, which requested that we assess the root cause(s) of device use errors observed in the previously conducted human factors testing. We are currently working to address these issues and intend to conduct a new human factors study, with input from the FDA, with a goal to respond to the Complete Response Letter in the first half of calendar 2015. The FDA did not find any clinical or non-clinical safety or efficacy issues nor chemistry, manufacturing, and controls (CMC) issues. The FDA did not request that any additional clinical trials be conducted prior to approval.

We entered into a multi-year agreement with Merck Sharp & Dohme Corp. (“Merck”) to co-promote Merck’s type 2 diabetes therapies JANUVIA^® (sitagliptin) and the sitagliptin family of products in the long-term care institutional setting in the United States beginning October 1, 2013. The term of the agreement will continue for three years following the launch date of the co-promotion activities, unless terminated earlier pursuant to the terms of the agreement. Under the terms of the agreement, we will be compensated via a (i) fixed monthly fee and (ii) performance fee based on the amount of the products sold by us above a predetermined baseline. A significant majority of the fee is performance-based. Over the three years of the agreement, Avanir could receive up to $46.7 million in compensation, including revenue earned in the first contract year.

We have developed and licensed certain intellectual property rights relating to NUEDEXTA and our existing drug candidates (AVP-923, AVP-786 and AVP-825) and we continue to actively seek to acquire rights to other complementary products and technologies, particularly following our successful defense of the patents underlying NUEDEXTA. As a result, we intend to seek to in-license or acquire through other means, such as mergers, stock purchases or asset purchases, complementary products and technologies, as well as sales and marketing infrastructure and other assets or resources. There can be no assurance, however, that we will be successful in acquiring any additional assets, or that we will receive the anticipated benefits of any such acquisitions.

Avanir was incorporated in California in August 1988 and was reincorporated in Delaware in March 2009.

MERGER AGREEMENT

On December 1, 2014, Avanir entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Otsuka Pharmaceutical Co., Ltd., a Japanese joint stock company (“Otsuka”), and Bigarade Corporation, a Delaware corporation and a wholly-owned subsidiary of Otsuka (“Acquisition Sub”), pursuant to which, and on the terms and subject to the conditions thereof, among other things, Acquisition Sub will commence a tender offer (“Offer”) as soon as practicable after the date of the Merger Agreement, but in no event later than ten business days after the date of the Merger Agreement, to acquire all of the outstanding shares of common stock of the Company (the “Company Shares”) at a purchase price of $17.00 per Company Share net to the holder thereof in cash, subject to reduction for any applicable withholding taxes, without interest (the “Offer Price”). The Offer is not subject to a financing condition.

authority that would make illegal or otherwise prohibit the Offer, the acquisition of Company Shares by Otsuka or Acquisition Sub or the Merger (as defined below) within the United States, (iv) the accuracy of the representations and warranties of the Company contained in the Merger Agreement, subject to customary exceptions, (v) the Company’s material compliance with its covenants contained in the Merger Agreement, (vi) there not having been a material adverse effect on the Company following the execution of the Merger Agreement that is continuing, and (vii) other customary conditions.

Following the completion of the Offer and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Acquisition Sub will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Otsuka, pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law without any stockholder approvals (the “Merger”). The Merger Agreement contains certain customary termination rights in favor of each of the Company and Otsuka, including under certain circumstances, the requirement for the Company to pay to Otsuka a termination fee of $90 million.

The Merger Agreement contains customary representations, warranties and covenants, including covenants obligating the Company to continue to conduct its business in the ordinary course and to cooperate in seeking regulatory approvals.

MARKETED PRODUCTS AND DRUG CANDIDATES

The following chart illustrates the status of research and development activities for our products and product candidates that are commercialized or under development.

LOGO

In addition to the research and development programs identified above, Avanir has provided unrestricted research grants to support several investigator initiated studies with AVP-923. Current studies planned or ongoing include potential treatment of behavioral symptoms of adults with autism spectrum disorder, treatment of bulbar function (impaired speech, swallowing, and saliva control) associated with amyotrophic lateral sclerosis (“ALS”), and potential treatment of treatment-resistant depression. For additional information regarding these studies please see http://clinicaltrials.gov.

NUEDEXTA for the Treatment of Pseudobulbar Affect

NUEDEXTA is the first and only FDA and European Medicines Agency (“EMA”)-approved treatment for PBA. PBA occurs secondary to a variety of otherwise unrelated neurological conditions, and is characterized by involuntary, sudden, and frequent episodes of laughing and/or crying. PBA episodes typically occur out of proportion or incongruent to the patient’s underlying emotional state.

NUEDEXTA is an innovative combination of two well-characterized components: dextromethorphan hydrobromide, the ingredient that is pharmacologically active in the central nervous system, and quinidine sulfate, a metabolic inhibitor enabling dextromethorphan to reach therapeutic plasma concentrations. NUEDEXTA acts on sigma-1 and NMDA receptors in the brain, although the mechanism by which NUEDEXTA exerts therapeutic effects in patients with PBA is unknown.

Studies to support the effectiveness of NUEDEXTA were performed in patients with PBA and underlying ALS and Multiple Sclerosis (“MS”). The primary outcome measure, the number of laughing and crying episodes, was significantly lower in the NUEDEXTA cohort compared with placebo. The secondary outcome measure, the Center for Neurologic Studies Lability Scale (“CNS-LS”), demonstrated a significantly greater mean decrease in CNS-LS score from baseline for the NUEDEXTA cohort compared with placebo. NUEDEXTA has not been studied in other types of emotional lability that can commonly occur, for example, in Alzheimer’s disease and other dementias.

NUEDEXTA safety information

For a description of the NUEDEXTA safety information, a copy has been filed as Exhibit 99.1 on this Annual Report on Form 10-K for the period ended September 30, 2014. For additional information regarding PBA or NUEDEXTA see www.pbafacts.com or www.nuedexta.com.

PBA indication and market

PBA is a distinct neurologic syndrome that is characterized by a loss of control of emotional expression, involving episodes of involuntary crying or laughing that are contrary or exaggerated relative to the patient’s inner feelings.

There are an estimated 18 to 20 million people in the United States who suffer from the underlying neurologic conditions that can give rise to PBA. These underlying neurologic conditions include but are not limited to ALS (Lou Gehrig’s disease), MS, Alzheimer’s disease and other dementias, Parkinson’s disease, stroke and traumatic brain injury. Based on the epidemiologic medical literature, physician estimates, market research, an Avanir-sponsored patient survey of 2,464 neurologic patients and their caregivers, and the PRISM PBA registry which enrolled 5,290 neurologic patients across 173 investigator sites in the U.S., we estimate that approximately 10% of people in the United States who suffer from neurological disease or injury also suffer from moderate to severe PBA symptoms, with many more suffering from mild PBA symptoms. Initial research indicates a similar rate of prevalence of PBA in the European Union.

Other than NUEDEXTA, there are no FDA-approved therapies or European Medicines Agency (“EMA”)-approved therapies indicated to treat PBA. Some physicians treat PBA using a range of drugs off-label, including: selective serotonin reuptake inhibitors/serotonin-norepinephrine reuptake inhibitors (SSRIs/SNRIs), tri-cyclic antidepressants and atypical antipsychotics. According to our market research, physicians are generally only moderately satisfied with these off-label therapies as a treatment for PBA. We periodically conduct this market research through an Internet-based survey of approximately 240 physicians, consisting of Neurologists, Internal Medicine/Geriatrics, Psychiatrists and long-term care affiliated physicians who treat sufficient numbers of neurologic patients at-risk of PBA.

We believe that NUEDEXTA represents a more attractive treatment option for patients suffering from PBA. In our Phase 3 STAR trial that was completed in 2009, patients treated with NUEDEXTA reported an average 82% reduction in PBA episodes at the end of the 12-week study compared to baseline, with an average 44% reduction in episodes after the first week of treatment. Over the course of the 12-week study, patients receiving NUEDEXTA

experienced significantly lower PBA episode rates versus placebo (P<0.0001). Over the final two weeks of the STAR trial, 51% of patients treated with NUEDEXTA achieved episode-free remission.

In October 2014, at the American Neurological Association annual meeting, Avanir presented data from the PRISM II open label study assessing the effectiveness, tolerability and safety of NUEDEXTA treating PBA in 134 patients with underlying Alzheimer’s disease/dementia. The PRISM II study demonstrated a 68% reduction in PBA episodes vs. baseline (P<0.001) and 78% of the investigators rated their patient’s condition with respect to PBA as much and very much improved after 12 weeks of treatment. In this study NUEDEXTA was well tolerated with a safety profile similar to previous controlled studies.

NUEDEXTA commercial strategy

We currently market NUEDEXTA in the U.S. to approximately 20,000 physicians and other healthcare providers who specialize in psychiatry, neurology, internal medicine or geriatric medicine and practice in outpatient or long-term care settings in the U.S. Our U.S. commercial strategy for NUEDEXTA includes the following key objectives:

•

Maximize sales force reach in retail and institutional channels — We have two separate sales teams in the retail specialty and institutional channels which has expanded our sales force reach and increased our efficiency by allowing each team to focus their specialized skill set and expertise towards the unique needs of each distinct channel.

•

Increase awareness and appropriate diagnosis of PBA — Since PBA is under-diagnosed and often not treated, we use a range of tools to educate physicians and nurses about the prevalence of PBA, the burden of the disease, the differential diagnosis versus depression, and encourage the utilization of screening tools to appropriately diagnose PBA in patients with underlying neurological disorders.

•

Expand adoption of NUEDEXTA — We are focused on driving awareness of NUEDEXTA and educating health care providers on the risks and benefits of the drug. These interactions take place in a wide range of settings including physician offices, long term care facilities, speaker programs and medical meetings and conferences.

•

Minimize barriers to patient access — We work actively with major insurance plans and pharmacy benefit managers to ensure that NUEDEXTA receives the appropriate coverage and patients with PBA have access to the drug. Additionally, we have a range of patient programs to help defray some of the out-of-pocket costs of the medication including co-pay cards, support for a third party patient assistance foundation program for Medicare Part D patients, and patient assistance programs for under-insured patients and patients lacking health insurance.

•

Motivate patients and caregivers to request and adhere to NUEDEXTA therapy — Our market research has shown that many neurological patients are not aware that PBA is a distinct medical condition and do not discuss their symptoms with their physicians. Research also shows that when they engage with a physician, they are likely to be appropriately diagnosed and receive a medication like NUEDEXTA. Based on this data, we have engaged in a series of programs directly communicating with patients and their caregivers to provide educational material on PBA and NUEDEXTA where appropriate. These programs include direct database marketing, Internet advertising and direct response television advertising.

We received approval in June 2013 to market NUEDEXTA in the European Union and are currently evaluating our commercial strategy for the European Union.

AVP-923 for the Treatment of Agitation in Patients with Alzheimer’s Disease

Alzheimer’s disease is generally characterized by cognitive decline, impaired performance of daily activities, and behavioral disturbances. Behavioral and psychiatric symptoms develop in as many as 60% of community-dwelling dementia patients and in more than 80% of patients with dementia living in nursing homes; as the disease

progresses the risk of such complications approaches 100%. Dementia-related behavioral symptoms, including agitation, can be extremely distressing to the individual, the family, and caregivers. These behavioral disturbances have been associated with more rapid cognitive decline, institutionalization, and increased caregiver burden.

On September 15, 2014, Avanir announced positive results from a Phase 2 clinical study of AVP-923 in the treatment of agitation in Alzheimer’s patients. The objectives of this proof-of-concept study were to evaluate the safety, tolerability, and efficacy of AVP-923 for the treatment of agitation in Alzheimer’s patients. The trial was a multicenter, randomized, double-blind, placebo-controlled study that enrolled approximately 220 Alzheimer’s patients in the United States utilizing a Sequential Parallel Comparison Design (“SPCD”) intended to reduce placebo response rates. Eligible patients were initially randomized 3:4 to receive either AVP-923 (dose escalated from DM 20mg/Q 10mg to DM 30mg/Q 10mg) or placebo. At the end of week five, patients who initially received placebo were stratified according to their response to treatment and subsequently re-randomized 1:1 to receive either AVP-923 or placebo for the remainder of the study (an additional five weeks of treatment). The primary efficacy measure was the agitation/aggression domain of the Neuropsychiatric Inventory (“NPI”). The primary endpoint follows a standard analysis of SPCD by combining the change from baseline to week five (stage 1: full analysis population) and change from week five to week ten (stage 2) on the NPI agitation/aggression domain (patients who were considered “non-responders” to placebo during the initial five weeks). Secondary outcome measures include global assessments of disease severity, other neuropsychiatric symptoms, cognition, activities of daily living, quality of life and caregiver strain.

Treatment with AVP-923 was associated with significantly reduced agitation as measured by the primary endpoint, the agitation/aggression domain score of the NPI compared to placebo (p=0.00008). The reduction in agitation was observed in both stage 1 (p=0.0002) and stage 2 (p=0.021) of the SPCD. In addition, improvements were also seen in secondary endpoints including the NPI total score (p=0.014), clinical global impression of change-agitation (p=0.0003), patient global impression of change (p=0.001) and measures of caregiver burden (p£0.05). The complete set of primary and secondary endpoints in the study is set forth below. In the study, AVP-923 showed a statistically significant improvement over placebo in the primary endpoint and in a majority of the secondary endpoints.

Primary Endpoint

The treatment effect of AVP-923 was measured using the agitation/aggression domain of the NPI. The NPI is a well-accepted tool and was developed to provide a means of assessing neuropsychiatric symptoms and psychopathology of patients with Alzheimer’s disease and other neurodegenerative disorders. The NPI has proven to be sensitive to change and has been employed to capture treatment related behavioral changes in patients receiving cholinesterase inhibitors, antipsychotic agents, melatonin and a variety of other anti-dementia and psychotropic compounds. The NPI is comprised of 12 domains. The score for each domain is the product of frequency (on a four-point scale) x severity (on a three-point scale). The maximum score on any single sub-domain is therefore 12. A 30 percent reduction in the agitation/aggression domain of the NPI is considered to be a clinically meaningful improvement in symptoms. The NPI caregiver distress score provides internal validity to the score of each NPI domain and the overall NPI.

At the study baseline, the NPI agitation/aggression domain was 7.0 and 7.1 for patients in the AVP-923 and placebo groups, respectively. At the end of stage 1, scores for the AVP-923 treated patients had reduced by 3.3 (SD=2.98), vs. 1.7 (SD=3.10) for placebo (p<0.001), amounting to a 47 percent reduction and a Standard Effect Size (SES)=0.505. In stage 2, where only placebo non-responders were included in the primary analysis, a reduction of 2.0 (SD=3.19) was observed in patients treated with AVP-923 vs. 0.8 for patients on placebo (p=0.021), corresponding to a 26 percent reduction for AVP-923 vs. a 6.7 reduction for placebo and a SES=0.340.

Secondary Endpoints and Safety Measures

Clinical benefits were observed across a number of secondary endpoints providing additional insight into the overall treatment effect. Improvements were observed in the following measures (SPCD analysis):

•

Total NPI: p=0.014

•

Two NPI domain clusters encompassing commonly observed symptoms of agitation:

•

NPI4A (agitation/aggression: irritability/lability; aberrant motor behavior; and anxiety): p=0.001

•

NPI4D (agitation/aggression; irritability/lability; aberrant motor behavior; and disinhibition): p<0.001

•

Clinical Global Impression of Change-agitation: p=0.0003

•

Clinical Global Impression of Change-overall: p=0.005

•

Patient Global Impression of Change: p=0.001

•

Measures of caregiver distress/strain:

•

Caregiver Distress — NPI agitation/aggression: p=0.01

•

Caregiver Distress NPI total: p=0.014

•

Caregiver Strain Index (CSI): p=0.05

•

Cornell Scale for Depression in Dementia (CSDD): p=0.02

Additionally, there was no evidence of cognitive decline for patients treated with AVP-923 as shown by the Mini-Mental State Examination (MMSE), a widely utilized measure of general cognitive function (SPCD analysis p=0.053; trend in favor of AVP-923) and the Alzheimer’s Disease Assessment Scale-Cognition (ADAS-Cog) (p=NS).

Two secondary endpoints, the Alzheimer’s Disease Cooperative Study-Activities of Daily Living (ADCS-ADL) Inventory and Quality of Life-AD (QoL-AD) Measure (patient and caregiver) showed no difference between treatment groups (p=NS).

In the study, AVP-923 was shown to be generally well tolerated with treatment emergent adverse events consistent with the known safety profile of AVP-923. The most common adverse events (with an incidence greater than 3 percent and greater than placebo) were falls (8.6 percent versus 3.9 percent), diarrhea (5.9 percent versus 3.1 percent) and urinary tract infection (5.3 percent versus 3.9 percent) for AVP-923 versus placebo, respectively. In addition, no new cardiovascular safety signals and no clinically significant changes in QTc were observed in the study. Serious adverse events were reported in 7.9 percent of patients receiving AVP-923 versus 4.7 percent receiving placebo. The overall patient discontinuation rate was low (11.8 percent); 5.3 percent of patients discontinued the study due to an adverse event in the AVP-923 group versus 3.1 percent in the placebo group.

As a result of the successful study, we have requested a meeting with the FDA and intend to request a meeting with the EMA to discuss next steps in the clinical program. We also expect to discuss with the FDA the possibility of transitioning the Phase 2 study results in AVP-923 to AVP-786, and thereby proceeding with the development of AVP-786 for this indication.

AVP-923 for the Treatment of Levodopa-Induced Dyskinesia

LID occurs in most patients with PD, after several years of treatment, generally in association with other motor response complications, such as wearing-off or “on-off” fluctuations. Dyskinesia may be as disabling as the parkinsonism itself, and current treatment options are limited and are not always effective.

This proof-of-concept, double blind, randomized, crossover study will compare AVP-923 (45mg DM/10mg Q) with placebo for treatment of LID. The study will enroll approximately 16 PD patients across three study centers in the U.S. and Canada. Study participants will receive, in a random order, a two-week treatment with AVP-923 and a two-week placebo treatment, separated by a two-week break. At the end of each two-week treatment period,

patients will receive a two-hour levodopa infusion to test the drug effect on dyskinesia. Patients will be carefully monitored throughout the six-week study for side effects, PD symptoms and general health status. The results of this study will help inform future development of AVP-923 for LID. This study is being funded through a grant awarded by the Michael J. Fox Foundation. .

AVP-786 for the Treatment of Neurologic and Psychiatric Disorders

AVP-786 is a novel investigational drug product consisting of a combination of deuterium-modified dextromethorphan (a new chemical entity, or “NCE”) and the metabolic inhibitor quinidine. The compound was developed through incorporation of deuterium into molecular positions of dextromethorphan, resulting in strengthened molecular bonds which reduce susceptibility to enzyme cleavage. This AVP-786 formulation contains significantly less quinidine than used in AVP-923. In June 2013, the FDA agreed to an expedited development pathway for AVP-786, requiring only a limited non-clinical package as part of the IND application. We are currently studying AVP-786 in MDD and intend to study AVP-786 in agitation in patients with Alzheimer’s disease and potentially other disorders of the nervous system.

AVP-786 for the Adjunctive Treatment to Antidepressants for Major Depressive Disorder

Major depressive disorder is a condition in which patients exhibit depressive symptoms, such as a depressed mood or a loss of interest or pleasure in daily activities consistently for at least a two-week period, and demonstrate impaired social, occupational, educational or other important functioning. An estimated 16.1 million people in the United States suffer from MDD in a given year, with as many as two-thirds of patients who are diagnosed with MDD do not experience adequate improvement with initial antidepressant therapy.

In August 2014, we initiated patient enrollment in a Phase 2 study for AVP-786 as adjunctive therapy to antidepressants for the treatment of MDD. This multicenter, randomized, double-blind, placebo-controlled proof-of-concept Phase 2 study will evaluate the efficacy and safety of AVP-786 in patients suffering from MDD who have had an inadequate response to commonly prescribed antidepressants, including selective serotonin reuptake inhibitors and serotonin-norepinephrine reuptake inhibitors. The study is expected to enroll approximately 200 patients in the United States. The study will utilize innovative methodologies to reduce the placebo response, which is commonly observed in depression trials. Eligible patients will be randomized to receive either AVP-786 or placebo for 10 weeks. The main efficacy measure is the Montgomery-Asberg Depression Rating Scale total score, a standard clinical measure of depression. Secondary outcome measures include assessments of disease severity, activities of daily living, and quality of life. Pharmacokinetics and standard safety assessments will also be conducted.

AVP-825 for the Acute Treatment of Migraine

Migraine represents an area of significant unmet medical need. According to the Centers for Disease Control and Prevention, over 37 million people in the United States suffer from migraine headaches. The triptan class of medications is generally considered the standard of care with over 13 million prescriptions written annually. Sumatriptan is the class leader with a market share of over 50%, making it the most commonly prescribed migraine drug in the U.S. An online survey of over 2,500 frequent migraine sufferers revealed that 66% were dissatisfied with their treatments. As a result, many migraine sufferers are seeking fast-acting, well-tolerated treatment options.

AVP-825 is an investigational drug-device combination product consisting of low-dose sumatriptan powder for the acute treatment of migraine. The powder is delivered intranasally utilizing a novel Breath Powered delivery technology. If approved, AVP-825 would be the first and only fast-acting dry-powder intranasal form of sumatriptan. In March 2014, the FDA accepted our NDA of AVP-825. In November 2014, we received a Complete Response Letter from the FDA, which requested that we assess the root cause(s) of device use errors observed in the previously conducted human factors testing. We are currently working to address these issues and intend to conduct a new human factors study, with input from the FDA, with a goal to respond to the Complete Response Letter in the first half of calendar 2015. The FDA did not find any clinical or non-clinical safety or efficacy issues nor chemistry, manufacturing, and controls (CMC) issues. The FDA did not request that any additional clinical trials be conducted prior to approval.

In June 2014, the Company completed a Phase 3b clinical trial comparing the efficacy and safety of the investigational product AVP-825 22mg to sumatriptan 100mg tablets for the acute treatment of migraines in adults (“the COMPASS study”). The COMPASS study met the primary endpoint for the sum of pain intensity difference at 30 minutes post dose, showing that migraine sufferers achieved greater pain relief within 30 minutes of treatment with 22 mg of the investigational product AVP-825 compared with 100 mg sumatriptan tablet (p<0.0001). In addition, AVP-825 treated migraine sufferers achieved pain freedom in a greater proportion of migraine attacks at 15, 30, 45, 60 and 90 minutes post dose compared with those treated with sumatriptan tablet (p<0.05). In these topline data, several additional secondary endpoints relating to pain relief were also met.

The overall safety profile of AVP-825, an investigational product, was consistent with that observed in previous trials, with less than 2% of subjects experiencing an adverse event leading to treatment discontinuation. There were no serious adverse events in the study. Nasal discomfort and abnormal product taste were more common with AVP-825 administration; these adverse events were deemed mild in nearly 90% of cases.

Competition

The pharmaceutical industry is characterized by rapidly evolving technology and intense competition. A large number of companies of all sizes, including major pharmaceutical companies and specialized biotechnology companies, engage in activities similar to our activities. Many of our competitors have substantially greater financial and other resources available to them. In addition, colleges, universities, governmental agencies and other public and private research organizations continue to conduct research and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technologies that they have developed. Some of our competitors’ current or future products and technologies may be in direct competition with ours. We also must compete with these institutions in recruiting highly qualified personnel.

NUEDEXTA for Pseudobulbar Affect. Although NUEDEXTA is the first product to be marketed for the treatment of PBA, we are aware that physicians may prescribe other products in an off-label manner for the treatment of this disorder. For example, NUEDEXTA may face competition from the following products:

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Antidepressants, including Prozac^®, Celexa^®, Zoloft^®, Paxil^®, Elavil^® and Pamelor^® and others;

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Atypical antipsychotic agents, including Zyprexa^®, Risperdal^®, Seroquel, Abilify^®, Geodon^® and others; and

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Miscellaneous agents, including Symmetrel^®, Lithium and others.

While it is also possible that compounding pharmacies could combine the components of NUEDEXTA in an unauthorized fashion that is in violation of our patents, it is inconsistent with the policies of the Pharmacy Compounding Accreditation Board.

Manufacturing

We currently have no manufacturing or production facilities and, accordingly, rely on third parties for commercial and clinical production of our products and product candidates. We obtain the APIs for NUEDEXTA from a sole supplier who is one of several available commercial suppliers. (See Item 1A, “Risk Factors”).

Intellectual Property Rights

Patents

We own and have licensed a number of our patents relating to our products, which in the aggregate are believed to be of material importance to us in the operation of our business. See Item 1A, “Risk Factors.”

Trademarks and Other Intellectual Property Rights

We have made a practice of selling our products under trademarks and of obtaining protection for these trademarks by all available means. These trademarks are protected under the common law and/or by registration in the United States and other countries. We consider these trademarks in the aggregate to be of material importance in the operation of our business.

Our intellectual property also includes copyrights, confidential and trade secret information.

Government Regulations

The FDA and comparable regulatory agencies in foreign countries extensively regulate the manufacture and sale of the pharmaceutical products that we have developed or are currently developing. The FDA has established guidelines and safety standards that are applicable to the nonclinical evaluation and clinical investigation of therapeutic products and stringent regulations that govern the manufacture and sale of these products. The process of obtaining regulatory approval for a new therapeutic product usually requires a significant amount of time and substantial resources. The steps typically required before a product can be tested in humans include:

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Animal pharmacology studies to obtain preliminary information on the safety and efficacy of a drug; and

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Non-clinical evaluation in vitro and in vivo including extensive toxicology studies.

The results of these non-clinical studies may be submitted to the FDA as part of an IND application. The sponsor of an IND application may commence human testing of the compound 30 days after submission of the IND, unless notified to the contrary by the FDA.

The clinical testing program for a new drug typically involves three phases:

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Phase 1 investigations are generally conducted in healthy subjects. In certain instances, subjects with a life-threatening disease, such as cancer, may participate in Phase 1 studies that determine the maximum tolerated dose and initial safety of the product;

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Phase 2 studies are conducted in limited numbers of subjects with the disease or condition to be treated and are aimed at determining the most effective dose and schedule of administration, evaluating both safety and whether the product demonstrates therapeutic effectiveness against the disease; and

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Phase 3 studies involve large, well-controlled investigations in diseased subjects and are aimed at verifying the safety and effectiveness of the drug.

Data from all clinical studies, as well as all nonclinical studies and evidence of product quality, typically are submitted to the FDA in a NDA. Although the FDA’s requirements for clinical trials are well established and we believe that we have planned and conducted our clinical trials in accordance with the FDA’s applicable regulations and guidelines, these requirements, including requirements relating to testing the safety of drug candidates, may be subject to change or new interpretation. Additionally, we could be required to conduct additional trials beyond what we had planned due to the FDA’s safety and/or efficacy concerns or due to differing interpretations of the meaning of our clinical data. (See Item 1A, “Risk Factors”).

The FDA’s Center for Drug Evaluation and Research must approve a NDA for a drug before it may be marketed in the U.S. If we begin to market our proposed products for commercial sale in the U.S., any manufacturing operations that may be established in or outside the U.S. will also be subject to rigorous regulation, including compliance with current good manufacturing practices. We also may be subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substance Control Act, the Export Control Act and other present and future laws of general application.

Regulatory obligations continue post-approval, and include the reporting of adverse events when a drug is utilized in the broader commercial population. Promotion and marketing of drugs is also strictly regulated, with penalties imposed for violations of FDA regulations, the Lanham Act (trademark statute), and other federal and state laws, including the federal anti-kickback statute.

We currently intend to continue to seek, directly or through our partners, approval to market our products and product candidates in foreign countries, which may have regulatory processes that differ materially from those of the FDA. We anticipate that we will rely upon pharmaceutical or biotechnology companies to license our proposed products or independent consultants to seek approvals to market our proposed products in foreign countries. We cannot assure you that approvals to market any of our proposed products will be obtained in any country. Approval to market a product in any one foreign country does not necessarily indicate that approval can be obtained in other countries.

Product Liability Insurance

We maintain product liability insurance on our products and clinical trials that provides coverage in the amount of $20 million per incident and $20 million in aggregate.

Executive Officers and Key Employees of the Registrant

Information concerning our executive officers and key employees, including their names, ages and certain biographical information can be found in Part III, Item 10 under the caption, “Executive Officers and Key Employees of the Registrant.” This information is incorporated by reference into Part I of this report.

Employees

As of December 1, 2014, we employed 484 persons, including 54 engaged in research, development, regulatory and medical affairs activities, 394 in selling and marketing, and 36 in general and administrative functions.

Financial Information about Segments

We operate in a single accounting segment — the development and commercialization of novel treatments that target the central nervous system. Refer to Note 14, “Segment Information” in the Notes to Consolidated Financial Statements.

General Information

Our principal executive offices are located at 30 Enterprise, Suite 400, 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. No portion of our website is incorporated by reference into this Annual Report on Form 10-K.

You are advised to read this Annual Report on Form 10-K in conjunction with other reports and documents that we file from time to time with the Securities and Exchange Commission (“SEC”). In particular, please read our definitive proxy statement, which will be filed with the SEC in connection with our 2015 Annual Meeting of Stockholders, our Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K that we may file from time to time. You may obtain copies of these reports after the date of this annual report directly from us or from the SEC at the SEC’s Public Reference Room at 100 F Street, N.E. Washington, D.C. 20549. In addition, the SEC maintains information for electronic filers (including Avanir) at its website at www.sec.gov. The public may obtain information regarding the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. 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.

Item 1A.

Risk Factors

This Annual Report on Form 10-K contains forward-looking information based on our current expectations. Because our actual results may differ materially from any forward-looking statements that we make or that are made on our behalf, this section includes a discussion of important factors that could affect our actual future results, including, but not limited to, our product sales, capital resources, commercial market estimates, safety of NUEDEXTA, future development efforts, patent protection, effects of healthcare reform, reliance on third parties, and other risks set forth below. We disclaim any intent to update forward-looking statements to reflect subsequent developments or actual results.

Risks Related to our Pending Acquisition by Otsuka

The conditions under the Merger Agreement to Otsuka’s consummation of the Offer and the subsequent Merger may not be satisfied at all or in the anticipated timeframe.

On December 1, 2014, we entered into the Merger Agreement. The obligation of Otsuka and Acquisition Sub to complete the Offer and consummate the Merger is subject to certain conditions, including (i) the expiration or termination of any waiting period (and extensions thereof) applicable to the transactions contemplated by the Merger Agreement under the HSR Act, (ii) that the number of Company Shares validly tendered and not withdrawn

in accordance with the terms of the Offer, together with the Company Shares then owned by Otsuka, Acquisition Sub and their respective controlled affiliates, represents at least a majority of all then outstanding Company Shares (not including Company Shares tendered pursuant to guaranteed delivery procedures) and (iii) the absence of any law or order by any governmental authority that would make illegal or otherwise prohibit the Offer, the acquisition of Company Shares by Otsuka or Acquisition Sub or the Merger within the United States. These conditions are described in more detail in the Merger Agreement, which we filed as an exhibit to the Current Report on Form 8-K with the SEC on December 2, 2014.

We intend to pursue all required approvals in accordance with the Merger Agreement. However, no assurance can be given that the required approvals will be obtained and, even if all such approvals are obtained, no assurance can be given as to the terms, conditions and timing of the approvals or that they will satisfy the terms of the Merger Agreement.

Furthermore, we, our board of directors and Otsuka have been named as defendants in lawsuits brought by purported holders of our common stock challenging our board of directors’ actions in connection with the proposed Merger and seeking, among other things, injunctive relief to enjoin the defendants from completing the Merger on the agreed-upon terms. See Part I, Item 3. “Legal Proceedings” for more information regarding such lawsuits. If a settlement or other resolution is not reached in these lawsuits and the plaintiffs secure injunctive or other relief prohibiting, delaying or otherwise adversely affecting our ability to consummate the Merger, then such injunctive or other relief may prevent the Merger from becoming effective within the expected timeframe or at all.

The announcement of, or a failure to complete, the Offer and the Merger could negatively impact our business, financial condition, results of operations or our stock price.

Our announcement of having entered into the Merger Agreement and Otsuka and Acquisition Sub’s commencement of the Offer could cause a material disruption to our business and there can be no assurance that the conditions to the completion of the Offer and the Merger will be satisfied. The Merger Agreement may also be terminated by us and Otsuka in certain specified circumstances, including, subject to compliance with the terms of the Merger Agreement, by us in order to accept a third-party acquisition proposal that our board of directors determines constitutes a superior proposal upon payment of a termination fee (the “Termination Fee”) to Otsuka of $90 million. We are subject to several risks as a result of the announcement of the Merger Agreement and the Offer, including, but not limited to, the following:

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If the Offer and the Merger are not completed, the share price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that the Offer and the Merger will be completed;

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Certain costs related to the Offer and the Merger, including the fees and/or expenses of our legal, accounting and financial advisors, must be paid even if the Merger is not completed;

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Pursuant to the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to the completion of the Merger, which restrictions could adversely affect our ability to realize certain of our business strategies or take advantage of certain business opportunities;

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The inability to retain certain key employees who may have sought and obtained different employment in anticipation of the completion of the Offer and the Merger;

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Sales of Nuedexta may be negatively impacted if we experience sales force turnover or if the sales force activity is reduced as a result of the announcement of the Offer and the Merger;

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A failure of the Offer and the Merger may result in negative publicity and/or a negative impression of us in the investment community or business community generally; and

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Third parties may determine to delay or defer purchase decisions or contractual arrangements with regard to our products and product candidates or terminate and/or attempt to renegotiate their relationships with us as a result of the Offer and the Merger, whether pursuant to the terms of their existing agreements with us or otherwise.

The Merger Agreement contains provisions that could make it difficult for a third party to acquire us prior to the completion of the Offer and the Merger.

The Merger Agreement contains restrictions on our ability to obtain a third-party proposal for an acquisition of our company. These provisions include our agreement not to solicit or initiate any additional discussions with third parties regarding other proposals for our acquisition, as well as restrictions on our ability to respond to such proposals, subject to fulfillment of certain fiduciary requirements of our board of directors. The Merger Agreement also contains certain termination rights, including, under certain circumstances, a requirement for us to pay to Otsuka the Termination Fee.

These provisions might discourage an otherwise-interested third party from considering or proposing an acquisition of the Company, even one that may be deemed of greater value to our stockholders than the Offer. Furthermore, even if a third party elects to propose an acquisition, the concept of a termination fee may result in that third party’s offering of a lower value to our stockholders than such third party might otherwise have offered.

Risks Relating to Our Business

Our near-term prospects depend on reaching profitability from the commercialization of NUEDEXTA in the United States. If we are unable to continue to increase NUEDEXTA revenues, including through raising PBA awareness among patients and physicians, driving higher rates of physician adoption and obtaining reimbursement and third party payer coverage, our ability to generate significant revenue or achieve profitability will be adversely affected.

Although NUEDEXTA has been approved for marketing, our ability to generate significant revenue in order to reach profitability in the near term is entirely dependent upon our ability to continue the successful commercialization of NUEDEXTA. To continue to be successful we must:

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maintain successful sales, marketing and educational programs for our targeted physicians and other health care providers;

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raise patient and physician awareness of PBA and encourage physicians to screen patients for the condition;

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minimize employee turnover in the increasing competitive market for sales and marketing employees in the CNS space;

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obtain adequate reimbursement for NUEDEXTA from a broad range of payers; and

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maintain and defend our patent protection and maintain regulatory exclusivity for NUEDEXTA.

Supplying the market for NUEDEXTA requires us to manage relationships with an increasing number of collaborative partners, suppliers and third-party contractors. If we are unable to successfully maintain the required sales and marketing infrastructure, as well as successfully manage an increasing number of relationships, including with suppliers, manufacturers, distributors, insurance carriers and prescribers, we will have difficulty growing our business. In addition, pharmacies, institutions and prescribers may rely on third-party medical information systems to interpret the NUEDEXTA approved product label and guide utilization of NUEDEXTA. If these information systems load incorrect information or misinterpret the approved product label, it may result in lower adoption or utilization than expected. For example, because NUEDEXTA contains quinidine, which is a known pro-arrhythmic drug at antiarrhythmic doses exceeding 600 mg per day, it is possible that medical information systems may incorrectly identify NUEDEXTA as contraindicated or otherwise inappropriate for a patient, even in situations where the risks are substantially less than perceived.

In addition, we may enter into co-promotion or out-licensing arrangements with other pharmaceutical or biotechnology partners for NUEDEXTA where necessary to reach customers in domestic or foreign market segments and when deemed strategically and economically advantageous. To the extent that we enter into co-promotion or other licensing arrangements, our product revenues may be lower than if we directly marketed and sold NUEDEXTA, 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 accomplish any of these key objectives, we may not be able to generate significant product revenue or become profitable.

We have a history of net losses and an accumulated deficit, and we may be unable to generate sufficient revenue to achieve or maintain profitability in the future.

We have experienced significant net losses and negative cash flows from operations and we expect our negative cash flow from operations to continue until we are able to generate substantially higher revenues from sales of NUEDEXTA for the long-term. As of September 30, 2014, we had an accumulated deficit of approximately $551.0 million. We have incurred these losses principally from costs incurred in funding the research, development and clinical testing of our drug candidates, from our general and administrative expenses and from our commercialization activities for NUEDEXTA. We may continue incurring net losses for the foreseeable future as we continue to grow NUEDEXTA sales, invest in the development of AVP-923 and AVP-786, seek to commercialize NUEDEXTA in the European Union (“EU”), and seek FDA approval and subsequently commercialize AVP-825.

Our ability to generate revenue and achieve profitability in the near term is dependent on our ability, alone or with partners, to successfully market NUEDEXTA for the treatment of patients with PBA in the United States. We expect to continue to spend substantial amounts on the ongoing marketing of NUEDEXTA domestically for the treatment of PBA, invest in Europe to commercialize NUEDEXTA, and seek regulatory approvals for use of NUEDEXTA in other geographic markets and indications. As a result, we may be unable to generate sufficient revenue from product sales to become profitable or generate positive cash flows.

Certain of our key issued patents may be challenged and our pending patent applications may be denied. An adverse outcome affecting either issued patents or patent applications would adversely affect our ability to generate significant product revenue or become profitable.

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. The degree of patent protection that will ultimately be afforded to us in the U.S. and in other important markets remains uncertain and is dependent upon the scope of protection decided upon by the patent offices, courts and lawmakers in these countries. If we cannot prevent others from exploiting claims in our patent portfolio, we will not derive the benefit from it that we currently expect. Further, we may incur substantial expense from litigation to protect our patent portfolio.

On September 16, 2011, the Leahy-Smith America Invents Act (the “America Invents Act”), was signed into law. The final substantive provisions of the America Invents Act, including the first-to-file system, became effective on March 16, 2013. The America Invents Act includes a number of significant changes to U.S. patent law. These changes include provisions that affect the way patent applications are being filed and prosecuted and may also affect patent litigation. For example, the America Invents Act enacted proceedings involving post-issuance patent review procedures, such as inter partes review, covered business method reviews, and post grant reviews. These proceedings are conducted before the Patent Trial and Appeal Board. Each proceeding has different eligibility criteria and different patentability challenges that can be raised. Because the standard of review for certain of these proceedings may differ from the standard in patent litigation, the success of the Company in defending its patents in a court proceeding does not necessarily preclude a subsequent challenge of the same patents under the America Invents Act. As a result, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

The validity, enforceability and scope of our core patents may also be challenged as a result of abbreviated new drug application (“ANDA”) filings from generic drug companies or through post-grant proceedings before the U.S. Patent and Trademark Office outside of the auspices of the America Invents Act. An adverse outcome in any future challenge to the validity, enforceability or scope of our patent portfolio could significantly reduce revenues from any future products. More broadly, investors should be aware that the pharmaceutical industry is highly competitive.

Our ability to compete in this space involves various risks relating to our intellectual property, including:

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our patents may be found to be invalid and unenforceable or insufficiently broad to block the introduction of a generic form;

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the claims in any of our pending patent applications may not be allowed and/or our patent applications may not be granted;

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we or our licensors or partners might not have been the first to invent or file, as appropriate, subject matters covered by our issued patents or pending patent applications or the pending patent applications or issued patents of our licensors or partners;

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competitors may develop similar or superior technologies independently, duplicate our technologies, or design around the patented aspects of our technologies;

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others may be able to make products that are similar to our product candidates but that are not covered by the claims of our patents, or for which we are not licensed under our license agreements;

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others may independently develop similar or alternative products without infringing our intellectual property rights;

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we may not develop additional proprietary products that are patentable;

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our issued patents may not cover our competitors’ products and the issued patents of our licensors or partners may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges by third parties;

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our issued patents and the issued patents of our licensors or partners may be vulnerable to legal challenges as a result of changes in applicable law;

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the patents of others may have an adverse effect on our business;

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any of our issued patents may not provide us with significant competitive advantages; and

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we may not be able to secure additional worldwide intellectual property protection for our patent portfolio.

The existence of a patent will not necessarily prevent other companies from developing similar or therapeutically equivalent products or protect us from claims of third parties that our products infringe their issued patents, which may require licensing and the payment of significant fees or royalties. Competitors may successfully challenge our patents, produce similar products that do not infringe our patents, or manufacture products in countries where we have not applied for patent protection or that do not respect our patents. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents, our licensed patents or in third party patents.

If our employees, consultants, advisors and partners develop inventions or processes independently, or jointly with us, that may be applicable to our products under development, disputes may arise about ownership or proprietary rights to those inventions and processes. Enforcing a claim that a third party illegally obtained and is using any of our inventions is expensive and time-consuming, and the outcome is unpredictable. In addition, our competitors may independently develop equivalent knowledge, methods and know-how.

Our research and development collaborators may have rights to publish data and other information to which we have rights. In addition, we sometimes engage individuals or entities to conduct research that may be relevant to our business. While the ability of these individuals or entities to publish or otherwise publicly disclose data and other information generated during the course of their research is subject to contractual limitations, these contractual provisions may be insufficient or inadequate to protect our trade secrets and may impair our patent rights. If we do not apply for patent protection prior to such publication, or if we cannot otherwise maintain the confidentiality of our innovations and other confidential information, then our ability to obtain patent protection or protect our proprietary information may be jeopardized. Moreover, a dispute may arise with our research and development collaborators over the ownership of rights to jointly developed intellectual property. Such disputes, if not successfully resolved, could lead to a loss of rights and possibly prevent us from pursuing certain new products or product candidates.

An adverse outcome with respect to any of these risks could adversely affect our ability to generate significant product revenue or become profitable.

We have received notices of ANDA filings for NUEDEXTA submitted by six generic drug companies. These ANDA filings assert that a generic form of NUEDEXTA would not infringe our FDA Orange Book listed patents and/or those patents are invalid. Although we have prevailed on certain of these matters at the district court level, this decision has been appealed. The litigation has been costly and time consuming and, depending on the outcome of any appeal, we may face competition from lower cost generic or follow-on products in the future.

NUEDEXTA is approved under the provisions of the Federal Food, Drug and Cosmetic Act (“FDCA”), which renders it susceptible to potential competition from generic manufacturers via the Hatch-Waxman Act and ANDA process. Generic manufacturers pursuing ANDA approval are not required to conduct costly and time-consuming clinical trials to establish the safety and efficacy of their products; rather, they are permitted to rely on the innovator’s data regarding safety and efficacy. Additionally, generic drug companies generally do not expend significant sums on sales and marketing activities, instead relying on physicians or payers to substitute the generic form of a drug for the branded form. Thus, generic manufacturers can sell their products at prices much lower than those charged by the innovative pharmaceutical or biotechnology companies who have incurred substantial expenses associated with the research and development of the drug product and who must spend significant sums marketing a new drug.

The ANDA procedure includes provisions allowing generic manufacturers to challenge the innovator’s patent protection by submitting “Paragraph IV” certifications to the FDA in which the generic manufacturer claims that the innovator’s patent is invalid, unenforceable and/or will not be infringed by the manufacture, use, or sale of the generic product. A patent owner who receives a Paragraph IV certification may choose to sue the generic applicant for patent infringement. In recent years, generic manufacturers have used Paragraph IV certifications extensively to challenge the applicability of patents listed in the FDA’s Approved Drug Products List with Therapeutic Equivalence Evaluations, commonly referred to as the Orange Book, on a wide array of innovative therapeutic products. We expect this trend to continue and to affect drug products with even relatively modest revenues.

We have received Paragraph IV certification notices from six separate companies contending that our patents listed in the Orange Book (U.S. Patents 7,659,282, 8,227,484 and RE 38,115, which expire in August 2026, July 2023 and January 2016, respectively) are invalid, unenforceable and/or will not be infringed by the manufacture, use, or sale of a generic form of NUEDEXTA. In response to these notices, we filed suit against all of the generic drug companies to defend our patent rights. We have entered into settlement agreements with five of the companies to resolve pending patent litigation in response to their ANDAs seeking approval to market generic versions of NUEDEXTA capsules. The settlement agreements grant the five companies the right to begin selling a generic version of NUEDEXTA on July 30, 2026, or earlier under certain circumstances. The parties also filed stipulations and orders of dismissal with the United States District Court for the District of Delaware which conclude the litigation with respect to the five companies. On April 30, 2014, the United States District Court for the District of Delaware issued an Order finding our latest to expire patents to be valid and infringed. On May 14, 2014, the Court issued a Judgment in favor of Avanir and a permanent injunction enjoining Par from manufacturing, using, offering to sell, or selling a generic version of NUEDEXTA during the terms of the ’282 Patent and ’484 Patent. The Judgment also ordered that the FDA shall not approve Par’s generic product earlier than the latest date of expiration of the ’282 Patent and ’484 Patent, August 13, 2026. On August 20, 2014, the United States District Court for the District of Delaware entered its Final Judgment triggering the appealability of the underlying decision. On September 11, 2014, Par filed a Notice of Appeal in the United States Court of Appeals for the Federal Circuit pertaining to the district court’s Order.

We intend to continue to vigorously enforce our intellectual property rights relating to any future challenges to our NUEDEXTA product. Our existing patents could be invalidated, found unenforceable or found not to cover a generic form of NUEDEXTA. If an ANDA filer were to receive FDA approval to sell a generic version of NUEDEXTA and/or prevail in any patent litigation, NUEDEXTA would become subject to increased competition and our revenue would be adversely affected.

There can be no assurance that the FDA will approve AVP-825 for the acute treatment of migraine.

A Phase 2 and Phase 3 clinical trial of AVP-825 for the acute treatment of migraine have been completed and we have filed an NDA with previously completed studies with the reference drug, sumatriptan, utilizing the FDA’s

505(b)(2) pathway. The FDA and other regulatory authorities will have substantial discretion in evaluating the results of the Phase 3 clinical trial and our NDA filing. In November 2014, we received a Complete Response Letter from the FDA, which requested that we assess the root cause(s) of device use errors observed in the previously conducted human factors testing. We are currently working to address these issues and intend to conduct a new human factors study, with input from the FDA, with a goal to respond to the Complete Response Letter in the first half of calendar 2015.

Although the FDA did not request in the Complete Response Letter that any additional clinical trials be conducted prior to approval, it is possible that the FDA may issue an additional Complete Response Letter or otherwise require us to conduct additional non-clinical, clinical or chemical manufacturing control-related studies before we gain approval for AVP-825. Prior to approving a new drug, the FDA generally requires that the efficacy of the drug be demonstrated in two adequate and well-controlled clinical trials. In some situations, the FDA approves drugs on the basis of a single well-controlled clinical trial and / or on the basis of referencing data generated previously with the reference drug under the 505(b)(2) application process. If the FDA determines that the clinical trials already conducted do not demonstrate a clinically meaningful benefit and an acceptable safety profile, or do not reflect an acceptable risk-benefit profile or if the FDA requires us to conduct additional clinical trials in order to gain approval, we may incur significant additional development costs and commercialization of AVP-825 would be prevented or delayed and our business would be adversely affected. AVP-825 is classified as a new drug-device combination which requires additional conditions to be satisfied for FDA approval beyond what is required for other drug products. Delays in obtaining regulatory approval for AVP-825, or the issuance of additional Complete Response Letters, would, among other consequences, delay the commercialization of AVP-825 and adversely affect our ability to generate revenue.

In addition, this Breath Powered intranasal device has not been previously reviewed or approved by the FDA and therefore, it is possible that other issues may arise during the review process which could delay or preclude the approval and require additional capital investment. In addition, we have limited experience obtaining FDA approval for drug-device combinations.

We established a joint steering committee, a joint intellectual property committee and joint development committee which will give OptiNose, our partner we license AVP-825 from, input on matters related to development of AVP-825 and intellectual property related to the product. As a result, our success depends partially on the success of OptiNose in performing its responsibilities and enforcing their intellectual property rights.

There can be no assurance that we will be able to successfully manufacture, distribute and commercialize AVP-825, including adequate sales, marketing, distribution and manufacturing capabilities. If we are unable to successfully commercialize AVP-825, our ability to generate significant revenue and achieve product launch timelines may be adversely affected.

We are primarily responsible for the manufacturing and distribution of AVP-825. We will utilize third parties to manufacture, package and distribute AVP-825. We have limited experience with the manufacturing and regulatory approval of nasal delivery devices. We have no experience in manufacturing AVP-825 in commercial quantities. Currently, we have sole suppliers for AVP-825 drug product and device components. Any delays or difficulties, including the purchase of manufacturing equipment, entering into manufacturing and supply agreements, obtaining API or in the manufacturing, packaging or distribution of AVP-825, could negatively affect our sales revenues as well as delay FDA approval or launch timing.

If AVP-825 is approved by the FDA, our ability to generate significant revenue is entirely dependent upon our ability to commercialize AVP-825 successfully. Our future results could be impacted by important factors which include, but are not limited to, commercial market estimates, reliance on market research, competition in the migraine segment, effect of healthcare reform, ability to secure reasonable pricing and patent protection. If we are unable to generate revenues from AVP-825, including through raising awareness among patients and physicians of the benefits of using the device for the acute treatment of migraine, driving higher rates of physician adoption and obtaining reimbursement and third party payer coverage, our ability to generate significant revenue or achieve profitability will be adversely affected.

We may not be able to adequately build or maintain necessary sales, marketing, supply chain management or 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:

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recruit and retain adequate numbers of effective sales personnel;

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effectively train our sales personnel on AVP-825;

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reach an adequate number of health care providers which treat migraine;

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manage geographically dispersed sales and marketing operations;

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obtain adequate reimbursement for AVP-825 from a broad range of payers;

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effectively compete with existing and newly developed migraine products or therapies; and

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rely on OptiNose to maintain and defend the patent protection and maintain regulatory exclusivity for AVP-825.

The commercialization of AVP-825 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 customers 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 AVP-825, 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.

Our co-promotion agreement with Merck may be terminated with or without cause, which could negatively impact our business.

The co-promotion agreement with Merck may be terminated with cause at any time or without cause upon 90 days written notice at any time after the first year anniversary of the launch date. If the agreement were to be terminated, with or without cause, our business could be negatively impacted, including failure to achieve profitability for the co-promote activity and damage to our reputation.

We are developing AVP-786, an investigational drug product containing deuterium-modified dextromethorphan for the potential treatment of neuropsychiatric disorders including major depressive disorder and agitation in patients with Alzheimer’s disease. It is possible that studies of AVP-786 may not produce similar results to those observed in studies of AVP-923 or favorable results. Future studies utilizing AVP-786 carry certain risks.

We have licensed exclusive, worldwide rights to develop and commercialize deuterium-modified dextromethorphan compounds for the potential treatment of neurologic and psychiatric disorders, as well as certain rights to other deuterium-modified dextromethorphan compounds. The goal of the AVP-786 program is to deliver therapeutically effective levels of deuterium-modified dextromethorphan, but with a reduction in the need for an enzyme inhibitor such as quinidine. Although we believe that a drug product containing deuterium-modified dextromethorphan will allow us to significantly reduce the level of quinidine, we are not certain that the reduction in quinidine will result in improved safety and similar efficacy.

We completed pharmacokinetic studies with AVP-786 and, based on these data, we identified a formulation of AVP-786 to move forward into clinical studies. To date, we have had no discussions with the EMA regarding AVP-786. Although the FDA has agreed to allow us to reference the extensive data generated during the AVP-923 development programs in support of the AVP-786 development programs and regulatory filings, there can be no assurance that:

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the FDA will continue to allow us to reference data generated during the AVP-923 development programs in this fashion;

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the FDA will allow us to continue on an expedited development pathway for AVP-786 for additional indications including agitation in patients with Alzheimer’s disease;

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the FDA will allow us to advance directly into a phase 3 program with AVP-786 for the treatment of agitation in patients with Alzheimer’s disease;

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the EMA will allow us to reference data generated during the AVP-923 development program;

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we will be successful developing this investigational drug; or

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we will obtain regulatory approval domestically or internationally.

In addition, our initial discussions regarding the development of AVP-786 have been with the FDA’s Division of Neurology. There can be no assurance that other divisions at the FDA will agree with the expedited development plan discussed with the Division of Neurology.

Additionally, we established a joint steering committee and a joint patent committee which will give Concert, our partner we license an active pharmaceutical ingredient (“API”), deuterium-modified dextromethorphan, used in AVP-786 from, input on development and patent prosecution for a period of time. As a result, our success depends partially on the success of Concert in performing its responsibilities.

PBA is a new market and estimates vary significantly over the potential market size and our anticipated revenues over the near and long term.

NUEDEXTA is being made available to patients to treat PBA, an indication for which there was no previously established pharmaceutical market. Industry sources and equity research analysts have a wide divergence of estimates for the near- and long-term market potential of our product. A variety of assumptions directly impact the estimates for our drug’s market potential, including estimates of underlying neurologic condition prevalence, severity of PBA prevalence among these conditions, rates of physician adoption of our drug for treatment of PBA among these populations, health plan reimbursement rates, and patient adherence and compliance rates within each underlying neurological condition. Small differences in these assumptions can lead to widely divergent estimates of the market potential of our product. Additionally, although our approved product label is indicated to treat PBA, without regard to the underlying neurological condition, it is possible that physicians, the FDA’s Office of Prescription Drug Promotion (“OPDP”), payers or others may interpret the label more narrowly than the FDA’s Division of Neurology Products approval for a broad PBA label and believe that PBA secondary to certain conditions, such as Alzheimer’s disease, is not an indicated use. If such misinterpretations are widespread, the actual market size may be smaller than we have estimated. Accordingly, investors are cautioned not to place undue reliance on any particular estimates of equity research analysts or industry sources.

Significant safety or drug interaction problems could arise with respect to NUEDEXTA, which could result in restrictions in NUEDEXTA’s label, recalls, withdrawal of NUEDEXTA from the market, an adverse impact on potential sales of NUEDEXTA, or cause us to alter or terminate current or future NUEDEXTA clinical development programs, any of which would adversely impact our future business prospects.

Discovery of previously unknown safety or drug interaction problems with an approved product may result in a variety of adverse regulatory actions. Under the Food and Drug Administration Amendments Act of 2007, the FDA has broad authority to force drug manufacturers to take any number of actions if previously unknown safety or drug interaction problems arise, including, but not limited to: (i) requiring manufacturers to conduct post-approval

clinical studies to assess known risks or signals of serious risks, or to identify unexpected serious risks; (ii) mandating labeling changes to a product based on new safety information; or (iii) requiring manufacturers to implement a Risk Evaluation Mitigation Strategy, or REMS, where necessary to assure safe use of the drug. In addition, previously unknown safety or drug interaction problems could result in product recalls, restrictions on the product’s permissible uses, or withdrawal of the product from the market.

The combination of dextromethorphan and quinidine has never been marketed for the treatment of any condition until the approval of NUEDEXTA for the treatment of PBA. NUEDEXTA has only been studied in a limited number of patients in clinical trials. The data submitted to the FDA and the EMA were obtained in controlled clinical trials of limited duration. In connection with the approval of NUEDEXTA, the FDA and EMA have required that we conduct certain post-approval studies, which include clinical and non-clinical studies. New safety or drug interaction issues may arise from these studies or as NUEDEXTA is used over longer periods of time by a wider group of patients. For example, elderly patients may be more prone to have multiple risk factors for adverse events such as certain cardiac conditions, hepatic or renal insufficiency, or multi-drug treatment regimens. In addition, as we conduct other clinical trials for AVP-923 in other indications, new safety or drug interaction problems may be identified which could negatively impact both our ability to successfully complete these studies and the use and/or regulatory status of NUEDEXTA for the treatment of PBA. New safety or drug interaction issues may result in product liability lawsuits and may require us to, among other things, provide additional warnings and/or restrictions on the NUEDEXTA prescribing information, including a boxed warning, directly alert healthcare providers of new safety information, narrow our approved indications, or alter or terminate current or planned trials for additional uses of AVP-923, any of which could have a significant adverse impact on potential sales of NUEDEXTA and our ability to achieve or maintain profitability.

In addition, if we are required to conduct additional post-approval clinical studies, implement a REMS, or take other similar actions, such requirements or restrictions could have a material adverse impact on our ability to generate revenues from sales of NUEDEXTA, and/or require us to expend significant additional funds.

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

We have experienced significant operating losses due to costs associated with funding the research, development, clinical testing and commercialization of NUEDEXTA and our drug candidates. We expect to continue to incur substantial operating losses for the foreseeable future as we continue to expand our commercialization efforts for NUEDEXTA in the U.S. and in European markets, continue to develop AVP-923 and AVP-786, and seek FDA approval and subsequently commercialize AVP-825. Although we had approximately $274.5 million in cash and cash equivalents, restricted cash and cash equivalents, and restricted investments as of September 30, 2014, we currently do not have sufficient revenue from NUEDEXTA or other sources of recurring revenue or cash flow from operations to sustain our operations and it is possible that we may not be able to achieve profitability with our current capital resources.

In light of our substantial long-term capital needs, we may need to partner our rights to NUEDEXTA (either in the U.S. or outside the U.S.) or raise additional capital in the future to finance our long-term operations, until we are able to generate sufficient revenue from product sales to fund our operations. Based on our current loss rate and existing capital resources as of the date of this report, we estimate that we have sufficient funds to sustain our operations at their current and anticipated levels for at least the next 12 months, which includes the costs associated with the ongoing commercialization of NUEDEXTA for the treatment of PBA in the U.S. and European markets, and seeking FDA approval and subsequently commercialize AVP-825. Although we expect to be able to raise additional capital if needed, 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, we may experience significant delays or cutbacks in the commercialization of NUEDEXTA and may be forced to further curtail our operations.

If we raise additional capital, 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 securities. 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 may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as encumbering our assets, making capital expenditures or entering into certain licensing transactions.

We are party to a co-promotion agreement for our institutional sales force that could have negative business implications.

We entered into a multi-year agreement involving our institutional sales team. This co-promote agreement involves certain financial and operating risks, including:

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promotional efforts being diverted to the co-promote product which could result in a negative impact on NUEDEXTA revenues;

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increased compliance risk which could harm our reputation;

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dependence on our partner for reimbursement from third party payers; and

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if we are unable to generate significant revenue or achieve profitability for the co-promote activity.

If any of these risks occurred, it could adversely affect our business, financial condition and operating results.

We are party to a license agreement with obligations that could require significant capital infusions and could involve many financial and operating risks.

In July 2013, we entered into an exclusive license agreement for the development and commercialization of a Breath Powered intranasal delivery system containing low-dose sumatriptan powder for the acute treatment of migraine, now named AVP-825. The licensed territories are the United States, Canada and Mexico. Our obligations pursuant to this license agreement could require significant capital infusions and could involve many financial and operating risks, including, but not limited to, the following:

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we may have to issue debt or equity securities to meet our obligations under this license agreement, which would dilute our stockholders and could adversely affect the market price of our common stock, and we may issue securities or rights with contingent payment obligations, which could have variable accounting treatment and negative accounting consequences;

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our obligations pursuant to this license agreement may result in a negative impact on our results of operations and, as such, delay profitability;

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we may encounter difficulties in assimilating and integrating AVP-825 into our existing business, including related technologies, personnel or operations;

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our obligations pursuant to this license agreement may require significant capital infusions and AVP-825 may not generate sufficient value to justify the acquisition cost;

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focus on integrating AVP-825 into our existing business may disrupt our ongoing business, divert resources, increase our expenses and distract our management; and

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we have little or no prior experience in the migraine market and our assumptions surrounding the market, including revenue forecasts, may not be accurate.

If any of these risks occurred, it could adversely affect our business, financial condition and operating results.

We are seeking partners to market NUEDEXTA in the EU, and we will be substantially dependent on any such marketing partners in those countries to successfully commercialize NUEDEXTA. We may not be successful in establishing a partnership, but even if we are successful in establishing a partnership or decide to launch ourselves, we may be unable to generate NUEDEXTA revenue in the European market, including through raising PBA awareness among patients and physicians, driving higher rates of physician adoption and obtaining reimbursement and third party payer coverage, our ability to generate significant revenue or achieve profitability in the European market will be adversely affected.

NUEDEXTA has been approved for marketing in the EU and our ability to generate significant revenue in the EU is entirely dependent upon our ability to successfully commercialize NUEDEXTA. To be successful in the EU we must:

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maintain successful sales, marketing and educational programs for our targeted physicians and other health care providers;

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raise patient and physician awareness of PBA and encourage physicians to screen patients for the condition;

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obtain adequate reimbursement for NUEDEXTA from a broad range of payers; and

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maintain and defend our patent protection and maintain regulatory exclusivity for NUEDEXTA.

Our prospects to successfully commercialize NUEDEXTA in the EU will depend, among other things, on our ability to establish successful arrangements with international distribution and marketing partners. Consummation of NUEDEXTA partnering arrangements is subject to the negotiation of complex contractual relationships and we may not be able to negotiate such agreements on a timely basis, if at all, or on terms acceptable to us. Where we are successful in entering into these third party arrangements, our revenues from NUEDEXTA sales will be lower than if we commercialized directly, as we will be required to share the revenues with our licensing, commercialization and development partners. If our commercialization efforts with our partners are unsuccessful or we are unable to launch NUEDEXTA in certain countries, we may realize little or no revenue from sales in the EU despite having received marketing approval. In the event that we are unsuccessful in obtaining a partner, we may establish a NUEDEXTA sales and marketing sales infrastructure in the EU.

We have entered into a number of agreements providing for the acquisition or divestiture of drug products and clinical assets and we expect to enter into additional such agreements in the future. We may not realize the anticipated value of these transactions and we may become involved in disputes with the counterparties, both of which could harm our business operations and prospects.

We have entered into agreements relating to the acquisition or divestiture of certain assets, including FazaClo, our anthrax antibody program, and other antibodies in our infectious disease program, as well as docosanol in the U.S. and other markets worldwide. We have also licensed certain intellectual property rights from CNS, AVP-786 from Concert Pharmaceuticals and AVP-825 from OptiNose AS. All of these transactions and agreements involve numerous risks, including:

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diversion of management’s attention from normal daily operations of the business;

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disputes over royalty obligations, earn-outs, working capital adjustments or contingent payment obligations;

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threatened or actual loss of potentially material contractual rights;

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inability to effectively integrate an acquired business or asset or to achieve the efficiencies or synergies we anticipate;

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insufficient proceeds to offset expenses associated with the transactions; and

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the potential loss of key employees following such a transaction.

Further, from time to time, we have been and will continue to be engaged in discussions with potential licensing or development partners for NUEDEXTA for the treatment of PBA and/or AVP-923/AVP-786 for other indications and we may choose to pursue a partnership or license involving NUEDEXTA and/or AVP-923/AVP-786 if the terms are attractive. We also regularly review potential acquisition opportunities for complementary products and technologies and may seek to acquire rights to other drugs or technologies, as well as other complementary assets.

Transactions such as these carry significant risks where a large portion of the total value to Avanir and our stockholders is contingent upon post-closing events, such as regulatory, commercialization or sales milestones. In certain circumstances, we may not have control over whether these milestones are met and, if they are not met, then a potentially large portion of the value of the transaction may not be realized. Disputes may also develop over these and other terms, such as representations and warranties, indemnities, earn-outs, the scope of intellectual property rights and related obligations, and other provisions in the underlying 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. Further, stockholders may not support the terms of any such transactions and our stock price may decline upon announcing any planned acquisition or divestiture.

If our products infringe the intellectual property rights of others, we may incur damages and be required to incur the expense of obtaining a license.

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. In addition, a third party may claim that we or our manufacturing or commercialization partners are using inventions covered by the third party’s patent rights, or that we or such partners are infringing, misappropriating or otherwise violating other intellectual property rights, and may go to court to stop us from engaging in our normal operations and activities, including making or selling our products. 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 could 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 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.

We rely on market research to evaluate the commercial acceptance of NUEDEXTA and AVP-825.

Based on the results of our market research, we believe that physicians are likely to continue to support the use and adoption of NUEDEXTA for the treatment of PBA. In addition, we believe that physicians are likely to support and adopt the use of AVP-825 for the acute treatment of migraine, if approved by the FDA. We conduct market research in accordance with Good Marketing Research Practices; however, research findings may not be indicative of the response we might receive from a broader sample of physicians. Moreover, these results are based on physicians’ impressions formed from a description of the product or their actual experience from having prescribed the product, which could result in different impressions or intended behaviors compared to other physicians in our target audience. If the actual use and adoption rates of NUEDEXTA and AVP-825 (if approved by the FDA) are significantly lower than market research or other data suggest, our financial condition and results of operations could be adversely affected.

It is unclear whether we would be eligible for patent term extension in the U.S. and supplementary protection certificates in Europe and we therefore do not know whether our patent term can be extended.

Market exclusivity provisions under the FDCA 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 (ANDA) for drugs containing the original active agent.

If the patents that cover NUEDEXTA expire or have been invalidated, 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 NUEDEXTA sales may be significantly less than expected, we may have greater difficulty finding a development partner or licensee for NUEDEXTA and the costs to defend the patents would be significant.

In Europe, based on the European Commission’s Article 14(11) of Regulation (EC) No. 726/2004, NUEDEXTA qualifies for ten years of regulatory data protection. Similar to the U.S., market exclusivity provisions provide for a maximum five-year extension for certain patents through the granting of Supplementary Protection Certificates. Although all countries in the European Union are required to provide Supplementary Protection Certificates that come into force after expiry of the patent upon which they are based, no unified cross-recognition exists. Applications for Supplementary Protection Certificates must be filed with each country’s patent office and approved on a country-by-country basis. Although we believe that NUEDEXTA will qualify for this extension and we have applied for Supplementary Protection Certificates, we cannot assure you that NUEDEXTA will be granted any Supplementary Protection Certificates nor, if a Supplementary Protection Certificate is granted, that the term of the extension will be five years.

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 protect our trade secrets and confidential information, our business and results of operations could be adversely affected.

We face challenges recruiting and 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 commercial, clinical and regulatory affairs, research and development and accounting and finance. Because we have a relatively small management team, 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.

Our operations might be interrupted by the occurrence of a natural disaster or other catastrophic event.

Our principal operations are located in Aliso Viejo, California. We depend on our facilities and on our partners, contractors and vendors for the continued operation of our business. Natural disasters or other catastrophic events, interruptions in the supply of natural resources, political and governmental changes, wildfires and other fires, floods, explosions, actions of animal rights activists, earthquakes and civil unrest could disrupt our operations or those of our partners, contractors and vendors. Even though we believe we carry commercially reasonable business interruption and liability insurance, and our contractors may carry liability insurance that protect us in certain events, we might suffer losses as a result of business interruptions that exceed the coverage available under our and our contractors’ insurance policies or for which we or our contractors do not have coverage. Any natural disaster or catastrophic event could have a significant negative impact on our operations and financial results. However, we have a disaster recovery plan in place for our information technology infrastructure that generally allows us to have our critical systems operational in as little as four hours of triggering the disaster recovery plan, depending on the severity of the disaster. Moreover, any such event could adversely impact the commercialization of NUEDEXTA and our research and development programs.

We may become involved in litigation and administrative proceedings that may materially affect us.

From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business, including contracts and license agreements that we have entered into or may enter into, intellectual property, commercial, employment, class action, whistleblower and other litigation and claims, and

governmental and other regulatory investigations and proceedings. Litigation may also arise as a result of a decline in the market price of our securities or as a result of disclosures we make with the Securities and Exchange Commission in our periodic reports and documents that are provided to our stockholders. Although we are not currently aware of litigation or administrative proceedings that will have a material effect on us, such matters can be time-consuming, divert management’s attention and resources and may cause us to incur significant expenses. Furthermore, because legal actions are inherently unpredictable, there can be no assurance that the results of any legal actions will not have a material adverse effect on our business, results of operations or financial condition.

Our ability to use our net operating loss carry-forwards and certain other tax attributes may be limited.

We have incurred substantial losses during our history and do not expect to become profitable in the near future and we may never achieve profitability. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carry-forwards, or NOLs, and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carry-forwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

Risks Relating to Our Industry

The pharmaceutical industry is highly competitive and most of our competitors have larger operations and 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 NUEDEXTA may face competition from off-label use of other agents in the treatment of PBA, even though none of these agents has proven to be safe and effective for the treatment of PBA. Additionally, NUEDEXTA may face direct competition from a generic form of NUEDEXTA, if approved, as described above.

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.

Further, AVP-825, if approved, will have to compete with existing and any newly developed migraine products or therapies. There are also likely to be numerous competitors developing new products to treat migraine, which could render AVP-825 obsolete or non-competitive.

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, the EMA and other regulatory bodies. In addition, regulatory authorities subject a marketed product, its manufacturer and the manufacturing facilities to ongoing review and periodic inspections. We are 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. If we fail to comply with any of these requirements, we may be subject to action by regulatory agencies, which could negatively affect our business.

Regulatory agencies may also 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.

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:

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the results from earlier clinical trials may not be predictive of results that will be obtained from subsequent clinical trials, particularly larger trials;

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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;

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subjects may drop out of our clinical trials;

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our non-clinical 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;

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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;

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the cost of our clinical trials may be greater than we currently anticipate and clinical trials may take longer than expected to enroll patients and complete, particularly for progressive diseases such as MS where our drug candidates are primarily aimed at treating associated symptoms and not the underlying disease itself; and

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there could be a delay in initiating our clinical trials.

It is possible that earlier clinical and non-clinical trial results may not be predictive of the results of subsequent clinical trials. If earlier clinical and/or non-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, disagree with our interpretations of regulations, draw different conclusions from our clinical trial data or ask for additional information at any time during their review.

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:

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delays in our ability to submit an NDA;

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the refusal by the FDA to accept for filing any NDA we may submit;

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requests for additional studies or data;

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delays in obtaining an approval;

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the rejection of an application; or

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the approval of the drug, but with restrictive labeling 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 may not be able to generate sufficient revenues or achieve or maintain profitability.

We face uncertainty related to healthcare reform, pricing, coverage and reimbursement, which could reduce our revenue.

In the United States, President Obama signed in March 2010 the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, “PPACA”), which is expected to substantially change the way health care is financed by both governmental and private payers. PPACA provides for changes to extend medical benefits to those who currently lack insurance coverage, encourages improvements in the quality of health care items and services, and significantly impacts the U.S. pharmaceutical industry in a number of ways, further listed below. By extending coverage to a larger population, PPACA may substantially change the structure of the health insurance system and the methodology for reimbursing medical services, drugs and devices. These structural changes, as well as other changes that may be made as part of deficit and debt reduction efforts in Congress, could entail modifications to the existing system of private payers and government programs, such as Medicare, Medicaid and State Children’s Health Insurance Program, as well as the creation of a government-sponsored healthcare insurance source, or some combination of both. Such restructuring of the coverage of medical care in the United States could impact the extent of coverage and reimbursement for prescribed drugs, including our product candidates, biopharmaceuticals, and medical devices. We expect that the PPACA, as currently enacted or as it may be amended in the future, and other healthcare reform measures that may be adopted in the future could have a material adverse effect on our industry in general and on our ability to maintain or increase our product sales, successfully commercialize our product candidates or could limit or eliminate our future spending on development projects. Some of the specific PPACA provisions, among other things:

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Establish annual, non-deductible fees on any entity that manufactures or imports certain branded prescription drugs and biologics;

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Increase minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program;

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Extend manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations or extension of statutory rebates to a broader patient population;

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Establish a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research;

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Require manufacturers to participate in a coverage gap discount program, under which they must agree to offer 50 percent point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D; and

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Revised the definition of average manufacturer price by changing the classes of purchasers included in the calculation, and expanded the entities eligible for discounted 340B pricing.

A significant portion of our sales of NUEDEXTA come from patients who are covered under a third party reimbursement plan. Any adverse change in reimbursement policy affecting patients could potentially result in a change in patient co-payments. For example, if a third party payor placed NUEDEXTA in a specialty tier, it could potentially result in a transition from a patient co-payment plan to a co-insurance plan for NUEDEXTA. Any adverse change in reimbursement policy, including the changes described above, may have a material and adverse impact on our business.

If future coverage and reimbursement for NUEDEXTA, products that we co-promote or any other approved product candidates, if any, is substantially less than we project, or rebate obligations associated with them are substantially increased, our business could be materially and adversely impacted. Sales of NUEDEXTA for treatment of patients with PBA will depend in part on the availability of coverage and reimbursement from third-party payers such as government insurance programs, including Medicare and Medicaid, private health insurers, health maintenance organizations and other health care related organizations. Accordingly, coverage and reimbursement may be uncertain. Adoption of NUEDEXTA by the medical community may be limited if third-party payers will not offer coverage. Cost control initiatives may decrease coverage and payment levels for NUEDEXTA 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 payers to NUEDEXTA. Any denial of private or government payer coverage of NUEDEXTA could harm our business and reduce our revenue.

To help patients afford our medicines, we have various programs to assist them, including a patient assistance program and a co-pay coupon assistance program for NUEDEXTA for commercial payers. The co-pay coupon programs of other pharmaceutical manufacturers have been the subject of legal challenges under a variety of federal and state laws, and our co-pay assistance program could become the target of similar lawsuits. In September 2014, the Office of Inspector General of the U.S. Department of Health and Human Services issued a Special Advisory Bulletin that pharmaceutical manufacturers are at risk of sanctions if they fail to take appropriate steps to ensure that their copayment coupons do not induce the purchase of Federal health care programs items or services, including but not limited to, drugs paid for by Medicare Part D. It is possible that the outcome of the pending litigation against other manufacturers, changes in insurer policies regarding co-pay coupons, and/or the introduction and enactment of new legislation or regulatory action could restrict or otherwise negatively affect these programs, which could result in fewer patients using affected medicines, which could include NUEDEXTA, and therefore could have a material and adverse impact on our revenue, business and financial condition.

In addition, 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, as well as hold public hearings on these matters. Further federal and state proposals and healthcare reforms are likely, which could limit the prices that can be charged for our products and 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 and product candidates, if approved and commercialized, and we cannot predict the scope of any future changes or the impact that those changes would have on our operations.

We may be subject to regulatory and investigative proceedings, which may find that our policies and procedures do not fully comply with complex and changing regulations.

While we have established policies and procedures that we believe will be sufficient to ensure that we operate in substantial compliance with applicable laws, regulations and requirements, the criteria are often vague and subject to change and interpretation. We may become the subject of regulatory, enforcement or other investigations or proceedings, and our relationships, business structure, and interpretations of applicable laws and regulations may be challenged. The defense of any such challenge could result in substantial cost and a diversion of management’s time and attention. In addition, any such challenge could require significant changes to how we conduct our business and could have a material adverse effect on our business, regardless of whether it ultimately is successful. If we fail to comply with any applicable laws, or a determination is made that we have failed to comply with these laws, our financial condition and results of operations could be adversely affected.

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 are seeking to have our products or product candidates marketed outside the United States. In order to market our products in the EU 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, and may not qualify or be accepted for accelerated review in foreign countries. 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 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 including products in which we co-promote. Product liability claims might be brought against us by consumers, health care providers, other pharmaceutical companies or others selling or otherwise coming into contact with our products. If we cannot successfully defend ourselves against product liability claims, we could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in:

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impairment of our business reputation;

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withdrawal of clinical study participants;

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costs of related litigation;

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distraction of management’s attention from our primary business;

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substantial monetary awards to patients or other claimants;

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the inability to commercialize our product candidate; and

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decreased demand for our product candidate, if approved for commercial sale.

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 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, there can be no assurance that we will be able to maintain coverage under existing policies at the current rates or purchase insurance under new policies at reasonable rates.

If we market products in a manner that violates health care fraud and abuse laws, we may be subject to civil and criminal penalties, which may adversely affect our business, financial condition and results of operations.

We are subject to healthcare fraud and abuse regulation and enforcement by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

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the federal healthcare programs’ Anti-Kickback Statute (as amended by the PPACA, which modified the intent requirement of the Anti-Kickback Statute so that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it to have committed a violation), which prohibits, among other things, persons from soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;

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federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent and, under the PPACA, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statutes;

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the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters. Similar to the Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;

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HIPAA, as amended by the Health Information Technology and Clinical Health Act and its implementing regulations, which imposes certain requirements relating to the privacy, security, and transmission of individually identifiable health information; and

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state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payer, including commercial insurers.

In addition, the compliance environment is changing as some states mandate implementation of commercial compliance programs to ensure compliance with these laws.

The PPACA also imposes new reporting and disclosure requirements on drug manufacturers for any “transfer of value” made or distributed to prescribers and other healthcare providers and such information will be made publicly available in a searchable format. Drug manufacturers are required to submit reports disclosing any investment interests held by physicians and their immediate family members. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (and up to an aggregate of $1 million per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests not reported in an annual submission. PPACA also requires pharmaceutical manufacturers and distributors to provide the U.S. Department of Health and Human Services with an annual report on the drug samples they provide to physicians. There has also been a recent trend of increased federal and state regulation of payments made to physicians, including the tracking and reporting of gifts, compensation, and other remuneration to physicians. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with multiple jurisdictions with different compliance and/or reporting requirements increases the possibility that a healthcare company may run afoul of one or more of the requirements.

If our operations are found to be in violation of any of the laws described above or any other domestic or foreign laws or governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from governmental health care programs, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Even if we are not found to be in violation of any of the laws described above or any other domestic or foreign laws or governmental regulations that apply to us, any allegations in the public or otherwise regarding, or any action against us for, violation of these laws could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

We may incur significant liability if it is determined that we are promoting the “off-label” use of drugs.

We have taken numerous steps to ensure compliance is a high priority throughout the organization and we believe that our communications regarding our products are in compliance with the relevant regulatory requirements. However, the FDA or another regulatory authority may disagree.

Responding to government investigations, defending any claims raised, and any resulting fines, restitution, damages and penalties, settlement payments or administrative actions, as well as any related actions brought by stockholders or other third parties, could have a material impact on our reputation, business and financial condition and divert the attention of our management from operating our business. Our distribution and contracting partners

may also be the subject of regulatory investigations involving, or remedies or sanctions for, off-label promotion of products we have licensed to them, or for which they provide vendor support services, which may have an adverse impact on sales of such licensed products, or indemnification obligations, which may, in turn, have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common shares to decline. The risks of a regulatory investigation are increased by the practice of some stock market participants to publicly issue reports alleging compliance violations.

Companies may not promote approved drugs for “off-label” uses — that is, uses that are not described in the product’s labeling and that differ from those approved by the FDA or other applicable regulatory agencies. Physicians may prescribe approved drug products for off-label uses and such off-label uses are common across medical specialties. Although the FDA and other regulatory agencies do not regulate a physician’s choice of treatments for a given medical condition, the FDA and other regulatory agencies do restrict communications by pharmaceutical companies and their sales representatives regarding information concerning approved products for off-label use. The FDA and other regulatory agencies actively enforce regulations prohibiting promotion of approved products for off-label uses and the promotion of products for which marketing authorization has not been obtained. A company that is found to have promoted an approved product for off-label uses may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions. Even when a company is not determined to have engaged in off-label marketing, the allegation from regulatory authorities or market participants that a company like us has engaged in such activities could have a material adverse effect on the company’s business and cause its market price to decline. Notwithstanding the regulatory restrictions on off-label promotion, the FDA and other regulatory authorities allow companies to engage in truthful, non-misleading, and non-promotional scientific exchange with health care professionals concerning their products.

Risks Related to Reliance on Third Parties

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 NUEDEXTA and to provide clinical supplies of our drug candidates. We will also utilize third parties to manufacture, package and distribute AVP-825 and AVP-786. We have no experience in manufacturing and do not have any manufacturing facilities. Currently, we have sole suppliers for the APIs for NUEDEXTA, and a sole manufacturer for the finished form of NUEDEXTA. In addition, these materials are custom-made and available from only a limited number of sources. In particular, there may be a limited supply source for APIs in NUEDEXTA. Although we maintain a significant supply of APIs on hand, any sustained disruption in this supply could adversely affect our operations and revenues. 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 NUEDEXTA API suppliers. 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 NUEDEXTA could negatively affect our sales revenues, as well as delay our clinical trials of AVP-923 or AVP-786 for future indications. 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, macro-economic conditions may adversely affect these third parties, causing them to 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.

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, macro-economic conditions 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 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 out-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 NUEDEXTA 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, in some instances 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 NUEDEXTA, 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 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 NUEDEXTA 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 our operating results, as well as many factors independent of our operating results, including the following:

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comments made by securities analysts, including changes in their recommendations;

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short selling activity by certain investors, including any failures to timely settle short sale transactions;

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announcements by us of financing transactions and/or future sales of equity or debt securities;

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sales of our common stock by our directors, officers or significant stockholders, including sales effected pursuant to predetermined trading plans adopted under the safe-harbor afforded by Rule 10b5-1;

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negative opinions that are misleading and inaccurate regarding our business, management or future prospects published by certain market participants intent on putting downward pressure on our stock price;

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regulatory developments in the U.S. and foreign countries, including the passage of laws, rules or regulations relating to healthcare and reimbursement or the public announcement of inquiries relating to these subjects;

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lack of volume of stock trading leading to low liquidity; and

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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 under our existing “shelf” registration statements, from an existing stockholder, or the result of warrant or stock options exercised), 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.

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 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 our favor. 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 us.

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 errors 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. 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 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 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.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

Our headquarters, commercial and administrative offices are located in Aliso Viejo, California, where we occupy approximately 69,000 square feet. There is one lease for 61,000 square feet which expires in December 2020 and a separate lease for 8,000 square feet which expires in October 2018.

We lease an additional approximately 30,000 square feet of office space in Aliso Viejo, California which we sublease until the end of the lease in October 2018. We do not intend to renew this lease.

Item 3.

Legal Proceedings

Stockholder Class-Action Litigation Regarding Our Pending Acquisition by Otsuka

Following the announcement of the Merger Agreement on December 2, 2014, five putative stockholder class action complaints have been filed in the Delaware Court of Chancery against the Company, our board of directors, Otsuka and Acquisition Sub challenging the proposed Merger. The actions, brought by named plaintiffs John Kim, filed December 4, 2014; Adeline Speer, filed December 5, 2014; Henri Minette, filed December 5, 2014; Douglas Las Wengell, filed December 5, 2014; and Samuel Shoneye, filed December 9, 2014, allege that members of our board of directors breached their fiduciary duties by agreeing to sell the Company for inadequate consideration, by including terms providing for their continued employment in the post-transaction company, and/or by utilizing deal protection measures that discouraged competing bids. The complaints further allege that the Company, Otsuka, and Acquisition Sub aided and abetted these alleged breaches. Among other remedies, the plaintiffs seek to enjoin the Merger. We and Otsuka believe the allegations in the complaints are without merit and intend to defend vigorously against them.

Additional lawsuits may be filed against the Company, Otsuka, and/or the directors of either company in connection with the Merger.

NUEDEXTA ANDA Litigation

In fiscal 2011 and 2012, we received Paragraph IV certification notices from five separate companies contending that certain of our patents listed in the FDA’s publication, “Approved Drug Products with Therapeutic Equivalence Evaluation” (“FDA Orange Book”) (U.S. Patents 7,659,282 (“’282 Patent”), 8,227,484 (“’484 Patent”) and RE 38,115 (“’115 Patent”), which expire in August 2026, July 2023 and January 2016, respectively) are invalid, unenforceable and/or will not be infringed by the manufacture, use, sale or offer for sale of a generic form of NUEDEXTA as described in those companies’ abbreviated new drug application (“ANDA”). The FDA Orange Book provides potential competitors, including generic drug companies, with a list of issued patents covering approved drugs. In August 2011 and March 2012, we filed lawsuits in the U.S. District Court for the District of

Delaware against Par Pharmaceutical, Inc. and Par Pharmaceutical Companies, Inc. (collectively “Par”), Actavis South Atlantic LLC and Actavis, Inc. (collectively “Actavis”), Wockhardt USA, LLC and Wockhardt, Ltd. (collectively, “Wockhardt”), Impax Laboratories, Inc. (“Impax”) and Watson Pharmaceuticals, Inc., Watson Laboratories, Inc. and Watson Pharma, Inc. (collectively “Watson”) (Par, Actavis, Wockhardt, Impax and Watson, collectively the “Defendants”). In September and October 2012, we filed lawsuits in the U.S. District Court for the District of Delaware against the Defendants. All lawsuits (collectively, the “ANDA Actions”) were filed on the basis that the Defendants’ submissions of their respective ANDAs to obtain approval to manufacture, use, sell, or offer for sale generic versions of NUEDEXTA prior to the expiration of the ‘282 Patent, the ‘484 Patent and the ‘115 Patent listed in the FDA Orange Book constitute infringement of one or more claims of those patents. On October 31, 2012, Watson announced the divestiture of its ANDA for a generic form of NUEDEXTA to Sandoz, Inc. (“Sandoz”). As a result of Sandoz’ acquisition and maintenance of said ANDA, on May 30, 2013, we filed suit in the U.S. District Court for the District of Delaware against Sandoz. This suit was filed on the basis that Sandoz’ ANDA to obtain approval to manufacture, use, sell, or offer for sale generic versions of NUEDEXTA prior to the expiration of the ’282 Patent, the ’484 Patent and the ’115 Patent listed in the FDA Orange Book constitutes infringement of one or more claims of those patents.

A bench trial was held in September 2013 and concluded on October 15, 2013.

On August 9, August 30, and September 6, 2013, we entered into settlement agreements with Sandoz, Actavis and Wockhardt, respectively, to resolve pending patent litigation in response to their ANDAs seeking approval to market generic versions of NUEDEXTA capsules. The settlement agreements grant Sandoz, Actavis and Wockhardt the right to begin selling a generic version of NUEDEXTA on July 30, 2026, or earlier under certain circumstances. The parties also filed stipulations and orders of dismissal with the United States District Court for the District of Delaware which conclude the litigation with respect to Sandoz, Actavis and Wockhardt.

On April 30, 2014, the United States District Court for the District of Delaware issued an Order finding our latest to expire patents to be valid and infringed. On May 14, 2014, the Court issued a judgment in favor of Avanir and a permanent injunction enjoining Par and Impax from manufacturing, using, offering to sell, or selling a generic version of NUEDEXTA during the terms of the ‘282 Patent and ‘484 Patent. The judgment also ordered that the FDA shall not approve Par’s and Impax’s generic product earlier than the latest date of expiration of the ‘282 Patent and ‘484 Patent, August 13, 2026.

On June 16, 2014, we entered into a settlement agreement with Impax to resolve all outstanding issues pertaining to the patent litigation case. The settlement agreement grants Impax the right to begin selling a generic version of NUEDEXTA on July 30, 2026, or earlier under certain circumstances. The parties also filed stipulations and orders of dismissal with the United States District Court for the District of Delaware which concludes the litigation with respect to Impax.

On August 20, 2014, the United States District Court for the District of Delaware entered its Final Judgment triggering the appealability of the underlying decision. On September 11, 2014, Par filed a Notice of Appeal in the United States Court of Appeals for the Federal Circuit pertaining to the district court’s Order.

General and Other

In the ordinary course of business, we may face various claims brought by third parties and we may, from time to time, make claims or take legal actions to assert our rights, including intellectual property rights as well as claims relating to employment matters and the safety or efficacy of our products. Any of these claims could subject us to costly litigation and, while we generally believe that we have adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage, may be inadequately capitalized to pay on valid claims, or our 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 our consolidated operations, cash flows and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business. Management believes the outcome of currently pending claims or lawsuits will not likely have a material effect on our operations or financial position.

Item 4.

Mine Safety Disclosures

Not applicable.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The following table sets forth the high and low prices for our common stock in each of the quarters over the past two fiscal years, as quoted on the NASDAQ Global Market.


	Common Stock Price
	Fiscal 2014				Fiscal 2013
	High		Low		High		Low
First Quarter	$	5.07	$	2.62	$	3.57	$	2.07
Second Quarter	$	5.08	$	3.05	$	3.32	$	2.65
Third Quarter	$	5.89	$	3.02	$	4.78	$	2.60
Fourth Quarter	$	13.09	$	5.08	$	6.00	$	3.98

On December 1, 2014, the closing sales price of our common stock was $15.00 per share.

As of December 1, 2014, we had approximately 24,918 stockholders, including 337 holders of record and an estimated 24,581 beneficial owners. We have not paid any dividends on our common stock since our inception and do not expect to pay dividends on our common stock in the foreseeable future.

The following graph compares the cumulative 5-year return provided to a hypothetical stockholder in Avanir Pharmaceuticals, Inc.’s common stock relative to the cumulative total returns of the NASDAQ Composite index and the NASDAQ Biotechnology index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on October 1, 2009 and its relative performance is tracked through September 30, 2014.

LOGO

Information About Our Equity Compensation Plans

Information regarding our equity compensation plans is incorporated by reference to Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of Part III of this annual report on Form 10-K.

Item 6.

Selected Financial Data

The selected consolidated financial data set forth below at September 30, 2014 and 2013, and for the fiscal years ended September 30, 2014, 2013, and 2012, are derived from our audited consolidated financial statements included elsewhere in this report. This information should be read in conjunction with those consolidated financial statements, the notes thereto, and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data set forth below at September 30, 2012, 2011 and 2010, and for the years ended September 30, 2011 and 2010, are derived from our audited consolidated financial statements that are contained in reports previously filed with the SEC, not included herein. The quarterly consolidated financial data are derived from unaudited consolidated financial statements included in our Quarterly Reports on Form 10-Q.

The following tables include selected consolidated financial data for each of our last five fiscal years and quarterly data for the last two fiscal years. Operating expense includes cost of product sales, cost of research and development services, and cost of government research grant services for all periods presented.

Summary Financial Information

(in thousands except per share amounts and share data)


	Fiscal Years Ended September 30,
Statement of operations data:	2014			2013			2012			2011			2010
Total revenues	$	115,029		$	75,366		$	41,275		$	10,496		$	2,895
Operating expenses	$	161,373		$	146,793		$	99,677		$	71,125		$	29,992
Loss from operations	$	(46,344	)	$	(71,427	)	$	(58,402	)	$	(60,629	)	$	(27,097	)
Net loss	$	(50,436	)	$	(75,476	)	$	(59,744	)	$	(60,632	)	$	(26,694	)
Basic and diluted net loss per share:	$	(0.31	)	$	(0.53	)	$	(0.45	)	$	(0.51	)	$	(0.30	)
Basic and diluted weighted average number of shares of common stock outstanding		161,269,021			142,269,399			133,358,571			119,405,230			87,614,420

	September 30,
Balance sheet data:	2014			2013			2012			2011			2010
Cash and cash equivalents	$	271,870		$	55,259		$	69,778		$	79,543		$	38,771
Restricted cash and cash equivalents and restricted investments	$	2,624		$	2,270		$	2,357		$	2,253		$	602
Total cash, cash equivalents, restricted cash and cash equivalents, and restricted investments	$	274,494		$	57,529		$	72,135		$	81,796		$	39,373
Working capital	$	268,724		$	37,051		$	60,596		$	70,201		$	32,967
Total assets	$	306,983		$	76,079		$	86,012		$	89,649		$	42,141
Deferred revenues	$	—		$	1,289		$	4,049		$	7,791		$	8,477
Notes payable, net of debt discount	$	—		$	29,365		$	28,861		$	—		$	—
Total liabilities	$	33,594		$	57,608		$	49,175		$	18,309		$	14,135
Stockholders’ equity	$	273,389		$	18,471		$	36,837		$	71,340		$	28,006


Quarterly statement of operations data for fiscal 2014 (Unaudited):	Fiscal Quarters Ended
	December 31, 2013			March 31, 2014			June 30, 2014			September 30, 2014
Total revenues	$	26,746		$	26,947		$	28,631		$	32,705
Operating expenses	$	36,743		$	38,722		$	40,523		$	45,385
Loss from operations	$	(9,997	)	$	(11,775	)	$	(11,892	)	$	(12,680	)
Net loss	$	(10,947	)	$	(12,678	)	$	(12,699	)	$	(14,112	)
Basic and diluted net loss per share	$	(0.07	)	$	(0.08	)	$	(0.08	)	$	(0.08	)
Basic and diluted weighted average number of common shares outstanding		152,100,388			154,633,853			166,016,719			172,232,486

Quarterly statement of operations data for fiscal 2013 (Unaudited):	Fiscal Quarters Ended
	December 31, 2012			March 31, 2013			June 30, 2013			September 30, 2013
Total revenues	$	16,520		$	17,434		$	19,759		$	21,653
Operating expenses	$	27,556		$	32,917		$	30,169		$	56,151
Loss from operations	$	(11,036	)	$	(15,483	)	$	(10,410	)	$	(34,498	)
Net loss	$	(12,076	)	$	(16,527	)	$	(11,424	)	$	(35,449	)
Basic and diluted net loss per share	$	(0.09	)	$	(0.12	)	$	(0.08	)	$	(0.24	)
Basic and diluted weighted average number of common shares outstanding		136,772,557			139,173,746			145,244,796			147,851,544

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Except for the historical information contained herein, the matters set forth in this Annual Report on Form 10-K, including statements regarding the Company’s plans, potential opportunities, financial or other expectations, projections, goals objectives, milestones, strategies, market growth, timelines, legal matters, product pipeline, clinical studies, product development and the potential benefits of its commercialized products and products under development are forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from the anticipated or estimated future results, including the risks and uncertainties associated with Avanir’s future operating performance and financial position, developments in Avanir’s ongoing NUEDEXTA patent litigation, the market demand for and acceptance of Avanir’s products domestically and internationally, research, development and commercialization of new products domestically and internationally, obtaining and maintaining regulatory approvals domestically and internationally, including, but not limited to potential regulatory delays or rejections in the filing or acceptance of the Marketing Authorization Application, uncertainty regarding use of the data package which served as the basis for the U.S. FDA approval, risks associated with meeting the objectives of clinical studies, including, but not limited to, delays or failures in enrollment, and the occurrence of adverse safety events, and other risks set forth below under Item 1A, “Risk Factors” and other documents subsequently filed with or furnished to the Securities and Exchange Commission. These forward-looking statements are based on current information that may change and you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update any forward-looking statement to reflect events or circumstances after the date hereof. 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.

Executive Overview

We are a biopharmaceutical company focused on acquiring, developing and commercializing novel therapeutic products for the treatment of central nervous system disorders. Our lead product NUEDEXTA^® (referred to as AVP-923 during clinical development) is a first-in-class dual NMDA receptor antagonist and sigma-1 agonist. NUEDEXTA, 20/10 mg, is approved in the United States for the treatment of pseudobulbar affect (“PBA”). It is also approved for the symptomatic treatment of PBA in the European Union in two dose strengths, NUEDEXTA 20/10 mg and NUEDEXTA 30/10 mg. We commercially launched NUEDEXTA in the United States in February 2011 and we are currently assessing plans regarding the potential commercialization of NUEDEXTA in the European Union

The table below shows quarterly net product sales and dispensed prescription data for NUEDEXTA over the past four quarterly periods.


	Three Months Ended
	December 31, 2013			March 31, 2014			June 30, 2014			September 30, 2014
Net product sales (in thousands)	$	23,299		$	24,379		$	26,540		$	31,223
Percentage growth over same quarter in previous year		57	%		47	%		39	%		54	%
Total dispensed units (capsules)		2,798,569			2,868,468			3,039,450			3,328,823
Percentage growth over same quarter in previous year		62	%		56	%		30	%		30	%

We are studying the clinical utility of AVP-923 in other mood/behavior disorders and movement disorders, including the potential treatment of agitation in patients with Alzheimer’s disease and potential treatment of levodopa-induced dyskinesia in Parkinson’s disease (“LID”). Our Phase 2 LID study is supported by a grant from the Michael J. Fox Foundation. Our Phase 2 study of agitation in Alzheimer’s disease was recently completed and, on September 15, 2014, we announced positive results from this study.

We are also developing AVP-786, an investigational drug product containing deuterium-modified dextromethorphan and quinidine for the potential treatment of neurologic and psychiatric disorders. We completed a pharmacokinetic study with AVP-786 and, based on this data, we have identified a formulation of AVP-786 to move forward into clinical studies. This AVP-786 formulation contains significantly less quinidine than used in AVP-923. In June 2013, the U.S. Food and Drug Administration (“FDA”) agreed to an expedited development pathway for AVP-786, requiring only a limited non-clinical package as part of the Investigational New Drug (“IND”) application. In August 2014, we initiated a Phase 2 study for AVP-786 as an adjunctive therapy to antidepressants for the treatment of Major Depressive Disorder (“MDD”.)

We entered into a multi-year agreement with Merck Sharp & Dohme Corp. (“Merck”) to co-promote Merck’s type 2 diabetes therapies JANUVIA^® (sitagliptin) and the sitagliptin family of products in the long-term care institutional setting in the United States beginning October 1, 2013. The term of the agreement will continue for three years following the launch date of the co-promotion activities, unless terminated earlier, pursuant to the terms of the agreement. Under the terms of the agreement, we will be compensated via a (i) fixed monthly fee and (ii) performance fee based on the amount of the products sold by us above a predetermined baseline. A significant

majority of the fee is performance based. Over the three years of the agreement, Avanir could receive up to a maximum of $46.7 million in compensation.

We have developed and licensed certain intellectual property rights relating to NUEDEXTA and our existing drug candidates (AVP-923, AVP-786 and AVP-825) and we continue to seek to acquire rights to other complementary products and technologies, particularly following our successful defense of the patents underlying NUEDEXTA. As a result, we may seek to in-license or acquire through other means, such as mergers, stock purchases or asset purchases, complementary products and technologies, as well as sales and marketing infrastructure and other assets or resources. There can be no assurance, however, that we will be successful in acquiring any additional assets or that we will receive the anticipated benefits of any such acquisitions.

Avanir was incorporated in California in August 1988 and was reincorporated in Delaware in March 2009.

In addition to the summary above, additional accomplishments in fiscal 2014 and subsequent to the end of fiscal 2014 through the date of this filing are:

•

We announced positive data for AVP-825 studies:

•

In October 2014, we published the results from TARGET, a pivotal phase 3 study evaluating the efficacy and safety of AVP-825, demonstrating relief of moderate or severe migraine headache as quickly as 15 minutes (19.4% AVP-825 vs. 14.4% placebo device) in subjects receiving AVP-825. A significantly greater proportion of AVP-825 patients reported headache relief at 30 minutes (41.7% vs. 26.9%, P=0.03) and at every time point up to two hours post-dose compared with those using the placebo device (67.6% vs. 45.2%, P=0.002).

•

In June 2014, we announced positive results of our Phase 3b COMPASS trial, a head-to-head study comparing AVP-825 to oral sumatriptan for the acute treatment of migraine. The COMPASS study met the primary endpoint for the sum of pain intensity difference at 30 minutes post dose (SPID30), showing that migraine sufferers achieved greater pain relief within 30 minutes of treatment with 22 mg of the investigational product AVP-825 compared with 100 mg sumatriptan tablet (p<0.0001).

•

In September 2014, we sold 20,930,000 shares of our common stock through a public offering. Gross proceeds were $230.2 million, before deducting underwriting discounts, commissions and offering expenses.

•

In September 2014, we announced positive results from its Phase 2 clinical trial evaluating the safety and efficacy of AVP-923 for the treatment of agitation in patients with Alzheimer’s disease. Treatment with AVP-923 was associated with significantly reduced agitation as measured by the primary endpoint, the agitation/aggression domain score of the neuropsychiatric inventory (NPI) compared to placebo (p=0.00008). The reduction in agitation was observed in both stage 1 (p=0.0002) and stage 2 (p=0.021) of the Sequential Parallel Comparison study design.

•

In August 2014, we enrolled the first patient in our Phase II study to evaluate the efficacy, safety and tolerability of AVP-786 for the adjunctive treatment of major depressive disorder (MDD).

•

In July 2104, we announced positive results from our Phase 4 PRISM II study showing that treatment with NUEDEXTA substantially reduced symptoms of PBA in patients with Alzheimer’s disease/dementia.

•

In the fourth quarter of fiscal 2014, we initiated a sales force expansion adding approximately 80 representatives to focus on the institutional care setting and adding approximately 70 representatives to focus on the retail setting. We currently have approximately 160 representatives focused in the institutional care setting and approximately 142 representatives focused in the retail setting.

•

In April 2014, we announced that the U.S. District Court of Delaware ruled in our favor in our patent infringement lawsuits against Par Pharmaceuticals, Inc. and Impax Laboratories, Inc. in conjunction with their Abbreviated New Drug Applications (“ANDA”s) for generic versions of NUEDEXTA^® (dextromethorphan hydrobromide/quinidine sulfate) capsules for the treatment of pseudobulbar affect resulting in exclusivity through 2026.

•

In October 2013, we enrolled the first patient in our Phase II study investigating the use of AVP-923 for the treatment of levodopa-induced dyskinesia in patients with Parkinson’s disease.

Our principal focus is on the commercialization of NUEDEXTA for the PBA indication. We believe that cash and cash equivalents, restricted cash and cash equivalents, and restricted investments of approximately $274.5 million at September 30, 2014, together with funds generated from sales of NUEDEXTA will be sufficient to fund our operations for at least the next 12 months. For additional information about the risks and uncertainties that may affect our business and prospects, please see Item 1A, “Risk Factors.”

Merger Agreement

On December 1, 2014, Avanir entered into the Merger Agreement. Pursuant to the terms of the Merger Agreement, and on the terms and subject to the conditions thereof, among other things, Otsuka and Acquisition Sub have commenced the Offer. If the Merger is completed, the Company will cease to be a publicly traded company. See further discussion of the Merger in Part I, Item 1. “Business — Merger Agreement” of this Annual Report on Form 10-K and Note 15, “Subsequent Events” in the Notes to Consolidated Financial Statements.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make a number of assumptions and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Significant estimates and assumptions made by management include, among others, sales returns, discounts and allowances, provisions for uncollectible receivables, realizability of inventories, valuation of investments, recoverability of long-lived assets, recognition of deferred revenue, the fair value of stock options, warrants and shares issued for non-cash consideration, determination of expenses in outsourced contracts, and realization of deferred tax assets. We base our estimates on historical experience and various other assumptions that are available at the time of the estimate and that we believe to be reasonable under the circumstances. Some of these judgments can be subjective and complex. For any given individual estimate or assumption made by us, there may also be other estimates or assumptions that are reasonable. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.

Revenue Recognition

We have 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.

We recognize 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) our price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. In addition, certain product sales are subject to rights of return. For products sold where the buyer has the right to return the product, we recognize revenue at the time of sale only if (1) our price to the buyer is substantially fixed or determinable at the date of sale, (2) the buyer has paid us, or is obligated to pay us and the obligation is not contingent on resale of the product, (3) the buyer’s obligation to us 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 us, (5) we do 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. We recognize such product revenues when we have met all the above

criteria, including the ability to reasonably estimate future returns, or when we can reasonably estimate that the return privilege has substantially expired, whichever occurs first.

Product Sales — NUEDEXTA. NUEDEXTA is sold primarily to third-party wholesalers who, in turn, sell this product to retail pharmacies, hospitals, and other dispensing organizations. We have entered into agreements with wholesale customers, group purchasing organizations and third-party payers throughout the United States. These agreements frequently contain commercial terms, which may include favorable product pricing and discounts and rebates payable upon dispensing the product to patients. Additionally, these agreements customarily provide the customer with rights to return the product, subject to the terms of each contract. Consistent with pharmaceutical industry practice, wholesale customers can return purchased product during an 18-month period that begins six months prior to the product’s expiration date and ends 12 months after the expiration date. We recognize revenue upon delivery of NUEDEXTA to our wholesalers and other customers.

We record allowances for customer credits, including estimated discounts, co-pay assistance, rebates and chargebacks. These allowances provided by us to a customer are presumed to be a reduction of the selling prices of our products and, therefore, are characterized as a reduction of revenue when recognized in our consolidated statement of operations. We believe the assumptions used to estimate these allowances are reasonable considering known facts and circumstances. However, actual rebates, chargebacks and returns could differ materially from estimated amounts because of, among other factors, unanticipated changes in prescription trends and any change in assumptions affecting sell-through and research data purchased from third parties. Product shipping and handling costs are included in cost of product sales.

We offer discounts to certain of our customers, including discounts to wholesalers for certain services, cash discounts to customers for the early payment of trade receivables and patient discounts in the form of co-pay assistance for the purchase of NUEDEXTA through the use of coupons. We accrue for discounts based on the contractual terms of agreements with customers and historical experience. The estimated redemption cost of the coupons accrued is based on the historical experience for NUEDEXTA and sell-through data purchased from third parties. Cash discount accruals for early payment of trade receivables are recorded as a contra asset to trade receivables in our consolidated balance sheets. All other discount accruals are recorded in accrued expenses in our consolidated balance sheets.

We participate in various managed care access rebate programs, the largest of which relate to Medicaid, Medicare and commercial insurers. We also incur chargebacks, which are contractual discounts given primarily to federal government agencies and group purchasing organizations. We estimate rebate and chargeback accruals using quantitative factors such as contractual terms of agreements with our customers, historical experience, estimated percentages of product sold to qualified patients and estimated levels of inventory in the distribution channel. These quantitative factors are supplemented by additional factors such as our judgment with respect to many factors, including but not limited to, current market dynamics, changes in sales trends, an evaluation of current laws and regulations and product pricing. We evaluate percentages of NUEDEXTA sold to qualified patients primarily through analysis of wholesaler and other third party sell-through and research data. Additionally, there is a significant time lag between the date we estimate the accrual and when we actually pay the accrual. Due to this time lag, we record adjustments to estimated accruals over several periods, which can result in a net increase to net loss or a decrease to net loss in those periods. The rebate and chargeback accruals are recorded in accrued expenses in our consolidated balance sheets.

We estimate future returns and record a returns reserve as a reduction to revenue. The returns reserve represents a reserve for NUEDEXTA that may be returned primarily due to product expiration and is estimated based on contractual terms with customers and historical return trends as a percentage of gross sales. The returns reserve is recorded as a contra asset to trade receivables in our consolidated balance sheets. We have experienced annual returns of approximately 1% of gross product sales over the past two years.

Prior to the second quarter of fiscal 2012, we were unable to reasonably estimate future returns due to the lack of sufficient historical return data for NUEDEXTA. Accordingly, we invoiced the wholesaler, recorded deferred revenue at gross invoice sales price less estimated cash discounts and distribution fees, and classified the inventory shipped as finished goods. We previously deferred recognition of revenue and the related cost of product sales on

shipments of NUEDEXTA until the right of return no longer existed, i.e. when we received evidence that the products had been dispensed to patients. We estimated patient prescriptions dispensed using an analysis of third-party information.

The following table provides a summary of activity with respect to our sales allowances and accruals during fiscal 2014, 2013, and 2012 (reported in thousands):


	Balance at 9/30/2013		Accruals		Payments/ Credits			Balance at 9/30/2014
Accrued discounts	$	891	$	8,290	$	(8,032	)	$	1,149
Accrued rebates and chargebacks		3,596		22,187		(17,843	)		7,940
Other accrued discounts		26		657		(628	)		55

Subtotal		4,513		31,134		(26,503	)		9,144
Reserve for doubtful accounts		208		—		(208	)		—
Reserve for product returns		—		1,547		(687	)		860
Reserve for cash discounts		264		2,432		(2,334	)		362

Total	$	4,985	$	35,113	$	(29,732	)	$	10,366


	Balance at 9/30/2012		Accruals		Payments/ Credits			Balance at 9/30/2013
Accrued discounts	$	671	$	5,222	$	(5,002	)	$	891
Accrued rebates and chargebacks		1,532		12,976		(10,912	)		3,596
Other accrued discounts		28		467		(469	)		26

Subtotal		2,231		18,665		(16,383	)		4,513
Reserve for doubtful accounts		—		208		—			208
Reserve for cash discounts		147		1,848		(1,731	)		264

Total	$	2,378	$	20,721	$	(18,114	)	$	4,985


	Balance at 9/30/2011		Accruals		Payments/ Credits			Balance at 9/30/2012
Accrued discounts	$	245	$	2,776	$	(2,350	)	$	671
Accrued rebates and chargebacks		161		3,922		(2,551	)		1,532
Other accrued discounts		—		426		(398	)		28

Subtotal		406		7,124		(5,299	)		2,231
Reserve for cash discounts		41		910		(804	)		147

Total	$	447	$	8,034	$	(6,103	)	$	2,378

Multiple Element Arrangements. We have, in the past, entered into arrangements whereby we deliver to the customer multiple elements including technology and/or services. Such arrangements have 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. At the inception of each such arrangement, we analyze the multiple elements contained within the arrangement to determine whether the elements can be separated. If a product or service is not separable, the combined deliverables will be accounted for as a single unit of accounting.

substantially in our control. If an element can be separated, we allocate amounts based upon the selling price of each element. We determine the selling price of a separate deliverable using the price we charge other customers when we sell that product or service separately; however, if we do not sell the product or service separately, we use third-party evidence of selling price of a similar product or service to a similarly situated customer. We consider licensed rights or technology to have standalone value to our customers if we or others have sold such rights or technology separately or our customers can sell such rights or technology separately without the need for our continuing involvement. We have not entered into any multiple element arrangements that have required us to estimate selling prices during fiscal 2014, 2013 or 2012.

License Arrangements. License arrangements may consist of non-refundable up-front license fees, data transfer fees, research reimbursement payments, exclusive licensed rights to patented or patent pending compounds, technology access fees, and 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 us, and require no consequential continuing involvement on our 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. We defer recognition of non-refundable up-front fees if we have 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 our performance under the other elements of the arrangement. In addition, if we have required continuing involvement through research and development services that are related to our proprietary know-how and expertise of the delivered technology, or can only be performed by us, 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 revenue upon the achievement of the milestones as specified in the underlying agreements when they represent the culmination of the earnings process.

Royalty Arrangements. We recognize 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.

Certain royalty arrangements provide 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 GSK, we recognized royalty revenue in the period in which the threshold was exceeded. For royalty revenue generated from the license agreement with Azur Pharma (“Azur”), we recognized revenue when it had determined that the threshold had been exceeded.

When we sell our rights to future royalties under license agreements and also maintain continuing involvement in earning such royalties, we defer recognition of any up-front payments and recognize them as revenues over the life of the license agreement. We recognized revenues for the sale of an undivided interest of our Abreva^® license agreement to Drug Royalty USA under the “units-of-revenue method.” Under this method, the amount of deferred revenues recognized in each period was calculated by multiplying the ratio of the royalty payments due to Drug Royalty USA by GSK for the period to the total remaining royalties we expected GSK would pay Drug Royalty USA over the remaining term of the agreement. The GSK license agreement expired in April 2014.

Co-Promotion Arrangements. We recognize both a fixed monthly fee and a performance fee as revenues from co-promote activities in the fee in the consolidated statements of operations. The fixed monthly fee is recognized ratably over the period earned. The performance fee is recognized when the products sold exceeds a predetermined baseline for the period. The receivable from the co-promotion fee is recorded in other current assets in the consolidated balance sheets.

Cost of Product Sales

Cost of product sales includes third-party royalties and direct and indirect costs to manufacture product sold, including packaging, storage, shipping and handling costs and the write-off of obsolete inventory.

Recognition of Expenses in Outsourced Contracts

Pursuant to our assessment of the services that have been performed on clinical trials and other contracts, we recognize expense as the services are provided. Our 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.

Research and Development Expenses

Research and development expenses consist of expenses incurred in performing research and development activities including salaries and benefits, facilities and other overhead expenses, clinical trials, contract services and other outsourced contracts. Research and development expenses are charged to operations as they are incurred. Up-front payments to collaborators made in exchange for the avoidance of potential future milestone and royalty payments on licensed technology are also charged to research and development expense when the drug is still in the development stage, has not been approved by the FDA for commercialization and has no alternative uses.

We assess our obligations to make milestone payments that may become due under licensed or acquired technology to determine whether the payments should be expensed or capitalized. We charge milestone payments to research and development expense when:

•

The technology is in the early stage of development and has no alternative uses;

•

There is substantial uncertainty regarding the future success of the technology or product;

•

There will be difficulty in completing the remaining development; and

•

There is substantial cost to complete the work.

Acquired contractual right. Payments to acquire contractual rights to a licensed technology or drug candidate are expensed as incurred when there is uncertainty in receiving future economic benefits from the acquired contractual rights. We consider the future economic benefits from the acquired contractual rights to be uncertain until such drug candidate is approved by the FDA or when other significant risk factors are abated.

Share-Based Compensation

We grant options, restricted stock units and restricted stock awards to purchase our common stock to our employees, directors and consultants under our stock option plans. The benefits provided under these plans are share-based payments that we account 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, our expected stock price volatility, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends. Expected volatilities are based on historical volatility of our common stock and other factors. The expected terms of options granted are based on analyses of historical employee termination rates and option exercises. The expected risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant. Since we do not expect to pay dividends on our common stock in the foreseeable future, we estimated the dividend yield to be 0%.

If factors change and we employ different assumptions in calculating the fair value in future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation. Because changes in the subjective input assumptions can materially affect our estimates of fair value

of our share-based compensation, in our opinion, existing valuation models, including the Black-Scholes model and lattice binomial models, may not provide reliable measures of the fair value of our share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, early termination or forfeiture of those share-based payments in the future. Certain share-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair value originally estimated on the grant dates and reported in our financial statements.

Alternatively, values may be realized from these instruments that are significantly in excess of the fair value originally estimated on the grant date and reported in our financial statements. There is no current market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee share-based awards is determined using an option-pricing model, the value derived from that model may not be indicative of the value observed in a willing buyer/willing seller market transaction.

The application of the fair value method of accounting for share-based compensation may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and materially affect the fair value estimate of share-based payments. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.

Theoretical valuation models and market-based methods are evolving and may result in lower or higher fair value estimates for share-based compensation. The timing, readiness, adoption, general acceptance, reliability and testing of these methods is uncertain. Sophisticated mathematical models may require voluminous historical information, modeling expertise, financial analyses, correlation analyses, integrated software and databases, consulting fees, customization and testing for adequacy of internal controls. Market-based methods are emerging that, if employed by us, may dilute our earnings per share and involve significant transaction fees and ongoing administrative expenses. The uncertainties and costs of these extensive valuation efforts may outweigh the benefits to investors.

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 and is amortized using the straight-line attribution method. As share-based compensation expense recognized in the consolidated statements of operations for fiscal 2014, 2013, and 2012 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. We estimate forfeitures based on our historical experience. Changes to the estimated forfeiture rate are accounted for as a cumulative effect of change in the period the change occurred.

Effects of Inflation

We believe the impact of inflation and changing prices on net revenues and on operations has been minimal during the past three years.

Results of Operations

We operate our business on the basis of a single reportable segment, which is the business of development, acquisition and commercialization of novel therapeutics for chronic diseases. Our chief operating decision-maker is the Chief Executive Officer, who evaluates our company as a single operating segment.

We categorize revenues by type of revenue in five different categories: 1) product sales, 2) royalties and royalty rights, 3) licensing, 4) government research grant services and 5) research and development services.

All long-lived assets for fiscal 2014 and 2013 were located in the United States.

Comparison of Fiscal 2014 and 2013

Revenues (in thousands)


	Year ended September 30,
	2014		2013		$ Change			% Change
REVENUES
Net product sales	$	105,441	$	70,692	$	34,749			49	%
Revenues from royalties		2,743		4,454		(1,711	)		-38	%
Revenues from co-promotion with Merck		6,735		—		6,735			100	%
Revenues from research grant services		110		220		(110	)		-50	%

Total revenues	$	115,029	$	75,366	$	39,663			53	%

Total revenues were $115.0 million for the fiscal year ended September 30, 2014 compared to $75.4 million for the fiscal year ended September 30, 2013. The increase in total revenues of approximately $39.6 million was primarily attributed to an increase of 44% in volume for NUEDEXTA net product sales when compared to the same period of the prior year and revenues from our co-promote activities which began in the first quarter of fiscal 2014. Our GSK License Agreement expired in April 2014 and we do not expect any future revenues from royalties under this agreement.

Potential revenue-generating contracts that remained active as of September 30, 2014 include co-promote revenues from our agreement with Merck. 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.

Operating Expenses (in thousands)


	Year ended September 30,
	2014		2013		$ Change			% Change
OPERATING EXPENSES
Cost of product sales	$	3,324	$	4,002	$	(678	)		-17	%
Cost of research grant services		198		148		50			34	%
Research and development		44,004		49,506		(5,502	)		-11	%
Selling and marketing		77,656		63,202		14,454			23	%
General and administrative		36,191		29,935		6,256			21	%

Total operating expenses	$	161,373	$	146,793	$	14,580			10	%

Cost of Product Sales

In fiscal 2014, cost of product sales was $3.3 million compared to $4.0 million in fiscal 2013. The decrease in cost of product sales is primarily driven by the elimination of royalty expense related to NUEDEXTA effective May 1, 2014, partially offset by an increase in cost of product sales attributable to an increase in the volume of NUEDEXTA net product sales as compared to the same period of the prior year.

Research and Development Expenses

Research and development expenses decreased by approximately $5.5 million for the fiscal year ended September 30, 2014 compared to the fiscal year ended September 30, 2013. The decrease is primarily due to the $20.0 million up-front payment for the in-licensing of AVP-825 paid in fiscal 2013, substantially offset by an

increase of $9.8 million in clinical costs, approximately a $3.1 million increase in personnel costs, and an increase of approximately $1.6 million in other costs in fiscal 2014.

Research and Development Expenses by Product

The following table presents the costs attributable to our proprietary research and clinical development programs.


	Inception to Date(1)		Year Ended September 30,
(in thousands)	Inception to Date(1)		2014		2013		2012
Product AVP-923(2)	$	120,704	$	9,972	$	13,037	$	10,252
Product AVP-786(2)		17,524		10,096		4,890		2,538
Product AVP-825(2)		29,640		8,455		21,007		—
All other costs(3)				15,481		10,572		10,276

Total(4)			$	44,004	$	49,506	$	23,066

(1)

The date of inception varies for each product. For AVP-923, the table includes development costs from October 1, 2000 to present date. However, the development of AVP-923 commenced in 1999. For AVP-786 the date of inception occurred in the second fiscal quarter of 2012. For AVP-825, date of inception occurred in the fourth fiscal quarter of 2013.

(2)	Includes developmental costs such as non-clinical, clinical research, regulatory, supply chain, and other related costs as well as on-going post approval costs such as regulatory, supply chain, post-marketing requirements and other related costs, if applicable.

(3)	Includes unallocated costs such as salaries and wages and certain consulting costs, other outside expenses and medical affairs.

(4)	Excludes unallocated indirect corporate overhead costs.

Selling and Marketing Expenses

Selling and marketing expenses increased by approximately $14.5 million for the fiscal year ended September 30, 2014 compared to the fiscal year ended September 30, 2013. The increase is primarily attributed to increased personnel costs of approximately $8.0 million resulting from sales force expansions, which increased our sales force by approximately 30% in the fourth quarter of fiscal 2013 and approximately 85% during the fourth quarter of fiscal 2014, increased marketing costs of approximately $4.6 million and increases in other costs of approximately $1.9 million.

General and Administrative Expenses

General and administrative expenses increased by approximately $6.3 million for the fiscal year ended September 30, 2014, compared to the fiscal year ended September 30, 2013. The increase is primarily attributed to increased personnel costs of approximately $2.6 million, increased rent and related facility costs of approximately $2.0 million related to the relocation of our corporate offices to a larger space, additional expense related the U.S. Branded Prescription Drug Fee of $0.5 million and increases in other costs of approximately $3.2 million, partially offset by a $2.0 million decrease in legal costs.

On July 28, 2014, the IRS issued final regulations for the U.S. Branded Prescription Drug Fee, an annual non-tax deductible fee imposed entities engaged in the business of manufacturing or importing branded prescription drugs (“Covered entities”) enacted by the PPACA. The final regulations accelerated the expense recognition criteria for the fee obligation by one year, from the year in which the fee is paid to the year in which the sales used to calculate the fee occur. This change impacts Covered Entities and resulted in the need for Covered Entities to record an additional expense in 2014 for the fee that would have otherwise been expensed when paid in 2015. We accrued

an additional $0.5 million in fiscal 2014 due to this change. This fee associated with this accelerated expense will be paid, as scheduled, in 2015 and therefore had no cash impact in fiscal 2014.

Share-Based Compensation

Total compensation expense for our share-based payments in the fiscal years ended September 30, 2014 and 2013 was approximately $6.7 million and $5.8 million, respectively. Research and development expense in the fiscal years ended September 30, 2014 and 2013 includes share-based compensation expense of approximately $1.3 million and $1.1 million, respectively. Selling and marketing expense in the fiscal years ended September 30, 2014 and 2013 includes share-based compensation expense of approximately $2.1 million and $1.6 million, respectively. General and administrative expense in the fiscal years ended September 30, 2014 and 2013 includes share-based compensation expense of approximately $3.2 million and $3.1 million, respectively. As of September 30, 2014, approximately $15.3 million of total unrecognized compensation costs related to unvested awards is expected to be recognized over a weighted average period of 2.6 years. See Note 10, “Stockholders’ Equity — Employee Equity Incentive Plans,” in the Notes to Consolidated Financial Statements for further discussion.

Interest Expense

For the fiscal year ended September 30, 2014, interest expense was approximately $3.3 million compared to interest expense of $4.1 million for the prior fiscal year.

Loss on Early Extinguishment of Debt

For the fiscal year ended September 30, 2014, we recorded a loss on early extinguishment of debt of approximately $0.8 million resulting from the payoff of a loan agreement we entered into in July 2012.

Net Loss

Net loss was approximately $50.4 million, or $0.31 per share, for the fiscal year ended September 30, 2014, compared to a net loss of approximately $75.5 million, or $0.53 per share for the fiscal year ended September 30, 2013. The decrease in net loss is primarily attributed to increased NUEDEXTA net product sales offset by increased operating expenses.

Comparison of Fiscal 2013 and 2012

Revenues (in thousands)


	Year ended September 30,
	2013		2012		$ Change		% Change
REVENUES
Net product sales	$	70,692	$	37,075	$	33,617		91	%
Revenues from royalties		4,454		4,200		254		6	%
Revenues from research grant services		220		—		220		—

Total revenues	$	75,366	$	41,275	$	34,091		83	%

Total revenues were $75.4 million for the fiscal year ended September 30, 2013 compared to $41.3 million for the fiscal year ended September 30, 2012. The increase in total revenues of approximately $34.1 million was primarily attributed to an increase in volume for NUEDEXTA net product sales which we began promoting commercially in February 2011.

Operating Expenses (in thousands)


	Year ended September 30,
	2013		2012		$ Change		% Change
OPERATING EXPENSES
Cost of product sales	$	4,002	$	2,120	$	1,882		89	%
Cost of research grant services		148		—		148		—
Research and development		49,506		23,066		26,440		115	%
Selling and marketing		63,202		52,463		10,739		20	%
General and administrative		29,935		22,028		7,907		36	%

Total operating expenses	$	146,793	$	99,677	$	47,116		47	%

Cost of Product Sales

In fiscal 2013, cost of product sales was $4.0 million compared to $2.1 million in fiscal 2012. The increase in cost of product sales is attributable to the increase in product sales of NUEDEXTA which we began promoting commercially in February 2011.

Research and Development Expenses

Research and development expenses increased by approximately $26.4 million for the fiscal year ended September 30, 2013 compared to the fiscal year ended September 30, 2012. The increase is primarily due to the $20.0 million up-front payment for the in-licensing of AVP-825, increased clinical study costs of approximately $5.9 million and increased personnel costs of approximately $0.5 million to support the increased number of studies.

Selling and Marketing Expenses

Selling and marketing expenses increased by approximately $10.7 million for the fiscal year ended September 30, 2013, compared to the fiscal year ended September 30, 2012. The increase is primarily attributed to increased personnel costs of approximately $8.4 million resulting from sales force expansion which increased our sales force by 30% and increased marketing and other costs of approximately $2.3 million.

General and Administrative Expenses

General and administrative expenses increased by approximately $7.9 million for the fiscal year ended September 30, 2013, compared to the fiscal year ended September 30, 2012. The increase is primarily attributed to increased legal costs of approximately $5.6 million associated with the enforcement of our intellectual property rights related to NUEDEXTA, increased personnel costs of approximately $1.1 million and increased other costs of approximately $1.2 million.

Share-Based Compensation

Total compensation expense for our share-based payments in the fiscal years ended September 30, 2013 and 2012 was approximately $5.8 million and $4.9 million, respectively. Research and development expense in the fiscal years ended September 30, 2013 and 2012 includes share-based compensation expense of approximately $1.1 million and $1.0 million, respectively. Selling and marketing expense in the fiscal years ended September 30, 2013 and 2012 includes share-based compensation expense of approximately $1.6 million and $0.9 million, respectively. General and administrative expense in the fiscal years ended September 30, 2013 and 2012 includes share-based compensation expense of approximately $3.1 million and $3.0 million, respectively.

Interest Expense

For the fiscal year ended September 30, 2013, interest expense was approximately $4.1 million compared to interest expense of $1.4 million for fiscal year ended September 30, 2012. The increase in interest expense is due to

a financing arrangement entered into in June 2012, resulting in fiscal 2013 having a full year of interest expense compared to only four months of interest expense in fiscal 2012.

Net Loss

Net loss was approximately $75.5 million, or $0.53 per share, for the fiscal year ended September 30, 2013, compared to a net loss of approximately $59.7 million, or $0.45 per share for the fiscal year ended September 30, 2012. The increase in net loss is primarily attributed to an increase in operating expenses and interest expense, partially offset by increased NUEDEXTA net product sales.

Liquidity and Capital Resources

We assess our liquidity based on our ability to generate 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 or cash paid for 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 has been used to fund operations, working capital requirements and investing activities.

Cash, cash equivalents, restricted cash and 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 (reported in thousands).


	September 30, 2014			Change During Period			September 30, 2013			Change During Period			September 30, 2012
Cash, cash equivalents, restricted cash and cash equivalents, and restricted investments	$	274,494		$	216,965		$	57,529		$	(14,606	)	$	72,135
Cash and cash equivalents	$	271,870		$	216,611		$	55,259		$	(14,519	)	$	69,778
Net working capital	$	268,724		$	231,673		$	37,051		$	(23,545	)	$	60,596

	Year Ended September 30, 2014			Change Between Periods			Year Ended September 30, 2013			Change Between Periods			Year Ended September 30, 2012
Net cash used in operating activities	$	(48,654	)	$	16,768		$	(65,422	)	$	(7,764	)	$	(57,658	)
Net cash used in investing activities		(3,405	)		(3,043	)		(362	)		555			(917	)
Net cash provided by financing activities		268,670			217,405			51,265			2,455			48,810

Net change in cash and cash equivalents	$	216,611		$	231,130		$	(14,519	)	$	(4,754	)	$	(9,765	)

Operating activities. Net cash used in operating activities was approximately $48.7 million in fiscal 2014 compared to approximately $65.4 million in fiscal 2013. Net cash used in operating activities for fiscal 2014 included a net loss of $50.4 million and a $7.1 million use of cash for an increase in net working capital items, partially offset by non-cash items of $8.8 million consisting primarily of share-based compensation expense, depreciation and amortization, loss on early extinguishment of debt, and amortization of debt discount and debt issuance costs. The changes in working capital items reflect an increase in trade receivables of $10.3 million primarily as a result of increasing revenues coupled with extending payment terms for certain customers in exchange for discounted wholesaler fees. This increase is partially offset by an increase in accrued expenses and

other liabilities of $3.6 million primarily as a result of increased accrued royalties, rebates, chargebacks and distribution fees due to revenue growth.

Net cash used in operating activities for fiscal 2013 included a net loss of $75.5 million, partially offset by a $2.6 million source of cash for a decrease in net working capital items and by non-cash items of $7.5 million consisting primarily of share-based compensation expense, depreciation and amortization, and amortization of debt discount and debt issuance costs.

Net cash used in operating activities for fiscal 2012 included a net loss of $59.7 million and a $3.7 million use of cash for an increase in net working capital items, partially offset by non-cash items of $5.8 million consisting of share-based compensation expense, depreciation and amortization, and amortization of debt discount and debt issuance costs.

Investing activities. Net cash used in investing activities was approximately $3.4 million in fiscal 2014, compared to approximately $0.4 million in fiscal 2013. The increase is primarily related to increased purchases of manufacturing equipment for the AVP-825 program, along with increased costs for computer hardware and infrastructure related to the relocation of our corporate office and employee growth.

Net cash used in investing activities in fiscal 2012 was approximately $0.9 million. The decrease in fiscal 2013 when compared to fiscal 2012 is primarily related to a decrease in purchases of property and equipment.

Financing activities. Net cash provided by financing activities was approximately $268.7 million in fiscal 2014 compared to approximately $51.3 million in fiscal 2013. In fiscal 2014, we raised approximately $295.4 million in net proceeds from the sale of common stock and approximately $3.3 million from the exercise of stock options.

In fiscal 2013, we received net proceeds of approximately $48.8 million from the sale of common stock and approximately $2.5 million from the exercise of warrants and stock options.

In fiscal 2012, we received proceeds from debt, net of issuance costs of approximately $29.6 million In addition, we raised approximately $10.1 million in net proceeds from the sale of common stock and approximately $9.1 million from the exercise of warrants and stock options.

In August 2012, we filed with the SEC a shelf registration statement on Form S-3 to sell an aggregate of up to $100.0 million in common stock, preferred stock, debt securities and warrants. Included in this shelf registration on Form S-3 is a prospectus relating to a financing facility with Cowen and Company, LLC (“Cowen”), providing for the sale of up to $25.0 million worth of shares of our common stock from time to time into the open market at prevailing prices in accordance with the terms of a sales agreement entered into on August 8, 2012. On May 7, 2014, we amended our sales agreement with Cowen, and filed with the SEC a prospectus providing for the sale of up to an additional $50.0 million worth of shares of our common stock from time to time in the open market at prevailing prices. On May 9, 2014, we concluded the offering and, accordingly, no further sales of our common stock will be made pursuant to our prospectus dated May 7, 2014. As of September 30, 2014, approximately 19.2 million shares of common stock had been sold under this facility for total gross proceeds of approximately $75.0 million. As of September 30, 2014, approximately $25.0 million remains available on this shelf registration statement.

In July 2013, we filed with the SEC a shelf registration statement on Form S-3 to sell an aggregate of up to $150.0 million in common stock, preferred stock, debt securities and warrants. Included in this shelf registration on Form S-3 is a prospectus relating to a financing facility with Cowen, providing for the sale of up to $55.0 million worth of shares of our common stock from time to time into the open market at prevailing prices in accordance with the terms of a sales agreement entered into on August 8, 2012 and amended in July and December 2013. As of September 30, 2014, approximately 12.2 million shares of common stock had been sold under this facility for total gross proceeds of approximately $55.0 million. As of September 30, 2014 approximately $95.0 million remains available on this shelf registration statement.

As of September 30, 2014, we have contractual obligations for operating lease obligations, as summarized in the table that follows (in thousands).


	Payments Due by Period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Operating lease obligations(1)	$	13,530	$	2,149	$	4,294	$	4,369	$	2,718

(1)	Expected sublease payments for our operating lease are netted against the total obligations.

NUEDEXTA License Milestone Payments. We are party to an exclusive license agreement with the Center for Neurologic Study (“CNS”).

We paid to CNS a $75,000 milestone upon FDA approval of NUEDEXTA for the treatment of PBA in fiscal 2011. In addition, we have been obligated to pay CNS a royalty ranging from approximately 5% to 8% of net U.S. GAAP revenue generated by sales of NUEDEXTA. During fiscal 2014, 2013 and 2012, royalties of approximately $2.7 million, $3.5 million and $1.8 million, respectively, were recorded to cost of product sales in the consolidated statements of operations. Effective with the ANDA ruling on April 30, 2014, we no longer have a royalty obligation on revenue generated by sales of NUEDEXTA. Under certain circumstances, we may have the obligation to pay CNS a portion of net revenues received if we sublicense the licensed patent rights to a third party.

Under the agreement with CNS, we are required to make payments 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 pursued the development of the licensed patent rights for all five of the licensed indications. In general, individual milestones range from $75,000 to $125,000 for each accepted new drug application (“NDA”) and a similar amount for each approved NDA in addition to the royalty discussed above on net U.S. GAAP revenues. We do not have the obligation to develop additional indications under the CNS license agreement.

Deuterium-Modified Dextromethorphan License Milestone Payments. We hold the exclusive worldwide marketing rights to develop and commercialize deuterium-modified dextromethorphan compounds for the potential treatment of neurological and psychiatric disorders, as well as certain rights to other deuterium-modified dextromethorphan compounds pursuant to a license agreement with Concert.

Under the agreement with Concert, we are obligated to make milestone and royalty payments to Concert based on successful advancement of deuterium-modified dextromethorphan products for one or more indications in the United States, Europe, and Japan. Individual milestone payments range from $2.0 — $6.0 million, $1.5 — $15.0 million, and $25.0 — $60.0 million for clinical, regulatory and commercial targets respectively, and in aggregate could total over $200.0 million. Royalty payments are tiered, beginning in the single-digits and increasing to the low double-digits for worldwide net sales of deuterium-modified dextromethorphan products exceeding $1 billion annually. As of September 30, 2014, we have paid $4.0 million for milestones that have been achieved pursuant to this agreement.

AVP-825 License Milestone Payments. In July 2013, we entered into an exclusive license agreement for the development and commercialization of OptiNose’s novel Breath Powered intranasal delivery system containing low-dose sumatriptan powder to treat acute migraine. The licensed territories are the United States, Canada and Mexico. If approved, this product would be the first and only fast-acting dry-powder nasal delivery form of sumatriptan.

Under the terms of the agreement, OptiNose received an up-front cash payment of $20.0 million and OptiNose is eligible to receive reimbursement for certain shared development costs and up to an additional $90.0 million in total payments resulting from the achievement of future clinical, regulatory and commercial milestones. As of September 30, 2014, we have paid $2.5 million for milestones that have been achieved pursuant to this agreement. In addition, if approved, we will make tiered royalty payments of a low double-digit percentage of net sales in the United States, Canada and Mexico.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Management Outlook

We believe that cash, cash equivalents, restricted cash and cash equivalents, and restricted investments of approximately $274.5 million at September 30, 2014, together with funds expected to be generated from sales of NUEDEXTA, will be sufficient to sustain our planned level of operations for at least the next 12 months, which includes the costs associated with the ongoing commercialization of NUEDEXTA for the treatment of PBA in the U.S. and European markets, and seeking FDA approval and subsequently commercialize AVP-825. However, we cannot provide assurances that our plans will not change, or that changed circumstances 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 Item 1A, “Risk Factors.”

Recent Authoritative Guidance

See Note 2, “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements for a discussion of recently issued authoritative guidance and its effect, if any, on us.

Item 7A.

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 if we obtain EMA approval to market NUEDEXTA and distribute internationally or 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 equivalent 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 September 30, 2014 as held-to-maturity. These held-to-maturity securities are subject to interest rate risk. Based on our current low yield, any decrease in interest rates is not likely to have a material effect on interest income.

We maintain cash balances at major financial institutions in the United States that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per owner. At times, deposits held with these financial institutions may exceed the amount of insurance provided by the FDIC. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk.

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. Our cash and cash equivalents are placed at various money market mutual funds and financial institutions of high credit standing.

We extend credit to our customers in the form of trade receivables. We perform ongoing credit evaluations of our customers’ financial conditions and may limit the amount of credit extended if deemed necessary but usually we have required no collateral.

Item 8.

Financial Statements and Supplementary Data

Our consolidated financial statements are annexed to this report beginning on page F-1.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.

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(b) and 15d-15(b) 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 September 30, 2014. For the purpose of this review, disclosure controls and procedures means controls and procedures designed to ensure that information required to be disclosed by us 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 us in the reports that we file or submit is accumulated and communicated to management, including our principal executive officer, principal financial officer and principal 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.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and related COSO guidance. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of September 30, 2014.

Our assessment of the effectiveness of our internal control over financial reporting as of September 30, 2014 has been audited by KMJ Corbin & Company LLP, an independent registered public accounting firm, as stated in their report, which is set forth at page F-3.

Changes in Internal Control 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 fourth fiscal quarter ended September 30, 2014, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

Item 9B.

Other Information

None.

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

Board of Directors

The names of our directors, their ages and their positions with the Company as of December 1, 2014 are set forth below.


Nominee / Director Name and Year First Became a Director	Age		Position(s) with the Company
Keith A. Katkin (2007)		43	President, Chief Executive Officer, Director
Craig A. Wheeler (2005)		54	Chairman of the Board of Directors
Hans E. Bishop (2012)		50	Director
Mark H. Corrigan, M.D. (2014)		57	Director
David J. Mazzo, Ph.D. (2005)		57	Director
Corinne H. Nevinny (2013)		54	Director
Dennis G. Podlesak (2005)		56	Director

Keith Katkin. Mr. Katkin was appointed President and Chief Executive Officer of Avanir and was elected as a member of the Board of Directors in March of 2007. From July 2005 until March 2007, Mr. Katkin served as Senior Vice President of Sales and Marketing. Prior to joining Avanir, Mr. Katkin previously served as Vice President, Commercial Development for Peninsula Pharmaceuticals, playing a key role in the management and ultimate sale of the company to Johnson & Johnson in 2005. Additionally, Mr. Katkin’s employment experience includes leadership roles at InterMune, Amgen and Abbott Laboratories. Mr. Katkin also served as strategic advisor to Cerexa, a pharmaceutical company that was sold to Forest Laboratories in 2007. Mr. Katkin currently serves on the board of directors of Brain Injury Associates of America, a non-profit organization dedicated to people with brain injury and their families and Carbylan Therapeutics a private company focused on the development and marketing of device/drug combination products based on novel, chemically engineered polymer systems incorporating hyaluronic acid. Mr. Katkin received a B.S. degree in Business and Accounting from Indiana University and an M.B.A. degree in Finance from the Anderson School of Management at UCLA, graduating with honors. Mr. Katkin became a licensed Certified Public Accountant in 1995.

Craig A. Wheeler has served as our Chairman of the Board since May 2007 and currently serves as a member of our Audit Committee and Chairperson of each of our Corporate Governance Committee and Executive Committee. Mr. Wheeler serves as a director and as Chief Executive Officer of Momenta Pharmaceuticals, Inc. Prior to joining Momenta in August 2006, Mr. Wheeler was President of Chiron BioPharmaceuticals for five years, a division of Chiron Corporation, until it was acquired by Novartis AG in 2006. In this position he was responsible for all aspects of the division including commercial, research, development and manufacturing. Mr. Wheeler serves on the board of directors for the Generic Pharmaceutical Associates (GPHA) and is a member of their executive committee. He currently serves on the Cornell Biomedical Engineering Advisory Board, and serves on the Gene Partnership Advisory Board for the Children’s Hospital of Boston. Mr. Wheeler holds B.S. and M.S. degrees in chemical engineering from Cornell University and an M.B.A. degree from the Wharton School of the University of Pennsylvania, where he majored in marketing and finance. Mr. Wheeler’s experience within the pharmaceutical industry and his management experience at other companies in the biotechnology industry make him a valuable member of our Board.

Hans E. Bishop has served on the Board of Directors since May 2012. Mr. Bishop is the chief executive officer of Juno Therapeutics, an oncology company, and also currently serves as an Executive in Residence with Warburg Pincus, a private equity investment firm. Prior to joining Juno Therapuetics, Mr. Bishop was the chief operating officer of Photothera Inc., a late-stage medical device company, from February 2012 until October 2013. Prior to joining Photothera Inc., Mr. Bishop served as Executive Vice President and Chief Operating Officer at Dendreon Corporation from January 2010 to September 2011. His previous roles have included President of the specialty medicine business at Bayer Healthcare Pharmaceuticals Inc. from December 2006 to January 2010, where

he was responsible for a diverse portfolio of neurology, oncology and hematology products, growing the division into a €3 billion global franchise. Mr. Bishop also held various positions at Chiron Corporation, Glaxo Wellcome, and SmithKline Beecham. In addition, he served as Executive Vice President of operations with a global telecom service company. Mr. Bishop served as chairman of the board of Genesis Biopharma, Inc., a biotechnology company, from January 2012 until November 2012. Mr. Bishop received a B.S. degree in chemistry from Brunel University in London. Based on Mr. Bishop’s experience within the pharmaceutical industry and his executive experience at other companies in the biotechnology industry, the Board believes Mr. Bishop has the appropriate set of skills to serve as a member of our Board.

Mark H. Corrigan, M.D. has served as a member of the Board since March 2014 and currently serves as Chairperson of our Science Committee and as a member of our Corporate Governance Committee. Dr. Corrigan is Chairman of the Board of Epirus Biopharmaceuticals, Inc. a public biopharmaceutical company, and from 2010 to 2014, he previously served as a Director, President and Chief Executive Officer of Zalicus Inc. prior to their merger with Epirus Biopharmaceuticals in July 2014. He also served as a Director of Zalicus and its progenitor companies since December 2006. Prior to Zalicus, Dr. Corrigan joined the specialty pharmaceutical company Sepracor Inc. in 2003 (now known as Sunovion Pharmaceuticals, Inc.) and served as their Executive Vice President of Research and Development until December 2009. Prior to joining Sepracor, Dr. Corrigan spent 10 years with Pharmacia & Upjohn, a pharmaceutical company acquired by Pfizer, Inc. where he served most recently as group vice president of Global Clinical Research and Experimental Medicine. Before Dr. Corrigan entered the pharmaceutical industry, he spent five years in academic research at the University of North Carolina, School of Medicine, focusing on psychoneuroendocrinology. Dr. Corrigan also serves on the board of directors of Cubist Pharmaceuticals, Inc. Dr. Corrigan holds a B.A. and an M.D. from the University of Virginia and received specialty training in psychiatry at Maine Medical Center and Cornell University.

David J. Mazzo, Ph.D. has served as a member of the Board since July 2005 and he currently serves as Chairperson of our Compensation Committee and as a member of our Science Committee. From August 2008 through October 2014, he served as President, Chief Executive Officer and member of the board of Regado Biosciences, Inc., a publicly traded, U.S.-based biopharmaceutical company developing novel aptamer-reversal agent pairs initially in the area of injectable antithrombotics. From April 2007 through March 2008, Dr. Mazzo served as President and Chief Executive Officer and member of the board of Æterna Zentaris, Inc., a global biopharmaceutical company with products and a therapeutic focus in the areas of oncology and endocrinology. From April 2003 through March 2007, Dr. Mazzo served as President and Chief Executive Officer and member of the board of Chugai Pharma USA, a pharmaceutical company. Dr. Mazzo has spent more than 28 years in the pharmaceutical industry and has held positions of increasing responsibility with Merck, Baxter, Rhône-Poulenc Rorer, Hoechst Marion Roussel and Schering-Plough. Dr. Mazzo holds a B.A. degree in Honors (Interdisciplinary Humanities) and a B.S. degree in Chemistry from Villanova University, as well as an M.S. degree in Chemistry and a Ph.D. degree in Analytical Chemistry from the University of Massachusetts (Amherst). He further complemented his American education as a Research Fellow at the Ecole Polytechnique Fédérale de Lausanne, Switzerland. Dr. Mazzo serves as non-executive Chairman of the board of directors of pSivida, Inc., a global public biopharmaceutical company. Based on Dr. Mazzo’s experience within the pharmaceutical industry and his executive experience, specifically his experience as Chief Executive Officer at other companies in the biotechnology industry, as well as his service on other boards of directors in the biotechnology industries, the Board believes Dr. Mazzo has the appropriate set of skills to serve as a member of our Board.

Corinne H. Nevinny joined the Board in March 2013 and currently serves as Chairperson of our Audit Committee and as a member of our Compensation Committee. Ms. Nevinny is currently General Partner of LMNVC LLC, a privately held venture firm, a position she has held since October 2010. From September 2009 to August 2010, Ms. Nevinny served as General Manager, Cardiac Surgery and Vascular, at Edwards Lifesciences Corporation, a leading cardiovascular technology company. Prior to assuming that position, she was President of Global Operations from December 2005 until September 2009. Ms. Nevinny served as Corporate Vice President, Chief Financial Officer and Treasurer of Edwards Lifesciences Corporation from March 2003 until December 2005. From 1998 until 2003, Ms. Nevinny was Vice President and Chief Financial Officer of Tularik, Inc., a biotechnology company. From 1996 until 1998, Ms. Nevinny was Executive Director for the health care group at

Warburg Dillon Read LLC, an investment bank. Ms. Nevinny also serves on the board of directors of Neurocrine Biosciences, Inc. and previously served on the board of directors of Onyx Pharmaceuticals, Inc. from October 2005 until October 2013, both of which are biopharmaceutical companies, as well as three private companies. Ms. Nevinny received a B.S. degree in industrial engineering from Stanford University and her M.B.A. from Harvard Business School. Based on Ms. Nevinny’s experience within the pharmaceutical industry and her executive experience at other companies in the biotechnology industry, the Board believes Ms. Nevinny has the appropriate set of skills to serve as a member of our Board.

Dennis G. Podlesak joined the Board in March 2005 and currently serves on our Compensation Committee and our Science Committee. Since November 2007, Mr. Podlesak has been a Partner with Domain Associates LLC, a life science focused venture capital firm, and has over 20 years of experience within the pharmaceutical industry. While at Domain, Mr. Podlesak was a Founder and the Chief Executive Officer of Calixa Therapeutics, Inc., a biopharmaceutical company that was acquired by Cubist Pharmaceuticals, Inc. in December 2009. Mr. Podlesak was also the Executive Chairman of Corthera, Inc., a biopharmaceutical company, which was acquired by Novartis AG in January 2010. Prior to Domain, from June 2005 to November 2007, Mr. Podlesak served as the Chief Executive Officer and a member of the board of directors of Cerexa, Inc., a biotechnology company. Cerexa, Inc. became a wholly owned subsidiary of Forest Laboratories after being acquired by Forest in January 2007. Prior to Cerexa, from 2004 to 2005, Mr. Podlesak served as the Chief Executive Officer and as a member of the board of directors of Peninsula Pharmaceuticals and, in June 2005, Mr. Podlesak led the sale of Peninsula to Johnson & Johnson. Prior to joining Peninsula, Mr. Podlesak served with Novartis AG, a healthcare company, as a Senior Vice President and Head of a North American Business Unit, and as a member of the Pharmaceutical Executive Committee and Global Leadership Team. Earlier in his career, Mr. Podlesak served as Vice President and Head of the CEC division of Allergan, Inc., a healthcare company, and was a member of Allergan’s North American and Global Management Team. Mr. Podlesak spent the first ten years of his career with SmithKline Beecham, a healthcare company (now GlaxoSmithKline plc). Mr. Podlesak has served on a number of public company and private boards, and is currently a member of the board of directors of Adynxx, Inc., a privately held pharmaceutical company, Regado Biosciences, Inc., a publicly traded biotechnology company, RightCare Solutions, Inc., a privately held healthcare technology company, Syndax Pharmaceuticals, Inc., a privately held pharmaceutical company, and Domain Russia Investments Ltd., a private venture capital firm. Mr. Podlesak received a B.A. and an M.B.A. degree from Pepperdine University and has completed postgraduate studies at the Wharton School, University of Pennsylvania. Based on Mr. Podlesak’s experience within the pharmaceutical industry and his executive experience, specifically his experience as Chief Executive Officer at other successful companies in the biotechnology industry, as well as his service on other boards of directors in the biotechnology industry, the Board believes Mr. Podlesak has the appropriate set of skills to serve as a member of our Board.

Executive Officers and Key Employees

The names of our executive officers and other key employees, their ages and positions within the Company as of December 1, 2014 are set forth below. Officers are elected annually by the Board of Directors and hold office until their respective successors are qualified and appointed or until their resignation, removal or disqualification.


Name	Age		Position
Keith A. Katkin		43	President and Chief Executive Officer
Gregory J. Flesher		44	Senior Vice President, Corporate Development and Chief Business Officer
Rohan Palekar		49	Senior Vice President and Chief Commercial Officer
Joao Siffert, M.D.		50	Senior Vice President, Research and Development, Chief Scientific Officer
Christine G. Ocampo, CPA		42	Vice President, Finance, Chief Accounting Officer and Secretary

Keith Katkin. Mr. Katkin’s biography is set forth under the heading “Board of Directors.”

Gregory J. Flesher. Mr. Flesher was appointed Senior Vice President, Corporate Development and Chief Business Officer in February 2011. From August 2007 to February 2011, he served as Vice President of Business Development. From June 2006 to August 2007, he served as Senior Director of Commercial Strategy and, in November 2006, assumed the additional responsibility for Business Development and Portfolio Planning. Prior to joining Avanir, Mr. Flesher held positions as Director of Sales — Hepatology (from 2004 to 2006) and Director of Marketing — Pulmonary (from 2002 to 2004) at InterMune, Inc. Prior to his tenure at InterMune, Mr. Flesher held both oncology and nephrology marketing positions with Amgen Inc., a global biotechnology company, from 1999 to 2002. Mr. Flesher also has global marketing and clinical development experience from Eli Lilly and Company, where he worked from 1995 to 1998. Mr. Flesher graduated from Purdue University with a Bachelor of Science in Biology.

Rohan Palekar. Mr. Palekar joined Avanir in March 2012 as Senior Vice President and Chief Commercial Officer. Mr. Palekar has over 20 years of experience in the biopharmaceutical industry and has worked on significant brands including Remicade^® and Stelara^® as well as the investigational therapy MDV3100. Mr. Palekar’s most recent commercial leadership role was as Chief Commercial Officer for Medivation, Inc., a biopharmaceutical company, from January 2008 to September 2011, where he was responsible for all commercial activities, chemistry, manufacturing and controls, medical affairs and public relations functions. Prior to Medivation, Mr. Palekar spent over 16 years at Johnson & Johnson, a diversified healthcare company, from July 1991 to January 2008, in various senior commercial and strategic management roles, most recently as Vice President of Sales & Marketing at Centocor, a subsidiary of Johnson & Johnson, where he successfully launched two new indications for Remicade. Prior to that, Mr. Palekar was the worldwide Vice President of Immunology and held marketing leadership roles at McNeil Consumer and Specialty Pharmaceuticals. Mr. Palekar earned his M.B.A. degree from the Amos Tuck School of Business Administration Dartmouth College, his B.Com. in Accounting from the University of Bombay and his L.L.B. in Law from the University of Bombay.

Joao Siffert, M.D. Dr. Siffert joined Avanir in August 2011 as Senior Vice President, Research and Development and also became Chief Scientific Officer in December 2012. Dr. Siffert previously served as Vice President and Chief Medical Officer at Ceregene, Inc., a biotechnology company focused on the development of neurotrophic gene therapies for Alzheimer’s and Parkinson’s diseases, from September 2007 to August 2011. Prior to his work at Ceregene, Dr. Siffert served as the Chief Medical Officer at Avera Pharmaceuticals, a CNS specialty pharmaceutical company, from May 2005 to September 2007. Prior to joining Avera, Dr. Siffert held positions with Pfizer (from February 2002 to May 2005) first as a medical director for Relpax and subsequently as the worldwide medical team leader of Lyrica and Neurontin focusing in areas of pain and epilepsy. Prior to Pfizer, Dr. Siffert held academic positions at Beth Israel Medical Center, where he served as director of the Adult Neuro-Oncology program, and Albert Einstein College of Medicine, where he was assistant professor of neurology. Dr. Siffert completed residencies in pediatrics at New York University School of Medicine and in neurology at Harvard Medical School. Dr. Siffert was certified by the American Board of Neurology and Psychiatry in 1996. He holds an M.D. degree from the University of Sao Paulo School of Medicine as well as an M.B.A. degree from Columbia University Business School.

Christine G. Ocampo, CPA. Ms. Ocampo joined Avanir in March 2007 and currently serves as Vice President, Finance, Chief Accounting Officer and Secretary. Ms. Ocampo has over 20 years of accounting and finance experience, including over 11 years as the head of Finance for publicly-traded companies in the healthcare industry. Prior to her current role, Ms. Ocampo previously served as Avanir’s Vice President, Finance, Chief Compliance Officer and Secretary beginning in February 2008. Prior to Avanir, Ms. Ocampo served as Senior Vice President, Chief Financial Officer, Chief Accounting Officer, Treasurer and Secretary of Cardiogenesis Corporation (now known as CryoLife, Inc.), a publicly-traded medical device company, from November 2003 to April 2006, and as Cardiogenesis’ Vice President, Corporate Controller from May 2001 to November 2003. Prior to Cardiogenesis, Ms. Ocampo held a management role in Finance at Mills-Peninsula Health Systems in Burlingame, California, and served as an auditor for Ernst & Young LLP. Ms. Ocampo graduated with a Bachelor of Science in Accounting from Seattle University in 1994 and became a licensed Certified Public Accountant in 1996.

Corporate Governance

Code of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics that applies to our employees, officers and directors and incorporates guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. In addition, the Code of Business Conduct and Ethics incorporates our guidelines pertaining to topics such as conflicts of interest and workplace behavior. The Code of Business Conduct and Ethics is available on our website at www.avanir.com. Any waivers from or amendments to the Code of Business Conduct and Ethics will be posted to our website. You may also request a printed copy of our Code of Business Conduct and Ethics, without charge, by writing to us at 30 Enterprise, Suite 400, Aliso Viejo, California 92656, Attn: Investor Relations.

Board of Directors and Committees

Board and Committee Meetings

During fiscal 2014, our Board met 7 times. Each director attended at least 97% of the aggregate of the meetings of the Board and meetings of the committees of which he or she was a member in our last fiscal year. During fiscal 2014, our Board had an Audit Committee, a Compensation Committee, a Corporate Governance Committee, a Science Committee and a Pricing Committee. All members of the Audit, Compensation, Corporate Governance and Science Committees are non-employee directors who are deemed independent.

All members of our Board attended the 2014 Annual Meeting of Stockholders. Although the Company has no formal policies regarding director attendance at annual meetings, all members of the Board are expected to attend the 2015 Annual Meeting.

Board Leadership Structure and Risk Oversight

The positions of Chairman of the Board and Chief Executive Officer are separated, which allows our Chief Executive Officer to focus on our day-to-day business, while allowing the Chairman of the Board to lead the Board in its fundamental role of providing advice to and independent oversight of management. Our Board recognizes the time, effort, and energy that the Chief Executive Officer is required to devote to his position in the current business environment, as well as the commitment required to serve as our Chairman. Our Board also believes that this structure ensures a greater role for the independent directors in the oversight of our Company and active participation of the independent directors in setting agendas and establishing priorities and procedures for the work of our Board. Our Board believes its administration of its risk oversight function has not affected its leadership structure.

While our Bylaws do not require that our Chairman and Chief Executive Officer positions be separate, our Corporate Governance Guidelines do require that the positions be separate because our Board believes that having separate positions and having an independent outside director serve as Chairman is the appropriate leadership structure for us at this time and demonstrates our commitment to good corporate governance. Our separated Chairman and Chief Executive Officer positions are augmented by the independence of six of our seven directors, and our independent Board committees that provide appropriate oversight in the areas described below. At executive sessions of independent directors, these directors speak candidly on any matter of interest, which may be with or without the Chief Executive Officer present. The Board met in executive session 4 times in 2014. We believe this structure provides consistent and effective oversight of our management and the Company.

The Board has overall responsibility for the oversight of the Company’s risk management process, which is designed to support the achievement of organizational objectives, including strategic objectives, to improve long-term organizational performance and enhance stockholder value. Risk management includes not only understanding company-specific risks and the steps management implements to manage those risks, but also what level of risk is acceptable and appropriate for the Company. Management is responsible for establishing our business strategy, identifying and assessing the related risks and implementing appropriate risk management practices. The Board periodically reviews our business strategy and management’s assessment of the related risk, and discusses with

management the appropriate level of risk for the Company, especially in light of the fact that the Company has a marketed product, as well as a product that the Company is currently co-promoting, and may face additional risk management concerns that it did not face while developing product candidates, such as risk of off-label promotion and other risks associated with marketed products. The Board also delegates oversight to Board committees to oversee selected elements of risk as set forth below.

Board Committees

Audit Committee. As of December 1, 2014, the Audit Committee was comprised of Ms. Nevinny (Chairperson) and Messrs. Bishop and Wheeler. The Audit Committee selects the Company’s independent registered public accounting firm, approves its compensation, oversees and evaluates the performance of the independent registered public accounting firm, oversees the accounting and financial reporting policies and internal control systems of the Company, reviews the Company’s interim and annual financial statements, independent registered public accounting firm reports and management letters, and performs other duties, as specified in the Audit Committee Charter, a copy of which is available on the Company’s website at www.avanir.com. Additionally, the Audit Committee is involved in the oversight of the Company’s risk management through its practice of having a head of the Company’s different business functions report on risk management issues within his or her respective business division at each quarterly meeting of the Audit Committee. The Audit Committee met 8 times in fiscal 2014. All members of the Audit Committee satisfy the current independence standards promulgated by NASDAQ and the SEC and the Board has determined that Ms. Nevinny qualifies as an “audit committee financial expert,” as the SEC has defined that term in Item 407 of Regulation S-K.

Compensation Committee. As of December 1, 2014, the Compensation Committee was comprised of Dr. Mazzo (Chairperson), Ms. Nevinny and Mr. Podlesak. The Compensation Committee determines compensation levels for the Company’s executive officers and directors, oversees administration of the Company’s equity compensation plans, and performs other duties regarding compensation for employees and consultants as the Board may delegate from time to time. Our Chief Executive Officer makes recommendations to the Compensation Committee regarding the corporate and individual performance goals and objectives relevant to executive compensation and executives’ performance in light of such goals and objectives, and recommends other executives’ compensation levels to the Compensation Committee based on such evaluations. The Compensation Committee considers these recommendations and then makes an independent decision regarding officer compensation levels and awards. The Compensation Committee met 4 times in fiscal 2014. A copy of the Compensation Committee charter is available on the Company’s website at www.avanir.com. All members of the Compensation Committee satisfy the current NASDAQ independence standards.

Corporate Governance Committee. As of December 1, 2014, the Corporate Governance Committee was comprised of Messrs. Wheeler (Chairperson) and Bishop and Dr. Corrigan. The Corporate Governance Committee oversees the Company’s Code of Conduct, develops and implements policies and processes regarding corporate governance matters, assesses Board membership needs and acts as the Company’s nominating committee by reviewing potential director nominees and recommending nominees to the Board. The Corporate Governance Committee met 4 times in fiscal 2014. A copy of the Corporate Governance Committee charter is available on our website at www.avanir.com. All members of the Corporate Governance Committee satisfy the current NASDAQ independence standards.

Science Committee. As of December 1, 2014, the Science Committee was comprised of Drs. Corrigan (Chairperson) and Mazzo and Mr. Podlesak. The Science Committee advises management and the Board on scientific and regulatory matters relating to the Company’s drugs and drug candidates, including reviewing medical affairs policies and practices of the Company and reviewing key scientific, clinical and medical aspects of significant proposed business development activities. The Science Committee reviews both pre-clinical studies and clinical trials of Avanir’s research programs, and provides advice on the design, conduct and analyses of these data. The Science Committee is also responsible for reviewing and providing advice on scientific issues relating to drug manufacturing and intellectual property related to Avanir’s scientific research. The Science Committee met 5 times in fiscal 2014.

Pricing Committee. As of December 1, 2014, the Pricing Committee was comprised of Messrs. Wheeler (Chairperson) and Katkin and Ms. Nevinny. The Pricing Committee held one meeting in fiscal 2014.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Executive officers, directors and greater-than-10% stockholders are required by SEC regulations to furnish us with copies of all reports filed under Section 16(a). To the Company’s knowledge, based solely on the review of copies of the reports filed with the SEC, all reports required to be filed by our executive officers, directors and greater-than-10% stockholders were timely filed in fiscal 2014.

Item 11.

Executive Compensation

Compensation Discussion and Analysis

The following compensation discussion and analysis describes the material elements of compensation earned in fiscal 2014 by each of the executive officers identified below in the Summary Compensation Table, who are referred to collectively as our “named executive officers.” Our named executive officers with respect to the fiscal year that ended on September 30, 2014 were Keith A. Katkin, President and Chief Executive Officer; Rohan Palekar, Senior Vice President and Chief Commercial Officer; Joao Siffert, M.D., Senior Vice President, Research and Development, Chief Medical Officer; and Christine G. Ocampo, Vice President, Finance, Chief Accounting Officer. These persons constitute our principal executive officer, principal financial officer and two other executive officers serving during fiscal 2014. The 2014 compensation set forth below includes payments that were made, and compensation-related actions that were taken, in the first quarter of fiscal 2015 where these payments and decisions related to performance in fiscal 2014.

Compensation Philosophy and Objectives

Our philosophy in setting compensation policies for executive officers has two fundamental objectives: (1) to attract, motivate and retain a highly skilled team of executives and (2) to align our executives’ interests with those of our stockholders by rewarding short-term and long-term performance and tying compensation to increases in stockholder value. The Compensation Committee believes that executive compensation should be directly linked both to continuous improvements in corporate performance (“pay for performance”) and the achievement of objectives that are expected to increase stockholder value. In furtherance of this goal, the Compensation Committee has established the following guidelines as a foundation for compensation decisions:

•

provide a competitive total compensation package that enables the Company to attract and retain highly qualified executives with the skills and experience required for the achievement of business goals;

•

align compensation elements with the Company’s annual goals and long-term business strategies and objectives;

•

promote the achievement of key strategic and financial performance measures by linking short-term and long-term cash and equity incentives to the achievement of measurable corporate and individual performance goals; and

•

align executives’ incentives with the creation of stockholder value.

The Compensation Committee has historically compensated executive officers with three compensation components: base salary, annual incentive bonus and equity-based compensation. The Compensation Committee believes that cash compensation in the form of base salary and an annual incentive bonus provides our executives with short-term rewards for success in operations, and that long-term compensation through the award of stock options, restricted stock and other equity awards aligns the objectives of management with those of our stockholders with respect to long-term performance and success.

Risk Management and Mitigation

In reviewing the compensation structure in fiscal 2014, the Compensation Committee also considered how the Company’s compensation policies may affect the Company’s risk profile and whether compensation policies and practices may encourage risk-taking by employees. More specifically, the Compensation Committee considered the general design philosophy of the Company’s policies for employees whose conduct would be most affected by incentives established by compensation policies. In considering these issues, the Compensation Committee concluded that the use of performance-based bonuses and long-term equity awards did not appear to create undue risks for the Company or encourage excessive risk-taking behavior on the part of named executive officers.

With respect to bonus awards for our executive officers, the amount of an individual’s award depends principally (exclusively, in the case of our Chief Executive Officer) on overall Company performance, which reduces the ability and incentive for an individual to take undue risks in an effort to increase the amount of his or her bonus award for a particular year. The Company’s performance goals are reviewed annually by the Compensation Committee at the beginning of each fiscal year and are considered to be generally of the nature that would not encourage or reward excessive risk taking; these goals are then presented to the full Board for review and approval. Additionally, the Compensation Committee monitors Company performance throughout the year and has the ability to intervene in instances where actions by the Company vis-à-vis Company performance goal attainment would be considered unduly risky to prevent or penalize such actions.

Similarly, the Board reviews and approves annual revenue targets that are believed to be attainable with reasonable effort, which targets then are used to set individual sales goals for our commercial sales force. By providing reasonable but moderately challenging sales targets, while reinforcing our culture of compliance as it relates to legal and acceptable sales practices, the Company believes that individual sales targets for our commercial sales force do not encourage risk-taking by employees, while at the same time tying compensation to performance.

With respect to equity awards, these awards typically vest and become exercisable over a period of four years, meaning that long-term value creation, contrasted with short-term gain, presents the best opportunity for employees to profit from these awards. To the extent that performance-based equity awards are used, the performance achievement(s) that cause subsequent time-based vesting are estimated to be achieved one year from the grant date resulting in the vesting of such awards over a four year period from the grant date. The Company has also adopted certain policies consistent with good corporate governance including stock ownership guidelines to promote executive stock ownership and prohibiting certain trading practices in our stock, including hedging stock ownership, pledging shares of our stock as collateral for loans, and speculative and short-term trading each more fully described below. The Company has not historically used claw-back provisions, although the Compensation Committee will consider whether such a policy might be appropriate in the future to mitigate risk as a fully integrated specialty pharmaceutical company with commercial operations. Additionally, the use of financial-based performance metrics to determine employee compensation may subject those payouts to claw-back penalties under the Dodd-Frank Act, to the extent that there is a subsequent restatement of the financial measure that was used to determine a payout.

Roles in Determining Compensation

Compensation Committee

The Board has delegated to the Compensation Committee the responsibility to ensure that total compensation paid to our executive officers, including named executive officers, is consistent with our compensation policy and objectives. The Compensation Committee oversees and approves all compensation arrangements and actions for our executive officers and other key employees, including the named executive officers. While the Compensation Committee draws on a number of resources, including input from the Chief Executive Officer and independent compensation consultants, to make decisions regarding the Company’s executive compensation program, ultimate decision-making authority rests with the Compensation Committee. The Compensation Committee retains discretion over base salary, annual incentive bonus, equity compensation and other compensation considerations. The Compensation Committee relies upon the judgment of its members in making compensation decisions, after reviewing the performance of the Company and carefully evaluating an executive’s performance during the year against established goals, operational performance and business responsibilities. In addition, the Compensation

Committee incorporates its independent judgment in the assessment process to respond to and adjust for the evolving business environment. Corporate goals are reviewed annually by the Compensation Committee and then presented to the full Board for review and approval.

Compensation Consultant

The Compensation Committee has retained the services of an external compensation consultant, Radford, an AonHewitt Company (“Radford”). The mandate of the consultant is to assist the Compensation Committee in its review of executive and director compensation practices, including the competitiveness of pay levels, executive compensation design, benchmarking with the Company’s peers in the industry and other technical considerations including tax-and accounting-related matters. The Compensation Committee regularly evaluates Radford’s independence, as well as its performance, considers alternative compensation consultants and has the final authority to engage and terminate Radford’s services. The decision to engage Radford was not made or recommended by the Company’s management. The Compensation Committee, after a review of the factors set forth in Section 10C-1of the Securities Exchange Act of 1934, has determined that the work performed by Radford in fiscal 2014 and continuing to be performed in 2015 does not present any conflicts of interest.

Chief Executive Officer

The Chief Executive Officer attends Compensation Committee meetings and works with the Compensation Committee Chairman and Radford to develop compensation recommendations for the executive officers (excluding the Chief Executive Officer), based upon individual experience and breadth of knowledge, internal considerations, individual performance during the fiscal year and other factors deemed relevant by the Compensation Committee. The recommendations are then submitted to the Compensation Committee for review and consideration. The Compensation Committee works directly with Radford and the Chairman of the Board to determine compensation actions for the Chief Executive Officer; the Chief Executive Officer does not participate in Compensation Committee discussions relating to his compensation.

Competitive Market Benchmarking

The Compensation Committee draws on a number of resources to assist in the evaluation of the various components of the Company’s executive compensation program including, but not limited to, industry data compiled yearly by Radford in its Global Life Sciences Survey, which represents a nationally-based assessment of executive compensation widely used within the pharmaceutical and biotechnology industry sectors. While we do not establish compensation levels based solely on benchmarking, pay practices at other companies are an important factor that the Compensation Committee considers in assessing the reasonableness of compensation and ensuring that our compensation practices are competitive in the marketplace. The Compensation Committee adopted a group of peer companies during the third quarter of the 2013 fiscal year and, in fiscal 2014, the Compensation Committee, with the assistance of Radford, revised the group of peer companies to take into account changes in market capitalization and similarities to the Company along the dimensions of competition for talent, phase of development or stage of commercialization, current and potential market capitalization, and number of employees. Our current list of peer companies is comprised of the following companies:


ACADIA Pharmaceuticals	Dyax	Spectrum Pharmaceuticals
Acorda Therapeutics	Halozyme Therapeutics	VIVUS
Aegerion Pharmaceuticals	Horizon Pharma
AMAG Pharmaceuticals	Impax Laboratories
Arena Pharmaceuticals	Isis Pharmaceuticals
Auxilium Pharmaceuticals	Nektar Therapeutics
DepoMed	Sagent Pharmaceuticals

In addition to adopting the above group of peer companies in July 2014 (the “2014 peer group”), the Compensation Committee engaged Radford to conduct a comprehensive benchmarking study reporting on compensation levels and practices, including equity, relative to the 2014 peer group. An Executive Compensation

Assessment report was prepared by Radford in August 2014 that provided a competitive assessment of the Company’s executive compensation program as compared to the market data for base salaries, target total cash compensation and equity compensation of the 2014 peer group. In consideration of the benchmarking data in Radford’s competitive assessment of the Company’s executive compensation programs and the Company’s performance in fiscal 2014, adjustments to compensation were made in the first quarter of fiscal 2015, as described below.

Implementation of Objectives

In fiscal 2014, our executive compensation program consisted of the following forms of compensation, each of which are described below in greater detail:

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Base Salary

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Annual Bonus Incentive

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Equity Compensation

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Employee Benefit Program

Base Salary

Overview

Our Compensation Committee aims to set executives’ base salaries, in the aggregate, at levels near the 50th percentile of salaries of executives with similar roles as compared to the 2014 peer group. The Compensation Committee believes it is important to provide adequate fixed compensation to our executive officers working in a highly volatile and competitive industry. Our Compensation Committee believes that the 50th percentile for base salaries is generally the appropriate cash compensation level that will allow us to attract and retain highly skilled executives. The Compensation Committee’s choice of this target percentile reflects consideration of our stockholders’ interests in paying what is necessary to achieve our corporate goals, while conserving cash and equity as much as practicable. We believe that, given the industry in which we operate and our compensation philosophy and objectives, base salaries at or near the 50th percentile are generally sufficient to retain our current executives and to hire new executives when and as required. In determining appropriate base salary levels for a given executive officer, the Compensation Committee considers the following factors:

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individual performance of the executive, as well as our overall performance, during the prior year;

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level of responsibility, including breadth, scope and complexity of the position;

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level of experience and expertise of the executive;

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internal review of the executive’s compensation relative to other executives to ensure internal equity; and

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executive officer compensation levels at other similar companies to ensure competitiveness.

Salaries for executive officers are determined on an individual basis at the time of hire and are set to be competitive with peer companies in our industry. Adjustments to base salary are considered annually in light of each executive officer’s individual performance, the Company’s performance and compensation levels at peer companies in our industry, as well as changes in job responsibilities or promotion. The Chief Executive Officer assists the Compensation Committee in its annual review of the base salaries of other executive officers based on the foregoing criteria.

Changes in Base Salaries for Fiscal 2015

The Executive Compensation Assessment report prepared by Radford in August 2014 provided a competitive assessment of the Company’s compensation practices as compared to that of the 2014 peer group. Base salary levels for the Company’s executives, in the aggregate, are positioned at levels generally competitive with the 50^th percentile of the 2014 peer group and consistent with the Company’s compensation philosophy. Merit increases and any market-based adjustments awarded to executives for fiscal 2014 are consistent with the recommendations presented in the Executive Compensation Assessment report prepared by Radford and competitive with the 2014 peer group.

The following table shows the base salaries for our named executive officers for fiscal 2015, after giving effect to merit-based increases made in November 2014, which were made effective as of October 1, 2014, as well as the average salaries in the 2014 peer group at the 25th, 50th and 75th percentiles.


				Base Salary — Market Data(2)
Name	Title	Fiscal 2015 Base Salary(1)		25^th Percentile		50^th Percentile		75^th Percentile
Keith A. Katkin	President and Chief Executive Officer	$	675,000	$	580,500	$	638,800	$	746,100
Rohan Palekar	Senior Vice President, Chief Commercial Officer	$	404,478	$	344,700	$	375,800	$	392,400
Joao Siffert, M.D.	Senior Vice President, Research and Development, Chief Medical Officer	$	404,613	$	391,100	$	403,700	$	423,300
Christine G. Ocampo	Vice President, Finance, Chief Accounting Officer	$	295,267	$	237,800	$	249,800	$	290,000

(1)	Effective as of October 1, 2014.

(2)	Source: Radford’s Executive Compensation Assessment report of August 2014

Fiscal 2014 and 2015 Base Salary Levels for Each Named Executive Officer


Name	Title	Fiscal 2014 Ending Base Salary		Fiscal 2015 Base Salary(1)		Percentage (%) Increase
Keith A. Katkin	President and Chief Executive Officer	$	611,773	$	675,000		10.3	%
Rohan Palekar	Senior Vice President, Chief Commercial Officer	$	392,697	$	404,478		3.0	%
Joao Siffert, M.D.	Senior Vice President, Research and Development, Chief Medical Officer	$	382,071	$	404,613		5.9	%
Christine G. Ocampo	Vice President, Finance, Chief Accounting Officer	$	268,425	$	295,267		10.0	%

(1)	Effective as of October 1, 2014, inclusive of merit-based increase and market-based adjustment (if applicable).

Annual Bonus Incentive

Overview

The Company also provides executive officers with annual performance-based cash bonuses, which are specifically designed to reward executives for overall corporate performance as well as individual performance in a given year. Corporate goals are established at the beginning of each fiscal year by the Compensation Committee with input from senior management and approved by the independent members of the Board. The target annual incentive bonus amounts relative to base salary vary depending on each executive’s accountability, scope of responsibilities and potential impact on the Company’s performance. Accordingly, officers with a higher level of control and accountability will have a greater percentage of their overall cash compensation tied to annual performance-based cash bonus awards. Fiscal 2014 target annual incentive bonus levels ranged from 32.5% to 65.0% of base salary for our named executive officers.

Our Compensation Committee sets annual incentive bonus amounts for executive officers as a percent of base salary generally ranging between the 50th and 75th percentiles of the 2014 peer group.

The target bonuses, as a percentage of base salary, for the named executive officers for fiscal 2014 are set forth in the following table:

Fiscal 2014 Annual Bonus Incentive Levels for Each Named Executive Officer


Name	Title	Target Bonus for Fiscal 2014 (% of Base Salary)
Keith A. Katkin	President and Chief Executive Officer		65.0	%
Rohan Palekar	Senior Vice President, Chief Commercial Officer		45.0	%
Joao Siffert, M.D.	Senior Vice President, Research and Development, Chief Medical Officer		45.0	%
Christine G. Ocampo	Vice President, Finance, Chief Accounting Officer		32.5	%

We believe these target bonus levels for our executive officers are appropriate and consistent with our pay-for-performance compensation philosophy and are competitive with the 2014 peer group to attract and retain highly skilled executives, and further align executive compensation with the Company’s annual goals and long-term business strategic objectives. The target bonuses, as a percentage of base salary, for the named executive officers for fiscal 2015 are set forth in the following table:


	Title	Target Bonus for Fiscal 2015 (% of Base Salary)			Target Annual Incentive Bonus — Market Data(1)
					25^th Percentile			50^th Percentile			75^th Percentile
Name					25^th Percentile			50^th Percentile			75^th Percentile
Keith A. Katkin	President and Chief Executive Officer		65.0	%		60	%		75	%		80	%
Rohan Palekar	Senior Vice President, Chief Commercial Officer		45.0	%		35	%		40	%		45	%
Joao Siffert, M.D.	Senior Vice President, Research and Development, Chief Scientific Officer		45.0	%		35	%		40	%		45	%
Christine G. Ocampo	Vice President, Finance, Chief Accounting Officer		32.5	%		30	%		35	%		35	%

(1)	Source: Radford’s Executive Compensation Assessment report of August 2014.

The Compensation Committee considers the individual performance of each executive officer and the Company’s overall performance for the preceding fiscal year in deciding whether to award a bonus and, if one is to be awarded, the amount of the bonus. For fiscal 201, the maximum bonus for each executive was 150% of his or her respective target and the minimum bonus, or threshold, for each executive was zero. All executive officers, except for the Chief Executive Officer, are assigned annual incentive bonus targets with 75% of the bonus attributed to corporate performance and 25% based on individual performance. The annual incentive bonus for the Chief Executive Officer is based 100% on overall corporate performance. In addition, the Compensation Committee has the discretion to adjust any bonus award, based on additional considerations of performance and to account for the evolving business environment during the performance year.

At the end of each fiscal year, individual and corporate performance are measured versus plan and a percentage of target is fixed, which then determines the size of the total bonus pool from which annual bonus incentives are to be paid to executive officers. All cash bonuses are awarded retrospectively. Payout dates for all annual incentive bonuses to executive officers are targeted during the first quarter of each fiscal year.

Fiscal 2014 Annual Bonus Incentive

Upon completion of fiscal 2014, the Compensation Committee assessed the Company’s overall performance against the achievement of corporate performance goals established in November 2013. The Compensation Committee then assessed the individual accomplishments of the Company’s executive officers. Performance against each goal is scored by the Compensation Committee on a scale of 0 to 5, with a score of 3 equaling the target goal and resulting in a payout amount that is equal to 100% of the target amount. After determining scores for individual goals, a weighted-average score is computed, using the weighting prescribed at the beginning of the year for each goal. Once a total weighted-average performance score is determined, the funding of the bonus pool is determined from the scale shown below, with the Compensation Committee retaining the discretion as set forth below to adjust individual awards, within certain limits.


Weighted Average Score	Payout Level (Percent of Target Amount)
0		0	%
1		0	%
2		50	%
3		100	%
4		125	%
5		150	%

In fixing the targets for each fiscal year, the Compensation Committee selects performance goals that are considered achievable, but only with a high degree of diligence and success in execution. In accruing for the compensation expense associated with bonuses during each fiscal year, management assumes that the target goals will be achieved (i.e., a score of 3.0), absent a set of circumstances arising during the course of the year that would suggest otherwise.

Set forth below are the general performance goals that were considered by the Compensation Committee in assessing overall performance for the 2014 fiscal year, as well as the relative weighting of these goals and the Compensation Committee’s assessment of achievement for each goal:

NUEDEXTA Net Revenues (weighting 50.0%): This goal set targets for sales performance for NUEDEXTA.

Goal Description: This goal measured the net shipment revenues generated from the sales of NUEDEXTA to wholesalers and other customers in 2014. The targets for sales performance for NUEDEXTA are set as achievable with a reasonable amount of effort.

Results and Scoring: Net NUEDEXTA shipment revenues for fiscal 2014 were $105.4 million. The Compensation Committee determined that the Company’s achievement for the 2014 fiscal year resulted in a score of 1.65.

Clinical Development Goals (weighting 25.0%): These goals established target performance for the Company for the continued development of AVP-923 for additional indications, continuing development of AVP-786, and regulatory progress of AVP-825. The specific goals were as follows:

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Clinical Development Progress (weighting 10.0%)

Goal Description: This goal measured progress made by the Company in several clinical programs — our AVR-131 study, a Phase II clinical trial of AVP-923, which is an investigational drug that is being studied for the treatment of agitation in patients with Alzheimer’s disease, our PRIME study, a Phase II clinical trial

of AVP-923, which is an investigational drug that is being studied for the treatment of central neuropathic pain in patients with multiple sclerosis, our Phase II clinical trial of AVP-923, which is investigational drug that is begin studied for the treatment of levodopa induced dyskinesia in Parkinson’s disease, and an interim analysis of the NUEDEXTA patient registry in PBA patients.

Results and Scoring: Based on the progress of these clinical programs, including the Company’s announcement on September 15, 2014 of positive results of its Phase II clinical trial evaluating the safety and efficacy of AVP-923 for the treatment of agitation in patients with Alzheimer’s disease, the Compensation Committee determined that the Company achieved a score of 5.0 for this goal.

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AVP-825 NDA (weighting 7.5%)

Goal Description: This goal measured the timely filing of the Company’s New Drug Application (“NDA”) and regulatory progress of AVP-825 for the acute treatment of migraine.

Results and Scoring: The Company announced on March 26, 2014 that the U.S. Food and Drug Administration (“FDA”) had accepted the Company’s New Drug Application (“NDA”) resulting in a PDUFA date of November 26, 2014. On November 26, 2014, the Company announced that the FDA had issued a Complete Response letter to its NDA. Based on the timing of the NDA submission and the FDA’s Complete Response letter, the Compensation Committee determined that the Company achieved a score of 2.0 for this goal.

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Lifecycle Management (weighting 7.5%)

Goal Description: This goal measured the continued development of AVP-923 and AVP-786 for PBA and additional indications.

Results and Scoring: In July 2014, the Company announced that the FDA accepted the Company’s Investigational New Drug (“IND”) application for a Phase II study assessing the safety and efficacy of AVP-786 and announcing the enrollment of the first patient into a Phase II study to evaluate the efficacy, safety, and tolerability of AVP-786 for the adjunctive treatment of major depressive disorder (“MDD”). The Compensation Committee determined the Company achieved a score of 5.0 for this goal.

Financial Operations (weighting 10.0%): This category of goals focused attention on demonstrating fiscal responsibility through (i) improving the Company’s cash position by the end of the fiscal year while supporting budgeted activities such as the continued commercialization of NUEDEXTA; and (ii) effective budget management, as measured by expenses and working capital at the end of the fiscal year.

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Fiscal 2014 Net Operating Cash Burn for Budgeted Activities (weighting 5.0%)

Goal Description: The performance metric measures the Company’s aggregate cash expenditures on operations for fiscal 2014. This measure is intended to encourage efficient use of capital, while still achieving the operational goals set forth above, including the commercial operations of NUEDEXTA.

Results and Scoring: In 2014, the Net Operating Cash Burn was approximately $36.9 million resulting in a score of 3.1 on this goal.

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Cash Position at Year-End of Fiscal 2014 (weighting 5.0%)

Goal Description: The performance metric measures the Company’s cash available at the end of the 2014 fiscal year. This measure is intended to encourage the prudent utilization of cash as well as encourage the Company to seek and select the most efficient financing instrument(s) to appropriately fund on-going operational requirements including the commercial operations of NUEDEXTA.

Results and Scoring: At September 30, 2014, the Company had a cash balance of approximately $271.9 million resulting in a score of 5.0 on this goal.

Corporate Development (weighting 15.0%): This goal targeted enhancing the Company’s clinical and/or product portfolios through licensing or other business development opportunities and achieving a successful resolution to the Company’s patent infringement lawsuit.

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Corporate Development Initiatives (weighting 5.0%)

Goal Description: This goal measures the Company’s progress in its business development strategy to further expand the Company’s clinical and/or product portfolios through in-licensing and out-licensing opportunities for the U.S. and/or international markets.

Results and Scoring: Based on the business development activities of the Company, the Compensation Committee awarded a score of 2.5 for this goal.

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ANDA Resolution (weighting 10.0%)

Goal Description: The performance metric measures the extent of the Company’s successful resolution of its patent infringement lawsuit.

Results and Scoring: The Company announced on April 30, 2014 the favorable ruling of the Company’s patent infringement lawsuit upholding the validity of the patents covering NUEDEXTA. The Compensation Committee awarded a score of 5.0 on this goal based on the outcome in this litigation.


Corporate Performance Goal	Weighting%			Scoring of Achievement of Corporate Performance Goal
NUEDEXTA Net Revenues
NUEDEXTA Net Revenues		50.0	%		1.65
Clinical Development
Clinical Development Progress		10.0	%		5.0
AVP-825 NDA		7.5	%		2.0
Lifecycle Management		7.5	%		5.0
Financial Operations
Fiscal 2014 Net Operating Cash Burn for Budgeted Activities		5.0	%		3.1
Cash Position at Year-End of Fiscal 2014		5.0	%		5.0
Corporate Development
ANDA Resolution		10.0	%		5.0
Corporate Development Initiatives		5.0	%		2.5
*Weighted Average Score*					*2.88*

The individual performance goals for Keith A. Katkin, the Company’s Chief Executive Officer, were the same as the overall corporate performance goals for the Company, as the primary responsibility of the Chief Executive Officer is to help ensure the overall success of the Company by executing the Company’s business strategies. All other executive officers are assigned annual incentive bonus targets with 75% of the bonus attributed to corporate performance and 25% based on individual performance. The individual goals for Dr. Siffert, Mr. Palekar, and Ms. Ocampo are discussed below. In addition, as described above, the Compensation Committee has the discretion to adjust any bonus award, based on additional considerations of performance, significant achievements not covered by the annual goals as established at the beginning of the year, and to account for the evolving business environment during the performance year.

The individual performance goals for Rohan Palekar, the Company’s Senior Vice President, Chief Commercial Officer weighted more heavily to the performance goal of NUEDEXTA Contribution Margin. The NUEDEXTA Contribution Margin goal accounted for 55.0% of Mr. Palekar’s individual performance goals. The other 45.0% related to: (i) AVP-825 commercial readiness (15.0%); (ii) providing commercial input to corporate development activities (10.0%); (iii) retention (10.0%) and (iv) compliance enhancements (10.0%).

The individual performance goals for Joao Siffert, the Company’s Senior Vice President, Research and Development, Chief Scientific Officer were similar to the overall corporate performance goals but weighted more heavily to clinical development and regulatory milestones. Specifically, the clinical development and regulatory goals described above under the captions “Clinical Development Progress”, “AVP-825 NDA”, and “Lifecycle Management” accounted for 70% of Dr. Siffert’s individual performance goals. The other 30% related to: (i) providing clinical and medical input to corporate development activities (10.0%); (ii) compliance enhancements (10.0%); and (iii) efficient management of departmental expenditures and resources (10.0%).

With respect to Christine Ocampo, the Company’s Vice President, Finance, Chief Accounting Officer, her individual performance goals were the same as the overall corporate performance goals for the Company and weighed more heavily towards the corporate performance goals of “Fiscal 2014 Net Operating Cash Burn for Budgeted Activities” and “Cash Position at Year-End of Fiscal 2014.”

Dr. Siffert’s, Mr. Palekar’s, and Ms. Ocampo’s level of achievement is determined by the Compensation Committee, based in part on recommendations from the Chief Executive Officer, with input from the Chairman of the Audit Committee.

Achievement of Goals and Relationship to Compensation Awarded

For fiscal 2014, the Compensation Committee determined that the Company’s performance against the corporate performance goals merited a weighted-average score of 2.88 out of 5.0, resulting in a bonus pool equal to 94.0% of the target amount for corporate achievement. With respect to Mr. Katkin and Ms. Ocampo, their bonus award was determined solely based on the Company’s performance against the corporate goals. The Compensation Committee determined that Mr. Palekar achieved an individual score of 2.55 out of 5.0, resulting in a weighted-average annual performance score of 2.80 and that Dr. Siffert achieved an individual score of 3.97 out of 5.0, resulting in a weighted-average annual performance score of 3.06.

In addition to considering the annual individual performance score in determining bonus awards for Mr. Katkin and Dr. Siffert, the Compensation Committee approved special one-time performance payments based on their contributions towards the achievement of the corporate goals related to Research & Development and the ANDA victory providing for 12 years of market exclusivity for NUEDEXTA.

These levels of achievement and special one-time performance payments to Mr. Katkin and Dr. Siffert resulted in the Compensation Committee approving bonus awards for performance in 2014 as set forth in the following table:


Name	Title	Fiscal 2014
Keith A. Katkin	President and Chief Executive Officer	$	475,000
Rohan Palekar	Senior Vice President, Chief Commercial Officer	$	158,821
Joao Siffert, M.D.	Senior Vice President, Research and Development, Chief Medical Officer	$	194,618
Christine G. Ocampo	Vice President, Finance, Chief Accounting Officer	$	84,130

Equity Compensation

Overview

Stock Options and Restricted Stock. As an additional component of our compensation program, executive officers are eligible to receive equity compensation in the form of stock options or restricted stock awards, which may also be granted as awards of restricted stock units. The Compensation Committee has historically granted stock options to executive officers to aid in their retention, to motivate them to assist with the achievement of corporate objectives and to align their interests with those of our stockholders by creating a return tied to the performance of our stock price. In determining the form, date of issuance and value of a grant, the Compensation Committee considers the contributions and responsibilities of each executive officer, appropriate incentives for the achievement

of our long-term growth, the size and value of grants made to other executives at peer companies holding comparable positions, individual achievement of designated performance goals, and the Company’s overall performance relative to corporate objectives.

Under the terms of our 2014 Plan, pursuant to which all new equity grants are currently made, the exercise price of any stock options awarded under these plans must be equal to at least 100% of the fair market value of our common stock (the closing sales price on the NASDAQ Global Market) on the date of grant. We do not have any program, plan or obligation that requires us to grant equity awards on specified dates, although historically we have made annual grants to existing officers and employees in the fourth calendar quarter of the year, to new hires on a fixed schedule within one month of the commencement of their employment, and periodically in connection with broader compensation surveys. We also do not have any program, plan or practice to time stock option grants to our executive officers in coordination with the release of material nonpublic information, other than our practice to issue annual option awards in the fourth calendar quarter of the year. Equity awards may occasionally be granted following a significant change in job responsibilities or to meet other special retention or performance objectives. Additionally, executive officers are eligible to receive equity compensation in the form of restricted stock awards, which may also be granted as awards of restricted stock units.

Authority to make equity grants to employees rests with the Compensation Committee. With respect to executive officers, recommendations for equity grants are made by our external compensation consultant, Radford, and then reviewed by the Chief Executive Officer before being sent to the Compensation Committee for review and consideration. The Compensation Committee Chairman has been delegated the authority to review and approve awards to non-officer employees, within limits set by the Compensation Committee. In addition, the Chief Executive Officer has been delegated the authority to review and approve new hire awards if they are consistent with the guidelines approved by the Compensation Committee.

We believe that periodic equity awards serve as useful performance recognition mechanisms with respect to key employees, as most awards are subject to time-based vesting provisions. Our typical equity awards to executive officers (including the named executive officers) have a term of 10 years and vest and become exercisable over a period of four years, with 25% of the underlying shares vesting on the first anniversary of the grant date and the remainder quarterly over the next three years. Occasionally the granting or vesting of an equity award may be made contingent on achievement of certain specific performance conditions. We believe that such periodic equity awards encourage executive officers to remain with the Company and also focus on our long-term performance as well as the achievement of specific performance goals.

Equity Awards

In consideration of the Company’s overall performance against the achievement of corporate goals for fiscal 2014, on November 10, 2014 the Compensation Committee approved annual equity awards for the Company’s executive officers and employees. For the 2014 fiscal year, the Compensation Committee approved granting annual equity awards, generally based on the recommendations presented by Radford in August 2014 with a downward adjustment applied in consideration of the Company’s stock price at the time the Compensation Committee approved the annual equity awards relative to the stock price in August 2014. Further, the Compensation Committee approved awarding the annual equity awards as full-value restricted stock units to the Company’s executive officers and establishing the Grant Date as the date of the approval of annual equity awards by the Compensation Committee that is in accordance with good corporate governance and industry practices. The Compensation Committee consults with Radford and the Chairman of the Board in setting the annual equity award for the Chief Executive Officer. All annual equity awards granted in fiscal 2015 to executive officers, including the Chief Executive Officer, vest and become exercisable over an estimated period of four years. For fiscal 2015, each executive officer received a grant of restricted stock units, with 25% of the underlying shares vesting on each anniversary of the grant date so that the award is fully vested on the fourth anniversary of the grant.

In addition to the annual equity grant awarded in fiscal 2015, the Compensation Committee approved a performance-based grant in the form of restricted stock units, the vesting of which commences over a three-year period following the attainment of certain revenue levels for sales of NUEDEXTA during the 2015 fiscal year or achievement of the Company’s corporate goals related to Research & Development. The performance-based grant

is intended to promote executive retention, while tying compensation to the creation of meaningful stockholder value in a fashion that is consistent with the Company’s pay-for-performance philosophy. Time-based vesting will commence upon the achievement of the specified milestone, with 50% of the underlying shares vesting on the first anniversary following the achievement of the performance milestone, which is approximately two years after date of grant for a milestone that is estimated to be achieved in one year from the grant date. Thereafter, the grant vests in two equal installments of 25% of the underlying shares on each of the next two anniversaries so that the award is fully vested on the third anniversary of the achievement of the milestone, which is approximately four years from grant for a milestone that is estimated to be achieved in one year from the grant date.

Stockownership Guidelines

Our executive officers are subject to stock ownership guidelines. The guidelines are designed to align the interests of our executive officers with those of our stockholders by ensuring that our executive officers have a meaningful financial stake in our long-term success. The guidelines established minimum ownership levels by position as set forth below. Our stock ownership guidelines adopted by the Board require equity holdings by our Chief Executive Officer equal to at least three times his annual base salary and require equity holdings by our other executive officers equal to one time their annual base salary. Under the guidelines, covered officers must acquire ownership of target common stock ownership levels by the end of the applicable compliance period which is generally five years from when the guidelines become applicable to a given executive officer. Non-employee directors are also subject to stock ownership guidelines, which can be found below in the section entitled “Director Compensation”.

All shares beneficially owned by the Chief Executive Officer or other executive officers as of applicable the measurement date, including the value of vested restricted stock units and options (with the number of shares underlying vested options being calculated assuming a “net” exercise of each such option), are included for the purposes of determining the value of shares owned under our stock ownership guidelines.

Insider Trading Policy Prohibitions and Hedging Policy

Our Company maintains an Insider Trading Policy that prohibits our officers, directors, employees (including temporary and contract employees) and independent contractors from engaging in certain practices relating to our stock that may encourage speculative behavior or lessen the alignment of long-term interests with our stockholders. These policies include: prohibitions on speculative transactions in our securities, including short sales, sale of “put” or “call” options or other derivative securities directly linked to our equity; prohibiting the use of our equity as a pledge or as collateral in a margin account; and prohibiting transactions that hedge the economic risks of stock ownership.

Employee Benefit Program

Executive officers are eligible to participate in all of our employee benefit plans, including medical, dental, vision, group life, disability and accidental death and dismemberment insurance, in each case on the same basis as other employees, subject to applicable law. In addition, Senior Vice Presidents and above are given access to a health reimbursement account for certain health-related expenses. We also provide vacation and other paid holidays to all employees, including executive officers, all of which we believe to be comparable to those provided at peer companies. These benefit programs are designed to enable us to attract and retain our workforce in a competitive marketplace. Health, welfare and vacation benefits ensure that we have a productive and focused workforce through reliable and competitive health and other benefits.

Our retirement savings plan (401(k) plan) is a tax-qualified retirement savings plan, pursuant to which all employees, including the named executive officers, are able to contribute certain amounts of their annual compensation, subject to limits prescribed by the Internal Revenue Service. We have historically made contributions of up to 50% of the first 4% of salary contributed to the plan. The value of these benefits for each of our named executive officers is reflected in the “All Other Compensation” column of the Summary Compensation Table.

Change of Control Arrangements

We have entered into change of control agreements with each of our named executive officers. Our Board approved these change of control agreements in order to mitigate some of the risk that exists for executives working in a biopharmaceutical company at our current stage of development and where the possibility exists that we may be acquired if our development efforts succeed. These arrangements are intended to retain highly skilled executives who have, or who may seek, alternatives that may appear to them to be less risky in terms of the potential loss of their position following a merger or sale, particularly where the services of these executive officers may not be required by the acquirer. These agreements provide change of control benefits either upon the termination of the employee’s service, a significant change in job responsibilities or the need to relocate within 12 months following a change of control. By using a so-called “double trigger” change of control benefit, and thereby tying the severance benefit both to a change in control and change in job status, rather than the mere consummation of a change of control transaction, the Compensation Committee believes that it is better able to balance the employee’s need for certainty with the interests of our stockholders.

Additionally, our named executive officers may be entitled to acceleration benefits under stock option and equity incentive plans in connection with a change of control. Our 2005 Plan and 2014 Plan contain certain acceleration benefits providing for the accelerated vesting of equity awards in the event of a change of control if such awards are not assumed or substitute awards are not issued, as well as a “double trigger” acceleration benefit that applies if services are terminated for certain reasons within 12 months following a change of control. We believe that these “double trigger” acceleration benefits are common practice among comparable companies.

Information regarding the change of control agreements and the potential value of payments upon termination or change of control is provided for the named executive officers under the headings “Employment, Change of Control and Severance Arrangements” and “Potential Payments Upon Termination or Change of Control.”

Compensation of our Current Named Executive Officers

Keith Katkin. Mr. Katkin, our President and Chief Executive Officer, is compensated with a base salary and, depending on performance and our financial condition, an annual incentive bonus in an amount targeted at 65% of his then-current annual base salary, as well as the annual grant of an equity award. In November 2014, his base salary was increased by 10.3% to $675,000, effective as of October 1, 2014, representing a merit-based increase for fiscal 2014 performance and a market-based adjustment expected to raise his base compensation to the competitive range of the 50th percentile as compared to the 2014 peer group. On November 10, 2014, Mr. Katkin received an annual equity award of full-value restricted stock units to vest and become exercisable over a period of four years, in which he received a grant of 220,563 restricted stock units, with 25% of the underlying shares vesting each anniversary of the grant date so that the award is fully vested on the fourth anniversary of the grant. In addition, Mr. Katkin was awarded on November 10, 2014 a performance-based grant of restricted stock units representing the right to receive up to 140,611 shares of common stock. The grant is tied to a performance milestone relating to the attainment of a certain revenue level for sales of NUEDEXTA during the 2015 fiscal year, with time-based vesting to commence upon the achievement of the specified milestone, with 50% of the underlying shares vesting on the first anniversary following the achievement of the performance milestone, which is approximately two years after date of grant for a milestone that is estimated to be achieved in one year from the grant date. Thereafter, the grant is to vest in two equal installments of 25% of the underlying shares on each of the next two anniversaries so that the award is fully vested on the third anniversary of the achievement of the milestone, which is approximately four years from grant for a milestone that is estimated to be achieved in one year from the grant date.

Rohan Palekar. Mr. Palekar, our Senior Vice President and Chief Commercial Officer, is compensated with a base salary and, depending on performance and our financial condition, an annual incentive bonus in an amount targeted at 45% of his then-current annual base salary. In November 2014, his base salary was increased by 3.0% to $404,478, effective as of October 1, 2014, representing a merit-based increase for fiscal 2014 performance. On November 10, 2014, Mr. Palekar received an annual equity award of full-value restricted stock units to vest and become exercisable over a period of four years, in which he received a grant of 59,231 restricted stock units, with 25% of the underlying shares vesting each anniversary of the grant date so that the award is fully vested on the fourth anniversary of the grant. In addition, Mr. Palekar was awarded on November 10, 2014 a performance-based

grant of a restricted stock unit representing the right to receive up to 34,825 shares of common stock. The grant is tied to a performance milestone relating to the attainment of a certain revenue level for sales of NUEDEXTA during the 2015 fiscal year, with time-based vesting to commence upon the achievement of the specified milestone, with 50% of the underlying shares vesting on the first anniversary following the achievement of the performance milestone, which approximately two years after date of grant for a milestone that is estimated to be achieved in one year from the grant date. Thereafter, the grant is to vest in two equal installments of 25% of the underlying shares on each of the next two anniversaries so that the award is fully vested on the third anniversary of the achievement of the milestone, which is approximately four years from grant for a milestone that is estimated to be achieved in one year from the grant date.

Joao Siffert, M.D. Dr. Siffert, our Senior Vice President of Research and Development, Chief Scientific Officer is compensated with a base salary and, depending on performance and our financial condition, an annual incentive bonus in an amount targeted at 45% of his then-current annual base salary. In November 2014, his base salary was increased by 5.9% to $404,613 effective as of October 1, 2014, representing a merit-based increase for fiscal 2014 performance and a market-based adjustment. The total change in Dr. Siffert’s base salary, including the merit-based increase and market-based adjustment, is expected to raise his base compensation to the 50th percentile of the 2014 peer group. On November 10, 2014, Dr. Siffert received an annual equity award of full-value restricted stock units to vest and become exercisable over a period of four years, in which he received a grant of 59,231 restricted stock units, with 25% of the underlying shares vesting each anniversary of the grant date so that the award is fully vested on the fourth anniversary of the grant. In addition, Dr. Siffert was awarded on November 10, 2014, a performance-based grant of restricted stock units representing the right to receive up to 34,825 shares of common stock. The grant is tied to a performance milestone relating to the achievement of regulatory milestones and clinical development performance goals during the 2015 fiscal year, with time-based vesting to commence upon the achievement of the specified milestone, with 50% of the underlying shares vesting on the first anniversary following the achievement of the performance milestone, which is approximately two years after date of grant for a milestone that is estimated to be achieved in one year from the grant date. Thereafter, the grant is to vest in two equal installments of 25% of the underlying shares on each of the next two anniversaries so that the award is fully vested on the third anniversary of the achievement of the milestone, which is approximately four years from grant for a milestone that is estimated to be achieved in one year from the grant date.

Christine Ocampo. Ms. Ocampo, our Vice President of Finance, Chief Accounting Officer is compensated with a base salary and, depending on performance and our financial condition, an annual incentive bonus in an amount targeted at 32.5% of her then-current annual base salary. In November 2014, her base salary was increased by 10.0% to $295,267, effective as of October 1, 2014, representing a merit-based increase for fiscal 2014 performance and market-based adjustment reflecting her responsibilities as the Company’s Chief Accounting Officer. On November 10, 2014, Ms. Ocampo received an annual equity award of full-value restricted stock units to vest and become exercisable over a period of four years, in which she received a grant of 31,992 restricted stock units, with 25% of the underlying shares vesting each anniversary of the grant date so that the award is fully vested on the fourth anniversary of the grant. In addition, Ms. Ocampo was awarded on November 10, 2014 a performance-based grant of restricted stock units representing the right to receive 19,844 shares of common stock. The grant is tied to a performance milestone relating to the attainment of a certain revenue level for sales of NUEDEXTA during the 2015 fiscal year, with time-based vesting to commence upon the achievement of the specified milestone, with 50% of the underlying shares vesting on the first anniversary following the achievement of the performance milestone, which is approximately two years after date of grant for a milestone that is estimated to be achieved in one year from the grant date. Thereafter, the grant is to vest in two equal installments of 25% of the underlying shares on each of the next two anniversaries so that the award is fully vested on the third anniversary of the achievement of the milestone, which is approximately four years from grant for a milestone that is estimated to be achieved in one year from the grant date.

Tax and Accounting Considerations

Deductibility of Executive Compensation. In making compensation decisions affecting our executive officers, the Compensation Committee considers our ability to deduct under applicable federal corporate income tax law compensation payments made to executives. Specifically, the Compensation Committee considers the requirements

and impact of Section 162(m) of the Internal Revenue Code, which limits the tax deductibility to us of compensation in excess of $1.0 million in any year for certain executive officers, except for qualified “performance-based compensation” under the Section 162(m) rules. The Compensation Committee considers the Section 162(m) rules as a factor in determining compensation, but will not necessarily limit compensation to amounts deductible under Section 162(m). No covered executive’s compensation for Section 162(m) purposes exceeded $1.0 million for fiscal 2014.

Accounting for Share-Based Compensation. In accordance with the Financial Accounting Standards Board’s Accounting Standards Codification 718, we are required to estimate the value for each award of equity compensation at the measurement date using the fair value method and record an expense over the service period of the award. Accounting rules also require us to record cash compensation as an expense at the time the obligation is incurred.

Allocation of Compensation

There is no pre-established policy or target for the allocation of compensation. The factors described above, as well as the overall compensation philosophy, are reviewed to determine the appropriate level and mix of compensation. In fiscal 2014, the largest portion of compensation to Mr. Katkin, Mr. Palekar, Dr. Siffert and Ms. Ocampo was in the form of equity compensation, which the Compensation Committee feels is appropriate, as it further aligns overall compensation payout with the creation of stockholder value.

Timing of Compensation Actions

Compensation, including base salary adjustments, for our named executive officers is reviewed annually, usually in the first quarter of the fiscal year and upon promotion or other change in job responsibilities.

Compensation Committee Report

The Compensation Committee of the Company has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K. Based on this review and discussion, the Compensation Committee recommended to the Board that the foregoing Compensation Discussion and Analysis be included in this proxy statement.

Submitted by the Compensation Committee of the Board of Directors

David J. Mazzo, Ph.D., Chairman

Dennis G. Podlesak

Corinne Nevinny

Summary Compensation Table

The following table summarizes compensation paid, awarded or earned for services rendered during fiscal 2012, 2013 and 2014 by our President and Chief Executive Officer, our Senior Vice President and Chief Commercial Officer, our Senior Vice President, Research and Development and Chief Scientific Officer and our Vice President, Finance, Chief Accounting Officer. We refer to these executive officers collectively as our “named executive officers.”


Name and Principal Position	Fiscal Year		Salary		Non-Equity Plan Performance Awards(1)		Option Awards(2)		Stock Awards(2)		All Other Compensation(3)		Total
Keith A. Katkin		2014	$	611,773	$	475,000	$	241,637	$	1,485,975	$	25,805	$	2,840,190
President and Chief Executive Officer		2013	$	578,782	$	318,330	$	393,840	$	571,095	$	24,327	$	1,866,374
President and Chief Executive Officer		2012	$	505,716	$	306,367	$	509,119	$	234,950	$	26,801	$	1,582,953

Rohan Palekar		2014	$	392,697	$	158,821	$	91,822	$	480,150	$	23,805	$	1,147,295
Senior Vice President Chief Commercial Officer		2013	$	371,520	$	175,655	$	98,460	$	163,171	$	62,015	$	870,821
Senior Vice President Chief Commercial Officer		2012	$	237,356	$	83,160	$	757,295	$	169,000	$	11,458	$	1,258,269

Joao Siffert, M.D.		2014	$	382,071	$	194,618	$	91,822	$	480,150	$	22,696	$	1,171,357
Senior Vice President,		2013	$	362,152	$	174,026	$	131,280	$	217,560	$	21,674	$	906,692
Research and Development, Chief Scientific Officer		2012	$	351,604	$	141,872	$	84,853	$	54,575	$	24,706	$	657,610

Christine G. Ocampo		2014	$	268,425	$	84,130	$	33,346	$	172,175	$	22,961	$	581,037
Vice President, Finance, Chief Accounting Officer		2013	$	260,101	$	89,296	$	56,888	$	78,350	$	22,236	$	506,871
Vice President, Finance, Chief Accounting Officer		2012	$	224,562	$	82,006	$	135,765	$	37,000	$	21,382	$	500,715

(1)	Annual bonuses are presented as “non-equity plan performance awards.” Such amounts are determined and paid after the end of each fiscal year, but reflect individual and Company performance for the respective fiscal years reflected above.

(2)

This column reflects the aggregate grant date fair value of equity awards granted in 2014, 2013 or 2012 and calculated in accordance with FASB ASC 718, excluding the effect of estimated forfeitures. Assumptions used in the calculations for these amounts are set forth in the notes to our financial statements included in our Annual Reports on Form 10-K for each of the periods presented above.

(3)

“All Other Compensation” summarized in the table for fiscal 2014 for Mr. Katkin consists of $20,605 in medical, dental, vision, disability and life insurance premiums, as well as a health reimbursement account for certain health-related expenses paid by us and $5,200 in matching contributions made by us under our 401(k) Plan. “All Other Compensation” summarized in the table for fiscal 2013 for Mr. Katkin consists of $19,227 in medical, dental, vision, disability and life insurance premiums, as well as a health reimbursement account for certain health-related expenses paid by us and $5,100 in matching contributions made by us under our 401(k) Plan. “All Other Compensation” summarized in the table for fiscal 2012 for Mr. Katkin consists of $21,166 in medical, dental, vision, disability and life insurance premiums, and a health reimbursement account for certain health-related expenses paid by us and $5,635 in matching contributions made by us under our 401(k) Plan.

“All Other Compensation” summarized in the table for fiscal 2014 for Mr. Palekar consists of $18,605 in medical, dental, vision, disability and life insurance premiums paid by us and $5,200 in matching contributions made by us under our 401(k) Plan. “All Other Compensation” summarized in the table for fiscal 2013 for Mr. Palekar consists of $17,227 in medical, dental, vision, disability and life insurance premiums paid by us, $6,251 in matching contributions made by us under our 401(k) Plan and $38,537 in relocation expenses (including tax gross-up). “All Other Compensation” summarized in the table for fiscal 2012 for Mr. Palekar consists of $7,609 in medical, dental, vision, disability, and life insurance premiums paid by us and $3,849 in matching contributions made by us under our 401(k) Plan.

“All Other Compensation” summarized in the table for fiscal 2014 for Dr. Siffert consists of $17,496 in health savings account contributions and medical, dental, vision, disability and life insurance premiums paid by us and $5,200 in matching contributions made by us under our 401(k) Plan. “All Other Compensation” summarized in the table for fiscal 2013 for Dr. Siffert consists of $17,217 in health savings account contributions and medical, dental, vision, disability and life insurance premiums paid by us and $4,457 in matching contributions made by us under our 401(k) Plan. “All Other Compensation” summarized in the table for fiscal 2012 for Dr. Siffert consists of $18,570 in health savings account contributions and medical, dental, vision, disability and life insurance premiums paid by us and $6,136 in matching contributions made by us under our 401(k) Plan.

“All Other Compensation” summarized in the table for fiscal 2014 for Ms. Ocampo consists of $18,431 in medical, dental, vision, disability and life insurance premiums paid by us and $4,530 in matching contributions made by us under our 401(k) Plan. “All Other Compensation” summarized in the table for fiscal 2013 for Ms. Ocampo consists of $17,017 in medical, dental, vision, disability and life insurance premiums paid by us and $5,219 in matching contributions made by us under our 401(k) Plan. “All Other Compensation” summarized in the table for fiscal 2012 for Ms. Ocampo consists of $18,105 in medical, dental, vision, disability and life insurance premiums paid by us and $3,277 in matching contributions made by us under our 401(k) Plan.

Grants of Plan-Based Awards

The following table sets forth certain information regarding grants of plan-based awards to the named executive officers during fiscal 2014.


Name	Grant Date		Performance Stock Awards: Number of Shares of Stock or Units Granted			Option Awards: Number of Securities Underlying Options Granted(1)		Exercise Price of Option Awards ($/Sh)		Grant Date Fair Value of Stock and Option Awards(2)
Keith A. Katkin		12/13/2013					125,000	$	2.84	$	241,637
		2/12/2014		257,125	(3)					$	997,645
		2/12/2014		97,250	(4)					$	377,330
		7/9/2014		20,000	(3)					$	111,000
Rohan Palekar		12/13/2013					47,500	$	2.84	$	91,822
		2/12/2014		80,750	(3)					$	313,310
		2/12/2014		43,000	(4)					$	166,840
Joao Siffert, M.D.		12/13/2013					47,500	$	2.84	$	91,822
		2/12/2014		80,750	(3)					$	313,310
		2/12/2014		43,000	(5)					$	166,840
Christine G. Ocampo		12/13/2013					17,250	$	2.84	$	33,346
		2/12/2014		29,325	(3)					$	113,781
		2/12/2014		15,050	(4)					$	58,394

(1)	Options vest with respect to one quarter of the underlying shares on the first anniversary of the grant date, and then with respect to the remaining shares on a quarterly basis over the next three years so that the option is fully vested on the fourth anniversary of the grant date.

(2)

This column reflects the aggregate grant date fair value of equity awards granted in 2014 and calculated in accordance with FASB ASC 718, excluding the effect of estimated forfeitures. Assumptions used in the calculations for these amounts are set forth in Note 10. “Stockholders’ Equity” in the Notes to Consolidated Financial Statements.

(3)	Stock awards vest with respect to one quarter of the underlying shares on the first anniversary of the grant date, and then with respect to the remaining shares on an annual basis over the next three years so that the award is fully vested on the fourth anniversary of the grant date.

(4)	Stock awards were subject to achievement of a revenue performance goal. The performance goal was not met and the shares expired on September 30, 2014.

(5)

Stock awards begin to vest upon achievement of a revenue performance goal (“Achievement Date”). The stock awards vest with respect to one half of the underlying shares on the first anniversary of the Achievement Date, and then, with respect to the remaining shares, on an annual basis over the next two years so that the award is fully vested on the third anniversary of the Achievement Date.

Outstanding Equity Awards at Fiscal Year-End

The following table shows information regarding outstanding equity awards at September 30, 2014 for our named executive officers.


	Option Awards								Stock Awards
	Number of Securities Underlying Unexercised Options				Option Exercise Price		Option Expiration Date		Number of Shares or Units of Stock that Have Not Vested			Market Value of Shares or Units of Stock that Have Not Vested(1)
	Exercisable		Unexercisable
Name	Exercisable		Unexercisable
Keith A. Katkin		75,000		—	$	11.76		7/5/15		9,375	(2)	$	111,750
		7,500		—	$	11.68		12/7/15		42,436	(3)	$	505,837
		55,960		—	$	1.29		3/21/17		110,531	(4)	$	1,317,530
		120,781		—	$	2.41		9/10/17		36,562	(5)	$	435,819
		417,600		—	$	1.74		11/27/19		20,000	(4)	$	238,400
		400,000		—	$	4.18		12/1/20		257,125	(4)	$	3,064,930
		232,031		105,469	$	1.85		12/15/21		—		$	—
		98,438		126,562	$	2.59		12/17/22		—		$	—
		—		125,000	$	2.84		12/13/23		—		$	—
Rohan Palekar		131,875		103,125	$	3.38		4/3/22		7,500	(2)	$	89,400
		24,610		31,640	$	2.59		12/17/22		30,000	(3)	$	357,600
		—		47,500	$	2.84		12/13/23		27,633	(4)	$	329,385
		—		—		—		—		13,078	(5)	$	155,890
		—		—		—		—		80,750	(4)	$	962,540
Joao Siffert, M.D.		195,000		65,000	$	2.74		9/6/21		2,539	(2)	$	30,265
		7,031		17,578	$	1.85		12/15/21		9,350	(3)	$	111,452
		32,813		42,187	$	2.59		12/17/22		36,843	(4)	$	439,169
		—		47,500	$	2.84		12/13/23		17,437	(5)	$	207,849
		—		—		—		—		80,750	(4)	$	962,540
		—		—		—		—		43,000	(6)	$	512,560
Christine G. Ocampo		65,000		—	$	0.53		12/16/18		1,953	(2)	$	23,280
		115,050		—	$	1.74		11/27/19		6,015	(3)	$	71,699
		17,500		—	$	4.18		12/1/20		15,966	(4)	$	190,315
		61,875		28,125	$	1.85		12/15/21		4,481	(5)	$	53,414
		14,219		18,281	$	2.59		12/17/22		29,325	(4)	$	349,554
		—		17,250	$	2.84		12/13/23		—			—

(1)	Calculated by multiplying the number of unvested shares by $11.92, the closing price per share of our common stock on the NASDAQ Global Market on September 30, 2014.

(2)	The total award vests over four years, with 25% vesting on the first anniversary of the date of grant and the remainder vesting quarterly thereafter over the next three years.

(3)	The total award vests over four years, with 25% vesting on the first anniversary of the achievement of a revenue-based performance goal and the remainder vesting quarterly thereafter over the next three years.

(4)	The total award vests over four years, with 25% vesting on the first anniversary of the date of grant and the remainder vesting annually thereafter over the next three years.

(5)	The total award vests over three years, with 50% vesting on the first anniversary of the achievement of a revenue-based performance goal and the remainder vesting annually thereafter over the next two years.

(6)	The total award vests over three years, with 50% vesting on the first anniversary of the achievement of a research and development related performance goal and the remainder vesting annually thereafter over the next two years.

Option Exercises and Stock Vested

The following table sets forth the vesting in fiscal 2014 of shares of restricted stock or restricted stock units held by the named executive officers, as well as the options exercised by our named executive officers during fiscal 2014.


	Option Awards				Stock Awards
Name and Principal Position	Number of Shares Acquired on Exercise		Value Realized on Exercise(1)		Number of Shares Acquired on Vesting		Value Realized on Vesting(1)
Keith A. Katkin,		392,212	$	1,590,594		105,157	$	690,352
President and Chief Executive Officer
Rohan Palekar,		25,000	$	203,000		27,289	$	202,013
Senior Vice President and Chief Commercial Officer
Joao Siffert, M.D.,		10,547	$	35,045		37,094	$	277,450
Senior Vice President, Research and Development, Chief Scientific Officer
Christine G. Ocampo,		55,000	$	289,883		14,804	$	92,877
Vice President, Finance

(1)	Amount represents the difference, if positive, between the fair value of the underlying common stock on the date of vesting and the exercise price of the award (if any); stock awards (granted as restricted stock units) do not have an exercise price.

Pension Benefits

We do not have a defined benefit plan. Our named executive officers did not participate in, or otherwise receive any special benefits under, any pension or defined benefit retirement plan sponsored by us during fiscal 2014.

Nonqualified Deferred Compensation

During fiscal 2014, our named executive officers did not contribute to, or earn any amount with respect to, any defined contribution or other plan sponsored by us that provides for the deferral of compensation on a basis that is not tax-qualified.

Employment, Change of Control and Severance Arrangements

Change of Control Agreements. We have entered into change of control agreements with each of our named executive officers. The change of control agreements provide certain severance benefits to each officer if his or her employment is terminated within 12 months following a “change of control,” which shall have occurred if (i) any person or entity, including a group deemed to be a person under Section 14(d)(2) of the Exchange Act, becomes the

“Beneficial Owner” (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing 50% or more of the combined voting power of the Company’s securities entitled to vote in the election of directors of the Company; or (ii) as a result of or in connection with a proxy solicitation made by a third party pursuant to Regulation 14A of the Exchange Act, the individuals who were our directors immediately before the election cease to constitute a majority of the Board; or (iii) there occurs a reorganization, merger, consolidation or other corporate transaction to which we are a party and in which our stockholders immediately prior to such transaction do not, immediately after such transaction, own more than 50% of the combined voting power of the Company; or (iv) all or substantially all of the assets of the Company are sold, liquidated or distributed, other than in connection with a bankruptcy, insolvency or other similar proceeding, or an assignment for the benefit of creditors.

These severance benefits will be paid only if (i) the termination of employment occurs subsequent to the signing of an agreement, the consummation of which would result in a change of control, or within 12 months following the change of control, and (ii) the termination was without “cause” or was a “resignation for good reason” (as such terms are defined). If these conditions are met for a particular officer, he or she will receive severance payments equal to 18 months (for Ms. Ocampo) or 24 months (for Senior Vice Presidents and above) of base salary, plus an amount equal to the greater of (two times the greater of for Mr. Katkin) (A) the aggregate bonus payment(s) received by such officer in the Company’s preceding fiscal year or (B) the officer’s then-current target bonus amount; provided, however, that if the officer ceases to be employed due to a “disability change of control termination” (as defined in the change of control agreement), then the severance payment will be prorated by a fraction, the numerator of which is the number of days elapsed from the date of the change of control (or the signing of an agreement, the consummation of which will result in a change of control, if such death or disability occurs prior to the actual change of control) through the date of termination, and the denominator of which is 365. Additionally, the vesting of outstanding equity awards will accelerate and the officer will be entitled to up to 18 months (24 months for Mr. Katkin) of post-termination benefits continuation under COBRA.

Severance Benefits without a Change of Control. We have entered into severance arrangements with each of our named executive officers. The employment agreement with Mr. Katkin provides for certain severance payments and benefits, even in the absence of a change of control. Under the Mr. Katkin’s employment agreement, if the Company terminates Mr. Katkin’s employment without “cause” or Mr. Katkin terminates his employment for “good reason” other than under circumstances that would constitute a “change of control termination” (each, as defined in Mr. Katkin’s change of control agreement), then Mr. Katkin will be entitled to: (1) a lump sum payment equal to (i) 24 months of Mr. Katkin’s then-current annual base salary plus (ii) an amount equal to two times the greater of (a) the aggregate annual cash bonus payment(s) received by Mr. Katkin in the Company’s preceding fiscal year, or (b) Mr. Katkin’s target annual cash bonus amount; (2) accelerated vesting of all of Mr. Katkin’s unvested equity-based compensation awards; and(3) Company-paid COBRA coverage for up to 24 months following Mr. Katkin’s termination.

Severance agreements with named executive officers Mr. Palekar, Dr. Siffert and Ms. Ocampo, provide for severance payments and benefits in the event the Company terminates the officer without “cause” or if the officer resigns for “good reason” other than under circumstances that would constitute a “change of control” (each, as defined in the officer’s change of control agreement), then the officer would be entitled to: (1) a lump sum payment equal to (i) nine months of the officer’s annual base salary plus (ii) a pro-rated annual target cash bonus amount based on the officer’s service during the year of termination; and (2) Company-paid COBRA coverage for up to nine months following termination.

Change of Control Provisions in Equity Plans. Under the Company’s 2005 Equity Incentive Plan and 2014 Incentive Plan, in any change of control transaction (e.g., the acquisition of the Company by way of merger), if the successor corporation does not assume outstanding awards or issue substitute awards, then the vesting of such awards will accelerate so that they are fully exercisable. The Compensation Committee may also, in its discretion, elect to accelerate the vesting of any or all outstanding awards even if the successor corporation will assume such awards or provide for substitute awards. The vesting of certain options granted to non-employee directors under the 2005 Equity Incentive Plan and the 2014 Incentive Plan will automatically accelerate immediately prior to any change of control transaction. Additionally, the 2005 Equity Incentive Plan and the 2014 Incentive plan provide that if a successor corporation assumes outstanding awards (or issues replacement awards) and the award holder is terminated without

cause within 12 months following the change of control, then the vesting of awards then held by that person will automatically accelerate. In the event of a proposed dissolution or liquidation of the Company, the Board may cause awards granted under the 2005 Equity Incentive Plan and the 2014 Incentive Plan to be fully vested and exercisable (but not after their expiration date) before the dissolution is completed, but contingent on its completion.

Compensation Actions Approved after 2014 Fiscal Year-End. On December 1, 2014, the Compensation Committee approved new employment and change of control agreements with Mr. Katkin. In addition, we entered into new change of control agreements and new severance letter agreements with Mr. Palekar, Dr. Siffert and Ms. Ocampo. Each of these new agreements are described herein.

Each executive has entered into a letter agreement acknowledging that the signing of the Merger Agreement, the consummation of the transactions provided for by the Merger Agreement, and/or any change in the executive’s position, authority, duties, reporting relationship or responsibilities that is caused by such signing or consummation solely by reason of the Company no longer being a publicly traded company, will not constitute “good reason” for purposes of these employment, change of control and severance agreements.

In connection with signing the Merger Agreement, we also entered into amendments to each named executive officer’s change of control agreement pursuant to which the named executive officer is entitled to receive a gross-up payment or reimbursement covering the executive for any excise tax (plus any related taxes resulting from such gross-up payment or reimbursement) imposed on the executive in connection with Section 280G of the Internal Revenue Code as a result of any compensation or benefits provided to the executive in connection with the Merger.

In addition, the Compensation Committee approved retention bonus awards in an amount equal to 65% (for Mr. Katkin) and 45% (for the other named executive officers) of the executive’s annual base salary that will be payable to each named executive officer if he or she remains employed through the six-month anniversary of the Merger closing date (or, if earlier, upon his or her death or disability).

The Compensation Committee also approved the payment of the portion of the named executive officers’ bonus corresponding to the first quarter of fiscal year 2015 (“2015 Q1 Bonus”). These bonuses will be paid within 30 days following the end of the first quarter of the Company’s 2015 fiscal year (i.e., December 31, 2014).


Name	2015 Q1 Bonus ($)
Keith Katkin	$	109,687.50
Rohan Palekar	$	45,503.76
Joao Siffert	$	45,518.99
Christine Ocampo	$	23,990.46

Potential Payments upon Termination or Change of Control

The table below shows the benefits potentially payable to each of our named executive officers if a change of control termination occurred on September 30, 2014 (after giving effect to the compensation actions taken by the Compensation Committee in November 2014 and by the Board of Directors on December 1, 2014, but not taking into account the Internal Revenue Code Section 280G gross-up amendment). The closing price per share of our common stock on The NASDAQ Global Market on September 30, 2014 (which was the last business day of fiscal 2014) was $11.92.


Name	Base Salary ($)(1)		Bonus Payment ($)		Accelerated Vesting of Options ($)(2)		Accelerated Vesting of Restricted Stock ($)(3)		COBRA Payment ($)(4)		Total ($)
Keith A. Katkin (5)	$	1,350,000	$	950,000	$	3,571,396	$	5,746,549	$	45,818	$	11,663,763
Rohan Palekar (6)	$	808,956	$	182,015	$	1,753,966	$	1,909,715	$	34,364	$	4,689,016
Joao Siffert, M.D. (7)	$	809,226	$	194,618	$	1,598,615	$	1,767,212	$	34,364	$	4,404,035
Christine G. Ocampo (8)	$	442,901	$	95,962	$	645,480	$	698,500	$	34,364	$	1,917,207

(1)	Reflects potential payments based on salaries as of October 1, 2014.

(2)	The value of the accelerated vesting equals the difference (if positive) between the option exercise price and the last reported stock price for fiscal 2014 ($11.92), multiplied by the number of options that would have been accelerated upon a change of control occurring on September 30, 2014.

(3)	The dollar value of restricted stock was calculated using the last reported stock price for fiscal 2014 ($11.92).

(4)	Represents Company-paid COBRA coverage for up to 24 months following termination for Mr. Katkin and up to 18 months following termination for the other named executive officers.

(5)	Based on 382,031 shares underlying unvested stock options and 482,093 shares of restricted stock outstanding as of September 30, 2014.

(6)	Based on 199,452 shares underlying unvested stock options and 160,211 shares of restricted stock outstanding as of September 30, 2014.

(7)	Based on 172,265 shares underlying unvested stock options and 148,256 shares of restricted stock outstanding as of September 30, 2014.

(8)	Based on 68,187 shares underlying unvested stock options and 58,599 shares of restricted stock outstanding as of September 30, 2014.

The table below shows the benefits potentially payable to the named executive officers if their employment was terminated on September 30, 2014 without cause or if the officer resigns for good reason in the absence of a change of control, (after giving effect to the compensation actions taken by the Compensation Committee in November 2014 and by the Board of Directors on December 1, 2014.)


Name	Base Salary Severance Benefit ($)(1)		Annual Bonus Severance Payment ($)(2)		Accelerated Vesting of Options ($)(3)		Accelerated Vesting of Restricted Stock ($)(4)		Cobra Payment ($)(5)		Total ($)(6)
Keith A. Katkin	$	1,350,000	$	950,000	$	3,571,396	$	5,746,549	$	45,818	$	11,663,763
Rohan Palekar	$	303,358		—	$	—	$	—	$	17,869	$	321,227
Joao Siffert, M.D.	$	303,460		—	$	—	$	—	$	17,869	$	321,329
Christine G. Ocampo	$	221,450		—	$	—	$	—	$	17,869	$	239,319

(1)	Reflects potential payments based on salaries as of October 1, 2014.

(2)

For Mr. Katkin, the severance benefit for annual bonus is equal to two times the greater of (a) the aggregate annual cash bonus payment(s) received by Mr. Katkin in the Company’s preceding fiscal year, or (b) Mr. Katkin’s target annual cash bonus amount. For Mr. Palekar, Dr. Siffert and Ms. Ocampo, the severance benefit for annual bonus is equal to a pro-rated annual target cash bonus amount based on the officer’s length of service during the year of termination.

(3)

Based on 382,031 shares underlying unvested stock options as of September 30, 2014. The value of the accelerated vesting equals the difference (if positive) between the option exercise price and the last reported stock price for fiscal 2014 ($11.92), multiplied by the number of options that would have been accelerated upon a termination without cause or a resignation for good reason occurring on September 30, 2014.

(4)	Based on 482,093 shares of restricted stock outstanding as of September 30, 2014.The dollar value of restricted stock was calculated using the last reported stock price for fiscal 2014 ($11.92).

(5)	Represents Company-paid COBRA coverage for up to 24 months following termination for Mr. Katkin and up to 18 months following termination for the other named executive officers.

(6)	Excludes severance benefit for annual bonus for Mr. Palekar, Dr. Siffert and Ms. Ocampo as their severance benefit for annual bonus is equal to a pro-rated annual target cash bonus amount based on the officer’s length of service during the year of termination.

401(k) Plan

We have established and maintain a retirement savings plan under Section 401(k) of the Internal Revenue Code. The Internal Revenue Code allows eligible employees to defer a portion of their compensation, within prescribed limits, on a tax deferred basis through contributions to a 401(k) plan. Our 401(k) plan permits us to make matching contributions on behalf of eligible employees, and we currently make these matching contributions up to a maximum amount of 50% of the first 4% of salary contributed to the plan per year. In fiscal 2014, the total value of the Company’s matching contributions on behalf of the named executive officers was $20,130.

Director Compensation

Non-Employee Director Compensation

A summary of the non-employee director compensation arrangements for fiscal 2014 is set forth below.


	Retainer and Meeting Fees
Annual Board Retainer Fee:
All non-employee directors	$	40,000
Annual Chairperson Retainer Fees: *
Chairman of the Board	$	30,000
Audit Committee Chairperson	$	25,000
Compensation Committee Chairperson	$	15,000
Corporate Governance or Science Committee Chairperson	$	10,000
Annual Committee Member Retainer Fees: *
Audit Committee	$	10,000
Compensation Committee	$	7,500
Corporate Governance or Science Committee	$	5,000

*	These fees are in addition to the Annual Board Retainer Fee, as applicable.

Non-employee directors are also reimbursed for their reasonable out-of-pocket expenses incurred in connection with attending Board and committee meetings and in attending continuing education seminars, to the extent that attendance is required by the Board or the committee(s) on which that director serves.

In fiscal 2014, the Company awarded restricted stock units representing 28,900 shares of common stock to each non-employee director. These awards vest over one year. The total grant-date value of these awards was $112,132, based on a closing stock price of $3.88 on the NASDAQ Global Market on the date of grant.

The Compensation Committee and the Board reassesses the appropriate level of equity compensation for non-employee directors on an annual basis. Future equity compensation payments will be determined on a year-by-year basis for the foreseeable future due to the volatility of the Company’s stock price.

The following table shows the compensation earned in fiscal 2014 to the Company’s non-employee directors.


Name	Fees Earned in Fiscal 2014		Stock Awards(1)		Total
Hans E. Bishop	$	55,000	$	112,132	$	167,132
Mark H. Corrigan, M.D.(2)	$	29,639	$	175,134	$	204,773
David J. Mazzo, Ph.D.	$	60,000	$	112,132	$	172,132
Corinne H. Nevinny	$	72,500	$	84,196	$	156,696
Dennis G. Podlesak	$	52,500	$	112,132	$	164,632
Craig A. Wheeler	$	87,500	$	112,132	$	199,632
Scott M. Whitcup, M.D.(3)	$	27,500	$	—	$	27,500

(1)

The value of the stock awards has been computed in accordance with FASB ASC 718, excluding the effect of estimated forfeitures. Assumptions used in the calculations for these amounts are included in notes to our financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014.

(2)	Dr. Corrigan was appointed to the Board effective March 2014.

(3)	Dr. Whitcup resigned from the Board effective January 6, 2014. Dr. Whitcup’s fees earned in fiscal 2014 include $13,750 paid in fiscal 2014 for services through September 30, 2013.

Director Ownership Guidelines

We have stock ownership guidelines for our non-employee directors requiring each non-employee director to hold a number of shares of Common Stock with a value equal to three times the amount of the annual cash retainer. Based on the cash retainer for fiscal 2014, this equated with a stock ownership target value of $120,000. For purposes of this requirement, a Director’s holdings include shares or units granted to the Director as compensation for Board service and shares or units held under a deferral or similar plan. A Director has five years from the date of (a) his or her first election as a Director or (b) if later, an increase in the amount of Avanir stock required to be held, to satisfy this ownership requirement.

Compensation Committee Interlocks and Insider Participation

During the last completed fiscal year, no member of the Compensation Committee was a current or former officer or employee of Avanir. None of our executive officers served as a member of the compensation committee (or board of directors serving the compensation function) of another entity where such entity’s executive officers served on our Compensation Committee. Moreover, none of our executive officers served as a member of the compensation committee (or board of directors serving the compensation function) of another entity where such entity’s executive officers served on our Board.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Equity Compensation Plan Information

The following table sets forth certain information, as of September 30, 2014, regarding the Company’s Amended and Restated 2000 Stock Option Plan, 2003 and 2005 Equity Incentive Plans and 2014 Incentive Plan as well as other stock options and warrants previously issued by the Company as compensation for services.


Plan category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights(1)		Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in First Column)
Equity compensation plans approved by security holders		2,343,364	$	4.62		15,055,347
Equity compensation plans not approved by security holders		6,566,719	$	2.63		—

Total		8,910,083	$	3.15		15,055,347

(1)	Excludes a total of 3,303,082 shares of common stock issuable upon the vesting of outstanding restricted stock units and 717,600 shares of common stock issuable upon vesting of inducement stock options.

Security Ownership of Certain Beneficial Owners and Management

Based on information available to us and filings with the SEC, the following table sets forth certain information regarding the beneficial ownership (as defined by Rule 13d-3 under the Securities Exchange Act of 1934) of our outstanding common stock for (i) each of our directors, (ii) each of our “named executive officers,” as

defined in Executive Compensation below, (iii) all of our directors and executive officers as a group, and (iv) persons known to us to beneficially hold more than 5% of our outstanding common stock. The following information is presented as of December 1, 2014, or such other date as may be reflected below. Beneficial ownership and percentage ownership are determined in accordance with the rules of the SEC and include voting or investment power with respect to shares of stock. This information does not necessarily indicate beneficial ownership for any other purpose. Under these rules, shares of common stock issuable under stock options or warrants that are exercisable within 60 days of December 1, 2014 are deemed outstanding for the purpose of computing the percentage ownership of the person holding the options or warrant(s), but are not deemed outstanding for the purpose of computing the percentage ownership of any other person.

Unless otherwise indicated and subject to applicable community property laws, to our knowledge, each stockholder named in the following table possesses sole voting and investment power over their shares of common stock, except for those jointly owned with that person’s spouse. Unless otherwise indicated below, the address of each person listed on the table is c/o Avanir Pharmaceuticals, Inc., 30 Enterprise, Suite 400, Aliso Viejo, California 92656.


	Shares Beneficially Owned
Name and Address of Beneficial Owner	Number(1)		Percent of Class(2)
*Greater than 5% Holders*
Baker Brother Life Sciences, L.P.(3)		32,767,078		16.9	%
667 Madison Avenue, 21st Floor
New York, NY 10065
T. Rowe Price Associates, Inc.(4)		28,047,222		14.5	%
P.O. Box 89000
Baltimore, MD 21289
Fidelity Management & Research (FMR) LLC(5)		20,561,721		10.6	%
245 Summer Street
Boston, MA 02210
BlackRock Institutional Trust Company, N.A.(6)		12,614,904		6.5	%
400 Howard Street
San Francisco, CA 94105

*Current directors and named executive officers:*
Keith A. Katkin(7)		2,470,485		1.3	%
Craig A. Wheeler(8)		406,644		*
Hans E. Bishop(9)		93,350		*
Mark Corrigan, M.D.(10)		43,350		*
David J. Mazzo, Ph.D.(11)		342,644		*
Corinne H. Nevinny(12)		80,050		*
Dennis G. Podlesak(13)		342,644		*
Rohan Palekar(14)		491,869		*
Joao Siffert, M.D.(15)		587,782		*
Christine G. Ocampo(16)		403,190		*
All current executive officers and directors as a group (10 persons)		5,262,008		2.6	%

*	Less than one percent.

(1)	Represents shares of common stock and shares of restricted stock held as of December 1, 2014, plus shares of common stock that may be acquired upon exercise of options, warrants and other rights exercisable within 60 days of December 1, 2014.

(2)

Based on 193,758,703 shares of the registrant’s Common Stock that were issued and outstanding as of December 1, 2014. The percentage ownership and voting power for each person (or all directors and executive officers as a group) is calculated by assuming the exercise or conversion of all options, warrants and convertible securities exercisable or convertible within 60 days of December 1, 2014 held by such person and the non-exercise and non-conversion of all outstanding warrants, options and convertible securities held by all other persons.

(3)	Based on a Schedule 13G-A filed November 10, 2014 on behalf of Baker Brothers Life Science, L.P., 14159, L.P. and 667, L.P.

(4)	Based on a Schedule 13F-HR filed November 14, 2014 on behalf of T. Rowe Price Associates, Inc.

(5)	Based on a Schedule 13G-A filed November 10, 2014 on behalf of FMR LLC.

(6)

Based on a Schedule 13F-HR filed October 29, 2014 on behalf of BlackRock, Inc.; a Schedule 13F-HR filed October 29, 2014 on behalf of BlackRock Advisors, LLC; a Schedule 13F-HR filed October 29, 2014 on behalf of BlackRock Fund Advisors; a Schedule 13F-HR filed October 29, 2014 on behalf of BlackRock Group LTD; a Schedule 13F-HR filed October 29, 2014 on behalf of BlackRock Investment Management, LLC; and a Schedule 13F-HR filed October 29, 2014 on behalf of BlackRock Institutional Trust Company, N.A.

(7)	Includes (i) 1,473,716 shares of common stock issuable upon the exercise of options exercisable within 60 days of December 1, 2104, (ii) 837,203 shares underlying restricted stock units granted under the Company’s equity plans and (iii) 159,566 shares of common stock.

(8)	Includes (i) 6,250 shares of common stock issuable upon the exercise of options exercisable within 60 days of December 1, 2014 and (ii) 400,394 shares underlying restricted stock units granted under the Company’s equity plans.

(9)	Consists of 93,350 shares underlying restricted stock units granted under the Company’s equity plans.

(10)	Consists of 43,350 shares underlying restricted stock units granted under the Company’s equity plans.

(11)	Includes (i) 6,250 shares of common stock issuable upon the exercise of options exercisable within 60 days of December 1, 2014, (ii) 335,394 shares underlying restricted stock units granted under the Company’s equity plans and (iii) 1,000 shares of common stock.

(12)	Consists of 80,050 shares underlying restricted stock units granted under the Company’s equity plans.

(13)	Includes (i) 6,250 shares of common stock issuable upon the exercise of options exercisable within 60 days of December 1, 2014, (ii) 335,394 shares underlying restricted stock units granted under the Company’s equity plans and (iii) 1,000 shares of common stock.

(14)	Includes (i) 189,063 shares of common stock issuable upon the exercise of options exercisable within 60 days of December 1, 2014, (ii) 253,017 shares underlying restricted stock units granted under the Company’s equity plans and (iii) 49,789 shares of common stock.

(15)	Includes (i) 271,172 shares of common stock issuable upon the exercise of options exercisable within 60 days of December 1, 2014, (ii) 283,975 shares underlying restricted stock units granted under the Company’s equity plans and (iii) 32,635 shares of common stock.

(16)	Includes (i) 285,613 shares of common stock issuable upon the exercise of options exercisable within 60 days of December 1, 2014, (ii) 109,576 shares underlying restricted stock units granted under the Company’s equity plans and (iii) 8,001 shares of common stock.

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Transactions with Related Parties

Other than compensation arrangements described in Item 11. “Executive Compensation” we are not a party to any transactions between us and certain “related parties,” which are generally considered to be our directors and executive officers, nominees for director, holders of 5% or more of our outstanding common stock and members of their immediate families.

Related-Party Transaction Review and Approval

Our Board has adopted policies and procedures for the review and approval of related-party transactions and has delegated to the Corporate Governance Committee the authority to review and approve the material terms of any proposed related-party transactions. To the extent that a proposed related-party transaction may involve a non-employee director or nominee for election as a director and may be material to a consideration of that person’s independence, the matter may also be considered by the other disinterested directors.

Pursuant to our Code of Business Conduct and Ethics and our Corporate Governance Committee Charter, each of our executive officers and directors must disclose related-party transactions to our Corporate Governance Committee. In order to avoid conflicts of interest, our executive officers and directors may not acquire any ownership interest in any supplier, customer or competitor (other than nominal amounts of stock in publicly traded companies), enter into any consulting or employment relationship with any customer, supplier or competitor, or engage in any outside business activity that is competitive with any of our businesses, without first disclosing the proposed transaction. After the proposed transaction has been disclosed, a determination will be made by our Corporate Governance Committee as to what course to follow, depending on the nature or extent of the conflict. Furthermore, our executive officers and directors may not serve on any board of directors of any customer, supplier or competitor unless such board service has been disclosed to us and approved by our Board. Our Corporate Governance Committee has been delegated the task of reviewing other directorships and consulting agreements of Board members for conflicts of interest. All members of our Board are required to report annually all other directorships and consulting agreements.

In determining whether to approve or ratify a related-party transaction, the Corporate Governance Committee may consider, among other factors it deems appropriate, the potential benefits to us, the impact on a director’s or nominee’s independence or an executive officer’s relationship with or service to us, whether the related-party transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related party’s interest in the transaction. In deciding to approve a transaction, the Corporate Governance Committee may, in its sole discretion, impose such conditions as it deems appropriate on us or the related party in connection with its approval of any transaction. Any transactions involving the compensation of executive officers, however, are to be reviewed and approved by the Compensation Committee. If a related-party transaction will be ongoing, the Corporate Governance Committee may establish guidelines to be followed in our ongoing dealings with the related party. Thereafter, the Corporate Governance Committee, on at least an annual basis, will review and assess ongoing relationships with the related party to see that they are in compliance with the committee’s guidelines and that the related-party transaction remains appropriate.

Director Independence

We believe that the Company benefits from having a strong and independent Board. For a director to be considered independent, the Board must determine that the director does not have any direct or indirect material relationship with the Company that would affect his or her exercise of independent judgment. On an annual basis, the Board reviews the independence of all directors under guidelines established by NASDAQ and in light of each director’s affiliations with the Company and members of management, as well as significant holdings of Company securities. This review considers all known relevant facts and circumstances in making an independence determination. Based on this review, the Board has made an affirmative determination that all directors, other than Mr. Katkin, are independent. It was determined that Mr. Katkin lacks independence because of his status as the Company’s President and Chief Executive Officer.

Item 14.

Principal Accounting Fees and Services

The following is a summary of the fees billed to the Company by KMJ Corbin & Company LLP for professional services rendered for the fiscal years ended September 30, 2014 and 2013. These fees are for work invoiced in the fiscal years indicated.


	2014		2013
*Audit Fees:*
Consists of fees billed for professional services rendered for the audit of the Company’s annual financial statements and the review of the interim financial statements included in the Company’s Quarterly Reports (together, the “*Financial Statements*”) and for services normally provided in connection with statutory and regulatory filings or engagements	$	206,800	$	229,000
*Other Fees:*
Audit-Related Fees
Consists of fees billed for assurance and related services reasonably related to the performance of the annual audit or review of the Financial Statements (defined above)		80,372		64,260
Tax Fees
Consists of fees billed for tax compliance, tax advice and tax planning		—		—
All Other Fees
Consists of fees billed for other products and services not described above		24,288		32,776

Total Other Fees		104,660		97,036

*Total All Fees*	$	311,460	$	326,036

PART IV

Item 15.

Exhibits and Financial Statement Schedules

(99)

Financial Statements and Schedules

See index to the financial statements on page F-1.

(b) Exhibits

The following exhibits are incorporated by reference or filed as part of this report.


Exhibit Number		Incorporated by Reference Herein
Exhibit Number	Description	Form	Date

2.1	Agreement and Plan of Merger, dated as of December 1, 2014, by and among Otsuka Pharmaceutical Co., Ltd., Bigarade Corporation and Avanir Pharmaceuticals, Inc.	Current Report on Form 8-K, as Exhibit 2.1	December 2, 2014

3.2	Certificate of Amendment to the Certificate of Incorporation of Avanir Pharmaceuticals, Inc.	Current Report on Form 8-K, as Exhibit 3.1	February 19, 2014

3.3	Amended & Restated Bylaws of Avanir Pharmaceuticals, Inc.	Current Report on Form 8-K, as Exhibit 3.2	February 19, 2014

3.4	Certificate of Ownership and Merger merging Avanir Pharmaceuticals, a California corporation, with and into Avanir Pharmaceuticals, Inc., a Delaware corporation	Current Report on Form 8-K, as Exhibit 3.3	March 25, 2009

4.1	Form of Common Stock Certificate	Current Report on Form 8-K, as Exhibit 4.1	March 25, 2009

4.7	Form of Common Stock Warrant, issued in connection with the Loan and Security Agreement dated May 7, 2012	Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, as Exhibit 4.1	August 9, 2012

10.1	License Agreement, dated as of March 31, 2000, by and between Avanir Pharmaceuticals and SB Pharmco Puerto Rico, a Puerto Rico Corporation	Current Report on Form 8-K, as Exhibit 10.1	May 4, 2000

10.2	License Agreement, dated as of August 1, 2000, by and between Avanir Pharmaceuticals and IriSys Research & Development, LLC*	Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, as Exhibit 10.2	August 14, 2000

10.3	Exclusive Patent License Agreement, dated as of April 2, 1997, by and between IriSys Research & Development, LLC and the Center for Neurologic Study	Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, as Exhibit 10.1	May 13, 2005

10.4	Amendment to Exclusive Patent License Agreement, dated as of April 11, 2000, by and between IriSys Research & Development, LLC and the Center for Neurologic Study	Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, as Exhibit 10.2	May 13, 2005


Exhibit Number		Incorporated by Reference Herein
Exhibit Number	Description	Form	Date

10.5	Manufacturing Services Agreement, dated as of January 4, 2006, by and between Patheon Inc. and Avanir Pharmaceuticals*	Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, as Exhibit 10.1	May 10, 2006

10.6	Amended and Restated 2000 Stock Option Plan	Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as Exhibit 10.1	May 14, 2003

10.7	Form of Restricted Stock Grant Notice for use with Amended and Restated 2000 Stock Option Plan	Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as Exhibit 10.2	May 14, 2003

10.8	2003 Equity Incentive Plan	Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as Exhibit 10.3	May 14, 2003

10.9	Form of Non-Qualified Stock Option Award Notice for use with 2003 Equity Incentive Plan	Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as Exhibit 10.4	May 14, 2003

10.10	Form of Restricted Stock Grant for use with 2003 Equity Incentive Plan	Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as Exhibit 10.5	May 14, 2003

10.11	Form of Restricted Stock Grant Notice (cash consideration) for use with 2003 Equity Incentive Plan	Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, as Exhibit 10.6	May 14, 2003

10.12	2005 Equity Incentive Plan	Annual Report on Form 10-K for the fiscal year ended September 30, 2013, as Exhibit 10.15	December 11, 2013

10.13	Form of Stock Option Agreement for use with 2005 Equity Incentive Plan	Current Report on Form 8-K, as Exhibit 10.1	March 23, 2005

10.14	Form of Restricted Stock Unit Grant Agreement for use with 2005 Equity Incentive Plan and 2003 Equity Incentive Plan	Annual Report on Form 10-K for the fiscal year ended September 30, 2010, as Exhibit 10.21	December 8, 2010

10.15	Form of Restricted Stock Unit Director Grant Agreement for use with 2005 Equity Incentive Plan and 2003 Equity Incentive Plan	Annual Report on Form 10-K for the fiscal year ended September 30, 2010, as Exhibit 10.22	December 8, 2010

10.16	Form of Restricted Stock Purchase Agreement for use with 2005 Equity Incentive Plan	Annual Report on Form 10-K for the fiscal year ended September 30, 2006, as Exhibit 10.35	December 18, 2006

10.17	2014 Incentive Plan	Filed herewith

10.18	Form of Incentive Stock Option Agreement (Employees) for use with 2014 Incentive Plan	Current Report on Form 8-K, as Exhibit 10.1	February 19, 2014

10.19	Form of Non-Statutory Stock Option Agreement (Employees) for use with 2014 Incentive Plan	Current Report on Form 8-K, as Exhibit 10.2	February 19, 2014


Exhibit Number		Incorporated by Reference Herein
Exhibit Number	Description	Form	Date

10.20	Form of Restricted Stock Unit Agreement (Employees) for use with 2014 Incentive Plan	Current Report on Form 8-K, as Exhibit 10.3	February 19, 2014

10.21	Form of Restricted Stock Unit Agreement (Directors) for use with 2014 Incentive Plan	Current Report on Form 8-K, as Exhibit 10.4	February 19, 2014

10.22	Form of Indemnification Agreement with certain Directors and Executive Officers of the Registrant	Filed herewith

10.23	Form of Change of Control Agreement	Filed herewith

10.24	Employment Agreement with Keith Katkin, dated as of December 1, 2014	Filed herewith

10.25	Asset Purchase and License Agreement, dated as of March 6, 2008, by and among Avanir Pharmaceuticals, Xenerex Biosciences and Emergent Biosolutions, Inc.*	Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, as Exhibit 10.1	May 14, 2008

10.26	Amendment #1 to Manufacturing Services Agreement, dated as of January 19, 2010, by and between Avanir Pharmaceuticals, Inc. and Patheon Inc.	Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, as Exhibit 10.1	May 3, 2010

10.27	Quality Agreement, dated as of January 19, 2010, by and between Avanir Pharmaceuticals, Inc. and Patheon Inc.*	Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, as Exhibit 10.2	May 3, 2010

10.28	First Amendment to Offer of Employment, dated as of December 31, 2008, by and between Keith A. Katkin and Avanir Pharmaceuticals, Inc.	Annual Report on Form 10-K for the fiscal year ended September 30, 2010, as Exhibit 10.37	December 8, 2010

10.29	Summit Office Lease, dated as of February 1, 2011, by and between Aliso Viejo RO-V1, LLC and Avanir Pharmaceuticals, Inc.	Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, as Exhibit 10.1	May 10, 2011

10.30	First Amendment to Summit Office Lease, dated September 27, 2013, by and between Aliso Viejo RP-V1, LLC and Avanir Pharmaceuticals Inc.	Annual Report on Form 10-K for the fiscal year ended September 30, 2013, as Exhibit 10.29	December 11, 2013

10.31	Sales Agreement dated as of August 8, 2012, by and between Avanir Pharmaceuticals, Inc. and Cowen and Company, LLC	Registration Statement on Form S-3 (File No. 333-183153), as Exhibit 1.2	August 8, 2012


Exhibit Number		Incorporated by Reference Herein
Exhibit Number	Description	Form	Date

10.32	Amendment No. 1 to Sales Agreement dated as of July 5, 2013, by and between Avanir Pharmaceuticals, Inc. and Cowen and Company, LLC	Registration Statement on Form S-3 (File No. 333-189831), as Exhibit 1.3	July 5, 2013

10.33	Amendment No. 2 to Sales Agreement dated as of December 10, 2013, by and between Avanir Pharmaceuticals, Inc. and Cowen and Company, LLC	Current Report on Form 8-K, as Exhibit 1.1	December 10, 2013

10.34	Amendment No. 3 to Sales Agreement dated as of May 7, 2014, by and between Avanir Pharmaceuticals, Inc. and Cowen and Company, LLC	Current Report on Form 8-K, as Exhibit 1.1	May 7, 2014

10.35	License Agreement dated July 1, 2013, by and between Avanir Pharmaceuticals, Inc. and OptiNose AS*	Annual Report on Form 10-K for the fiscal year ended September 30, 2013, as Exhibit 10.33	December 11, 2013

10.36	Sublease Agreement dated November 8, 2013, by and between Valeant Pharmaceuticals International, Inc. and Avanir Pharmaceuticals, Inc.	Annual Report on Form 10-K for the fiscal year ended September 30, 2013, as Exhibit 10.34	December 11, 2013

10.37	Sublease Agreement dated August 6, 2014, by and between Avanir Pharmaceuticals, Inc. and Telogis Inc.	Filed herewith

10.38	Amended Change of Control Agreement by and between Avanir Pharmaceuticals, Inc. and Keith Katkin dated as of December 1, 2014	Filed herewith

10.39	Form of Severance Letter	Filed herewith

10.40	Form of Amendment to Change of Control Agreement	Filed herewith

10.41	Form of Good Reason Waiver Letter	Filed herewith

21.1	List of Subsidiaries	Annual Report on Form 10-K for the fiscal year ended September 30, 2010, as Exhibit 21.1	December 8, 2010

23.1	Consent of Independent Registered Public Accounting Firm	Filed herewith

31.1	Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002	Filed herewith

31.2	Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002	Filed herewith


Exhibit Number		Incorporated by Reference Herein
Exhibit Number	Description	Form	Date

32.1	Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002	Filed herewith

32.2	Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002	Filed herewith

99.1	NUEDEXTA Safety Information	Filed herewith

101.INS	XBRL Instance Document	Filed herewith

101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith

101.CAL	XBRL Taxonomy Calculation Linkbase Document	Filed herewith

101.DEF	XBRL Taxonomy Definition Linkbase Document	Filed herewith

101.LAB	XBRL Taxonomy Extension Labels Linkbase Document	Filed herewith

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith

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.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.


AVANIR PHARMACEUTICALS, INC.

By:		/S/ KEITH A. KATKIN
		Keith A. Katkin
		President and Chief Executive Officer

Date: December 10, 2014

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.


Signature	Title	Date

/S/ KEITH A. KATKIN Keith A. Katkin	President and Chief Executive Officer (Principal Executive Officer)	December 10, 2014

/S/ CHRISTINE G. OCAMPO, CPA Christine G. Ocampo, CPA	Vice President, Finance (Principal Financial and Accounting Officer)	December 10, 2014

/S/ CRAIG A. WHEELER Craig A. Wheeler	Director, Chairman of the Board	December 10, 2014

/S/ HANS E. BISHOP Hans E. Bishop	Director	December 10, 2014

/S/ MARK CORRIGAN, MD Mark Corrigan, MD	Director	December 10, 2014

/S/ DAVID J. MAZZO, PH.D. David J. Mazzo, Ph.D.	Director	December 10, 2014

/S/ CORINNE NEVINNY Corinne Nevinny	Director	December 10, 2014

/S/ DENNIS G. PODLESAK Dennis G. Podlesak	Director	December 10, 2014

Avanir Pharmaceuticals, Inc.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page
Report of Independent Registered Public Accounting Firm		F-2
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting		F-3
Financial Statements:
Consolidated Balance Sheets		F-4
Consolidated Statements of Operations		F-5
Consolidated Statements of Stockholders’ Equity		F-6
Consolidated Statements of Cash Flows		F-7
Notes to Consolidated Financial Statements		F-8
Financial Statement Schedules:
Financial statement schedules have been omitted for the reason that the required information is presented in the consolidated financial statements or notes thereto, the amounts involved are not significant or the schedules are not applicable.

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Avanir Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheets of Avanir Pharmaceuticals, Inc. and subsidiaries (the “Company”) as of September 30, 2014 and 2013, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended September 30, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Avanir Pharmaceuticals, Inc. and subsidiaries as of September 30, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2014, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of September 30, 2014, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated December 10, 2014 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ KMJ Corbin & Company LLP

Costa Mesa, California

December 10, 2014

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Stockholders of

Avanir Pharmaceuticals, Inc.

We have audited the internal control over financial reporting of Avanir Pharmaceuticals, Inc. and subsidiaries (the “Company”) as of September 30, 2014, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of the internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Avanir Pharmaceuticals, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of September 30, 2014, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Avanir Pharmaceuticals, Inc. and subsidiaries as of September 30, 2014 and 2013, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended September 30, 2014 and our report dated December 10, 2014 expressed an unqualified opinion on those consolidated financial statements.

/s/ KMJ Corbin & Company LLP

Costa Mesa, California

December 10, 2014

F-3

Avanir Pharmaceuticals, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except for par value and share data)


	September 30,
	2014			2013
ASSETS
Current assets:
Cash and cash equivalents	$	271,870		$	55,259
Restricted cash and cash equivalents		1,320			966
Trade receivables, net		22,831			12,526
Inventories, net		799			710
Prepaid expenses		1,631			1,391
Other current assets		2,366			992

Total current assets		300,817			71,844
Restricted investments		1,304			1,304
Property and equipment, net		3,631			1,593
Non-current inventories, net		620			784
Other assets		611			554

Total assets	$	306,983		$	76,079


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,724		$	5,876
Accrued expenses		15,370			11,909
Accrued compensation and payroll taxes		9,999			7,776
Deferred royalty revenues		—			1,289
Current portion of notes payable, net of debt discount		—			7,943

Total current liabilities		32,093			34,793
Other liabilities		1,501			1,393
Notes payable, net of current portion and debt discount		—			21,422

Total liabilities		33,594			57,608

Commitments and contingencies
Stockholders’ equity:
Preferred stock — $0.0001 par value, 10,000,000 shares authorized, no shares issued		—			—
Common stock — $0.0001 par value, 300,000,000 and 200,000,000 shares authorized as of September 30, 2014 and 2013, respectively; 193,672,800 and 152,063,621 shares issued and outstanding as of September 30, 2014 and 2013, respectively		19			15
Additional paid-in capital		824,342			518,992
Accumulated deficit		(550,972	)		(500,536	)

Total stockholders’ equity		273,389			18,471

Total liabilities and stockholders’ equity	$	306,983		$	76,079

See notes to consolidated financial statements.

F-4

Avanir Pharmaceuticals, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts and share data)


	Years Ended September 30,
	2014			2013			2012
Revenues:
Net product sales	$	105,441		$	70,692		$	37,075
Revenues from royalties		2,743			4,454			4,200
Revenues from co-promote activities		6,735			—			—
Revenues from research grant services		110			220			—

Total revenues		115,029			75,366			41,275

Operating expenses:
Cost of product sales		3,324			4,002			2,120
Cost of research grant services		198			148			—
Research and development		44,004			49,506			23,066
Selling and marketing		77,656			63,202			52,463
General and administrative		36,191			29,935			22,028

Total operating expenses		161,373			146,793			99,677

Loss from operations		(46,344	)		(71,427	)		(58,402	)
Other income (expense):
Interest income		20			52			43
Interest expense		(3,312	)		(4,098	)		(1,386	)
Loss on early extinguishment of debt		(789	)		—			—
Other, net		(8	)		—			4

Loss before provision for income taxes		(50,433	)		(75,473	)		(59,741	)
Provision for income taxes		3			3			3

Net loss	$	(50,436	)	$	(75,476	)	$	(59,744	)

Basic and diluted net loss per share	$	(0.31	)	$	(0.53	)	$	(0.45	)

Basic and diluted weighted average number of common shares outstanding		161,269,021			142,269,399			133,358,571

See notes to consolidated financial statements.

F-5

Avanir Pharmaceuticals, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)


	Common Stock				Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Equity
	Shares		Amount		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Equity
BALANCE AT SEPTEMBER 30, 2011		125,443,788	$	13	$	436,643	$	(365,316	)	$	71,340
Net loss		—		—		—		(59,744	)		(59,744	)
Issuance of common stock in connection with:
Exercise of stock options		1,673,811		—		1,345		—			1,345
Exercise of warrants		5,445,061		1		7,786		—			7,787
Sale of stock, net of offering costs		3,668,656		—		10,063		—			10,063
Vesting of restricted stock units		204,176		—		—		—			—
Issuance of warrants to purchase common stock in connection with notes payable		—		—		1,169		—			1,169
Share-based compensation expense		—		—		4,877		—			4,877

BALANCE AT SEPTEMBER 30, 2012		136,435,492		14		461,883		(425,060	)		36,837
Net loss		—		—		—		(75,476	)		(75,476	)
Issuance of common stock in connection with:
Exercise of stock options		1,033,833		—		1,497		—			1,497
Exercise of warrants		782,294		—		1,015		—			1,015
Sale of stock, net of offering costs		12,965,465		1		48,751		—			48,752
Vesting of restricted stock units		846,537		—		—		—			—
Share-based compensation expense		—		—		5,846		—			5,846

BALANCE AT SEPTEMBER 30, 2013		152,063,621		15		518,992		(500,536	)		18,471
Net loss		—		—		—		(50,436	)		(50,436	)
Issuance of common stock in connection with:
Exercise of stock options		1,425,419		—		3,316		—			3,316
Exercise of warrants		25,548		—		—		—			—
Sale of stock, net of offering costs		39,354,687		4		295,350		—			295,354
Vesting of restricted stock units		803,525		—		—		—			—
Share-based compensation expense		—		—		6,684		—			6,684

BALANCE AT SEPTEMBER 30, 2014		193,672,800	$	19	$	824,342	$	(550,972	)	$	273,389

See notes to consolidated financial statements.

F-6

Avanir Pharmaceuticals, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Years Ended September 30,
	2014			2013			2012
Cash flows from operating activities:
Net loss	$	(50,436	)	$	(75,476	)	$	(59,744	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,402			826			700
Allowance for doubtful accounts		—			208			—
Amortization of debt discount and debt issuance costs		401			596			213
Share-based compensation expense		6,684			5,846			4,877
Loss on disposal of assets		9			—			—
Non-cash loss on early extinguishment of debt		345			—			—
Changes in operating assets and liabilities:
Trade receivables, net		(10,305	)		(5,502	)		(5,221	)
Inventories, net		75			(170	)		(279	)
Prepaid expenses and other assets		(1,782	)		484			(209	)
Accounts payable		372			2,888			(328	)
Accrued expenses and other liabilities		3,647			5,466			4,723
Accrued compensation and payroll taxes		2,223			2,173			1,352
Deferred product revenues, net		—			—			(1,653	)
Deferred royalty revenues		(1,289	)		(2,761	)		(2,089	)

Net cash used in operating activities		(48,654	)		(65,422	)		(57,658	)

Cash flows from investing activities:
Purchases of property and equipment		(3,058	)		(449	)		(813	)
Purchases of restricted investments and restricted cash and cash equivalents		(354	)		(315	)		(104	)
Proceeds from maturities of restricted short-term investments		—			402			—
Proceeds from disposal of fixed asset		7			—			—

Net cash used in investing activities		(3,405	)		(362	)		(917	)

Cash flows from financing activities:
Repayments of notes payable		(30,000	)		—			—
Proceeds from debt, net of issuance costs		—			—			29,615
Proceeds from issuances of common stock, net of commissions and offering costs		295,354			48,753			10,063
Proceeds from exercise of stock options and warrants		3,316			2,512			9,132

Net cash provided by financing activities		268,670			51,265			48,810

Net change in cash and cash equivalents		216,611			(14,519	)		(9,765	)
Cash and cash equivalents at beginning of year		55,259			69,778			79,543

Cash and cash equivalents at end of year	$	271,870		$	55,259		$	69,778

Supplemental disclosures of cash flow information:
Interest paid	$	4,251		$	2,685		$	649
Income taxes paid	$	3		$	3		$	3
Supplemental disclosures of non-cash investing and financing activities:
Purchases of property and equipment in accounts payable and accrued expenses	$	561		$	163		$	—
Issuance of warrants for common stock in connection with notes payable	$	—		$	—		$	1,169

See notes to consolidated financial statements.

F-7

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.	Description of Business and Basis of Presentation

Description of Business

Avanir Pharmaceuticals, Inc. and subsidiaries (“Avanir”, the “Company” or “we”) is a biopharmaceutical company focused on acquiring, developing and commercializing novel therapeutic products for the treatment of central nervous system disorders. The Company’s lead product, NUEDEXTA^® (referred to as AVP-923 during clinical development) is a first-in-class dual N-methyl-D-aspartate (NMDA) receptor antagonist and sigma-1 agonist. NUEDEXTA 20/10mg (dextromethorphan hydrobromide 20 mg/quinidine sulfate 10 mg) is approved in the United States for the treatment of pseudobulbar affect (“PBA”). It is also approved for the symptomatic treatment of PBA in the European Union in two dose strengths, NUEDEXTA 20/10 mg and NUEDEXTA 30/10 mg. The Company commercially launched NUEDEXTA in the United States in February 2011 and is currently assessing plans regarding the potential commercialization of NUEDEXTA in the European Union.

The Company is studying the clinical utility of AVP-923 in other mood/behavior disorders and movement disorders, including the potential treatment of agitation in patients with Alzheimer’s disease and the potential treatment of levodopa-induced dyskinesia in Parkinson’s disease (“LID”). The Phase 2 LID study is supported by a grant from the Michael J. Fox Foundation. The Phase 2 study of agitation in Alzheimer’s disease was recently completed and, on September 15, 2014, the Company announced positive results for this study (see “AVP-923 for the treatment of Agitation in patients with Alzheimer’s disease,” below).

The Company is also developing AVP-786, an investigational drug product containing deuterium-modified dextromethorphan and quinidine for the potential treatment of neurologic and psychiatric disorders. The Company completed pharmacokinetic studies with AVP-786 and, based on these data, the Company has identified a formulation of AVP-786 to move forward into clinical studies. This AVP-786 formulation contains significantly less quinidine than used in AVP-923. In June 2013, the U.S. Food and Drug Administration (“FDA”) agreed to an expedited development pathway for AVP-786, requiring only a limited non-clinical package as part of the Investigational New Drug (“IND”) application. In August 2014, the Company initiated a Phase 2 study for AVP-786 as an adjunctive therapy to antidepressants for the treatment of Major Depressive Disorder (“MDD”.)

The Company is also developing a novel Breath Powered™ intranasal delivery system containing low-dose sumatriptan powder acute treatment of migraine, AVP-825. If approved, this product would be the first and only fast-acting dry-powder nasal delivery form of sumatriptan. AVP-825 is licensed from OptiNose AS (“OptiNose”). Under the terms of the agreement, the Company assumed responsibility for regulatory, manufacturing, supply-chain and commercialization activities for the investigational product. In March 2014, the FDA accepted the Company’s New Drug Application (“NDA”) of AVP-825. In November 2014, the Company received a Complete Response Letter from the FDA, which requested that the Company assess the root cause(s) of device use errors observed in the previously conducted human factors testing. The Company is currently working to address these issues and intends to conduct a new human factors study, with input from the FDA, with a goal to respond to the Complete Response Letter in the first half of calendar 2015. The FDA did not find any clinical or non-clinical safety or efficacy issues nor chemistry, manufacturing, and controls (CMC) issues. The FDA did not request that any additional clinical trials be conducted prior to approval.

The Company entered into a multi-year agreement with Merck Sharp & Dohme Corp. (“Merck”) to co-promote Merck’s type 2 diabetes therapies JANUVIA^® (sitagliptin) and the sitagliptin family of products in the long-term care institutional setting in the United States beginning October 1, 2013. The term of the Agreement will continue for three years following the launch date of the co-promotion activities, unless terminated earlier pursuant to the terms of the agreement. Under the terms of the Agreement, the Company will be compensated via a (i) fixed monthly fee and (ii) performance fee based on the amount of the Products sold by the Company above a predetermined baseline. A significant majority of the fee is performance-based. Over the three years of the agreement, Avanir could receive up to $46.7 million in compensation, including revenue earned in the first contract year. See Note 11, “Research, License, Supply and other Agreements.”

F-8

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company developed and licensed certain intellectual property rights relating to NUEDEXTA and the existing drug candidates (AVP-923, AVP-786 and AVP-825) and the Company continues to actively seek to acquire rights to other complementary products and technologies, particularly following the successful defense of the patents underlying NUEDEXTA. As a result, the Company intends to seek to in-license or acquire through other means, such as mergers, stock purchases or asset purchases, complementary products and technologies, as well as sales and marketing infrastructure and other assets or resources. There can be no assurance, however, that the Company will be successful in acquiring any additional assets, or that the Company will receive the anticipated benefits of any such acquisitions.

Avanir was incorporated in California in August 1988 and was reincorporated in Delaware in March 2009.

Basis of presentation

The consolidated financial statements include the accounts of Avanir Pharmaceuticals, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. The Company’s fiscal year ends on September 30 of each year. The years ended September 30, 2014, 2013, and 2012 are herein referred to as fiscal 2014, fiscal 2013 and fiscal 2012, respectively.

The Company has evaluated subsequent events through the filing date of this Form 10-K, 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 discussed in the accompanying notes.

2.	Summary of Significant Accounting Policies

Management estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates made by management include, among others, sales returns, discounts and allowances, provisions for uncollectible receivables, realizability of inventories, valuation of investments, recoverability of long-lived assets, recognition of deferred revenue, the fair value of stock options, warrants and shares issued for non-cash consideration, determination of expenses in outsourced contracts, and realization of deferred tax assets.

Cash and cash equivalents

Cash and cash equivalents consist of cash and highly liquid investments with maturities of three months or less at the date of acquisition.

Concentration of credit risk and sources of supply

Financial assets that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and trade receivables. The Company’s cash and cash equivalents are placed in various money market mutual funds and at financial institutions of high credit standing. At times, deposits held with these financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation (FDIC). Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk. The Company performs ongoing credit evaluations of customers’ financial condition and may limit the amount of credit extended if necessary; however, the Company has historically required no collateral from its customers.

The Company currently has sole suppliers for the active pharmaceutical ingredients (“APIs”) for NUEDEXTA and a sole manufacturer for the finished form of NUEDEXTA. 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

F-9

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and possible loss of revenue. If the Company is required to change manufacturers, the Company may experience delays associated with finding an alternative manufacturer that is properly qualified to produce NUEDEXTA in accordance with FDA requirements and the Company’s specifications.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out (“FIFO”) basis. The Company evaluates the carrying value of inventories on a regular basis, based on the price expected to be obtained for products in their respective markets compared with historical cost. Write-downs of inventories are considered to be permanent reductions in the cost basis of inventories.

The Company also regularly evaluates its inventories for excess quantities and obsolescence (expiration), taking into account such factors as historical and anticipated future sales or use in production compared to quantities on hand and the remaining shelf life of products and active pharmaceutical ingredients on hand. The Company establishes reserves for excess and obsolete inventories as required based on its analyses.

Property and equipment

Property and equipment, net, is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful life of the asset. Computer equipment and related software are depreciated over three to five years. Office equipment, furniture and fixtures are depreciated over five years. Manufacturing equipment is depreciated over eight years. Leasehold improvements are amortized over the estimated useful life or remaining lease term, whichever is shorter.

Valuation of long-lived assets

Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the review indicates that a long-lived asset is not recoverable (i.e. the carrying amount is less than the future projected undiscounted cash flows), its carrying amount would be reduced to fair value. Factors management considers important that could trigger an impairment review include the following:

•

A significant underperformance relative to expected historical or projected future operating results;

•

A significant change in the manner of the Company’s use of the acquired asset or the strategy for its overall business; and/or

•

A significant negative industry or economic trend.

Based on its analysis, the Company’s management believes that no impairment of the carrying value of its long-lived assets existed at September 30, 2014 and 2013.

Deferred rent

The Company accounts for rent expense related to operating leases by determining total minimum rent payments on the leases over their respective periods and recognizing the rent expense on a straight-line basis. The difference between the actual amount paid and the amount recorded as rent expense in each fiscal year is recorded as an adjustment to deferred rent. Deferred rent as of September 30, 2014 and 2013 was approximately $681,000 and $367,000, respectively, and is included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.

F-10

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 (unadjusted) in active markets for identical assets and liabilities.

•

Level 2-Inputs other than Level 1 that are observable, either directly or indirectly, such as unadjusted quoted prices for similar assets and liabilities, unadjusted 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.

At September 30, 2014 and 2013, the Company’s financial instruments include cash and cash equivalents, restricted cash and cash equivalents, trade receivables, restricted investments, accounts payable, accrued expenses, accrued compensation and payroll taxes, and other liabilities. In addition, at September 30, 2013, the Company’s financial instruments included notes payable. The carrying amount of cash and cash equivalents, restricted cash and cash equivalents, trade receivables, accounts payable, accrued expenses, accrued compensation and payroll taxes, and other liabilities approximates fair value due to the short-term maturities of these instruments. The Company’s restricted investments are carried at amortized cost which approximates fair value. Based on borrowing rates available to the Company at September 30, 2013, the carrying value of notes payable approximated fair value.

Restricted cash and cash equivalents and restricted investments

Restricted cash and cash equivalents and restricted investments consist of certificates of deposit, which are classified as held-to-maturity.

Restricted cash and cash equivalents consist of a certificate of deposit relating to the Company’s corporate credit card agreement and automatically renews every three months.

Long-term restricted investments consist of two certificates of deposit related to irrevocable standby letters of credit connected to fleet rentals and an office lease with an expiration date in 2018. The certificates of deposit automatically renew annually.

Debt issuance costs and debt discount

Debt issuance costs are stated at cost, net of accumulated amortization in other assets in the consolidated balance sheets. Debt discount is recorded within notes payable in the consolidated balance sheets. Amortization expense of debt issuance costs and the debt discount is calculated using the interest method over the term of the debt and is recorded in interest expense in the accompanying consolidated statements of operations.

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

F-11

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

is fixed or determinable; and (4) collectability is reasonably assured. In addition, 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 is obligated to pay the Company 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, or when it can reasonably estimate that the return privilege has substantially expired, whichever occurs first.

Product Sales — NUEDEXTA. NUEDEXTA is sold primarily to third-party wholesalers that, in turn, sell this product to retail pharmacies, hospitals, and other dispensing organizations. The Company has entered into agreements with wholesale customers, group purchasing organizations and third-party payers throughout the United States. These agreements frequently contain commercial terms, which may include favorable product pricing and discounts and rebates payable upon dispensing the product to patients. Additionally, these agreements customarily provide the customer with rights to return the product, subject to the terms of each contract. Consistent with pharmaceutical industry practice, wholesale customers can return purchased product during an 18-month period that begins six months prior to the product’s expiration date and ends 12 months after the expiration date. The Company recognizes revenue upon delivery of NUEDEXTA to its wholesalers and other customers.

The Company records allowances for customer credits, including estimated discounts, co-pay assistance, rebates and chargebacks. These allowances provided by the Company to a customer are presumed to be a reduction of the selling prices of the Company’s products and, therefore, are characterized as a reduction of revenue when recognized in the Company’s consolidated statement of operations. The Company believes the assumptions used to estimate these allowances are reasonable considering known facts and circumstances. However, actual rebates, chargebacks and returns could differ materially from estimated amounts because of, among other factors, unanticipated changes in prescription trends and any change in assumptions affecting sell-through and research data purchased from third parties. Product shipping and handling costs are included in cost of product sales.

The Company offers discounts to certain of its customers, including discounts to wholesalers for certain services, cash discounts to customers for the early payment of trade receivables and patient discounts in the form of co-pay assistance for the purchase of NUEDEXTA through the use of coupons. The Company accrues for discounts based on the contractual terms of agreements with customers and historical experience. The estimated redemption cost of the coupons accrued is based on the historical experience for NUEDEXTA and sell-through data purchased from third parties. Cash discount accruals for early payment of trade receivables are recorded as a contra asset to trade receivables in the Company’s consolidated balance sheets. All other discount accruals are recorded in accrued expenses in the Company’s consolidated balance sheets.

The Company participates in various managed care access rebate programs, the largest of which relate to Medicaid, Medicare and commercial insurers. The Company also incurs chargebacks which are contractual discounts given primarily to federal government agencies and group purchasing organizations. The Company estimates rebate and chargeback accruals using quantitative factors such as contractual terms of agreements with its customers, historical experience, estimated percentages of product sold to qualified patients and estimated levels of inventory in the distribution channel. These quantitative factors are supplemented by additional factors such as management’s judgment with respect to many factors, including but not limited to, current market dynamics, changes in sales trends, an evaluation of current laws and regulations and product pricing. The Company evaluates percentages of NUEDEXTA sold to qualified patients primarily through analysis of wholesaler and other third party sell-through and research data. Additionally, there is a significant time lag between the date the Company estimates the accrual and when the Company actually pays the accrual. Due to this time lag, the Company records

F-12

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

adjustments to estimated accruals over several periods, which can result in a net increase to net loss or a decrease to net loss in those periods. The rebate and chargeback accruals are recorded in accrued expenses in the Company’s consolidated balance sheets.

The Company estimates future returns and records a returns reserve as a reduction to revenue. The returns reserve represents a reserve for NUEDEXTA that may be returned primarily due to product expiration and is estimated based on contractual terms with customers and historical return trends as a percentage of gross sales. The returns reserve is recorded as a contra asset to trade receivables in the Company’s consolidated balance sheets. The Company has experienced annual returns of approximately 1% of gross product sales over the past two years.

Prior to the second quarter of fiscal 2012, the Company was unable to reasonably estimate future returns due to the lack of sufficient historical return data for NUEDEXTA. Accordingly, the Company invoiced the wholesaler, recorded deferred revenue at gross invoice sales price less estimated cash discounts and distribution fees, and classified the inventory shipped as finished goods. The Company previously deferred recognition of revenue and the related cost of product sales on shipments of NUEDEXTA until the right of return no longer existed, i.e. when the Company received evidence that the products had been dispensed to patients. The Company estimated patient prescriptions dispensed using an analysis of third-party information.

Multiple Element Arrangements. The Company has, in the past, entered into arrangements whereby it delivers to the customer multiple elements including technology and/or services. Such arrangements have included some combination of the following: licensed rights to technology, patented products, compounds, data and other intellectual property; and research and development services. At the inception of each such arrangement, the Company analyzes the multiple elements contained within the arrangement to determine whether the elements can be separated. 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 both of the following criteria: (1) the delivered item has value to the customer on a standalone basis; and (2) 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 selling price of each element. The Company determines the selling price 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 selling price of a similar product or service to a similarly situated customer. 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. The Company has not entered into any multiple element arrangements which have required the Company to estimate selling prices during fiscal 2014, 2013 and 2012.

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 up-front 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

F-13

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

Certain royalty arrangements provide 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 (“GSK”), the Company recognized royalty revenue in the period in which the threshold is exceeded. For royalty revenue generated from the license agreement with Azur Pharma (“Azur”), the Company recognized revenue when it had determined that the threshold had 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 up-front 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 GSK for the period to the total remaining royalties the Company expects GSK will pay Drug Royalty USA over the remaining term of the agreement. The GSK license agreement expired in April 2014 and the Company does not expect any future revenues from royalties under this agreement.

Co-Promotion Arrangements. The Company recognizes both a fixed monthly fee and a performance fee as revenues from co-promote activities in the consolidated statements of operations. The fixed monthly fee is recognized ratably over the period earned. The performance fee is recognized when the products sold exceeds a predetermined baseline for the period. The receivable from the co-promotion fee is recorded in other current assets in the consolidated balance sheets.

Cost of product sales

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 expense 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 extend across multiple reporting periods.

Research and development expenses

Research and development expenses consist of expenses incurred in performing research and development activities including salaries and benefits and other overhead expenses, clinical trials, contract services and other outsourced contracts. Research and development expenses are charged to operations as they are incurred. Up-front

F-14

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

payments to collaborators made in exchange for the avoidance of potential future milestone and royalty payments on licensed technology are also charged to research and development expense when the drug is still in the development stage, has not been approved by the FDA for commercialization and has no alternative uses.

The Company assesses its obligations to make milestone payments that may become due under licensed or acquired technology to determine whether the payments should be expensed or capitalized. The Company charges milestone payments to research and development expense when:

•

The technology is in the early stage of development and has no alternative uses;

•

There is substantial uncertainty regarding the future success of the technology or product;

•

There will be difficulty in completing the remaining development; and

•

There is substantial cost to complete the work.

Acquired contractual rights. Payments to acquire contractual rights to a licensed technology or drug candidate are expensed as incurred when there is uncertainty in receiving future economic benefits from the acquired contractual rights. The Company considers the future economic benefits from the acquired contractual rights to a drug candidate to be uncertain until such drug candidate is approved by the FDA or when other significant risk factors are abated.

Share-based compensation

The Company grants options, restricted stock units and restricted stock awards to purchase the Company’s common stock to employees, directors and consultants under 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, expected stock price volatility, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Expected volatilities are based on the 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 rate is 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 common stock in the foreseeable future, it 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 and is amortized under the straight-line attribution method. As share-based compensation expense recognized in the accompanying consolidated statements of operations for fiscal 2014, 2013, and 2012 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 historical experience. Changes to the estimated forfeiture rate are accounted for as a cumulative effect of change in the period the change occurred.

F-15

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Total compensation expense related to all of the Company’s share-based awards for fiscal 2014, 2013 and 2012 was comprised of the following (in thousands):


	Years Ended September 30,
	2014		2013		2012
Share-based compensation classified as:
Research and development expense	$	1,326	$	1,072	$	965
Selling and marketing expense		2,136		1,650		908
General and administrative expense		3,222		3,124		3,004

Total	$	6,684	$	5,846	$	4,877


	Years Ended September 30,
	2014		2013		2012
Share-based compensation expense from:
Stock options	$	4,540	$	4,233	$	3,643
Restricted stock units		2,144		1,613		1,234

Total	$	6,684	$	5,846	$	4,877

Since the Company has a net operating loss carry-forward as of September 30, 2014, 2013, and 2012, no excess tax benefits for tax deductions related to share-based awards were recognized in the accompanying consolidated statements of operations. Additionally, no incremental tax benefits were recognized from stock options exercised in fiscal 2014, 2013, and 2012 that would have resulted in a reclassification from cash flows from operating activities to cash flows from financing activities.

Advertising expenses

Advertising costs are expensed as incurred, and these costs are included in selling and marketing expenses, which include promotional materials for physicians. Advertising costs were approximately $11.2 million, $8.9 million, and $7.3 million for fiscal 2014, 2013, and 2012, respectively.

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 consolidated 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 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 unrecognized tax benefit resulting in a decrease in deferred tax assets and corresponding decrease in the valuation allowance at September 30, 2014 is $3.7 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 consolidated balance sheets at September 30, 2014 and 2013.

F-16

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company is subject to taxation in the U.S. and various state jurisdictions. The Company’s tax years for 1995 and forward for federal purposes and 1989 and forward for California purposes 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 position liability within the next twelve months.

Recent authoritative guidance

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 establishes a core principle requiring the recognition of revenue to depict the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services Specifically, to apply the core principle, an entity must (1) identify the contract, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations, and (5) recognize revenue as each performance obligation is satisfied. In addition, ASU No. 2014-09 requires reporting companies to disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU No. 2014-09 is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is prohibited. The Company is required to adopt this guidance at the beginning of its first quarter of fiscal year 2018, and is currently evaluating the impact on its consolidated financial statements and disclosures.

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU No. 2013-11 provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013, with an option for early adoption. The Company intends to adopt this guidance at the beginning of its first quarter of fiscal year 2015, and is currently evaluating the impact on its consolidated financial statements and disclosures.

3.	Inventories

Inventories are comprised of NUEDEXTA finished goods and the active pharmaceutical ingredients of NUEDEXTA, dextromethorphan hydrobromide (“DM”) and quinidine sulfate (“Q”), as well as the active pharmaceutical ingredient docosanol, and sumatriptan.

The composition of inventories as of September 30, 2014 and 2013 is as follows (in thousands):


	September 30,
	2014			2013
Raw materials	$	954		$	937
Work in progress		148			36
Finished goods		317			521

Total inventory		1,419			1,494
Less: current portion		(799	)		(710	)

Non-current portion	$	620		$	784

F-17

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The amount classified as non-current inventories is comprised of the raw material components for NUEDEXTA, DM and Q, which will be used in the manufacture of NUEDEXTA capsules beyond our one year operating cycle.

The following table presents the activity in inventory reserves for the last three fiscal years (in thousands):


	Balance at September 30, 2013		Usage			Balance at September 30, 2014
Reserve for excess and obsolete inventory
Reserve for NUEDEXTA	$	41	$	(29	)	$	12
Reserve for docosanol		316		—			316
Reserve for DM and Q		379		—			379

Total	$	736	$	(29	)	$	707


	Balance at September 30, 2012		Usage			Balance at September 30, 2013
Reserve for excess and obsolete inventory
Reserve for NUEDEXTA	$	57	$	(16	)	$	41
Reserve for docosanol		316		—			316
Reserve for DM and Q		379		—			379

Total	$	752	$	(16	)	$	736


	Balance at September 30, 2011		Usage			Balance at September 30, 2012
Reserve for excess and obsolete inventory
Reserve for NUEDEXTA	$	82	$	(25	)	$	57
Reserve for docosanol		316		—			316
Reserve for DM and Q		379		—			379

Total	$	777	$	(25	)	$	752

4.	Property and Equipment

Property and equipment as of September 30, 2014 and 2013 consist of the following (in thousands):


	September 30,
	2014			2013
Computer equipment and related software	$	4,618		$	2,988
Leasehold improvements		820			309
Office equipment, furniture and fixtures		1,539			1,460
Manufacturing equipment		1,407			232

		8,384			4,989
Accumulated depreciation		(4,753	)		(3,396	)

	$	3,631		$	1,593

F-18

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Depreciation and amortization expense associated with property and equipment was approximately $1.4 million, $826,000 and $700,000 for fiscal 2014, 2013, and 2012, respectively. In fiscal 2014, the Company evaluated the estimated remaining useful life of certain assets and recorded an additional depreciation expense of approximately $276,000.

5.	Accrued Expenses

Accrued expenses at September 30, 2014 and 2013 are as follows (in thousands):


	September 30,
	2014		2013
Accrued royalties, rebates, chargebacks, and distribution fees(1)	$	9,450	$	5,525
Accrued research and development expenses		2,355		2,146
Accrued selling and marketing expenses		1,731		2,139
Accrued general and administrative expenses		1,474		1,753
Other current liabilities		360		346

Total accrued expenses	$	15,370	$	11,909

(1)	Accrued royalties, rebates, chargebacks and distribution fees are directly impacted by product revenue and will fluctuate over time in relation to the change in product revenue.

6.	Deferred Revenues

The following table sets forth as of September 30, 2014 and 2013 the net deferred revenue balances for the Company’s sale of future Abreva^® royalty rights to Drug Royalty USA (in thousands):


	2014			2013
Net deferred revenues as of October 1	$	1,289		$	4,049
Recognized as revenues during period		(1,289	)		(2,760	)

Net deferred revenues as of September 30	$	—		$	1,289

In November 2002, the Company sold to Drug Royalty USA an undivided interest in the Company’s rights to receive future Abreva royalties under the license agreement with GSK for $24.1 million (the “Drug Royalty Agreement” and the “GSK License Agreement,” respectively). Under the Drug Royalty Agreement, Drug Royalty USA had the right to receive royalties from GSK on sales of Abreva until the expiration of the patent for Abreva on April 28, 2014. The Company retained the right to receive 50% of all royalties (a net of 4%) under the GSK License Agreement for annual net sales of Abreva in the U.S. and Canada in excess of $62.0 million through April 28, 2014. In fiscal 2014, 2013, and 2012, the Company recognized royalties related to the annual net Abreva sales in excess of $62.0 million in the amount of approximately $1.5 million, $1.7 million and $1.6 million, respectively, which is included in the accompanying consolidated statements of operations as revenues from royalties. The GSK License Agreement expired in April 2014 and the Company does not expect any future revenues from royalties under this agreement.

Revenues are recognized when earned, collection is reasonably assured and no additional performance of services is required. The Company classified the proceeds received from Drug Royalty USA as deferred revenue, and recognized the revenue over the life of the license agreement because of the Company’s continued involvement over the term of the Drug Royalty Agreement. Such continued involvement included overseeing the performance of GSK and its compliance with the covenants in the GSK License Agreement, monitoring patent infringement, adverse claims or litigation involving Abreva, and undertaking to find a new license partner in the event that GSK terminated the agreement. The deferred revenue was recognized as revenue using the “units-of-revenue method”

F-19

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

over the life of the license agreement. Based on a review of the Company’s continued involvement, the Company concluded that the sale proceeds did not meet any of the rebuttable presumptions that would require classification of the proceeds as debt.

7.	Notes Payable

In May 2012, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Oxford Finance LLC and Silicon Valley Bank. The Loan Agreement provided for a term loan of $30.0 million which was funded upon closing of the transaction in June 2012. Under the terms of the Loan Agreement, interest accrued on the outstanding balance at a rate of 8.95% per annum. In the third fiscal quarter of 2013, the Company met the criteria to extend the interest only payment for six months. Therefore, until January 1, 2014 (the “Amortization Date”) the Company made monthly payments of interest only. In addition to the original principal, a final payment equal to 7% of the original purchase amount of the loan would have been due thirty months from the Amortization Date. The final payment was accreted as interest expense over the term of the debt using the interest method and the related liability of approximately $1.1 million was reported as of September 30, 2013.

The term loan under the Loan Agreement was repaid and terminated in September 2014 and the Company recorded a loss on early extinguishment of debt of approximately $789,000 comprised of the unamortized debt issuance costs, debt discount, and final payment fee.

In accordance with the terms of the Loan Agreement, the Company issued to the lenders warrants to purchase shares of the Company’s common stock equal to 4.55% of the original principal at a price per share equal to the lower of the 10-day average share price prior to closing or the price per share on the day of funding. Accordingly, the Company issued to the lenders warrants to purchase 491,007 shares of the Company’s common stock at an exercise price of $2.78 per share. As of September 30, 2014, none of the lenders’ warrants are outstanding. The relative fair value of the warrants was approximately $1.2 million and was estimated using the Black-Scholes model with the following assumptions: fair value of the Company’s common stock at issuance of $2.80 per share; ten-year contractual term; 96.7% volatility; 0% dividend rate; and a risk-free interest rate of 1.8%. The relative fair value of the warrants was recorded as a debt discount, decreasing notes payable and increasing additional paid-in capital on the accompanying consolidated balance sheets. The debt discount was being amortized to interest expense over the term of the debt using the interest method. For the years ended September 30, 2014, 2013, and 2012 debt discount amortization was approximately $340,000, $505,000 and $180,000, respectively.

8.	Computation of Net Loss Per 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. Diluted net loss per common share is computed by dividing net loss by the weighted-average number of common and dilutive common equivalent shares outstanding during the period. In the loss periods, the shares of common stock issuable upon exercise of stock options and warrants or upon vesting of restricted stock units are excluded from the computation of diluted net loss per share, as their effect is anti-dilutive.

For fiscal 2014, 2013, and 2012, 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:


	Fiscal 2014		Fiscal 2013		Fiscal 2012
Stock options		9,627,683		8,823,041		8,142,468
Stock warrants		—		53,957		1,201,116
Restricted stock units(1)		3,303,082		2,904,423		2,617,188

(1)	Includes 1,155,422, 1,267,215, and 1,600,564 shares of restricted stock in fiscal 2014, 2013, and 2012, respectively, awarded to directors that have vested but are still restricted until the directors resign.

F-20

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9.	Commitments and Contingencies

Operating lease commitments. The Company leases approximately 61,000 square feet of office space in Aliso Viejo, California. The lease has scheduled rent increases each year and expires in December 2020.

The Company also leases an additional approximately 38,000 square feet of office space in Aliso Viejo, California. The lease has scheduled rent increases each year and expires in October 2018. Approximately 30,000 square feet of office space is subleased through October 31, 2018. The sublease has scheduled rent increases each year.

Rent expense, excluding common area charges and other costs, was approximately $2.4 million, $1.1 million and $2.0 million in fiscal 2014, 2013, and 2012, respectively. Sublease rent income totaled approximately $113,000, $294,000 and $997,000 in fiscal 2014, 2013 and 2012, respectively. Future minimum rental payments under non-cancelable operating lease commitments, net of sublease payments as of September 30, 2014 are as follows (in thousands):


Year Ending September 30,	Minimum Payments		Lease Payments to be Received from Subleases			Net Payments
2015	$	2,943	$	(794	)	$	2,149
2016		3,031		(919	)		2,112
2017		3,138		(955	)		2,183
2018		3,230		(982	)		2,248
2019		2,202		(82	)		2,120
Thereafter		2,718		—			2,718

Total	$	17,262	$	(3,732	)	$	13,530

Legal contingencies.

Stockholder Class-Action Litigation Regarding Our Pending Acquisition by Otsuka

Following the announcement of the Merger Agreement on December 2, 2014, five putative stockholder class action complaints have been filed in the Delaware Court of Chancery against the Company, the Company’s board of directors, Otsuka and Acquisition Sub challenging the proposed Merger. The actions, brought by named plaintiffs John Kim, filed December 4, 2014; Adeline Speer, filed December 5, 2014; Henri Minette, filed December 5, 2014; Douglas Las Wengell, filed December 5, 2014; and Samuel Shoneye, filed December 9, 2014, allege that members of the Company’s board of directors breached their fiduciary duties by agreeing to sell the Company for inadequate consideration, by including terms providing for their continued employment in the post-transaction company, and/or by utilizing deal protection measures that discouraged competing bids. The complaints further allege that the Company, Otsuka, and Acquisition Sub aided and abetted these alleged breaches. Among other remedies, the plaintiffs seek to enjoin the Merger. The Company and Otsuka believe the allegations in the complaints are without merit and intend to defend vigorously against them.

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Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Additional lawsuits may be filed against the Company, Otsuka, and/or the directors of either company in connection with the Merger.

NUEDEXTA ANDA Litigation

In fiscal 2011 and 2012, the Company received Paragraph IV certification notices from five separate companies contending that certain of its patents listed in the FDA’s publication, “Approved Drug Products with Therapeutic Equivalence Evaluation” (“FDA Orange Book”) (U.S. Patents 7,659,282 (“’282 Patent”), 8,227,484 (“’484 Patent”) and RE 38,115 (“’115 Patent”), which expire in August 2026, July 2023 and January 2016, respectively) are invalid, unenforceable and/or will not be infringed by the manufacture, use, sale or offer for sale of a generic form of NUEDEXTA as described in those companies’ abbreviated new drug application (“ANDA”). The FDA Orange Book provides potential competitors, including generic drug companies, with a list of issued patents covering approved drugs. In August 2011 and March 2012, the Company filed lawsuits in the U.S. District Court for the District of Delaware against Par Pharmaceutical, Inc. and Par Pharmaceutical Companies, Inc. (collectively “Par”), Actavis South Atlantic LLC and Actavis, Inc. (collectively “Actavis”), Wockhardt USA, LLC and Wockhardt, Ltd. (collectively, “Wockhardt”), Impax Laboratories, Inc. (“Impax”) and Watson Pharmaceuticals, Inc., Watson Laboratories, Inc. and Watson Pharma, Inc. (collectively “Watson”) (Par, Actavis, Wockhardt, Impax and Watson, collectively the “Defendants”). In September and October 2012, the Company filed lawsuits in the U.S. District Court for the District of Delaware against the Defendants. All lawsuits (collectively, the “ANDA Actions”) were filed on the basis that the Defendants’ submissions of their respective ANDAs to obtain approval to manufacture, use, sell, or offer for sale generic versions of NUEDEXTA prior to the expiration of the ‘282 Patent, the ‘484 Patent and the ‘115 Patent listed in the FDA Orange Book constitute infringement of one or more claims of those patents. On October 31, 2012, Watson announced the divestiture of its ANDA for a generic form of NUEDEXTA to Sandoz, Inc. (“Sandoz”). As a result of Sandoz’ acquisition and maintenance of said ANDA, on May 30, 2013, the Company filed suit in the U.S. District Court for the District of Delaware against Sandoz. This suit was filed on the basis that Sandoz’ ANDA to obtain approval to manufacture, use, sell, or offer for sale generic versions of NUEDEXTA prior to the expiration of the ’282 Patent, the ’484 Patent and the ’115 Patent listed in the FDA Orange Book constitutes infringement of one or more claims of those patents.

A bench trial was held in September 2013 and concluded on October 15, 2013.

On August 9, August 30, and September 6, 2013, Avanir entered into settlement agreements with Sandoz, Actavis and Wockhardt, respectively, to resolve pending patent litigation in response to their ANDAs seeking approval to market generic versions of NUEDEXTA capsules. The settlement agreements grant Sandoz, Actavis and Wockhardt the right to begin selling a generic version of NUEDEXTA on July 30, 2026, or earlier under certain circumstances. The parties also filed stipulations and orders of dismissal with the United States District Court for the District of Delaware which conclude the litigation with respect to Sandoz, Actavis and Wockhardt.

On April 30, 2014, the United States District Court for the District of Delaware issued an Order finding the Company’s latest to expire patents to be valid and infringed. On May 14, 2014, the Court issued a judgment in favor of Avanir and a permanent injunction enjoining Par and Impax from manufacturing, using, offering to sell, or selling a generic version of NUEDEXTA during the terms of the ‘282 Patent and ‘484 Patent. The judgment also ordered that the FDA shall not approve Par’s and Impax’s generic product earlier than the latest date of expiration of the ‘282 Patent and ‘484 Patent, August 13, 2026.

On June 16, 2014, the Company entered into a settlement agreement with Impax to resolve all outstanding issues pertaining to the patent litigation case. The settlement agreement grants Impax the right to begin selling a generic version of NUEDEXTA on July 30, 2026, or earlier under certain circumstances. The parties also filed stipulations and orders of dismissal with the United States District Court for the District of Delaware which concludes the litigation with respect to Impax.

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Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

General and Other

In the ordinary course of business, the Company may face various claims brought by third parties and the Company 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 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 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 consolidated operations, cash 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 will not likely have a material effect on the Company’s consolidated 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, officers and certain executives 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, wholesale distribution agreements, 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 consolidated financial statements for guarantees and indemnifications as of September 30, 2014 and 2013.

Center for Neurologic Study (“CNS”) — The Company is party to an exclusive license agreement with CNS pursuant to which the Company licensed rights to certain patents relating to the use of DM/Q to treat neurological conditions.

The Company paid to CNS a $75,000 milestone upon FDA approval of NUEDEXTA for the treatment of PBA in fiscal 2011. In addition, the Company has been obligated to pay CNS a royalty ranging from approximately 5% to 8% of net U.S. GAAP revenue generated by sales of NUEDEXTA. Effective with the ANDA ruling on April 30, 2014, the Company no longer has a royalty obligation on revenue generated by sales of NUEDEXTA. Under certain circumstances, the Company may have the obligation to pay CNS a portion of net revenues received if the Company sublicenses NUEDEXTA 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 clinical indications. Maximum payments for these milestone payments could total approximately $1.1 million if the Company pursued the development of NUEDEXTA for all five of the licensed indications. In general, individual milestones range from $75,000 to $125,000 for each accepted new drug application (“NDA”) and a similar amount for each approved NDA in addition to the royalty discussed above on net U.S. GAAP revenues. The Company does not have the obligation to develop additional indications under the CNS license agreement.

F-23

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Concert Pharmaceuticals, Inc. — The Company holds the exclusive worldwide marketing rights to develop and commercialize Concert’s deuterium-modified dextromethorphan (“d-DM”) compounds for the potential treatment of neurological and psychiatric disorders, as well as certain rights to other deuterium-modified dextromethorphan compounds pursuant to a license agreement with Concert.

Under the agreement with Concert, the Company is obligated to make milestone and royalty payments to Concert based on successful advancement of d-DM products for one or more indications in the United States, Europe, and Japan. Individual milestone payments range from $2.0 — $6.0 million, $1.5 — $15.0 million, and $25.0 — $60.0 million for clinical, regulatory and commercial targets respectively, and in aggregate could total over $200 million. Royalty payments are tiered, beginning in the single-digits and increasing to the low double-digits for worldwide net sales of d-DM products exceeding $1.0 billion annually. As of September 30, 2014, the Company has paid $2.0 million in fiscal 2014 and 2013 for milestones that have been achieved pursuant to this agreement, which were recorded to research and development expense in the accompanying consolidated statement of operations.

OptiNose AS — In July 2013, the Company entered into an exclusive license agreement for the development and commercialization of a novel Breath Powered intranasal delivery system containing low-dose sumatriptan powder to treat acute migraine, AVP-825.

AVP-825 is licensed from OptiNose. Under the terms of the agreement, the Company paid OptiNose an up-front cash payment of $20.0 million in fiscal 2013, which was recorded to research and development expense in the accompanying consolidated statement of operations. The Company and OptiNose will share certain development costs. OptiNose is eligible to receive up to an additional $90.0 million in aggregate milestone payments resulting from the achievement of future clinical, regulatory and commercial milestones. In fiscal 2014, the Company paid to OptiNose $2.5 million for milestones that have been achieved pursuant to this agreement, and is included in research and development expenses in the consolidated statements of operations. In addition, following product approval, Avanir will be required to make tiered royalty payments to OptiNose of a low double-digits percentage of net sales in the United States, Canada and Mexico.

10.

Stockholders’ Equity

Common stock

Fiscal 2014. In September 2014, the Company filed with the SEC a shelf registration statement on Form S-3 to sell an aggregate of up to $200.0 million in common stock, preferred stock, debt securities and warrants. Included in this shelf registration on Form S-3 is a prospectus relating to an underwriting agreement with JP Morgan Securities LLC, Deutsche Bank Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the “Underwriters”), pursuant to which the Company agreed to issue and sell an aggregate of 18,200,000 shares of the Company’s common stock to the Underwriters. The shares were sold at a public offering price of $11.00 per share, and were purchased by the Underwriters at a price of $10.38125 per share. In September 2014, the Underwriters exercised their option to purchase an additional 2,730,000 shares of the Company’s common stock. This public offering was completed in September 2014 and the Company issued 20,930,000 shares of common stock and raised net proceeds of approximately $217.0 million, after deducting the Underwriter’s discounts and commissions and estimated offering expenses.

In August 2012, the Company filed with the SEC a shelf registration statement on Form S-3 to sell an aggregate of up to $100.0 million in common stock, preferred stock, debt securities and warrants. Included in this shelf registration on Form S-3 is a prospectus relating to a financing facility with Cowen and Company, LLC (“Cowen”), providing for the sale of up to $25.0 million worth of shares of the Company’s common stock from time to time into the open market at prevailing prices in accordance with the terms of a sales agreement entered into on August 8, 2012. On May 7, 2014, the Company amended its sales agreement with Cowen and filed with the SEC a

F-24

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

prospectus providing for the sale of up to an additional $50.0 million worth of shares of the Company’s common stock from time to time in the open market at prevailing prices. On May 9, 2014, the Company concluded the offering and, accordingly, no further sales of common stock will be made pursuant to the Company’s prospectus dated May 7, 2014. During fiscal 2014, the Company issued approximately 11.3 million shares of common stock under the sales agreement raising net proceeds of approximately $49.1 million.

In July 2013, the Company filed with the SEC a shelf registration statement on Form S-3 to sell an aggregate of up to $150.0 million in common stock, preferred stock, debt securities and warrants. Included in this shelf registration on Form S-3 is a prospectus relating to a financing facility with Cowen, providing for the sale of up to $55.0 million worth of shares of the Company’s common stock from time to time into the open market at prevailing prices in accordance with the terms of a sales agreement entered into on August 8, 2012 and amended in July and December 2013. During fiscal 2014, approximately 7.2 million shares of common stock had been sold under this facility raising net proceeds of approximately $29.3 million.

During fiscal 2014, the Company issued 290,286 shares of common stock underlying restricted stock units previously awarded to a director and vested at September 30, 2013, but were subject to deferred delivery until resignation of the director, 513,239 shares of common stock in connection with the vesting of restricted stock units and 1,425,419 shares of common stock in connection with the exercise of stock options resulting in proceeds of approximately $3.3 million.

During the fiscal 2014, restricted stock unit awards issued to directors vested, representing a total of 188,218 shares of the Company’s common stock, but the issuance and delivery of these shares are deferred until the director resigns.

Fiscal 2013. In August 2012, the Company filed with the SEC a shelf registration statement on Form S-3 to sell an aggregate of up to $100.0 million in common stock, preferred stock, debt securities and warrants. Included in this shelf registration on Form S-3 is a prospectus relating to a financing facility with Cowen and Company, LLC (“Cowen”), providing for the sale of up to $25.0 million worth of shares of our common stock from time to time into the open market at prevailing prices in accordance with the terms of a sales agreement entered into with Cowen in August 2012. During fiscal 2013, the Company issued 7,935,395 shares of common stock under the sales agreement at an average price of $3.15 per share raising proceeds of approximately $25.0 million ($24.4 million after offering expenses, including commissions).

In July 2013, the Company filed with the SEC a shelf registration statement on Form S-3 to sell an aggregate of up to $150.0 million in common stock, preferred stock, debt securities and warrants. Included in this shelf registration on Form S-3 is a prospectus relating to a financing facility with Cowen, providing for the sale of up to an additional $25.0 million worth of shares of our common stock from time to time into the open market at prevailing prices in accordance with the terms of a sales agreement entered into with Cowen in August 2012 and amended in July 2013. During fiscal 2013, the Company issued 5,030,070 shares of common stock under the sales agreement at an average price of $4.97 per share raising proceeds of approximately $25.0 million ($24.4 million after offering expenses, including commissions).

During fiscal 2013, the Company issued 510,188 shares of common stock in connection with restricted stock units which were awarded to directors and vested at September 30, 2012, but were restricted until the resignation of the directors, 336,349 shares of common stock in connection with the vesting of restricted stock units and 1,033,833 shares of common stock in connection with the exercise of stock options resulting in proceeds of approximately $1.5 million.

During fiscal 2013, restricted stock unit awards for a total of 176,839 shares awarded to directors vested, but the issuance and delivery of these shares are deferred until the director resigns.

Fiscal 2012. 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

F-25

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

common stock from time to time in the open market at prevailing prices. Pursuant to the Sales Agreement, sales of common stock are made in such quantities and on such minimum price terms as the Company may set from time to time. During fiscal 2012, 3,668,656 shares of common stock were sold under the Sales Agreement at an average price of $2.81 per share raising proceeds of approximately $10.3 million ($10.1 million after offering expenses, including commissions). As of September 30, 2012, a total of 12,355,166 shares of common stock were sold under the Sales Agreement at an average price of $2.83 per share raising gross proceeds of approximately $35.0 million ($33.8 million after offering expenses, including commissions).

During fiscal 2012, the Company received proceeds of approximately $7.8 million from the exercise of warrants to purchase 5,445,061 shares of the Company’s common stock. The warrants had been issued in connection with the Company’s registered securities offering in April 2008 at an exercise price of $1.43 per share.

During fiscal 2012, the Company issued 204,176 shares of common stock in connection with the vesting of restricted stock units and 1,673,811 shares of the Company’s common stock upon the exercise of outstanding options resulting in proceeds of approximately $1.3 million.

During fiscal 2012, restricted stock unit awards for a total of 187,083 shares awarded to directors vested, but the issuance and delivery of these shares are deferred until the director resigns.

Warrants

During fiscal 2014, 53,957 warrants were exercised in a cashless transaction resulting in the issuance of 25,548 shares of the Company’s common stock. The warrants were originally issued in May 2012 at an exercise price of $2.78 per share in connection with the Company’s financing transaction in May 2012. (See Note 7, “Notes Payable”). As of September 30, 2014 there were no warrants outstanding.

During fiscal 2013, the Company received proceeds of approximately $1.0 million from the exercise of warrants to purchase 710,109 shares of the Company’s common stock. The warrants had been issued in connection with the Company’s registered securities offering in April 2008 at an exercise price of $1.43 per share.

A following table summarizes all warrant activity for fiscal 2014 and 2013:


	Shares of Common Stock Purchasable Upon Exercise of Warrants			Weighted Average Exercise Price per Share		Range of Exercise Prices
Outstanding at September 30, 2012		1,201,116		$	1.98	$	1.43-$2.78
Exercised		(1,147,159	)	$	1.94	$	1.43-$2.78

Outstanding at September 30, 2013		53,957		$	2.78	$	2.78
Exercised		(53,957	)	$	2.78	$	2.78

Outstanding at September 30, 2014		—		$	—	$	0.00

Employee equity incentive plans

The Company currently has two equity incentive plans, which are the 2005 Equity Incentive Plan (the “2005 Plan”) and the 2014 Incentive Plan (the “2014 Plan”). The 2000 Stock Option Plan (the “2000 Plan”) and the 2003 Equity Incentive Plan (the “2003 Plan”) are expired and the Company no longer grants share-based awards from these plans, however, grants are still outstanding under each of these plans at September 30, 2014. Together, the 2000 Plan, 2003 Plan, 2005 Plan and the 2014 Plan are referred to as the “Plans.” All of the Plans were approved by the stockholders, except for the 2003 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 Company’s Board of

F-26

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

During fiscal 2014, the Company granted share-based awards under the 2005 Plan and the 2014 Plan. During fiscal 2013 and 2012, the Company granted share-based awards under the 2003 Plan and the 2005 Plan. Under the 2005 Plan and 2014 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. Pursuant to the provisions for annual increases of the 2005 Plan, the number of authorized shares of common stock for issuance increased by 325,000 shares effective November 15, 2013. In February 2014, the Company’s shareholders approved the 2014 Plan and the initial authorized shares under the 2014 Plan are 17,000,000. As of September 30, 2014, the Company had an aggregate of 27,268,512 shares of its common stock reserved for future issuance under the Plans. Of those shares, 12,213,165 shares were related to outstanding options and other awards and 15,055,347 shares were available for future grants of share-based awards. 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 September 30, 2014, there were 717,600 equity awards outstanding that were issued outside of the Plans as inducement option grants. None of the share-based awards are classified as a liability as of September 30, 2014.

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, generally 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. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans).

Summaries of stock options outstanding and changes during fiscal 2014 are presented below.


	Number of Shares			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (In Years)		Aggregate Intrinsic Value
Outstanding at September 30, 2013		8,823,041		$	2.85
Granted		2,611,556		$	3.98
Exercised		(1,425,419	)	$	2.33
Forfeited		(381,495	)	$	3.15

Outstanding at September 30, 2014		9,627,683		$	3.22		7.1	$	83,907,973

Vested and expected to vest in the future at September 30, 2014		9,279,640		$	3.20		7.1	$	81,073,221

Exercisable at September 30, 2014		5,149,145		$	2.98		5.9	$	46,220,186

The weighted average grant-date fair values of options granted during fiscal 2014, 2013, and 2012 were $2.68, $1.95 and $1.89 per share, respectively. The total intrinsic value of options exercised during fiscal 2014, 2013 and 2012 was $7.1 million, $2.2 million and $3.7 million, respectively, based on the differences in market prices on the dates of exercise and the option exercise prices. As of September 30, 2014, the total unrecognized compensation cost related to options was approximately $9.7 million, which is expected to be recognized over a weighted-average period of 2.7 years, based on the vesting schedules.

The fair value of each option award is estimated on the date of grant using the Black-Scholes model that 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

F-27

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

employee termination rates and option exercises. The risk-free interest rates are 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 fiscal 2014, 2013, and 2012 were as follows:


	2014	2013	2012
Expected volatility	78.6% — 85.6%	82.7% — 84.1%	103.7% — 108.7%
Weighted-average volatility	82.6%	83.7%	107.9%
Average expected term in years	5.4	5.4	5.8
Risk-free interest rate (zero coupon U.S. Treasury Note)	1.5% — 1.8%	0.8% — 1.7%	0.9% — 1.3%
Expected dividend yield	0%	0%	0%

Restricted stock units (“RSU”). RSUs granted to employees generally vest based on three or four years of continuous service from the date of grant. 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. Vesting for non-employee director grants allow for accelerated vesting of RSUs in the case of a non-employee director’s resignation where either: (i) he/she has served for at least four years as a member of the Board and is in good standing at the time of resignation, or (ii) he/she resigns for reasons related to health or family matters and is otherwise in good standing at the time of resignation. The following table summarizes the RSU activities for fiscal 2014.


	Number of Shares			Weighted Average Grant Date Fair Value
Unvested at September 30, 2013		1,637,210		$	2.40
Granted		1,637,190		$	3.91
Vested		(691,732	)	$	2.61
Forfeited		(435,008	)	$	3.72

Unvested at September 30, 2014		2,147,660		$	3.22

The weighted average grant-date fair value of RSUs granted during fiscal 2014, 2013, and 2012 was $3.91, $2.65 and $2.15 per unit, respectively. The fair value of RSUs vested during fiscal 2014, 2013, and 2012 was approximately $1.8 million, $1.4 million and $1.2 million, respectively. As of September 30, 2014, the total unrecognized compensation cost related to unvested stock units was approximately $5.6 million, which is expected to be recognized over a weighted-average period of 2.5 years, based on the vesting schedules and assuming no forfeitures.

At September 30, 2014, there were 1,155,422 shares of restricted stock with a weighted-average grant date fair value of $2.27 per share awarded to directors that have vested but are still restricted until the directors resign. In fiscal 2014, 2013, and 2012, 188,218 176,839 and 187,083 shares of restricted stock, respectively, vested but remained restricted.

During fiscal 2014, the Company granted performance RSUs to purchase 464,024 shares of common stock from the 2014 Plan. The performance RSUs are included in the above unvested RSU table. The RSUs had a performance goal related to fiscal 2014 performance that determines when vesting begins and the actual number of shares to be awarded ranging from 0% to 100% of target. Vesting is over three years beginning on the date the performance goal is achieved (“Achievement Date”), with 50% of the RSU shares vesting on the first anniversary of the Achievement Date and the remaining 50% of the RSU shares vesting annually in equal installments thereafter

F-28

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

over two years. At September 30, 2014, the performance goal related to 371,791 performance RSUs had not been met and were cancelled and the performance goal related to 88,789 performance RSUs had been met, began vesting and are outstanding at September 30, 2014.

During fiscal 2012, the Company granted performance-based RSUs to purchase 30,000 shares of common stock from the 2003 Stock Option Plan. These performance-based RSUs are included in the above unvested RSU table. The RSUs have a performance goal related to revenue that determines when vesting begins and the actual number of shares to be awarded ranging from 0% to 100% of target. Vesting is over 4 years beginning on the Achievement Date, with 25% of the RSU shares vesting on the first anniversary of the Achievement Date and the remaining 75% of the RSU shares vesting quarterly in equal installments thereafter over three years. During fiscal 2014, the performance goal was met and vesting began, and all 30,000 performance-based RSUs were outstanding at September 30, 2014.

11.

Research, License, Supply and other Agreements

Center for Neurologic Study. The Company is party to an exclusive license agreement with CNS pursuant to which the Company licensed rights to certain patents relating to the use of DM/Q to treat neurological conditions.

The Company paid to CNS a $75,000 milestone upon FDA approval of NUEDEXTA for the treatment of PBA in fiscal 2011. In addition, the Company has been obligated to pay CNS a royalty ranging from approximately 5% to 8% of net U.S. GAAP revenue generated by sales of NUEDEXTA. During fiscal 2014, 2013 and 2012, royalties of approximately $2.7 million, $3.5 million and $1.8 million respectively, were recorded to cost of product sales in the accompanying consolidated statements of operations. Effective with the ANDA ruling on April 30, 2014, the Company no longer has a royalty obligation on revenue generated by sales of NUEDEXTA. Under certain circumstances, the Company may have the obligation to pay CNS a portion of net revenues received if the Company sublicenses NUEDEXTA 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 clinical indications. Maximum payments for these milestone payments could total approximately $1.1 million if the Company pursued the development of NUEDEXTA for all five of the licensed indications. In general, individual milestones range from $75,000 to $125,000 for each accepted NDA and a similar amount for each approved NDA in addition to the royalty discussed above on net U.S. GAAP revenues. The Company does not have the obligation to develop additional indications under the CNS license agreement.

Concert Pharmaceuticals, Inc. — The Company holds the exclusive worldwide marketing rights to develop and commercialize Concert’s d-DM compounds for the potential treatment of neurological and psychiatric disorders, as well as certain rights to other deuterium-modified dextromethorphan compounds pursuant to a license agreement with Concert.

Under the agreement with Concert, the Company is obligated to make milestone and royalty payments to Concert based on successful advancement of d-DM products for one or more indications in the United States, Europe, and Japan. Individual milestone payments range from $2.0 — $6.0 million, $1.5 — $15.0 million, and $25.0 — $60.0 million for clinical, regulatory and commercial targets respectively, and in aggregate could total over $200 million. Royalty payments are tiered, beginning in the single-digits and increasing to the low double-digits for worldwide net sales of d-DM products exceeding $1.0 billion annually. As of September 30, 2014, the Company has paid $4.0 million for milestones that have been achieved pursuant to this agreement, which were recorded to research and development expense in the accompanying consolidated statement of operations.

OptiNose AS. In July 2013, the Company entered into an exclusive license agreement for the development and commercialization of a novel Breath Powered intranasal delivery system containing low-dose sumatriptan powder to treat acute migraine, AVP-825. AVP-825 is licensed from OptiNose.

F-29

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Under the terms of the agreement, the Company paid OptiNose an up-front cash payment of $20.0 million in fiscal 2013, which was recorded to research and development expense in the accompanying consolidated statements of operations. The Company and OptiNose will share certain development costs. OptiNose is eligible to receive up to an additional $90.0 million in aggregate milestone payments resulting from the achievement of future clinical, regulatory and commercial milestones. As of September 30, 2014, the Company has paid $2.5 million for milestones that have been achieved pursuant to this agreement, and is included in research and development expenses in the consolidated statements of operations. In addition, following product approval, the Company will be required to make tiered royalty payments to OptiNose of a low double-digit percentage of net sales in the United States, Canada and Mexico.

Merck. In August 2013, the Company entered into a multi-year agreement with Merck to co-promote Merck’s type 2 diabetes therapies JANUVIA^® (sitagliptin) and the sitagliptin family of products in the long-term care institutional setting in the United States beginning October 1, 2013. The term of the Agreement will continue for three years following the launch date of the co-promotion activities.

Under the terms of the Agreement, the Company will be compensated via a (i) fixed monthly fee and (ii) performance fee based on the amount of the products sold by the Company above a predetermined baseline. A significant majority of the fee is performance based. Over the three years of the agreement, the Company could receive up to a maximum of $46.7 million in compensation, including revenue earned in the first contract year.

The parties will jointly develop a product marketing and promotion plan. The Company will lead sales implementation with its institutional sales force. Merck will be required to provide a specific level of marketing and promotional support, and the Company is required to provide predetermined level of sales efforts. Merck will continue to be responsible for all other aspects of research, manufacturing, supply, regulatory, medical, managed care and marketing activities for the products.

The Agreement may be terminated without cause by either party upon 90 days written notice, at any time after the first anniversary of the launch date. If after the first anniversary, Merck terminates the Agreement without cause, Merck will be required to continue paying a portion of the performance based fee that would otherwise be due for a period of twelve months (though not beyond the expiration of three years following the launch date.) The Agreement may be terminated with cause by either party based on certain events, including a material uncured breach by either party, a failure to achieve certain sales thresholds by the Company, an assignment for the benefit of creditors, or upon mutual agreement. Additionally, Merck may terminate the Agreement (a) upon change of control of the Company; (b) if the Company adds promotional responsibilities for additional products to its sales representatives promoting the products; or (c) upon a violation of applicable law.

GlaxoSmithKline Subsidiary, SB Pharmco Puerto Rico, Inc. On March 31, 2000, the Company signed an exclusive license agreement with GSK for rights to manufacture and sell Abreva (docosanol 10% cream) as an over-the-counter product in the United States and Canada as a treatment for cold sores. Under the terms of the license agreement, GSK Consumer Healthcare is responsible for all sales and marketing activities and the manufacturing and distribution of Abreva in the U.S. and Canada. The terms of the license agreement provide for the Company to earn royalties on product sales. In October 2000 and August 2005, GSK launched Abreva in the United States and Canada, respectively. All milestones under the agreement were earned and paid prior to fiscal 2003. During fiscal 2003, the Company sold an undivided interest in the GSK license agreement to Drug Royalty with a term until the later of December 13, 2013 or until the expiration of the patent for Abreva on April 28, 2014. (See Note 6, “Deferred Revenues.”) The GSK License Agreement expired in April 2014 and the Company does not expect any future revenues from royalties under this agreement.

Azur Pharma. In August 2007, the Company entered into a license agreement with Azur, where the Company could receive up to $2.0 million in royalties, based on 3% of annualized net product revenues in excess of $17.0 million. During fiscal 2012 the Company recorded royalty revenues of approximately $492,000 in connection

F-30

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

with this agreement. As of September 30, 2012, the Company had received $2.0 million in royalties related to annual revenue in excess of $17.0 million and no further royalties will be recognized related under this license agreement.

12.

Income Taxes

Components of the income tax provision are as follows for the fiscal years ended September 30, 2014, 2013 and 2012 (in thousands):


	2014			2013			2012
Current:
State	$	3		$	3		$	3

Deferred:
Federal		(16,455	)		(23,056	)		(15,487	)
State		(2,844	)		(4,939	)		(2,731	)

		(19,299	)		(27,995	)		(18,218	)
Increase in deferred tax asset valuation allowance		19,299			27,995			18,218

Total income tax provision	$	3		$	3		$	3

Deferred income taxes reflect the income tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred income tax balance are as follows (in thousands):


	2014			2013			2012
Net operating loss carryforwards	$	170,660		$	155,961		$	135,430
Deferred Revenue		—			504			1,570
Research credit carryforwards		9,178			9,186			11,203
Capitalized license fees and patents		11,160			10,176			2,017
Capitalized research and development costs		—			30			100
Share-based compensation and options		10,347			8,452			6,980
Other		5,505			3,405			2,579

Deferred income tax assets		206,850			187,714			159,879

Deferred tax liabilities:
Other		—			(163	)		(323	)

Deferred tax liabilities		—			(163	)		(323	)

Less valuation allowance for net deferred income tax assets		(206,850	)		(187,551	)		(159,556	)

Net deferred tax assets/(liabilities)	$	—		$	—		$	—

The Company has provided a full valuation allowance against the net deferred income tax assets recorded as of September 30, 2014, 2013 and 2012 as the Company concluded that they are unlikely to be realized. As of September 30, 2014 the Company had federal and state net operating loss carryforwards of $446.6 million and $392.9 million, respectively. As of September 30, 2014 the Company had federal and California research and development credits of $7.6 million and $7.0 million, respectively. The net operating loss and research credit

F-31

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

carryforwards will expire on various dates through 2029, unless previously utilized. The Company also has no foreign tax credit carryforwards at September 30, 2014. In the event of certain ownership changes, the Tax Reform Act of 1986 imposes certain restrictions on the amount of net operating loss and credit carryforwards that the Company may use in any year.

Pursuant to Internal Revenue Code (“IRC”) Sections 382 and 383, annual use of the Company’s net operating loss and research and development credit carryforwards may be limited in the event of a cumulative change in ownership of more than 50% within a three-year period. The Company has completed an analysis under IRC Sections 382 and 383 through September 30, 2014, and has determined that it has not experienced an ownership change as defined by Section 382. The Company continues to monitor changes in our ownership as any future ownership changes may significantly reduce the utilization of the net operating loss carryforwards and research tax credits before they expire.

A reconciliation of the federal statutory income tax rate and the effective income tax rate is as follows for the fiscal years ended September 30:


	2014			2013			2012
Federal statutory rate		(34	)%		(34	)%		(34	)%
Increase in deferred income tax asset valuation allowance		38			37			31
State income taxes, net of federal effect		(6	)		(5	)		(5	)
Research and development credits		—			3			1
Expired net operating loss and other credits		—			—			6
Other		2			(1	)		1

Effective income tax rate		0	%		0	%		0	%

13.

Employee Savings Plan

The Company has established an employee savings plan pursuant to Section 401(k) of the Internal Revenue Code. The plan allows participating employees to deposit into tax deferred investment accounts up to 50% of their salary, subject to annual limits. The Company is not required to make matching contributions under the plan. However, the Company voluntarily contributed approximately $601,000, $401,000 and $412,000 in fiscal 2014, 2013, and 2012, respectively, to the plan.

14.

Segment Information

The Company operates the 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 operations are currently located in the United States; therefore, total revenues for fiscal 2014, 2013, and 2012 are attributed to the United States. All long-lived assets at September 30, 2014 and 2013 are located in the United States.

The Company sells NUEDEXTA to a limited number of wholesalers. Three wholesalers accounted for 88%, 88% and 89% of gross product sales in fiscal 2014, 2013 and 2012, respectively. In addition, the three wholesalers accounted for 93% and 91% of trade receivables at September 30, 2014 and 2013, respectively.

F-32

Avanir Pharmaceuticals, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

15.

Subsequent Events

Merger Agreement

Acquisition Sub’s obligation to purchase the Company Shares validly tendered pursuant to the Offer is subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, including (i) the expiration or termination of any waiting period (and extensions thereof) applicable to the transactions contemplated by the Merger Agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (ii) that the number of Company Shares validly tendered and not withdrawn in accordance with the terms of the Offer, together with the Company Shares then owned by Otsuka, Acquisition Sub and their respective controlled affiliates, represents at least a majority of all then outstanding Company Shares (not including Company Shares tendered pursuant to guaranteed delivery procedures), (iii) the absence of any law or order by any governmental authority that would make illegal or otherwise prohibit the Offer, the acquisition of Company Shares by Otsuka or Acquisition Sub or the Merger (as defined below) within the United States, (iv) the accuracy of the representations and warranties of the Company contained in the Merger Agreement, subject to customary exceptions, (v) the Company’s material compliance with its covenants contained in the Merger Agreement, (vi) there not having been a material adverse effect on the Company following the execution of the Merger Agreement that is continuing, and (vii) other customary conditions.

Following the announcement of the Merger Agreement on December 2, 2014, five putative stockholder class action complaints have been filed in the Delaware Court of Chancery against the Company, the Company’s board of directors, Otsuka and Acquisition Sub challenging the proposed Merger. The actions, brought by named plaintiffs John Kim, filed December 4, 2014; Adeline Speer, filed December 5, 2014; Henri Minette, filed December 5, 2014; Douglas Las Wengell, filed December 5, 2014; and Samuel Shoneye, filed December 9, 2014, allege that members of the Company’s board of directors breached their fiduciary duties by agreeing to sell the Company for inadequate consideration, by including terms providing for their continued employment in the post-transaction company, and/or by utilizing deal protection measures that discouraged competing bids. The complaints further allege that the Company, Otsuka, and Acquisition Sub aided and abetted these alleged breaches. Among other remedies, the plaintiffs seek to enjoin the Merger. The Company and Otsuka believe the allegations in the complaints are without merit and intend to defend vigorously against them.

* * * * *

F-33

Exhibit 10.17

AVANIR PHARMACEUTICALS, INC.

2014 INCENTIVE PLAN

1.	DEFINED TERMS

Exhibit A, which is incorporated by reference, defines the terms used in the Plan and sets forth certain operational rules related to those terms.

2.	PURPOSE

The Plan has been established to advance the interests of the Company by providing for the grant to Participants of Stock-based and other incentive Awards.

3.	ADMINISTRATION

The Administrator has discretionary authority, subject only to the express provisions of the Plan, to interpret the Plan; determine eligibility for and grant Awards; determine, modify or waive the terms and conditions of any Award; prescribe forms, rules and procedures relating to the Plan; determine whether Awards should be settled in cash and/or shares of Stock; and otherwise do all things necessary or appropriate to carry out the purposes of the Plan. Determinations of the Administrator made under the Plan will be conclusive and will bind all parties.

4.	LIMITS ON AWARDS UNDER THE PLAN

(a) Number of Shares. The maximum number of shares of Stock that may be delivered in satisfaction of Awards under the Plan is 17,000,000. Up to the total number of shares available for awards to Employee Participants may be issued in satisfaction of ISOs, but nothing in this Section 4(a) will be construed as requiring that any, or any fixed number of, ISOs be awarded under the Plan. For purposes of this Section 4(a), the number of shares of Stock delivered in satisfaction of Awards will be determined (i) net of shares of Stock underlying the portion of any Award that is settled in cash or the portion of any Award that expires, terminates or is forfeited prior to the issuance of Stock thereunder, (ii) by treating as having been delivered any shares of Stock underlying the portion of any Award that is settled in Stock, and (iii) by treating as having been delivered any shares of Stock withheld by the Company from an Award in payment of the exercise price of any Award requiring exercise or in satisfaction of the tax withholding requirements with respect to any Award. Each share of Stock subject to an Award consisting of Stock Options or SARs shall be counted against the share pool as one (1.0) share of Stock. Each share of Stock subject to an Award that does not consist of Stock Options or SARs shall be counted against the share pool as 1.32 shares of Stock. Any shares of Stock that again because available for delivery under the Plan pursuant to clause (i) above shall be added back to the share pool in an amount determined in accordance with the preceding sentence. To the extent consistent with the requirements of Section 422 and the regulations thereunder, and with other applicable legal requirements (including applicable stock exchange requirements), Stock issued under awards of an acquired company that are converted, replaced or adjusted in connection with the acquisition shall not reduce the number of shares of Stock available for Awards under the Plan.

(b) Type of Shares. Stock delivered by the Company under the Plan may be authorized but unissued Stock or previously issued Stock acquired by the Company. No fractional shares of Stock will be delivered under the Plan.

(c) Section 162(m) Limits. The following additional limits will apply to Awards of the specified type granted or, in the case of Cash Awards, payable to any person in any calendar year:

(1) Stock Options: 2,000,000 shares of Stock.

(2) SARs: 2,000,000 shares of Stock.

(3) Awards other than Stock Options, SARs or Cash Awards: 2,000,000 shares of Stock.

(4) Cash Awards: $2,000,000.

In applying the foregoing limits, (i) all Awards of the specified type granted to the same person in the same calendar year will be aggregated and made subject to one limit; (ii) the limits applicable to Stock Options and SARs refer to the number of shares of Stock subject to those Awards; (iii) the share limit under clause (3) refers to the maximum number of shares of Stock that may be delivered, or the value of which could be paid in cash or other property, under an Award or Awards of the type specified in clause (3) assuming a maximum payout; and (iv) the dollar limit under clause (4) refers to the maximum dollar amount payable under an Award or Awards of the type specified in clause (4) assuming a maximum payout. The foregoing provisions will be construed in a manner consistent with Section 162(m), including, without limitation, where applicable, the rules under Section 162(m) pertaining to permissible deferrals of exempt awards.

5.	ELIGIBILITY AND PARTICIPATION

The Administrator will select Participants from among key Employees and directors of, and consultants and advisors to, the Company and its Affiliates. Eligibility for ISOs is limited to individuals described in the first sentence of this Section 5 who are Employees of the Company or of a “parent corporation” or “subsidiary corporation” of the Company as those terms are defined in Section 424 of the Code. Eligibility for Stock Options other than ISOs is limited to individuals described in the first sentence of this Section 5 who are providing direct services on the date of grant of the Stock Option to either the Company or to a subsidiary of the Company that would be described in the first sentence of Treas. Regs. §1.409A-1(b)(5)(iii)(E).

6.	RULES APPLICABLE TO AWARDS

(a) All Awards.

(1) Award Provisions. The Administrator will determine the terms of all Awards, subject to the limitations provided herein. By accepting (or, under such rules as the Administrator may prescribe, being deemed to have accepted) an Award, the Participant will be deemed to have agreed to the terms of the Award and the Plan. Notwithstanding any provision

of this Plan to the contrary, awards of an acquired company that are converted, replaced or adjusted in connection with the acquisition may contain terms and conditions that are inconsistent with the terms and conditions specified herein, as determined by the Administrator.

(2) Term of Plan. No Awards may be made after ten years from the Date of Adoption, but previously granted Awards may continue beyond that date in accordance with their terms.

(3) Transferability. Neither ISOs nor, except as the Administrator otherwise expressly provides in accordance with the third sentence of this Section 6(a)(3), other Awards may be transferred other than by will or by the laws of descent and distribution. During a Participant’s lifetime, ISOs (and, except as the Administrator otherwise expressly provides in accordance with the third sentence of this Section 6(a)(3), SARs and NSOs) may be exercised only by the Participant. The Administrator may permit the gratuitous transfer (i.e., transfer not for value) of Awards other than ISOs to any transferee eligible to be covered by the provisions of Form S-8 (under the Securities Act of 1933, as amended), subject to such limitations as the Administrator may impose.

(4) Vesting, etc. The Administrator will determine the time or times at which an Award will vest or become exercisable and the terms on which a Stock Option or SAR will remain exercisable. Without limiting the foregoing, the Administrator may at any time accelerate the vesting or exercisability of an Award, regardless of any adverse or potentially adverse tax or other consequences resulting from such acceleration. Unless the Administrator expressly provides otherwise, however, the following rules will apply if a Participant’s Employment ceases:

(A) Immediately upon the cessation of the Participant’s Employment and except as provided in (B), (C), and (D) below, each Stock Option and SAR that is then held by the Participant or by the Participant’s permitted transferees, if any, will cease to be exercisable and will terminate and all other Awards that are then held by the Participant or by the Participant’s permitted transferees, if any, to the extent not already vested will be forfeited.

(B) Subject to (C), (D) and (E) below, all Stock Options and SARs held by the Participant or the Participant’s permitted transferees, if any, immediately prior to the cessation of the Participant’s Employment, to the extent then exercisable, will remain exercisable for the lesser of (i) a period of three months and (ii) the period ending on the latest date on which such Stock Option or SAR could have been exercised without regard to this Section 6(a)(4), and will thereupon immediately terminate.

(C) All Stock Options and SARs held by a Participant or the Participant’s permitted transferees, if any, immediately prior to the cessation of the Participant’s Employment due to his or her death, to the extent then exercisable, will remain exercisable for the lesser of (i) the one year period ending with the first anniversary of the Participant’s death and (ii) the period ending on the latest date on which such Stock Option or SAR could have been exercised without regard to this Section 6(a)(4), and will thereupon immediately terminate.

(D) All Stock Options and SARs held by a Participant or the Participant’s permitted transferees, if any, immediately prior to the cessation of the Participant’s Employment due to his or her “permanent and total disability” (within the meaning of Section 22(e)(3) of the Code, to the extent then exercisable, will remain exercisable for the lesser of (i) a period of six months and (ii) the period ending on the latest date on which such Stock Option or SAR could have been exercised without regard to this Section 6(a)(4), and will thereupon immediately terminate.

(E) All Awards (whether or not exercisable) held by a Participant or the Participant’s permitted transferees, if any, immediately prior to the cessation of the Participant’s Employment will immediately terminate upon such cessation of Employment if the termination is for Cause or occurs in circumstances that in the sole determination of the Administrator would have constituted grounds for the Participant’s Employment to be terminated for Cause.

(5) Additional Restrictions. The Administrator may cancel, rescind, withhold or otherwise limit or restrict any Award at any time if the Participant is not in compliance with all applicable provisions of the Award agreement and the Plan, or if the Participant breaches any agreement with the Company or its Affiliates with respect to non-competition, non-solicitation or confidentiality. Without limiting the generality of the foregoing, the Administrator may recover Awards made under the Plan and payments under or gain in respect of any Award in accordance with any applicable Company clawback or recoupment policy, as such policy may be amended and in effect from time to time, or as otherwise required by law or applicable stock exchange listing standards, including, without limitation, Section 10D of the Exchange Act, or any stock exchange or similar rule adopted under said Section.

(6) Taxes. The grant of an Award and the delivery, vesting and retention of Stock, cash or other property under an Award are conditioned upon full satisfaction by the Participant of all tax withholding requirements with respect to the Award. The Administrator will prescribe such rules for the withholding of taxes as it deems necessary or appropriate. The Administrator may, but need not, hold back shares of Stock from an Award or permit a Participant to tender previously owned shares of Stock in satisfaction of tax withholding requirements (but not in excess of the minimum withholding required by law).

(7) Dividend Equivalents, Etc. The Administrator may provide for the payment of amounts (on terms and subject to conditions established by the Administrator) in lieu of cash dividends or other cash distributions with respect to Stock subject to an Award whether or not the holder of such Award is otherwise entitled to share in the actual dividend or distribution in respect of such Award. Any entitlement to dividend equivalents or similar entitlements will be established and administered either consistent with an exemption from, or in compliance with, the requirements of Section 409A. Dividends or dividend equivalent amounts payable in respect of Awards that are subject to restrictions may be subject to such limits or restrictions as the Administrator may impose.

(8) Rights Limited. Nothing in the Plan or in any Award, will be construed as giving any person the right to continued employment or service with the Company or its Affiliates, or any rights as a stockholder except as to shares of Stock actually issued under the

Plan; nor will anything in the Plan or in any Award affect the right of the Company or its Affiliates to discharge or discipline a Participant at any time. The loss of existing or potential profit in Awards will not constitute an element of damages in the event of termination of Employment for any reason, even if the termination is in violation of an obligation of the Company or any Affiliate to the Participant.

(9) Section 162(m). In the case of any Performance Award (other than a Stock Option or SAR) intended to qualify for the performance-based compensation exception under Section 162(m), the Administrator will establish the applicable Performance Criterion or Criteria in writing no later than ninety (90) days after the commencement of the period of service to which the performance relates (or at such earlier time as is required to qualify the Award as performance-based under Section 162(m)) and, prior to the event or occurrence (grant, vesting or payment, as the case may be) that is conditioned on the attainment of such Performance Criterion or Criteria, will certify whether it or they have been attained.

(10) Coordination with Other Plans. Awards under the Plan may be granted in tandem with, or in satisfaction of or substitution for, other Awards under the Plan or awards made under other compensatory plans or programs of the Company or its Affiliates. For example, but without limiting the generality of the foregoing, awards under other compensatory plans or programs of the Company or its Affiliates may be settled in Stock (including, without limitation, Unrestricted Stock) if the Administrator so determines, in which case the shares delivered will be treated as awarded under the Plan (and will reduce the number of shares thereafter available under the Plan in accordance with the rules set forth in Section 4). In any case where an award is made under another plan or program of the Company or its Affiliates and such award is intended to qualify for the performance-based compensation exception under Section 162(m), and such award is settled by the delivery of Stock or another Award under the Plan, the applicable Section 162(m) limitations under both the other plan or program and under the Plan will be applied to the Plan as necessary (as determined by the Administrator) to preserve the availability of the Section 162(m) performance-based compensation exception with respect thereto.

(11) Section 409A. Each Award will contain such terms as the Administrator determines, and will be construed and administered, such that the Award either qualifies for an exemption from the requirements of Section 409A or satisfies such requirements.

(12) Fair Market Value. In determining the fair market value of any share of Stock under the Plan, the Administrator will make the determination in good faith consistent with the rules of Section 422 and Section 409A to the extent applicable.

(b) Stock Options and SARs.

(1) Time And Manner Of Exercise. Unless the Administrator expressly provides otherwise, no Stock Option or SAR will be deemed to have been exercised until the Administrator receives a notice of exercise (in form acceptable to the Administrator), which may be an electronic notice, signed (including electronic signature in form acceptable to the Administrator) by the appropriate person and accompanied by any payment required under the Award. A Stock Option or SAR exercised by any person other than the Participant will not be deemed to have been exercised until the Administrator has received such evidence as it may require that the person exercising the Award has the right to do so.

(2) Exercise Price. The exercise price (or the base value from which appreciation is to be measured) of each Award requiring exercise will be no less than 100% (or in the case of an ISO granted to a ten-percent shareholder within the meaning of subsection (b)(6) of Section 422, 110%) of the fair market value of the Stock subject to the Award, determined as of the date of grant, or such higher amount as the Administrator may determine in connection with the grant. Except in connection with a corporate transaction involving the Company (which term shall include, without limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, or exchange of shares) or as otherwise contemplated by Section 7 of the Plan, the Company may not, without obtaining stockholder approval, (A) amend the terms of outstanding Stock Options or SARs to reduce the exercise price or base value of such Stock Options or SARs, (B) cancel outstanding Stock Options or SARs in exchange for Stock Options or SARs with an exercise price or base value that is less than the exercise price or base value of the original Stock Options or SARs, or (C) cancel outstanding Stock Options or SARs that have an exercise price or base value greater than the fair market value of a share of Stock on the date of such cancellation in exchange for cash or other consideration.

(3) Payment Of Exercise Price. Where the exercise of an Award is to be accompanied by payment, payment of the exercise price will be by cash or check acceptable to the Administrator or by such other legally permissible means, if any, as may be acceptable to the Administrator.

(4) Maximum Term. Stock Options and SARs will have a maximum term not to exceed ten (10) years from the date of grant (or five (5) years from the date of grant in the case of an ISO granted to a ten-percent shareholder described in Section 6(b)(2) above); provided, however, that, if a Participant still holding an outstanding but unexercised NSO or SAR ten (10) years from the date of grant (or, in the case of an NSO or SAR with a maximum term of less than ten (10) years, such maximum term) is prohibited by applicable law or a written policy of the Company applicable to similarly situated Employees from engaging in any open-market sales of Stock, and if at such time the Stock is publicly traded (as determined by the Administrator), the maximum term of such Award will instead be deemed to expire on the thirtieth (30^th) day following the date the Participant is no longer prohibited from engaging in such open market sales.

7.	EFFECT OF CERTAIN TRANSACTIONS

(a) Mergers, etc. Except as otherwise provided in an Award agreement, the following provisions will apply in the event of a Covered Transaction:

(1) Assumption or Substitution. If the Covered Transaction is one in which there is an acquiring or surviving entity, the Administrator may (but, for the avoidance of doubt, need not) provide (i) for the assumption or continuation of some or all outstanding Awards or any portion thereof or (ii) for the grant of new awards in substitution therefor by the acquiror or survivor or an affiliate of the acquiror or survivor.

(2) Cash-Out of Awards. Subject to Section 7(a)(5) below the Administrator may (but, for the avoidance of doubt, need not) provide for payment (a “cash-out”), with respect to some or all Awards or any portion thereof, equal in the case of each affected Award or portion thereof to the excess, if any, of (A) the fair market value of one share of Stock (as determined by the Administrator in its reasonable discretion) times the number of shares of Stock subject to the Award or such portion, over (B) the aggregate exercise or purchase price, if any, under the Award or such portion (in the case of an SAR, the aggregate base value above which appreciation is measured), in each case on such payment terms (which need not be the same as the terms of payment to holders of Stock) and other terms, and subject to such conditions, as the Administrator determines, it being understood that if the exercise or purchase price (or base value) of an Award is equal to or greater than the fair market value of one share of Stock (as determined in accordance with this Section 7(a)(2)), the Award may be cancelled with no payment due hereunder.

(3) Acceleration of Certain Awards. Subject to Section 7(a)(5) below, the Administrator may (but, for the avoidance of doubt, need not) provide that any Award requiring exercise will become exercisable, in full or in part and/or that the delivery of any shares of Stock remaining deliverable under any outstanding Award of Stock Units (including Restricted Stock Units and Performance Awards to the extent consisting of Stock Units) will be accelerated in full or in part, in each case on a basis that gives the holder of the Award a reasonable opportunity, as determined by the Administrator, following exercise of the Award or the delivery of the shares, as the case may be, to participate as a stockholder in the Covered Transaction. Notwithstanding any of the foregoing, in the event of a Covered Transaction other than a dissolution or liquidation of the Company, each Award held by a Non-Employee Director shall accelerate and vest in full upon the consummation of such Covered Transaction.

(4) Termination of Awards Upon Consummation of Covered Transaction. Except as the Administrator may otherwise determine in any case, each Award will automatically terminate (and in the case of outstanding shares of Restricted Stock, will automatically be forfeited) upon consummation of the Covered Transaction, other than Awards assumed pursuant to Section 7(a)(1) above.

(5) Additional Limitations. Any share of Stock and any cash or other property delivered pursuant to Section 7(a)(2) or Section 7(a)(3) above with respect to an Award may, in the discretion of the Administrator, contain such restrictions, if any, as the Administrator deems appropriate to reflect any performance or other vesting conditions to which the Award was subject and that did not lapse (and were not satisfied) in connection with the Covered Transaction. For purposes of the immediately preceding sentence, a cash-out under Section 7(a)(2) above or acceleration under Section 7(a)(3) above (other than with respect to any Award held by a Non-Employee Director) will not, in and of itself, be treated as the lapsing (or satisfaction) of a performance or other vesting condition. In the case of Restricted Stock that does not vest and is not forfeited in connection with the Covered Transaction, the Administrator may require that any amounts delivered, exchanged or otherwise paid in respect of such Stock in connection with the Covered Transaction be placed in escrow or otherwise made subject to such restrictions as the Administrator deems appropriate to carry out the intent of the Plan.

(b) Changes in and Distributions With Respect to Stock.

(1) Basic Adjustment Provisions. In the event of a stock dividend, stock split or combination of shares (including a reverse stock split), recapitalization, reclassification or other distribution of the Company’s equity securities without the receipt of consideration by the Company, or other change in the Company’s capital structure that constitutes an equity restructuring within the meaning of FASB ASC 718, the Administrator will make appropriate adjustments to the maximum number of shares specified in Section 4(a) that may be delivered under the Plan and to the maximum share limits described in Section 4(c), and will also make appropriate adjustments to the number and kind of shares of stock or securities subject to Awards then outstanding or subsequently granted, any exercise or purchase prices (or base values) relating to Awards and any other provision of Awards affected by such change.

(2) Certain Other Adjustments. The Administrator may also make adjustments of the type described in Section 7(b)(1) above to take into account distributions to stockholders other than those provided for in Section 7(a) and 7(b)(1), or any other event, if the Administrator determines that adjustments are appropriate to avoid distortion in the operation of the Plan, having due regard for the qualification of ISOs under Section 422, the requirements of Section 409A, and for the performance-based compensation rules of Section 162(m), where applicable.

(3) Continuing Application of Plan Terms. References in the Plan to shares of Stock will be construed to include any stock or securities resulting from an adjustment pursuant to this Section 7.

8.	LEGAL CONDITIONS ON DELIVERY OF STOCK

The Company will not be obligated to deliver any shares of Stock pursuant to the Plan or to remove any restriction from shares of Stock previously delivered under the Plan until: (i) the Company is satisfied that all legal matters in connection with the issuance and delivery of such shares have been addressed and resolved; (ii) if the outstanding Stock is at the time of delivery listed on any stock exchange or national market system, the shares to be delivered have been listed or authorized to be listed on such exchange or system upon official notice of issuance; and (iii) all conditions of the Award have been satisfied or waived. The Company may require, as a condition to exercise of the Award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of the Securities Act of 1933, as amended, or any applicable state or non-U.S. securities law. Any Stock required to be issued to Participants under the Plan will be evidenced in such manner as the Administrator may deem appropriate, including book-entry registration or delivery of stock certificates. In the event that the Administrator determines that Stock certificates will be issued to Participants under the Plan, the Administrator may require that certificates evidencing Stock issued under the Plan bear an appropriate legend reflecting any restriction on transfer applicable to such Stock, and the Company may hold the certificates pending lapse of the applicable restrictions.

9.	AMENDMENT AND TERMINATION

The Administrator may at any time or times amend the Plan or any outstanding Award for any purpose which may at the time be permitted by law, and may at any time terminate the Plan as to any future grants of Awards; provided, that except as otherwise expressly provided in the Plan the Administrator may not, without the Participant’s consent, alter the terms of an Award so as to affect materially and adversely the Participant’s rights under the Award, unless the Administrator expressly reserved the right to do so at the time the Award was granted. Any amendments to the Plan will be conditioned upon stockholder approval only to the extent, if any, such approval is required by law (including the Code and applicable stock exchange requirements), as determined by the Administrator.

10.

OTHER COMPENSATION ARRANGEMENTS

The existence of the Plan or the grant of any Award will not in any way affect the Company’s right to Award a person bonuses or other compensation in addition to Awards under the Plan.

11.

MISCELLANEOUS

(a) Waiver of Jury Trial. By accepting an Award under the Plan and, to the extent permitted under applicable law, each Participant waives any right to a trial by jury in any action, proceeding or counterclaim concerning any rights under the Plan and any Award, or under any amendment, waiver, consent, instrument, document or other agreement delivered or which in the future may be delivered in connection therewith, and agrees that any such action, proceedings or counterclaim will be tried before a court and not before a jury. By accepting an Award under the Plan, each Participant certifies that no officer, representative, or attorney of the Company has represented, expressly or otherwise, that the Company would not, in the event of any action, proceeding or counterclaim, seek to enforce the foregoing waivers. Notwithstanding anything to the contrary in the Plan, nothing herein is to be construed as limiting the ability of the Company and a Participant to agree to submit disputes arising under the terms of the Plan or any Award made hereunder to binding arbitration or as limiting the ability of the Company to require any eligible individual to agree to submit such disputes to binding arbitration as a condition of receiving an Award hereunder.

(b) Limitation of Liability. Notwithstanding anything to the contrary in the Plan, neither the Company, nor any Affiliate, nor the Administrator, nor any person acting on behalf of the Company, any Affiliate, or the Administrator, will be liable to any Participant or to the estate or beneficiary of any Participant or to any other holder of an Award by reason of any acceleration of income, or any additional tax (including any interest and penalties), asserted by reason of the failure of an Award to satisfy the requirements of Section 422 or Section 409A or by reason of Section 4999 of the Code, or otherwise asserted with respect to the Award.

12.

ESTABLISHMENT OF SUB-PLANS

The Administrator may from time to time establish one or more sub-plans under the Plan for purposes of satisfying applicable blue sky, securities or tax laws of various jurisdictions. The Administrator will establish such sub-plans by adopting supplements to the Plan setting forth (i)

such limitations on the Administrator’s discretion under the Plan as it deems necessary or desirable and (ii) such additional terms and conditions not otherwise inconsistent with the Plan as it deems necessary or desirable. All supplements so established will be deemed to be part of the Plan, but each supplement will apply only to Participants within the affected jurisdiction (as determined by the Administrator).

13.

GOVERNING LAW

(a) Certain Requirements of Corporate Law. Awards will be granted and administered consistent with the requirements of applicable Delaware law relating to the issuance of stock and the consideration to be received therefor, and with the applicable requirements of the stock exchange or other trading system on which the Stock is listed or entered for trading, in each case as determined by the Administrator.

(b) Other Matters. Except as otherwise provided by the express terms of an Award agreement, under a sub-plan described in Section 12 or as provided in Section 13(a) above, the provisions of the Plan and of Awards under the Plan and all claims or disputes arising out of our based upon the Plan or any Award under the Plan or relating to the subject matter hereof or thereof will be governed by and construed in accordance with the domestic substantive laws of the State of California without giving effect to any choice or conflict of laws provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction.

(c) Jurisdiction. By accepting an Award, each Participant will be deemed to (a) have submitted irrevocably and unconditionally to the jurisdiction of the federal and state courts located within the geographic boundaries of the United States District Court for the Central District of California for the purpose of any suit, action or other proceeding arising out of or based upon the Plan or any Award; (b) agree not to commence any suit, action or other proceeding arising out of or based upon the Plan or an Award, except in the federal and state courts located within the geographic boundaries of the United States District Court for the Central District of California; and (c) waive, and agree not to assert, by way of motion as a defense or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that the Plan or an Award or the subject matter thereof may not be enforced in or by such court.

EXHIBIT A

Definition of Terms

The following terms, when used in the Plan, will have the meanings and be subject to the provisions set forth below:

“Administrator”: The Compensation Committee, except that the Compensation Committee may delegate (i) to one or more of its members (or one or more other members of the Board (including the full Board)) such of its duties, powers and responsibilities as it may determine; (ii) to one or more officers of the Company the power to grant Awards to the extent permitted by Section 157(c) of the Delaware General Corporation Law; and (iii) to such Employees or other persons as it determines such ministerial tasks as it deems appropriate. In the event of any delegation described in the preceding sentence, the term “Administrator” will include the person or persons so delegated to the extent of such delegation.

“Affiliate”: Any corporation or other entity that stands in a relationship to the Company that would result in the Company and such corporation or other entity being treated as one employer under Section 414(b) and Section 414(c) of the Code.

“Award”: Any or a combination of the following:

(i) Stock Options.

(ii) SARs.

(iii) Restricted Stock.

(iv) Unrestricted Stock.

(v) Stock Units, including Restricted Stock Units.

(vi) Performance Awards.

(vii) Cash Awards.

(viii) Awards (other than Awards described in (i) through (vii) above) that are convertible into or otherwise based on Stock.

“Board”: The Board of Directors of the Company.

“Cash Award”: An Award denominated in cash.

“Cause”: In the case of any Participant who is party to an employment or severance-benefit agreement that contains a definition of “Cause,” the definition set forth in such agreement will apply with respect to such Participant under the Plan for so long as such agreement is in effect. In the case of any other Participant, “Cause” will mean, as determined by the Administrator in its reasonable judgment (i) the Participant’s material breach of the Plan, an Award agreement, or any confidentiality agreement between the Company and the Participant;

(ii) the Participant’s failure or refusal to comply with the Company’s Employee Manual, the Company’s Code of Business Conduct and Ethics, or other policies or procedures established by the Company; (iii) the Participant’s appropriation (or attempted appropriation) of a material business opportunity of the Company, including attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of the Company; (iv) the Participant’s misappropriation (or attempted misappropriation) of any of the Company’s funds or material property; (v) the Participant’s commission of, or the entering of a guilty plea or plea of no contest with respect to, a felony, the equivalent thereof, or any other crime with respect to which imprisonment is a possible punishment; or (vi) the Participant’s willful misconduct or substantial failure to perform his or her duties and responsibilities to the Company or substantial negligence in the performance of such duties and responsibilities.

“Code”: The U.S. Internal Revenue Code of 1986 as from time to time amended and in effect, or any successor statute as from time to time in effect.

“Compensation Committee”: The Compensation Committee of the Board.

“Company”: Avanir Pharmaceuticals, Inc.

“Covered Transaction”: Any of (i) a consolidation, merger, or similar transaction or series of related transactions, including a sale or other disposition of stock, in which the Company is not the surviving corporation or which results in the acquisition of all or substantially all of the Company’s then outstanding common stock by a single person or entity or by a group of persons and/or entities acting in concert, (ii) a sale or transfer of all or substantially all the Company’s assets, or (iii) a dissolution or liquidation of the Company. Where a Covered Transaction involves a tender offer that is reasonably expected to be followed by a merger described in clause (i) (as determined by the Administrator), the Covered Transaction will be deemed to have occurred upon consummation of the tender offer.

“Date of Adoption”: The earlier of the date the Plan was approved by the Company’s stockholders or adopted by the Board, as determined by the Compensation Committee.

“Employee”: Any person who is employed by the Company or an Affiliate.

“Employment”: A Participant’s employment or other service relationship with the Company and its Affiliates, which may include service as a director, consultant or independent contractor. Employment will be deemed to continue, unless the Administrator expressly provides otherwise, so long as the Participant is employed by, or otherwise is providing services in a capacity described in Section 5 to the Company or an Affiliate. If a Participant’s employment or other service relationship is with an Affiliate and that entity ceases to be an Affiliate, the Participant’s Employment will be deemed to have terminated when the entity ceases to be an Affiliate unless the Participant transfers Employment to the Company or its remaining Affiliates. Notwithstanding the foregoing and the definition of “Affiliate” above, in construing the provisions of any Award relating to the payment of “nonqualified deferred compensation” (subject to Section 409A) upon a termination or cessation of Employment, references to termination or cessation of employment, separation from service, retirement or similar or correlative terms will be construed to require a “separation from service” (as that term

is defined in Section 1.409A-1(h) of the Treasury Regulations, after giving effect to the presumptions contained therein) from the Company and from all other corporations and trades or businesses, if any, that would be treated as a single “service recipient” with the Company under Section 1.409A-1(h)(3) of the Treasury Regulations. The Company may, but need not, elect in writing, subject to the applicable limitations under Section 409A, any of the special elective rules prescribed in Section 1.409A-1(h) of the Treasury Regulations for purposes of determining whether a “separation from service” has occurred. Any such written election will be deemed a part of the Plan.

“Exchange Act”: The Securities Exchange Act of 1934, as amended.

“ISO”: A Stock Option intended to be an “incentive stock option” within the meaning of Section 422. Each Stock Option granted pursuant to the Plan will be treated as providing by its terms that it is to be an NSO unless, as of the date of grant, it is expressly designated as an ISO.

“Non-Employee Director”: Any person who is a member of the Board but is not an Employee and has not been an Employee at any time during the preceding twelve (12) months.

“NSO”: A Stock Option that is not intended to be an “incentive stock option” within the meaning of Section 422.

“Participant”: A person who is granted an Award under the Plan.

“Performance Award”: An Award subject to Performance Criteria. The Administrator in its discretion may grant Performance Awards that are intended to qualify for the performance-based compensation exception under Section 162(m) and Performance Awards that are not intended so to qualify.

“Performance Criteria”: Specified criteria, other than the mere continuation of Employment or the mere passage of time, the satisfaction of which is a condition for the grant, exercisability, vesting or full enjoyment of an Award. For purposes of Awards that are intended to qualify for the performance-based compensation exception under Section 162(m), a Performance Criterion will mean an objectively determinable measure of performance relating to any or any combination of the following (measured either absolutely or by reference to an index or indices and determined either on a consolidated basis or, as the context permits, on a divisional, subsidiary, line of business, project or geographical basis or in combinations thereof): sales; revenues; assets; expenses; earnings before or after deduction for all or any portion of interest, taxes, depreciation, or amortization, whether or not on a continuing operations or an aggregate or per share basis; return on equity, investment, capital or assets; one or more operating ratios; borrowing levels, leverage ratios or credit rating; market share; capital expenditures; cash flow; stock price; stockholder return; sales of particular products or services; customer acquisition or retention; acquisitions and divestitures (in whole or in part); joint ventures and strategic alliances; spin-offs, split-ups and the like; reorganizations; recapitalizations, restructurings, financings (issuance of debt or equity) or refinancings; regulatory and/or clinical development progress; intellectual property protection; and any other performance metric designed to increase shareholder value. A Performance Criterion and any targets with respect thereto determined by the Administrator need not be based upon an increase,

a positive or improved result or avoidance of loss. To the extent consistent with the requirements for satisfying the performance-based compensation exception under Section 162(m), the Administrator may provide in the case of any Award intended to qualify for such exception that one or more of the Performance Criteria applicable to such Award will be adjusted in an objectively determinable manner to reflect events (for example, but without limitation, acquisitions or dispositions) occurring during the performance period that affect the applicable Performance Criterion or Criteria.

“Plan”: The Avanir Pharmaceuticals, Inc. 2014 Incentive Plan as from time to time amended and in effect.

“Restricted Stock”: Stock subject to restrictions requiring that it be redelivered or offered for sale to the Company if specified conditions are not satisfied.

“Restricted Stock Unit”: A Stock Unit that is, or as to which the delivery of Stock or cash in lieu of Stock is, subject to the satisfaction of specified performance or other vesting conditions.

“SAR”: A right entitling the holder upon exercise to receive an amount (payable in cash and/or in shares of Stock of equivalent value) equal to the excess of the fair market value of the shares of Stock subject to the right over the base value from which appreciation under the SAR is to be measured.

“Section 409A”: Section 409A of the Code.

“Section 422”: Section 422 of the Code.

“Section 162(m)”: Section 162(m) of the Code.

“Stock”: Common stock of the Company, par value $0.0001 per share.

“Stock Option”: An option entitling the holder to acquire shares of Stock upon payment of the exercise price.

“Stock Unit”: An unfunded and unsecured promise, denominated in shares of Stock, to deliver Stock or cash measured by the value of Stock in the future.

“Unrestricted Stock”: Stock not subject to any restrictions under the terms of the Award.

* * *

Exhibit 10.22

AVANIR PHARMACEUTICALS, INC.

DIRECTOR AND OFFICER

INDEMNIFICATION AGREEMENT

This Indemnification Agreement (“Agreement”) is made effective as of <Date> by and between Avanir Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and <Name> (“Indemnitee”).

RECITALS

WHEREAS, the Company, which is organized under the General Corporation Law of the State of Delaware (“DGCL”), wishes to enter into this Agreement to set forth certain rights and obligations of the Indemnitee and the Company with respect to the Indemnitee’s service as a director or officer of the Company;

WHEREAS, it is essential to the Company that it be able to retain and attract as directors and officers the most capable persons available;

WHEREAS, increased corporate litigation has subjected directors and officers to litigation risks and expenses, and the limitations on the availability of directors and officers liability insurance have made it increasingly difficult for the Company to attract and retain such persons;

WHEREAS, the Company’s Certificate of Incorporation and Bylaws (the “Charter” and “Bylaws,” respectively) require it to indemnify its directors and officers to the fullest extent permitted by law and permit it to make other indemnification arrangements and agreements;

WHEREAS, the Company desires to provide Indemnitee with specific contractual assurance of Indemnitee’s rights to full indemnification against risks and expenses, regardless, among other things, of any amendment to or revocation of the Charter or Bylaws or any change in the ownership of the Company or the composition of its Board of Directors (the “Board”);

WHEREAS, the Company intends that this Agreement provide Indemnitee with greater protection than that which is provided by the Company’s Charter and Bylaws; and

WHEREAS, Indemnitee is relying upon the rights afforded under this Agreement in continuing as a director or officer of the Company, as applicable, and this Agreement shall serve as a supplement to and in furtherance of the indemnification provided in the Charter and Bylaws and any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder.

NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:

Section 1. Services to the Company. Indemnitee agrees to serve as a director or officer of the Company, as applicable. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by law), and the Company may at any time and for any reason terminate Indemnitee (subject to any other contractual obligation or any obligation imposed by law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in such position. This Agreement shall not be deemed an employment contract between the Company (or any of its subsidiaries or any Enterprise) and Indemnitee. The foregoing notwithstanding, this Agreement shall continue in force after Indemnitee has ceased to serve as a director or officer of the Company, as provided for in Section 19 of this Agreement.

Section 2. Definitions.

As used in this Agreement:

(a) “Corporate Status” describes the status of a person as a current or former director, officer, employee, agent or trustee of the Company or of any other Enterprise which such person is or was serving at the request of the Company.

(b) “Enforcement Expenses” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with an action to enforce indemnification or advancement rights, or an appeal from such action, including without limitation the premium, security for, and other costs relating to any cost bond, supersedes bond, or other appeal bond or its equivalent.

(c) “Enterprise” shall mean any corporation (other than the Company), partnership, joint venture, trust, employee benefit plan or other legal entity of which Indemnitee is or was serving at the request of the Company as a director, officer, employee, agent or trustee.

(d) “Expenses” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding or an appeal resulting from a Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedes bond, or other appeal bond or its equivalent. Expenses, however, shall not include amounts paid in settlement by or on behalf of Indemnitee or the amount of judgments or fines against Indemnitee.

(e) “Independent Counsel” means a law firm, or a partner (or, if applicable, member) of such a law firm, that is experienced in matters of Delaware

corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company, any Enterprise or Indemnitee in any matter material to any such party (other than with respect to matters concerning Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

(f) The term “Proceeding” shall include any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, legislative or administrative hearing or any other actual, threatened or completed proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee was, is or will be involved as a party or otherwise by reason of the fact that Indemnitee is or was a director or officer of the Company or is or was serving at the request of the Company as a director, officer, employee, agent or trustee of any Enterprise or by reason of any action taken by Indemnitee or of any action taken on Indemnitee’s part while acting as director or officer of the Company or while serving at the request of the Company as a director, officer, employee, agent or trustee of any Enterprise, in each case whether or not serving in such capacity at the time any liability or expense is incurred for which indemnification, reimbursement or advancement of expenses can be provided under this Agreement; provided, however, that the term “Proceeding” shall not include any action, suit or arbitration, or part thereof, initiated by Indemnitee to enforce Indemnitee’s rights under this Agreement as provided for in Section 15(e) of this Agreement.

Section 3. Indemnity in Third-Party Proceedings. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 3, Indemnitee shall be indemnified against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his or her behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee has met the applicable standard of conduct for indemnification set forth in the DGCL.

Section 4. Indemnity in Proceedings by or in the Right of the Company. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 4 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 4, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by or on behalf of Indemnitee in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee has met the applicable standard of conduct for indemnification set forth in the DGCL. No indemnification for Expenses shall be made under this Section 4 in respect of any claim, issue or matter as to which Indemnitee shall

have been finally adjudged by a court to be liable to the Company, unless and only to the extent that the Delaware Court of Chancery (the “Delaware Court”) or any court in which the Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification for such expenses as the Delaware Court or such other court shall deem proper.

Section 5. Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provisions of this Agreement and except as provided in Section 9, to the extent that Indemnitee is a party to or a participant in and is successful, on the merits or otherwise, in any Proceeding or in defense of any claim, issue or matter therein, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee in connection therewith, and no Standard of Conduct Determination (as defined in Section 13(a)) shall be required. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by or on Indemnitee’s behalf in connection with each successfully resolved claim, issue or matter, and no Standard of Conduct Determination (as defined in Section 13(a)) shall be required as to those successfully resolved claims, issues or matters. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

Section 6. Indemnification For Expenses as a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his or her Corporate Status, a witness in any Proceeding to which Indemnitee is not a party and is not threatened to be made a party or otherwise incurs legal expenses as a result of or related to the Indemnitee’s service as a director or officer of the Company, in any threatened, pending, or completed Proceeding to which the Indemnitee neither is, nor is threatened to be made, a party, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by or on behalf of Indemnitee in connection therewith.

Section 7. Partial Indemnity. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his or her behalf in connection with a Proceeding or any claim, issue or matter therein, but not for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.

Section 8. Indemnification – Fullest Extent of Delaware Law.

(a) Except as provided in Section 9, notwithstanding any limitations set forth herein, the Company shall indemnify Indemnitee to the fullest extent permitted by law if Indemnitee is a party to or is threatened to be made a party to any Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its favor) against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with the Proceeding.

(b) For purposes of Section 8(a), the meaning of the phrase “to the fullest extent permitted by law” shall include, but not be limited to:

(i) to the fullest extent permitted by the provision of the DGCL that authorizes or contemplates additional indemnification by agreement, or the corresponding provision of any amendment to or replacement of the DGCL or such provision thereof; and

(ii) to the fullest extent authorized or permitted by any amendments to or replacements of the DGCL adopted after the date of this Agreement that increase the extent to which a corporation may indemnify its directors and officers.

Section 9. Exclusions to Indemnification. Notwithstanding any provision in this Agreement to the contrary, the Company shall not be obligated under this Agreement:

(a) to make any indemnity for amounts otherwise indemnifiable hereunder (or for which advancement is provided hereunder) if and to the extent that Indemnitee has otherwise actually received such amounts under any insurance policy, contract, agreement or otherwise;

(b) to make any indemnity for an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of state statutory law or common law;

(c) to make any indemnity or advancement in connection with any Proceeding initiated by Indemnitee against the Company or any director or officer of the Company unless (i) the Company has joined in or the Board has consented to the initiation of such Proceeding, or (ii) the Proceeding is one to enforce any of the indemnification rights under this Agreement; or

(d) to make any indemnity or advancement that is prohibited by applicable law.

Section 10. Advancement of Expenses.

(a) Subject to the limitations set forth below in Section 10(b), the Company shall advance, to the extent not prohibited by law, the Expenses incurred by Indemnitee in connection with any Proceeding, and such advancement shall be made within twenty (20) days after the receipt by the Company of a statement or statements requesting such advances (which shall include invoices received by Indemnitee in connection with such Expenses but, in the case of invoices in connection with legal services, any references to legal work performed or to expenditures made that would cause Indemnitee to waive any privilege accorded by applicable law shall not be included

with the invoice) from time to time, whether prior to or after final disposition of any Proceeding. The right to advancement described in this Section 10 is vested. Advances shall be unsecured and interest free. Advances shall be made without regard to Indemnitee’s ability to repay the expenses and without regard to Indemnitee’s ultimate entitlement to indemnification under the other provisions of this Agreement. Indemnitee shall qualify for advances upon the execution and delivery to the Company of this Agreement which shall constitute an undertaking providing that Indemnitee undertakes to the fullest extent required by law to repay the advance if and to the extent that it is ultimately determined by a court of competent jurisdiction in a final judgment, not subject to appeal, that Indemnitee is not entitled to be indemnified by the Company. The right to advances under this paragraph shall in all events continue until final disposition of any Proceeding, including any appeal therein. Nothing in this Section 10 shall limit Indemnitee’s right to advancement pursuant to Section 15(e) of this Agreement.

(b) Notwithstanding anything herein to the contrary, but subject to the limitations set forth in Section 10(c), if the Indemnitee shall make a request for the advancement of Expenses pursuant to Section 10(a), then the Board shall thereafter have the right to seek a Standard of Conduct Determination pursuant to Section 13. In the event that the Standard of Conduct Determination is adverse to the Indemnitee, then the Company shall thereafter have no obligation to advance Expenses pursuant to Section 10(a), unless otherwise required by applicable law or ordered by a court of competent jurisdiction.

(c) Upon the consummation of a Change in Control (defined below), the Board shall thereafter have no right under Section 10(b) to seek a Standard of Conduct Determination with respect to the Indemnitee. For purposes of this Section 10(c), “Change in Control” shall mean: (i) an acquisition of any voting securities of the Company (the “Voting Securities”) by any “person” (as the term “person” is used for purposes of Section 13(d) or Section 14(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), immediately after which such person has “beneficial ownership” (within the meaning of Rule 13d-3 promulgated under the 1934 Act) (“Beneficial Ownership”) of 50% or more of the combined voting power of the Company’s then outstanding Voting Securities without the approval of the Board; (ii) a merger or consolidation in which the Company’s stockholders immediately prior to such transaction hold, immediately after the consummation of the merger or consolidation, less than 50% of the combined voting power of the Company or its successor; (iii) the sale of all or substantially all of the Company’s assets; or (iv) the election of directors to the Board who, following their election, represent a majority of the Board and whose nomination was not made or recommended by a resolution adopted by the Board prior to their election.

Section 11. Procedure for Notification. To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request therefor. If Indemnitee so chooses pursuant to Section 13 of this Agreement, such written request shall also include a request for Indemnitee to have the right to indemnification determined by Independent Counsel. The failure by Indemnitee to request

indemnification within 120 days of the entry of a final disposition of any Proceeding, including any appeal therein, shall negate the Company’s indemnification obligations under this Agreement.

Section 12. Defense of Claims. Except as provided below, the Company will be entitled to participate in the Proceeding, or to assume the defense thereof, at its own expense, provided that Indemnitee provides signed, written consent to such participation or assumption. If, however, (i) it is determined at any time before or during the course of the Proceeding that the use of counsel chosen by the Company to represent Indemnitee presents such counsel with an actual or potential conflict, or (ii) it is determined at any time before or during the course of the Proceeding that any such representation by such counsel is precluded under the applicable standards of professional conduct then prevailing, then Indemnitee shall be entitled to retain separate counsel (but not more than one law firm plus, if applicable, local counsel) at the Company’s expense. The Company shall not be entitled to assume the defense of any Proceeding brought by or in the right of the Company. Indemnitee shall not enter into any settlement in connection with a Proceeding without the Company’s prior written consent, which will not be unreasonably withheld. The Company shall not enter into any settlement in connection with a Proceeding in any manner that would impose any Expenses, losses, liabilities, judgments, fines, or penalties (whether civil or criminal) on the Indemnitee without the Indemnitee’s prior written consent.

Section 13. Procedure Upon Request for Indemnification.

(a) To the extent that the provisions of Section 5 are inapplicable, upon the written request by Indemnitee for indemnification pursuant to Section 11, or upon written request by the Board acting pursuant to Section 10(b), a determination, if such determination is required by applicable law or is permitted by Section 10(b), with respect to Indemnitee’s entitlement thereto (a “Standard of Conduct Determination”) shall be made as follows: (i) by Independent Counsel in a written opinion to the Board if Indemnitee so requests in such written request for indemnification pursuant to Section 11 or in response to the Board’s request for a Standard of Conduct Determination, or (ii) by the Company in accordance with applicable law if Indemnitee does not so request such determination be made by Independent Counsel. In the case that such determination is made by Independent Counsel, a copy of Independent Counsel’s written opinion shall be delivered to Indemnitee and, if it is so determined that Indemnitee is entitled to indemnification or the advancement of Expenses, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the Independent Counsel or the Company, as applicable, in making such Standard of Conduct Determination, including providing to such counsel or the Company, upon reasonable advance request, any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys’ fees and disbursements) incurred by Indemnitee in so cooperating with the Independent Counsel or the Company shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification and advancement of Expenses) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.

(b) In the event that Indemnitee exercises his or her right to have the entitlement to indemnification determined by Independent Counsel pursuant to clause (i) of Section 13(a), the Independent Counsel shall be selected by Indemnitee and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. The Company may, within ten (10) days after written notice of such selection, deliver to Indemnitee a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 2 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within twenty (20) days after the later of (i) submission by Indemnitee of a written request for indemnification and Independent Counsel pursuant to Sections 11 and 13(a)(i) hereof, respectively, and (ii) the final disposition of the Proceeding, including any appeal therein, no Independent Counsel shall have been selected without objection, Indemnitee or the Company may petition the Delaware Court for resolution of any objection which shall have been made by the Company to the selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate. The person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 13(a) hereof. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 15(a) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). The Company agrees to pay the reasonable fees and expenses of the Independent Counsel referred to above against any and all expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.

Section 14. Presumptions and Effect of Certain Proceedings.

(a) In making a determination with respect to entitlement to indemnification hereunder, it shall be presumed that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 11 of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making of any determination contrary to that presumption by clear and convincing evidence. Neither (i) the failure of the Company or of Independent Counsel to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor (ii) an actual determination by the Company or by Independent Counsel that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.

(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of guilty, nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not meet any applicable standard of conduct.

(c) The knowledge and/or actions, or failure to act, of any other director, officer, agent or employee of the Company or any Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.

Section 15. Remedies of Indemnitee.

(a) Subject to Section 15(f), in the event that (i) a determination is made pursuant to Section 13 of this Agreement that Indemnitee is not entitled to indemnification or advancement of Expenses under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 10 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 13(a) of this Agreement within sixty (60) days after receipt by the Company of the request for indemnification that does not include a request for Independent Counsel, (iv) no determination of entitlement to indemnification shall have been made pursuant to Section 13(a) of this Agreement after receipt by the Company of the request for indemnification that includes a request for Independent Counsel within sixty (60) days after the later of (A) submission by Indemnitee of such written request for indemnification and Independent Counsel pursuant to Sections 11 and 13(a)(i) hereof, (B) submission by Indemnitee of written notice to the Company advising it of the identity of the Independent Counsel selected pursuant to Section 11(b) hereof, and (C) the Delaware Court’s resolution of any objection which shall have been made by the Company to the selection of Independent Counsel and/or appointment of Independent Counsel, if the case may be, (v) payment of indemnification is not made pursuant to Section 5 or 6 or the last sentence of Section 13(a) of this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (vi) payment of indemnification pursuant to Section 3, 4 or 8 of this Agreement is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication by the Delaware Court to such indemnification or advancement. Alternatively, Indemnitee, at his or her option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 15(a); provided, however, that the foregoing time limitation shall not apply in respect of a proceeding brought by Indemnitee to enforce his or her rights under Section 5 of this Agreement. The Company shall not oppose Indemnitee’s right to seek any such adjudication or award in arbitration.

(b) In the event that a determination shall have been made pursuant to Section 13(a) of this Agreement that Indemnitee is not entitled to indemnification or advancement of Expenses, any judicial proceeding or arbitration commenced pursuant to this Section 15 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section 15, the Company shall have the burden of proving Indemnitee is not entitled to indemnification or advancement, as the case may be.

(c) If a determination shall have been made pursuant to Section 13(a) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 15, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law.

(d) The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 15 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement.

(e) The Company shall indemnify Indemnitee against any and all Enforcement Expenses and, if requested by Indemnitee, shall (within ten (10) days after receipt by the Company of a written request therefor) advance, to the extent not prohibited by law or limited by Section 10(b), such Enforcement Expenses to Indemnitee, which are incurred by Indemnitee in connection with any action brought by Indemnitee for indemnification or advancement from the Company under this Agreement or under any directors and officers liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement or insurance recovery, as the case may be, in the suit for which indemnification or advancement is being sought.

(f) Notwithstanding anything in this Agreement to the contrary and except as may be permitted under Section 10(b), no determination as to entitlement to indemnification under this Agreement shall be required to be made prior to the final disposition of the Proceeding, including any appeal therein.

Section 16. Non-exclusivity. The rights of indemnification and to receive advancement as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Charter, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his or her Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in Delaware law,

whether by statute or judicial decision, permits greater indemnification or advancement than would be afforded currently under the Charter, Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

Section 17. Liability Insurance and Funding. The Company shall, from time to time (and no less than annually), make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with a reputable insurance company providing the Indemnitee with coverage for losses from wrongful acts. For so long as Indemnitee shall remain a director or officer of the Company and with respect to any such prior service, in all policies of directors and officers liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are afforded to the most favorably insured of the Company’s officers and directors. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, or if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit. In the event of such a determination, the Company shall promptly notify Indemnitee of any determination not to provide such coverage. If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has directors and officers liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall also, while any claim for indemnification or advancement of Expenses is pending hereunder, provide to Indemnitee: (i) copies of all potentially applicable directors and officers liability insurance policies, (ii) a copy of such notice delivered to the applicable insurers, and (iii) copies of all subsequent correspondence between the Company and such insurers regarding the proceeding, in each case substantially concurrently with the deliver or receipt thereof by the Company. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

Section 18. Subrogation.

(a) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. The Company hereby acknowledges that Indemnitee may have certain rights to indemnification, advancement of expenses and/or insurance provided by certain third parties and their affiliates (collectively, the “Third-

Party Indemnitors”). The Company hereby agrees (i) that it is the indemnitor of first resort (i.e., its obligations to Indemnitee are primary and any obligation of the Third-Party Indemnitors to advance expenses or to provide indemnification for the same expenses or liabilities incurred by Indemnitee are secondary), (ii) that it shall be required to advance the full amount of expenses incurred by Indemnitee and shall be liable for the full amount of all Expenses, judgments, penalties, fines and amounts paid in settlement to the extent legally permitted and as required by the terms of this Agreement and the Charter or Bylaws of the Company (or any other agreement between the Company and Indemnitee), without regard to any rights Indemnitee may have against the Third-Party Indemnitors, and, (iii) that it irrevocably waives, relinquishes and releases the Third-Party Indemnitors from any and all claims against the Third-Party Indemnitors for contribution, subrogation or any other recovery of any kind in respect thereof. The Company further agrees that no advancement or payment by the Third-Party Indemnitors on behalf of Indemnitee with respect to any claim for which Indemnitee has sought indemnification from the Company shall affect the foregoing and the Third-Party Indemnitors shall have a right of contribution and/or be subrogated to the extent of such advancement or payment to all of the rights of recovery of Indemnitee against the Company. The Company and Indemnitee agree that the Third-Party Indemnitors are express third-party beneficiaries of the terms of this Section 18(a).

(b) The Company’s obligation to provide indemnification or advancement hereunder to Indemnitee who is or was serving at the request of the Company as a director, officer, employee, agent or trustee of any other Enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement from such other Enterprise.

Section 19. Continuation of Indemnification. All agreements and obligations of the Company contained herein shall continue during the period that the Indemnitee is a director or officer of the Company (or of any other Enterprise which Indemnitee is or was serving at the request of the Company) and shall continue thereafter so long as the Indemnitee shall be subject to any possible Proceeding (including any rights of appeal thereto) and through any proceeding commenced by the Indemnitee to enforce or interpret his or her rights under this Agreement.

Section 20. Successors and Binding Agreement.

(a) The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance reasonably satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, including without limitation any person acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successors will thereafter be deemed the “Company” for purposes of this Agreement), but shall not otherwise be assignable or

delegable by the Company. For the avoidance of doubt, any assignment of this Agreement (by operation of law or otherwise) in connection with the acquisition of all or substantially all of the business or assets of the Company (whether such acquisition is by purchase, merger, consolidation, reorganization or otherwise), shall not require the consent of the Indemnitee, provided that the successor or acquiring entity, as applicable, expressly assumes the Company’s obligations hereunder.

(b) This Agreement shall inure to the benefit of and be enforceable by Indemnitee and his or her personal or legal representatives, heirs, executors and administrators, distributees, legatees, and other successors.

(c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign or delegate this Agreement or any rights or obligations hereunder except as expressly provided in these Sections 20(a) and 20(b). Without limiting the generality or effect of the foregoing, Indemnitee’s right to receive payments hereunder shall not be assignable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by the Indemnitee’s will or by the laws of descent and distribution, and, in the event of any attempted assignment or transfer contrary to this Section 20(c), the Company shall have no liability to pay any amount so attempted to be assigned or transferred.

Section 21. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.

Section 22. Enforcement.

(a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as a director or officer of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving the Company in such capacity.

(b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof, provided, however, that this Agreement is a

supplement to and in furtherance of the Charter, the Bylaws and applicable law, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder.

Section 23. Modification and Waiver. No supplement, modification or amendment, or waiver of any provision, of this Agreement shall be binding unless executed in writing by the parties thereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions of this Agreement nor shall any waiver constitute a continuing waiver.

Section 24. Notice by Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement as provided hereunder. The failure of Indemnitee to so notify the Company shall not relieve the Company of any obligation which it may have to Indemnitee under this Agreement or otherwise unless, and only to the extent that, the Company did not otherwise learn of the Proceeding and such failure results in forfeiture by the Company of substantial defenses, rights or insurance coverage.

Section 25. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given if (a) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, (b) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed, or (c) mailed by reputable overnight courier and receipted for by the party to whom said notice or other communication shall have been directed:

(a) If to Indemnitee, at such address as Indemnitee shall provide to the Company.

(b) If to the Company to:

Avanir Pharmaceuticals, Inc.

30 Enterprise, Suite 400

Aliso Viejo, California 92656

Attn: Corporate Secretary

or to any other address as may have been furnished to Indemnitee by the Company.

Section 26. Contribution. To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any Proceeding in such proportion as is deemed fair and reasonable in light of all of the circumstances in order to reflect (i) the relative benefits received by the Company and Indemnitee in connection with the event(s) and/or transaction(s) giving rise to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or

transactions. The relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee shall be determined by reference to, among other things, the degree to which their actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary, and the degree to which their conduct is active or passive.

Section 27. Applicable Law and Consent to Jurisdiction. This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. Except with respect to any arbitration commenced by Indemnitee pursuant to Section 15(a) of this Agreement, the Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Chancery Court of the State of Delaware, and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Chancery Court of the State of Delaware for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) consent to service of process at the address set forth in Section 25 of this Agreement with the same legal force and validity as if served upon such party personally within the State of Delaware, (iv) waive any objection to the laying of venue of any such action or proceeding in the Delaware Court, and (v) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.

Section 28. Injunctive Relief. The Company and Indemnitee agree herein that a monetary remedy for breach of this Agreement, at some later date, may be inadequate, impracticable and difficult of proof, and further agree that such breach may cause Indemnitee and the Company irreparable harm. Accordingly, the parties hereto agree that the parties may enforce this Agreement by seeking injunctive relief and/or specific performance hereof, without any necessity of showing actual damage or irreparable harm and that by seeking injunctive relief and/or specific performance, they shall not be precluded from seeking or obtaining any other relief to which they may be entitled. The Company and Indemnitee further agree that they shall be entitled to such specific performance and injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, without the necessity of posting bonds or other undertaking in connection therewith. The Company and Indemnitee acknowledge that in the absence of a waiver, a bond or undertaking may be required by the Delaware Court, and they hereby waive any such requirement of such a bond or undertaking.

Section 29. Certain Interpretive Matters. No provision of this Agreement shall be interpreted in favor of, or against, either of the parties hereto by reason of the extent to which any such party or its counsel participated in the drafting thereof or by reason of the extent to which any such provision is inconsistent with any prior draft hereof or thereof.

Section 30. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.

Section 31. Miscellaneous. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

* * *

IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year first above written.


AVANIR Pharmaceuticals, Inc.

By:
		Keith A. Katkin
		President & Chief Executive Officer

INDEMNITEE


<Name>

Exhibit 10.23

CHANGE OF CONTROL AGREEMENT

This Change of Control Agreement (the “Agreement”), dated as of , 2014 (the “Effective Date”), is made by and between Avanir Pharmaceuticals, Inc., a Delaware corporation having its principal offices at 30 Enterprise, Suite 400, Aliso Viejo, California (the “Company”) and <Name> (“Employee”).

RECITALS

A. It is expected that other entities or individuals may, from time to time, consider the possibility of acquiring the Company in a transaction that will result in a Change of Control (defined below), with or without the approval of the Company’s Board of Directors. The Board of Directors recognizes that such consideration may cause Employee to consider alternative employment opportunities. Accordingly, the Board of Directors has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication and objectivity of Employee, notwithstanding the possibility, threat or occurrence of a Change of Control.

B. The Company’s Board of Directors believes it is in the best interests of the Company and its shareholders to enter into this Agreement to provide incentives to Employee to continue in the service of the Company in the event of a Change of Control.

C. The Board of Directors further believes that it is necessary to provide Employee with certain benefits upon termination of Employee’s employment in connection with a Change of Control, which benefits are intended to provide Employee with financial security and provide sufficient income and encouragement to Employee to remain employed by the Company, notwithstanding the possibility of a Change of Control.

NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements contained herein, and in consideration of the continuing employment of Employee by the Company, the parties hereto agree as follows:

1. Definitions.

1.1 “Awards” means Employee’s outstanding stock options, restricted stock awards, restricted stock units, stock appreciation rights and other equity-based awards granted under the Company Equity Plans, in each case that remain outstanding immediately following a Change of Control.

1.2 “Base Salary” means Employee’s gross monthly salary on the date of calculation, which, for the avoidance of doubt, excludes any bonus or other incentive compensation.

1.3 “Cause” shall, if applicable, have the meaning set forth in the definitive written employment agreement between Employee and the Company (the “Employment Agreement”); provided, however, that if there is no Employment Agreement, or if the Employment Agreement does not define what shall constitute a termination for “cause” (or a substantially similar term), then “Cause” for purposes of this Agreement shall mean: (i) Employee’s material breach of this Agreement or any confidentiality agreement between the Company and Employee; (ii)

Employee’s failure or refusal to comply with the Company’s Employee Manual, the Company’s Code of Business Conduct and Ethics, or other policies or procedures established by the Company (iii) Employee’s appropriation (or attempted appropriation) of a material business opportunity of the Company, including attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of the Company; (iv) Employee’s misappropriation (or attempted misappropriation) of any of the Company’s funds or material property; (v) Employee’s conviction of, or the entering of a guilty plea or plea of no contest with respect to a felony, the equivalent thereof, or any other crime with respect to which imprisonment is a possible punishment; or (vi) Employee’s willful misconduct or incompetence.

1.4 “CCC” means the California Code of Civil Procedure.

1.5 A “Change of Control” shall have occurred if, and only if:

(a) any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity or person, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Securities Exchange Act of 1934 (the “Exchange Act”) is or becomes the “Beneficial Owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities entitled to vote in the election of directors of the Company; or

(b) if those individuals who constituted the Board at the Effective Date (together with any directors elected or nominated by a majority of such members) cease to constitute a majority of the Board as a result of, or in connection with, a proxy solicitation made by a third party pursuant to Regulation 14A under the Securities Exchange Act of 1934; or

(c) there occurs a reorganization, merger, consolidation or other corporate transaction involving the Company (“Transaction”), in each case, with respect to which the stockholders of the Company immediately prior to such Transaction do not, immediately after the Transaction, own, directly or indirectly, more than 50% of the combined voting power of the Company’s then outstanding securities entitled to vote in the election of directors of the Company or of the securities of any other corporation resulting from such Transaction; or

(d) all or substantially all of the assets of the Company are sold, liquidated or distributed to an unrelated third party, other than in connection with a bankruptcy, insolvency or other similar proceeding, or an assignment for the benefit of creditors.

1.6 A “Change of Control Termination” shall have occurred if Employee’s employment by the Company, or any of its subsidiaries or affiliates, is terminated without Cause or Employee resigns in a Resignation for Good Reason, in either case subsequent to the signing of an agreement, the consummation of which would result in a Change of Control, or within 12 months following the effective date of a Change of Control.

1.7 A “Death or Disability Change of Control Termination” shall have occurred if Employee’s employment by the Company, or any of its subsidiaries or affiliates, is terminated by reason of Employee’s Disability or death, in either case subsequent to the signing of an agreement, the consummation of which would result in a Change of Control, or within 12 months following the effective date of a Change of Control.

1.8 “Disability” means (a) Employee is unable to engage in any substantial gainful activity because of a medically determinable physical or mental impairment that can be expected to result in death or to last for a continuous period of at least 12 months; or (b) Employee has been receiving income replacement benefits for at least three months under an accident and health plan of the service recipient as the result of a medically determinable physical or mental impairment that can be expected to result in death or to last for a continuous period of at least 12 months.

1.9 “COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1985.

1.10 “Code” means the Internal Revenue Code of 1986, as amended.

1.11 “Company Equity Plans” means the Company’s 1994 Stock Option Plan, 1998 Stock Option Plan, 2000 Stock Option Plan, 2003 Equity Incentive Plan and 2005 Equity Incentive Plan, and any other equity incentive plan of the Company, each as may be amended from time to time, and any stock option agreements, award notices, stock purchase agreements or other agreements or instruments executed and delivered pursuant thereto.

1.12 “Release” means a general release, in the form attached hereto as Exhibit A, by Employee of all claims against the Company and its affiliates as of the date of the Change of Control Termination.

1.13 “Resignation for Good Reason” shall, if applicable, have the meaning set forth in the Employment Agreement; provided, however, that if there is no Employment Agreement, or if the Employment Agreement does not define what shall constitute a termination for “good reason” (or a substantially similar term), then “Resignation for Good Reason” for purposes of this Agreement means a resignation based on any of the following events occurring in each case without Employee’s consent, each of which shall constitute “Good Reason,” subject to the notice and cure provisions set forth below:

(a) a material diminution in Employee’s authority, duties, reporting relationship, or responsibilities;

(b) a material diminution in Employee’s Base Salary;

(d) any other action or inaction that constitutes a material breach of the terms of an Employment Agreement, if any.

To constitute a Resignation for Good Reason: (i) Employee must provide written notice to the Company within 90 days of the initial existence of the event constituting Good Reason, (ii) Employee may not terminate his or her employment unless the Company fails to remedy the event constituting Good Reason within 30 days after such notice has been deemed given

pursuant to this Agreement, and (iii) Employee must terminate employment with the Company no later than 30 days after the end of the 30-day period in which the Company fails to remedy the event constituting Good Reason.

1.14 “Severance Payment” means severance pay in an amount equal to <XX months> of Base Salary, plus an amount equal to the greater of (A) the aggregate annual cash bonus payment(s) received by Employee in the Company’s preceding fiscal year or (B) Employee’s target annual cash bonus amount, such payments to be paid in accordance with the terms in Section 2.1(b) below. Notwithstanding the foregoing, if the tenure of Employee’s employment with the Company at the time of termination is less than one year, then the bonus amount calculated under this Section 1.11 shall be pro rated for the partial year of service.

1.15 “Severance Period” means the 12-month period following a Change of Control Termination.

2. Change of Control Termination.

2.1 Payment upon Change of Control Termination. Subject to Sections 2.2 and 2.3, in the event of a Change of Control Termination:

(a) The Company shall promptly pay Employee all accrued but unpaid Base Salary and all accrued but unused vacation time, each through the date of termination, plus any annual cash bonus payment earned by Employee for the fiscal year preceding the year of termination to the extent unpaid at the time of termination; and

(b) The Company shall pay Employee the Severance Payment after the date of termination, which Severance Payment shall be payable in one lump-sum payment on the first payroll date that is 30 days after the date of such termination. ; and

(c) Employee may elect to continue insurance coverage as afforded to Employee according to COBRA, and, if such election is made, Employee shall be entitled to reimbursement of COBRA coverage during the Severance Period. Nothing in this Agreement will extend Employee’s COBRA period beyond the period allowed under COBRA, nor is Company assuming any responsibility for Employee’s election to continue coverage. Notwithstanding the foregoing, the foregoing benefit can be provided, at the Company’s sole discretion, in the form of a lump sum taxable severance payment in lieu of the COBRA subsidy if the COBRA subsidy is found to be discriminatory pursuant to applicable law; and

(d) As of the date of termination, the vesting of all Awards shall accelerate in full and all rights of repurchase of Award shares shall immediately lapse with any performance-based vesting criteria deemed achieved at the target level of performance.

(e) In the event of a Death or Disability Change of Control Termination, subject to Section 2.2 (which shall apply pursuant to this Section 2.1(e) only in the event of a termination due to Employee’s Disability) and Section 2.3, Employee shall receive the compensation stated in Sections 2.1(a) through (d) pursuant to the same terms and conditions stated therein; provided, however, that the Severance Payment shall be pro rated by a fraction,

the numerator of which is the number of days elapsed from the date of the Change of Control (or the signing of an agreement the consummation of which will result in a Change of Control, if such death or termination occurs prior to the actual Change of Control) through the date of death or termination, as the case may be, and the denominator of which is 365.

2.2 Employee Release. In consideration for the benefits set forth above in Sections 2.1(b), 2.1(c), 2.1(d) and, if applicable, 2.1(e), following either a Change of Control Termination or a Death or Disability Change of Control Termination due to Disability, as applicable, Employee shall execute and deliver the Release no later than 21 days after termination of employment. The Company shall have no obligation to pay or grant the benefits set forth in Sections 2.1(b), 2.1(c), 2.1(d) or 2.1(e) unless the Release becomes effective and irrevocable within 30 days after termination of employment.

2.3 Other Benefits. In the event that the Employment Agreement provides for specific benefits upon a Change of Control and/or a Change of Control Termination that are materially more favorable to Employee than like benefits set forth herein, then Employee shall be entitled to those benefits set forth in the Employment Agreement in lieu of the lesser like benefits set forth herein. For the avoidance of doubt, in no event shall Employee be entitled to severance compensation upon Change of Control Termination under both this Agreement and the Employment Agreement.

3. Excise Tax Cutback.

3.1 Anything in this Agreement to the contrary notwithstanding, in the event that any compensation, payment or distribution by the Company to or for the benefit of Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (collectively, the “Payments”), (i) constitute “parachute payments” within the meaning of Section 280G of the Code, and (ii) but for this Section 3 would be subject to the excise tax imposed by Section 4999 of the Code, or any comparable successor provisions (the “Excise Tax”), then Employee’s Payments hereunder shall be either (1) provided to Employee in full, or (2) provided to Employee as to such lesser extent which would result in no portion of such benefits being subject to the Excise Tax, whichever of the foregoing amounts, when taking into account applicable federal, state, local and foreign income and employment taxes, the Excise Tax, and any other applicable taxes, results in the receipt by Employee, on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under the Excise Tax.

3.2 In the event the Payments are to be reduced pursuant to Section 3.1, the Payments shall be reduced in the following order: (1) cash payments not subject to Section 409A of the Code; (2) cash payments subject to Section 409A of the Code; (3) equity-based payments and acceleration; and (4) non-cash forms of benefits. To the extent any payment is to be made over time (e.g., in installments, etc.), then the payments shall be reduced in reverse chronological order. The determination any reduction pursuant to this Section 3 shall be made by a nationally recognized accounting firm selected and paid for by the Company (the “Accounting Firm”), which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the date of termination of service, if applicable, or at such earlier time as is reasonably requested by the Company or the Employee. For purposes of this

determination, the Accounting Firm may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of the Code, and other applicable legal authority. Any determination by the Accounting Firm shall be binding upon the Company and Employee.

4. Dispute Resolution Procedures. Any dispute or claim arising out of this Agreement shall be subject to final and binding arbitration. The arbitration will be conducted by one arbitrator who is a member of the American Arbitration Association (AAA) or of the Judicial Arbitration and Mediation Services (JAMS). The arbitration shall be held in Orange County, California. The arbitrator shall have all authority to determine the arbitrability of any claim and enter a final and binding judgment at the conclusion of any proceedings in respect of the arbitration. Notwithstanding any rule of AAA or JAMS to the contrary, the provisions of Title 9 of Part 3 of the CCC including Section 1283.05, and successor statutes, permitting expanded discovery proceedings shall be applicable to all disputes that are arbitrated under this paragraph. The arbitrator shall have all power and authority to enter orders relating to such discovery as are allowed under the CCC. The party prevailing in the resolution of any such claim will be entitled, in addition to such other relief as may be granted, to an award of all fees and costs incurred in pursuit of the claim (including reasonable attorneys’ fees) without regard to any statute, schedule, or rule of court purported to restrict such award.

5. At-Will Employment. Notwithstanding anything to the contrary herein, Employee reaffirms that Employee’s employment relationship with the Company is at-will, terminable at any time and for any reason by either the Company or Employee. While certain paragraphs of this Agreement describe events that could occur at a particular time in the future, nothing in this Agreement may be construed as a guarantee of employment of any length.

6. General Provisions.

6.1 Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of California, without regard to conflict-of-law principles.

6.2 Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns. Employee may not assign, pledge or encumber her interest in this Agreement or any part thereof, provided, however, that the provisions of this Agreement shall inure to the benefit of, and be binding upon Employee’s estate.

6.3 No Waiver of Breach. If either party should waive any breach of any provisions of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. The rights granted the parties are cumulative, and the election of one will not constitute a waiver of such party’s right to assert all other legal and equitable remedies available under the circumstances.

6.4 Severability. The provisions of this Agreement are severable, and if any provision will be held to be invalid or otherwise unenforceable, in whole or in part, the remainder of the provisions, or enforceable parts of this Agreement, will not be affected.

6.5 Entire Agreement; Amendment. This Agreement, including Exhibit A, constitutes the entire agreement of the parties with respect to the subject matter of this Agreement, and supersedes all prior and contemporaneous negotiations, agreements and understandings between the parties, oral or written, except those provisions of the Employment Agreement expressly referred to herein. This Agreement may be amended or supplemented only by writing signed by both of the parties hereto.

6.6 Modification; Waivers. No modification, termination or attempted waiver of this Agreement will be valid unless in writing, signed by the party against whom such modification, termination or waiver is sought to be enforced.

6.7 Duplicate Counterparts. This Agreement may be executed in duplicate counterparts; each of, which shall be deemed an original; provided, however, such counterparts shall together constitute only one instrument.

6.8 Interpretation. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. As used in this Agreement, words of the masculine gender shall mean and include corresponding neuter words or words of the feminine gender.

6.9 No Mitigation. No payment to which Employee is entitled pursuant to Section 2.1 hereof shall be reduced by reason of compensation or other income received by her for services rendered after termination of her employment with the Company.

6.10 Withholding of Taxes. The Company shall withhold appropriate federal, state, local (and foreign, if applicable) income and employment taxes from any payments hereunder.

6.11 Drafting Ambiguities; Representation by Counsel. Each party to this Agreement and its counsel have reviewed and revised this Agreement and the Release. The rule of construction that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement, the Release or any of the amendments to this Agreement.

6.12 Prior Agreement. This Agreement amends and restates that certain Change of Control Agreement, dated <Date>, by and between the Company and Employee.

6.13 Section 409A Compliance.

(a) This Agreement is intended to comply with the requirements of Section 409A of the Code and the regulations and guidance promulgated thereunder (“Section 409A”) or an exemption from Section 409A. The Company shall undertake to administer, interpret, and construe this Agreement in a manner that does not result in the imposition on Employee of any additional tax, penalty, or interest under Section 409A. Each payment under this Agreement shall be treated as a separate payment for purposes of Section 409A.

(b) A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits upon or following a termination of employment unless such termination is also a

“separation from service” within the meaning of Section 409A and, for purposes of any such provision of this Agreement, references to a “termination,” “termination of employment” or like terms shall mean “separation from service.”

(c) Notwithstanding anything herein to the contrary, in the event that Employee is a “specified employee” within the meaning of that term under Section 409A(a)(2)(B) of the Code, then with regard to any payment or the provision of any benefit (whether under this Agreement or otherwise) that is considered deferred compensation under Section 409A payable on account of a “separation from service,” and that is not exempt from Section 409A as involuntary separation pay or a short-term deferral (or otherwise), to the extent necessary to avoid the imposition of excise taxes under Section 409A, such payment or benefit shall be made or provided at the date which is the earlier of (i) the expiration of the six (6)-month period measured from the date of such “separation from service” of Employee or (B) the date of Employee’s death (the “Delay Period”). Upon the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section 6.13(c) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to Employee in a lump sum without interest, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.

(d) With regard to any provision herein that provides for reimbursement of costs and expenses or in-kind benefits, except as permitted by Section 409A, all such payments shall be made on or before the last day of calendar year following the calendar year in which the expense occurred.

In witness whereof, this Change of Control Agreement has been executed as of the date first set forth above.


AVANIR Pharmaceuticals, Inc.

By:
		Keith Katkin
		President & Chief Executive Officer

Employee


(Signature)


(Print Name)

EXHIBIT A

GENERAL RELEASE

This General Release (“Release”) is entered into effective as of , 200 , (the “Effective Date”) by and between Avanir Pharmaceuticals, Inc., a Delaware corporation, having its principal offices at 30 Enterprise, Suite 400, Aliso Viejo, CA 92656 (the “Company”) and , an individual residing at (“Employee”) with reference to the following facts:

RECITALS

A. The parties hereto entered into a Change of Control Agreement dated , 20 (“Agreement”), by which the parties agreed that in certain circumstances Employee would become eligible for severance payments, equity acceleration and other specified benefits following a termination of service in connection with a Change of Control in exchange for Employee’s release of the Company from all claims which Employee may have against the Company.

B. The parties desire to dispose of, fully and completely, all claims that Employee may have against the Company in the manner set forth in this Release.

AGREEMENT

1. Release. Employee, for himself/herself and his/her heirs, successors and assigns, fully releases, and discharges Company, its officers, directors, employees, shareholders, attorneys, accountants, other professionals, insurers and agents (collectively “Agents”), and all entities related to each such party, including, but not limited to, heirs, executors, administrators, personal representatives, assigns, parent, subsidiary and sister corporations, affiliates, partners and co-venturers (collectively “Related Entities”), from all rights, claims, demands, actions, causes of action, liabilities and obligations of every kind, nature and description whatsoever, Employee now has, owns or holds or has at anytime had, owned or held or may have against the Company, Agents or Related Entities from any source whatsoever, whether or not arising from or related to the facts recited in this Release. Employee specifically releases and waives any and all claims arising under any express or implied contract, rules, regulation or ordinance, including, without limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans with Disabilities Act, the California Fair Employment and Housing Act, and the Age Discrimination in Employment Act, as amended (“ADEA”). Notwithstanding the foregoing, the Employee is not releasing (a) the right to enforce this agreement or (b) any rights to indemnification pursuant to agreement, by-law, policy or statute, if any, that the Employee maintains.

2. Section 1542 Waiver. This Release is intended as a full and complete release and discharge of any and all claims that Employee may have against the Company, Agents or Related Entities. In making this release, Employee intends to release the Company, Agents and Related Entities from liability of any nature whatsoever for any claim of damages or injury or for equitable or declaratory relief of any kind, whether the claim, or any facts on which such claim might be based, is known or unknown to Employee. Employee expressly waives all rights under §1542 of the Civil Code of the State of California, which Employee understands provides as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

Employee acknowledges that he may discover facts different from or in addition to those that he now believes to be true with respect to this Release. Employee agrees that this Release shall remain effective notwithstanding the discovery of any different or additional facts.

3. Waiver of Certain Claims. Employee acknowledges that he has been advised in writing of her right to consult with an attorney prior to executing the waivers set out in this Release, and that he has been given a 21-day period in which to consider entering into the release of ADEA claims, if any. In addition, Employee acknowledges that he has been informed that he may revoke a signed waiver of the ADEA claims for up to 7 days after executing this Release.

4. Confidentiality Agreement. Employee acknowledge and reaffirms that Employee’s obligations in respect of the Employee Invention Assignment, Patent, and Confidential Information Agreement entered into between the parties on shall remain in full force and effect following the execution of this Release, and Employee hereby represents that Employee has complied and will continue to fully comply with those obligations.

5. Non-disparagement. Employee agrees that he will not at any time disparage, criticize or ridicule any of the Released Entities, or make any negative public comments, whether by way of news interviews, posting comments on, or publishing internet blogs or webpages (whether or not done anonymously), publishing and/or circulating any other form of media, or the expression of Employee’s personal views, opinions or judgments to the media, internet blogs and webpages, or otherwise (whether or not done anonymously), or to current or former officers, directors or employees of the Released Parties.

6. Cooperation. Employee agrees that Employee will cooperate with the Company (or its present and former parents, subsidiaries, affiliates or related entities) and its legal counsel in connection with any current or future litigation, pursuant to the issuance of a valid subpoena, relating to matters with which Employee was involved or of which Employee has knowledge or which occurred during Employee’s employment at the Company. Such assistance will include, but not be limited to, depositions and testimony and will continue until such matters are resolved. The Company will provide Employee with reasonable notice whenever possible of the need for cooperation; will make all reasonable efforts to schedule cooperation so as not to interfere with Employee’s employment or professional obligations; and will reimburse Employee for all reasonable travel, lodging and meal costs incurred in providing requested assistance.

7. Return of Property. Employee represents that Employee has returned to the Company all company property and equipment of any kind in Employee’s possession or control. This includes computer equipment (hardware and software), BlackBerry, iPhone or similar

device, credit cards, office keys, security access cards, badges, identification cards and all files, documents, copies (including drafts) of any documentation or information (however stored), relating to the business of the Released Parties, their clients or prospective clients.

8. Nonsolicitation. Employee hereby covenants and agrees that for a period of twelve months following the effective date of this Release, Employee shall not, without the written consent of the Company, either directly or indirectly: solicit, offer employment to, or take any other action intended (or that a reasonable person acting in like circumstances would expect) to have the effect of causing any officer or employee of the Company or any of its subsidiaries or affiliates, to terminate his or her employment and accept employment or become affiliated with or provide services for compensation in any capacity whatsoever to, any business whatsoever that competes with the business of the Company or any of its direct or indirect subsidiaries or affiliates.

9. No Undue Influence. This Release is executed voluntarily and without any duress or undue influence. Employee acknowledges he has read this Release and executed it with full and free consent. No provision of this Release shall be construed against any party by virtue of the fact that such party or its counsel drafted such provision or the entirety of this Release.

10. Governing Law. This Release is made and entered into in the State of California and accordingly the rights and obligations of the parties hereunder shall in all respects be construed, interpreted, enforced and governed in accordance with the laws of the State of California as applied to contracts entered into by and between residents of California to be wholly performed within California.

11. Severability. If any provision of this Release is held to be invalid, void or unenforceable, the balance of the provisions of this Release shall, nevertheless, remain in full force and effect and shall in no way be affected, impaired or invalidated.

12. Counterparts. This Release may be executed simultaneously in counterparts, each of, which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Release may be executed by facsimile, with originals to follow by overnight courier.

13. Dispute Resolution Proceedings. Any dispute or claim arising out of this Release shall be subject to final and binding arbitration. The arbitration will be conducted by one arbitrator who is a member of the American Arbitration Association (AAA) or of the Judicial Arbitration and Mediation Services (JAMS) and will be governed by the Model Employment Arbitration rules of AAA. The arbitration shall be held in Orange County, California. The arbitrator shall have all authority to determine the arbitrability of any claim and enter a final and binding judgment at the conclusion of any proceedings in respect of the arbitration. Any final judgment only may be appealed on the grounds of improper bias or improper conduct of the arbitrator. Notwithstanding any rule of AAA or JAMS to the contrary, the provisions of Title 9 of Part 3 of the California Code of Civil Procedure (the “CCC”) including Section 1283.05, and successor statutes, permitting expanded discovery proceedings shall be applicable to all disputes that are arbitrated under this paragraph. The arbitrator shall have all power and authority to enter orders relating to such discovery as are allowed under the CCC. The party prevailing in the

resolution of any such claim will be entitled, in addition to such other relief as may be granted, to an award of all fees and costs incurred in pursuit of the claim (including reasonable attorneys’ fees) without regard to any statute, schedule, or rule of court purported to restrict such award.

14. Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter of this Agreement, and supersedes all prior and contemporaneous negotiations, agreements and understandings between the parties, oral or written.

15. Modification; Waivers. No modification, termination or attempted waiver of this Agreement will be valid unless in writing, signed by the party against whom such modification, termination or waiver is sought to be enforced.

16. Amendment. This Agreement may be amended or supplemented only by writing signed by Employee and the Company.


Dated:
						Employee Name

Exhibit 10.24

December 1, 2014

Keith Katkin

c/o Avanir Pharmaceuticals

30 Enterprise, Suite 400

Aliso Viejo, CA 92656

Dear Keith:

This letter presents the following definitive terms for your on-going service as President and Chief Executive Officer.

TITLE AND RESPONSIBILITIES

Your position will continue to be that of President and Chief Executive Officer and you will have such responsibilities as set forth in the bylaws of Avanir Pharmaceuticals (the “Company”) and as may be prescribed from time to time by the Board of Directors. Your appointment in this capacity was effective as of March 13, 2007 (the “Effective Date”) and you will serve until the earlier of your resignation or removal.

COMPENSATION

Base Salary. Your base salary will be $56,250.00 per month (an annual rate of $675,000.00), or such higher amount as the Compensation Committee of the Board of Directors may determine from time to time (“Base Salary”), payable in accordance with the Company’s regular payroll practices.

Bonus. In addition to the Base Salary, you will be eligible for an annual target bonus equal to 65% of the Base Salary. This annual bonus will be payable no later than the end of the first quarter of each fiscal year based on performance in the prior year. The actual bonus may be higher or lower than the target amount, depending on your satisfaction of performance criteria established by the Compensation Committee of the Board and the Company’s overall performance.

Equity Awards. The Compensation Committee will award you with equity compensation on terms to be determined by the Compensation Committee, in its sole discretion. The Compensation Committee ordinarily assesses performance and makes annual equity compensation grants following the end of each fiscal year (i.e., in the first quarter of the following fiscal year). The specific terms of such annual awards will be determined by the Compensation Committee.

BENEFITS AND EXPENSES

As an AVANIR employee and member of senior management you will be eligible for the employee benefits relating to health insurance, life insurance, disability insurance, etc., provided to other members of the Company’s senior management. In addition, all travel and other reasonable business expenses incurred by you in the performance of your duties will be reimbursed to you, in accordance with the Company’s expense reimbursement policy.

SEVERANCE COMPENSATION

As a member of AVANIR’s senior management team, you will remain eligible to receive those change of control severance benefits to which you are currently entitled under the Company’s standard form of Change of Control Agreement, as amended from time to time.

In addition, if the Company terminates your employment without Cause or you Resign for Good Reason (each as defined in the Change of Control Agreement) other than under circumstances that would constitute a “Change of Control Termination as defined in the Change of Control Agreement, then, subject to your entering into the Company’s standard form of release of claims in favor of the Company and such release of claims becoming effective and irrevocable within thirty days following your termination date, you will be entitled to severance pay equal to 24 months of Base Salary, plus an amount equal to two times the greater of (A) the aggregate annual cash bonus payment(s) received by Employee in the Company’s preceding fiscal year or (B) Employee’s target annual cash bonus amount, with such severance benefits to be paid in one lump sum on the first payroll date that is thirty

days following the date of termination. Additionally, in the event of such a termination of your employment without Cause or a resignation for Good Reason, the vesting of all of your unvested equity-based compensation awards will be accelerated in full so as to vest as of the date of termination (with any performance-based vesting conditions deemed satisfied at the target level of performance), and you will have 90 days to exercise all of your stock options that have vested as of the date of termination.

If you elect to continue insurance coverage as afforded according to COBRA, and, if such election is made, you will be entitled to reimbursement of COBRA coverage for 24 months following the end of the existing coverage as an active employee. Nothing in this Agreement will extend the COBRA period beyond the period allowed under COBRA, nor is the Company assuming any responsibility for your election to continue coverage. Notwithstanding the foregoing, the foregoing benefit can be provided, at the Company’s sole discretion, in the form of a lump sum taxable severance payment in lieu of the COBRA subsidy if the COBRA subsidy is found to be discriminatory pursuant to applicable law.

Anything in this Agreement to the contrary notwithstanding, if at the time of your separation from service, you are determined by the Company to be a ‘specified employee’ within the meaning of Section 409A(a)(2)(B)(i) of the Internal Revenue Code of 1986, as amended (the ‘Code’), and if any payment that you become entitled to under this Agreement would be considered deferred compensation subject to interest and additional tax imposed pursuant to Section 409A(a) of the Code as a result of the application of Section 409A(a)(2)(B)(i) of the Code, then no such payment shall be payable prior to the date that is the earlier of (1) six months and one day after your separation from service, or (2) your death. This letter is intended to comply with the requirements of Section 409A of the Code and shall be interpreted in a manner consistent with that intent. Each payment made hereunder will be treated as a “separate payment” within the meaning of Section 409A of the Code.

OTHER ITEMS

Employment with the Company is considered “at will”, meaning it is for an unspecified period of time and that the employment relationship may be terminated by yourself or by the Company at any time, with or without cause. Nothing in the Change of Control Agreement will modify this at will employment relationship.

You will be required to devote your full time, attention, energy and skills to the Company during the period you are employed under this Agreement. During your employment, you may not, directly or indirectly, either as an employee, employer, consultant, corporate officer or director, investor, or in any other capacity, engage or participate in any business that is in competition with the business of the Company, unless such participation or interest is fully disclosed to the Company and approved by the Board.

This letter, the Change of Control Agreement and the Inventions Agreement previously executed by you constitute the entire agreement between you and the Company with respect to the terms of your employment and, by signing below, will supersede all prior and contemporaneous negotiations, agreements and understandings between you and the Company, whether oral or written (including your prior employment agreement, but excluding any agreements governing outstanding equity awards). Any amendments to this agreement shall be in writing and signed by both parties.

We look forward to your continued contributions to Avanir.


Respectfully,

Avanir Pharmaceuticals, Inc.

/S/ DAVID J. MAZZO
David J. Mazzo, Ph.D.
Chairman & Compensation Committee


Acceptance:

/s/ KEITH A. KATKIN
Keith A. Katkin
President & Chief Executive Officer

Exhibit 10.37

SUBLEASE

This SUBLEASE is made as of August 6, 2014, by and between Avanir Pharmaceuticals, Inc. a Delaware corporation having an address at 30 Enterprise, Aliso Viejo, California 92656 (“Sublessor”) and Telogis, Inc., a Delaware corporation, having an address at 20 Enterprise, Aliso Viejo, California 92656 (“Sublessee”).

BACKGROUND

A. Pursuant to that certain Summit Office Lease dated as of February 1, 2011, by and between Aliso Viejo RP-V1, LLC, as Landlord (“Prime Lessor”) and Sublessor, as Tenant, as amended by a First Amendment to Lease (“First Amendment”) dated as of September 27, 2013 (such lease, as so amended, and all renewals, modifications and extensions of such lease are collectively referred to in this Sublease as the “Prime Lease”) (a true and complete copy of which is attached hereto as Exhibit A), whereby Sublessor leases approximately 29,790 square feet of rentable space on the second floor of the building known as and numbered 20 Enterprise, Aliso Viejo, California (“20 Enterprise”) and approximately 134,726 square feet of rentable space in the building known as and numbered 30 Enterprise, Aliso Viejo, California (“30 Enterprise”) (collectively, the “Total Premises”). As used in this Sublease, “Building” means the building located at 20 Enterprise.

B. Sublessee desires to sublease the Subleased Premises (defined in Paragraph 1) from Sublessor and Sublessor is willing to sublease the same, all on the terms and conditions set forth in this Sublease.

For good and valuable consideration, the receipt and sufficiency of which are acknowledged by Sublessor and Sublessee, Sublessor and Sublessee agree as follows:

1. Sublease of Subleased Premises. For the rent and upon the terms and conditions in this Sublease, Sublessor subleases to Sublessee, and Sublessee subleases from Sublessor approximately 29,790 square feet of rentable space on the second floor of 20 Enterprise as shown on Exhibit B attached hereto (the “Subleased Premises”). During the Term (defined in Paragraph 2) of this Sublease, Sublessee shall have access to the Subleased Premises twenty-four (24) hours a day, 7 days a week, subject to the terms of this Sublease. If Sublessee enters the Subleased Premises prior to the Commencement Date (defined in Paragraph 2), Sublessee shall be responsible for complying with all of the terms of this Sublease and the Prime Lease to the extent incorporated in this Sublease by reference, other than the payment of Rent. Sublessor shall have the right to have a representative present any time during such early entry into the Subleased Premises.

2. Term. The term (the “Term”) of this Sublease shall commence upon the date (the “Commencement Date”) that is the later of (a) thirty (30) days after Sublessor has vacated the Subleased Premises or (b) August 11, 2014; provided that the following contingencies have been satisfied: (i) the Consent Contingency (defined in Paragraph 29) has been satisfied no later than August 23, 2014 and (ii) the Sublease has been fully executed by Sublessor and Sublessee, and shall expire at 11:59 p.m. on October 31, 2018 or such earlier date on which this Sublease may

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terminate pursuant to any of the terms or provisions of the Prime Lease, this Sublease or applicable law (the “Expiration Date”). When the Commencement Date has been determined, the parties will enter into a commencement date letter substantially in the form attached hereto as Exhibit C.

3. Furniture. During the Term of this Sublease, Sublessee may use (i) those items of furniture located in the Subleased Premises as of the date of this Sublease that are described in Exhibit D (the “Furniture”), and (ii) the existing cabling and telecommunications wiring (the “Existing Network Cabling”) that serves the Subleased Premises as of the date of this Sublease for the purposes for which such Existing Network Cabling was installed. Sublessee shall use the Existing Network Cabling in a safe manner and in accordance with applicable permits or codes, and shall not remove or modify the Existing Network Cabling or exceed reasonable usage limitations that may be imposed by Sublessor from time to time. Sublessee accepts the Furniture and the Existing Network Cabling and fixtures “as is, where is” and in their current condition, Sublessor having made no representation or warranty of any kind, express or implied (including, but not limited to, any warranty of fitness for any particular use or purpose) with respect to any of the same. Sublessor shall have no obligation of any kind to make repairs resulting from normal wear and tear office usage of the Furniture or make any improvements to the Furniture in connection with Sublessee’s customary office use of the Furniture. If the Lease Expiration Date is October 31, 2018, Sublessee shall own the Furniture and shall remove the Furniture (excluding the Existing Network Cabling) from the Subleased Premises. If this Sublease terminates prior to the Expiration Date of October 31, 2018, the Furniture shall remain in the Subleased Premises. If Sublessee installs additional network cabling and/or equipment (“Additional Network Cabling”), Sublessee shall be responsible for removing such Additional Network Cabling and restoring the Subleased Premises to its condition prior to such installation at Sublessee’s sole cost and expense unless Prime Lessor advises Sublessee that Prime Lessor desires such Additional Network Cabling to remain. Notwithstanding anything in this Sublease to the contrary, Sublessee shall have no right to use the artwork or plants presently located in the Subleased Premises and Sublessee acknowledges that Sublessor shall remove such artwork and plants prior to the Commencement Date.

4. Rent.

a. Base Rent. Commencing on the Commencement Date, Sublessee shall pay to Sublessor the following amounts as base rent (the “Base Rent”) during the Term of this Sublease:

Period/Months of

Term

Monthly Rate per
Rentable Square
Foot

Monthly
Base Rent

Annual
Rent Per
Rentable
Square
Foot

Annual Base
Rent

1-3

$2.54¹

$75,964.50²

$30.60³

$683,680.50⁴

¹	Subject to Paragraph 4.c hereof.

²	Subject to Paragraph 4.c hereof.

³	Subject to Paragraph 4.c hereof.

⁴	Subject to Paragraph 4.c hereof.

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4-12	$2.54	$75,964.50	$30.60	$683,680.50
13-24	$2.61	$78,248.40	$31.52	$938,980.80
25-36	$2.69	$80,606.78	$32.47	$967,281.30
36- October 31, 2018	$2.77	$83,014.80	$33.44	$996,177.60

b. Intentionally deleted.

c. Abatement of Base Rent. Provided this Sublease is in full force and effect and Sublessee is not in default under this Sublease beyond any applicable notice and cure period, Base Rent shall be abated for the first, second and third months of the Term. Notwithstanding anything to the contrary in this Sublease, if Sublessee defaults under this Sublease beyond any applicable notice and cure period, Sublessee shall immediately pay to Sublessor the amount of Base Rent abated pursuant to the terms of this Paragraph 4.c; provided that such immediate payment obligation by Sublessee in the event of a default shall not limit or affect any of Sublessor’s rights pursuant to this Sublease or at law or in equity.

d. Real Estate Taxes and Operating Expenses. In addition to Base Rent, Sublessee shall pay as additional rent the Sublessee’s Percentage (as defined below) of amounts from time to time payable by Sublessor to Prime Lessor under the terms of the Prime Lease for: (i) Real Estate Taxes for the Building in excess of Real Estate Taxes for the year of 2014 and (ii) Operating Expenses for the Building in excess of Operating Expenses for the year of 2014. The Real Estate Taxes and Operating Expenses for the Subleased Premises are described in Article 5 of the Prime Lease, notwithstanding any modification thereof by the First Amendment. Rent for any partial month shall be prorated and paid on the first day of such month. As used in this Sublease, “Sublessee’s Percentage” shall mean that percentage that from time to time constitutes the ratio that the rentable square feet in the Subleased Premises bears to rentable square feet in the Building with respect to which Sublessor from time to time pays additional rent in respect of Real Estate Taxes or Operating Expenses. As of the date of this Sublease, the Sublessee’s Percentage is 25.68%.

e. Statements of Expenses. Sublessor shall furnish to Sublessee copies of all Real Estate Tax and Operating Expense statements and all backup for such statements furnished by Prime Lessor to Sublessor pursuant to Section 5.4 of the Prime Lease and from time to time with respect to the calendar commencing January 1, 2014 and all subsequent calendar years occurring within the term of this Sublease, together with a statement prepared by Sublessor of the additional rent payable by Sublessee pursuant to Paragraph 4.d. After actual Real Estate Taxes and Operating Expenses for the any lease year are determined by Prime Lessor and shared with Sublessor, Sublessor shall reconcile the amounts paid on account thereof with the actual amount of Real Estate Taxes and Operating Expenses paid by Sublessee under this Sublease and render a statement to Sublessee detailing the same. Any underpayment of Real Estate Taxes and Operating Expenses shall be paid by Sublessee within thirty (30) days after Sublessee receives such statement. Any over-payment of Operating Expenses shall be credited against the Rent next due or, if no Rent is due after the expiration or earlier termination of the Term, then Sublessor will refund the excess to Sublessee. The provisions of this Paragraph 4.e shall survive the expiration or earlier termination of this Sublease.

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f. Audit Right. At Sublessee’s request and subject to the shortened Notice Periods set forth in Paragraph 11.c hereof, Sublessor will exercise its right to audit the Operating Expenses and Real Estate Taxes charged to the Building pursuant to Section 5.6 of the Prime Lease, provided that (i) Sublessor has first exercised its audit rights under the Prime Lease for the Total Premises and (ii) Sublessee reimburses Sublessor for all costs incurred by Sublessor in connection with Sublessee’s request for Sublessor to exercise its audit rights under the Prime Lease as to Operating Expenses and Real Estate Taxes for the Building.

g. Additional Expenses. In addition to the amounts payable under Paragraph 4.d, Sublessee shall pay as additional rent for all other expenses for which Sublessor is responsible to Prime Lessor under the Prime Lease to the extent such expenses (i) relate to the Subleased Premises or (ii) are incurred pursuant to additional services requested by Sublessee, except that Sublessee will in no way be liable for costs or expenses of Sublessor as a result of Sublessor’s default or breach of the terms of the Prime Lease (other than a breach caused by Sublessee or any party claiming through or under Sublessee) or matters for which Sublessee is expressly not responsible under the terms of this Sublease notwithstanding anything to the contrary by extension to Sublessee as “Tenant” under the Prime Lease.

5. Utilities. Sublessee shall pay for all utilities used in the Subleased Premises during the Term commencing on the Commencement Date by paying its pro rata portion for Building shared utilities and paying directly for utilities separately metered to the Subleased Premises. Sublessee shall reimburse Sublessor within ten (10) days after billing therefor for all above-standard or excess utility charges incurred by Sublessor from time to time under the Prime Lease that are attributable in whole or in part to Sublessee’s use of the Subleased Premises. Should Sublessee desire any after-hours HVAC service, Sublessee must give Sublessor at least such prior notice as is required of Prime Lessor pursuant to the terms of Article 7 of Prime Lease and Sublessor shall provide such request to Prime Lessor promptly after receipt. Sublessee shall reimburse Sublessor for the costs of obtaining such after-hours HVAC use in accordance with Paragraph 4 of this Sublease.

6. Permitted Uses. Sublessee shall use the Subleased Premises only for general office purposes and legal uses ancillary or incidental thereto to the extent permitted under the Prime Lease. Sublessee shall not do, suffer or permit anything to be done in or upon the Subleased Premises except in compliance with and as permitted by the Prime Lease and applicable law. Sublessee shall comply with the certificate of occupancy relating to the Subleased Premises and with all laws, statutes, ordinances, orders, rules, regulations and requirements of all federal, state and municipal governments and the appropriate agencies, officers, departments, boards and commissions thereof, and the board of fire underwriters and/or the fire insurance rating organization or similar organization performing the same or similar functions, whether now or hereafter in force, applicable to the Subleased Premises.

7. Condition of Subleased Premises.

a. Sublessee represents that it has made or caused to be made a thorough examination and inspection of the Subleased Premises and is familiar with the condition of every part of the Subleased Premises. Sublessee acknowledges that, except as expressly provided in this Sublease, (i) it enters into this Sublease without relying upon any representations, warranties or

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promises by Sublessor, its agents, representatives, employees, servants or any other person in respect of the Building or the Subleased Premises, (ii) no rights, easements or licenses are acquired by Sublessee by implication or otherwise except as expressly set forth in this Sublease, (iii) Sublessor shall have no obligation to do any work in order to make the Subleased Premises suitable and ready for occupancy and use by Sublessee, and (iv) the Subleased Premises are accepted “as is” and are in satisfactory condition.

b. Sublessee shall keep and maintain the Subleased Premises, the fixtures and equipment and the Furniture in the Subleased Premises clean and in good order, repair and condition, except for reasonable wear and tear and damage by fire or other casualty or condemnation. Sublessor shall have no obligation of any kind to make repairs resulting from normal wear and tear office usage of the Furniture or make any improvements to the Furniture in connection with Sublessee’s customary office use of the Furniture. However, should Sublessee elect to repair or replace any item of Furniture, Sublessee may do so at its sole cost and expense without reimbursement from Sublessor.

c. Alterations. Sublessee may undertake the improvements and alterations set forth on Exhibit B in compliance with the Prime Lease, subject to obtaining all needed permits and approvals, , including Prime Lessor consent as required. Except for the initial alterations and improvements described on Exhibit B, no alterations or improvements shall be made to the Subleased Premises, except in accordance with the Prime Lease and with prior written consent of Sublessor, which shall not be unreasonably withheld or delayed, and Prime Lessor, if Prime Lessor’s consent is required under the Prime Lease. All alterations and improvements shall be made in accordance with the terms of the Prime Lease. Notwithstanding the foregoing, all alterations and improvements shall be paid for by the Sublessee without offset or contribution from Sublessor or Prime Lessor.

8. Insurance. Sublessee shall maintain throughout the Term of this Sublease property insurance covering any alterations, additions and improvements made to the Subleased Premises by or on behalf of Sublessee and such insurance in respect of the Subleased Premises and the conduct and operation of Sublessee’s business in the Subleased Premises, with Sublessor and Prime Lessor listed as additional insureds as is required of “Tenant” pursuant to the terms of the Prime Lease (including, without limitation, Article 14 as incorporated in this Sublease by reference) with no penalty to Sublessor or Prime Lessor resulting from deductibles or self-insured retentions effected in Sublessee’s insurance coverage, and with such other endorsements and provisions as Sublessor or Prime Lessor may reasonably request. If Sublessee fails to procure or maintain such insurance, pay all premiums and charges therefor and provide Sublessor with certificate(s) of such insurance within ten (10) days after notice from Sublessor, Sublessor may (but shall not be obligated to) do so, whereupon Sublessee shall reimburse Sublessor upon demand for Sublessor’s costs incurred in so doing. All such insurance policies shall, to the extent obtainable, contain endorsements providing that (i) such policies may not be canceled except upon thirty (30) days’ prior notice to Sublessor and Prime Lessor, (ii) no act or omission of Sublessee shall affect or limit the obligations of the insurer with respect to any other named or additional insured and (iii) Sublessee shall be solely responsible for the payment of all premiums under such policies and Sublessor, notwithstanding that it is or may be a named insured, shall have no obligation for the payment of any insurance premiums. Such insurance shall otherwise be reasonably acceptable to Sublessor in both form and substance. On or before the Commencement

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Date, Sublessee shall deliver to Sublessor and Prime Lessor a certificate evidencing the coverages required by this Paragraph 8. Any endorsements to such certificates shall also be delivered to Sublessor and Prime Lessor upon issuance of such certificates. Sublessee shall procure and pay for renewals of such insurance from time to time before the expiration of such insurance, and Sublessee shall deliver to Sublessor and Prime Lessor such renewal certificates at least thirty (30) days before the expiration of any existing policy. In the event Sublessee fails so to deliver any such renewal certificate at least thirty (30) days before the expiration of any existing policy, then, in addition to its other rights and remedies in respect of such breach of this Sublease by Sublessee, Sublessor shall have the right, but not the obligation, to obtain such insurance on Sublessee’s behalf, whereupon Sublessee shall reimburse Sublessor within thirty (30) days of demand for Sublessor’s costs incurred in so doing. Maintenance of such insurance and/or the coverage application shall not relieve a party of any responsibility under this Agreement for damages in excess of insurance limits or otherwise.

Sublessee shall include in all such insurance policies any clauses or endorsements in favor of Prime Lessor including, but not limited to, waivers of the right of subrogation, which Sublessor is required to provide as “Tenant” pursuant to the provisions of the Prime Lease. Sublessee releases and waives all claims against Sublessor for loss or damage to Sublessee’s personal property and its alterations in the Subleased Premises to the extent that such loss or damage is insurable under policies of casualty insurance Sublessee carries or is required to carry under this Sublease.

If Sublessor consents to any sublease or sub-sublease of the Subleased Premises, Sublessee shall ensure that any subtenants and sub-subtenants obtain and maintains the insurance, as per this Agreement, required to be carried by Sublessee under this Sublease.

9. Indemnification. Sublessee shall protect, defend (with counsel reasonably approved by Sublessor), indemnify and hold Sublessor and Prime Lessor and their respective officers, agents and employees harmless from and against any and all liabilities, claims, suits, demands, judgments, costs, losses, interest and expenses (except to the extent arising from any negligence or willful misconduct of Prime Lessor or Sublessor or their contractors, invitees, agents or employees), arising from any bodily injury to or death of persons, or damage to property occurring or resulting from an occurrence in the Subleased Premises during the Term of this Sublease or from any breach or default on the part of Sublessee in the performance of any covenant or agreement on the part of Sublessee to be performed pursuant to the terms of this Sublease or from any willful misconduct or negligence on the part of Sublessee or any of its agents, employees, licensees, subtenants, sub-subtenants, invitees or assignees or any person claiming through or under Sublessee. Sublessee shall also indemnify Sublessor and Prime Lessor and their respective officers, agents and employees from and against any and all liabilities, claims, suits, demands, judgments, costs, losses, interest and expenses (including, without being limited to, reasonable attorneys’ fees and expenses), incurred in connection with any such indemnified claim or any action or proceeding brought in connection therewith. The provisions of this Paragraph 9 are intended to supplement any other indemnification provisions contained in this Sublease and in the Prime Lease to the extent incorporated in this Sublease by reference. Any non-liability, indemnity or hold harmless provisions in the Prime Lease for the benefit of Prime Lessor that are incorporated in this Sublease by reference shall be deemed to inure to the benefit of Sublessor and Prime Lessor.

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10. Assignment or Subletting.

a. Sublessee shall not assign, sell, mortgage, pledge or in any manner transfer this Sublease or any interest in this Sublease, or the Term or estate granted or the rentals under this Sublease, or sublet the Subleased Premises or any part of the Subleased Premises, or grant any concession or license or otherwise permit occupancy of all or any part of the Subleased Premises by any person or take any action or undertake any transaction without the prior written consent of Sublessor and Prime Lessor in accordance with Article 13 of the Prime Lease. Neither the consent of Sublessor or Prime Lessor to an assignment, subletting, concession, or license, nor the references in this Sublease to assignees, subtenants, concessionaires or licensees, shall in any way be construed to relieve Sublessee or any assignee, subtenant or sub-subtenant of the requirement of obtaining the consent of Sublessor and Prime Lessor to any further assignment or subletting or to the making of any assignment, subletting, concession or license for all or any part of the Subleased Premises, Sublessee and any such assignee, subtenant or sub-subtenant under this Sublease agreeing to be bound by the provisions of this Sublease and the Prime Lease as to any further assignment, subleasing or other arrangement for which consent is required under this Sublease or the Prime Lease. Notwithstanding any assignment or subletting, including, without limitation, any assignment or subletting permitted or consented to, the original Sublessee named in this Sublease and any other person(s) who at any time was or were Sublessee shall remain fully liable under this Sublease, and all acts and omissions of any assignee or subtenant or anyone claiming under or through any assignee or subtenant that shall be in conflict with the terms of this Sublease shall constitute a breach by Sublessee under this Sublease. If this Sublease is assigned, or if the Subleased Premises or any part of the Subleased Premises is underlet or occupied by any person or entity other than Sublessee, Sublessor may, after default by Sublessee, following notice and the expiration of any applicable cure period, collect rent from the assignee, undertenant or occupant, and apply the net amount collected to the Rent payable by Sublessee under this Sublease, but no assignment, underletting, occupancy or collection shall be deemed a waiver of the provisions of this Sublease, the acceptance of the assignee, undertenant or occupant as tenant, or a release of Sublessee from the further performance by Sublessee of the covenants under this Sublease to be performed on the part of Sublessee. Any attempted assignment or subletting or other arrangement, whether by Sublessee or any assignee or subtenant of Sublessee, without the prior written consent of the Sublessor and Prime Lessor shall be void.

b. If the Rent or other consideration payable to Sublessee in respect of such subletting or assignment exceeds the Base Rent payable by Sublessee under this Sublease, then fifty percent (50%) of all such excess rent shall be deemed additional rent owed by Sublessee to Sublessor, and shall be payable monthly to Sublessor by Sublessee in the same manner and on the same terms as installments of Base Rent are payable by Sublessee under this Sublease (or upon Sublessee’s receipt thereof, whichever is earlier), except that Sublessee may recapture, on an amortized basis over the term of the sublease or assignment, any brokerage commission paid by Sublessee in connection with the subletting or assignment (not to exceed commissions typically paid in the market at the time of such subletting or assignment) and reasonable legal fees incurred by Sublessee in connection with the subletting or assignment (collectively, the “Sub-subletting Costs”). Notwithstanding any assignment, subletting or other transfer by Sublessee or consent thereto by Sublessor or Prime Lessor, Sublessee shall remain fully liable on this Sublease and shall not be released from performing any of the terms, covenants and conditions of this Sublease. As a condition to Sublessee recapturing the Sub-subletting Costs, Sublessee shall provide to Sublessor,

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within ninety (90) days of Sublessor’s execution of Sublessor’s consent to the assignment or sub-subletting, a detailed accounting of the Sub-subletting Costs and supporting documents, such as receipts and construction invoices.

11. Primacy and Incorporation of Prime Lease.

a. This Sublease is and shall be subject and subordinate to the Prime Lease and to all matters to which the Prime Lease is or shall be subject and subordinate, and to all amendments, modifications, renewals and extensions of or to the Prime Lease and Sublessor purports to convey, and Sublessee takes, no greater rights than those accorded to or taken by Sublessor as “Tenant” under the terms of the Prime Lease. Sublessee covenants that it will perform and observe all of the provisions contained in the Prime Lease to be performed and observed by the “Tenant” under the Prime Lease for the Term of this Sublease to the extent incorporated in this Sublease and as applicable to the Subleased Premises, other than the payment of rent; provided that Sublessor shall not enter into any amendment or other agreement with respect to the Prime Lease that will prevent or materially adversely affect the use by Sublessee of the Subleased Premises in accordance with the terms of this Sublease, materially increase the obligations of Sublessee or decrease the rights of Sublessee under this Sublease, shorten the term of this Sublease or increase the rental or any other sums required to be paid by Sublessee under this Sublease, all without the prior written consent of Sublessee in each case, such consent not to be unreasonably withheld, conditioned or delayed. Notwithstanding anything in this Sublease to the contrary, Sublessee shall have no obligation to (i) cure any default of Sublessor under the Prime Lease (unless caused by Sublessee’s default under this Sublease), (ii) perform any obligation of Sublessor under the Prime Lease which arose prior to the Commencement Date and which Sublessor failed to perform, (iii) repair any damage to the Subleased Premises caused by Sublessor, (iv) remove any alterations or additions installed within the Subleased Premises prior to the Commencement Date, including but not limited to the Existing Network Cabling (excluding the Furniture if this Sublease terminates on October 31, 2018), (v) indemnify Sublessor or Prime Lessor with respect to any negligence or willful misconduct of Sublessor, its agents, employees or contractors or (vi) discharge any liens on the Subleased Premises or the Building that arise out of any work performed, or claimed to be performed, by or at the direction of Sublessor, except work to be undertaken at Sublessee’s expense. Except to the extent inconsistent with the context of this Sublease, capitalized terms used and not otherwise defined in this Sublease shall have the meanings ascribed to them in the Prime Lease.

Further, except as set forth below, the terms, covenants and conditions of the following specified provisions of the Prime Lease are incorporated in this Sublease by reference as if such terms, covenants and conditions were stated in this Sublease to be the terms, covenants and conditions of this Sublease, so that except to the extent that they are inconsistent with or modified by the provisions of this Sublease, for the purpose of incorporation by reference each and every referenced term, covenant and condition of the Prime Lease binding upon or inuring to the benefit of the “Landlord” under the Prime Lease shall, in respect of this Sublease and the Subleased Premises, be binding upon or inure to the benefit of Sublessor, and each and every referenced term, covenant and condition of the Prime Lease binding upon or inuring to the benefit of the “Tenant” under the Prime Lease shall, in respect of this Sublease, be binding upon or inure to the benefit of

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Sublessee, with the same force and effect as if such terms, covenants and conditions were completely set forth in this Sublease. Notwithstanding anything in this Sublease to the contrary, for purposes of this Sublease, as to such incorporated terms, covenants and conditions:

i. references in the Prime Lease to the “Premises” shall be deemed to refer to the “Subleased Premises” under this Sublease;

ii. references in the Prime Lease to “Landlord” and to “Tenant” shall be deemed to refer to “Sublessor” and “Sublessee” under this Sublease, respectively, except that where the terms “Landlord” is used in the context of ownership or management of the entire Building, such term shall be deemed to mean only “Prime Lessor”;

iii. references in the Prime Lease to “this Lease” shall be deemed to refer to “this Sublease” (except when such reference in the Prime Lease is, by its terms (unless modified by this Sublease), a reference to any other section of the Prime Lease, in which event such reference shall be deemed to refer to the particular section of the Prime Lease);

iv. references in the Prime Lease to the “Commencement Date” shall be deemed to refer to the “Commencement Date” under this Sublease;

v. references in the Prime Lease to the “Termination Date” shall be deemed to refer to the Expiration Date under this Sublease;

vi. references in the Prime Lease to the “Base Rent”, “Additional Rent” and “Rent” shall be deemed to refer to the “Base Rent”, “additional rent” and “Rent”, respectively, as defined under this Sublease; and

vii. references in the Prime Lease to the “Term” shall be deemed to refer to the “Term” of this Sublease.

The following provisions of the Prime Lease (including First Amendment as noted below), Exhibits and Schedules annexed thereto are not incorporated in this Sublease by reference and shall not, except as to definitions set forth in the Prime Lease, have any applicability to this Sublease: Articles/Sections/Exhibits: 1.1, 1.4, 1.5, 1.6, 1.7, 1.8, 1.9, 1.10, 1.12, 1.15, 1.17, 2, 3, 5.4, 5.5, 5.6, 6, 7.2, except Sublessee’s right to access and use such telecommunication services, 7.3, 17.1 (excluding the last two sentences), 17.2, the second sentence of 18, 21, 22, 23.1, 23.2, 24.1, 27.4, 27.5, 27.7, 27.8, 27.11, the first sentence of 27.15, 27.17, 27.18 and 28; Exhibit C, Exhibit D, the last sentence of paragraph 2 of Exhibit E, Exhibit F, and Exhibit I; and the First Amendment.

Where reference is made in the following Sections to “Landlord”, the same shall be deemed to refer only to “Prime Lessor”: Articles/Sections: 5.1, 5.2, 5.3, 7.1, 8, 10.2, the tenth sentence of Section 10.3 (beginning with “In addition, within 30 days”) and last sentence of 10.3, the second to last sentence of 14, the first sentence of 17.2, the seventh and eighth sentences of 18, 25, 27.15 (except that Sublessee shall have no rights to an Exterior Sign as defined in Section 27.15) and Exhibit E (paragraphs 1, 2, 3, 4 (excluding the second, third and fourth sentences) and 5, except that the grant of such parking rights described in Exhibit E is made by Sublessor pursuant to Paragraph 32 of this Sublease).

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Where reference is made in the following Sections to “Landlord”, the same shall be deemed to refer to “Prime Lessor” and “Sublessor”: Articles/Sections: 9.1, 12, 13, the second, third and fourth sentences of paragraph 4 of Exhibit E , paragraph 6 of Exhibit E, and paragraph 7 of Exhibit E.

b. Notwithstanding such incorporation by reference, Sublessee acknowledges that pursuant to the Prime Lease, certain services, repairs, restorations, equipment and access to and for the Subleased Premises and insurance coverage of the Building are in fact to be provided by Prime Lessor and Sublessor shall have no obligation to provide any such services, repairs, restorations, equipment, access or insurance coverage. Sublessee recognizes that Sublessor is not in a position to render any of the services or to perform any of the obligations of Prime Lessor pursuant to the terms of the Prime Lease. Sublessor shall use commercially reasonable (not arbitrary) efforts to obtain for Sublessee’s benefit the performance by Prime Lessor of its obligations under the Prime Lease, but Sublessor shall in no event be obligated to commence litigation or other formal proceedings, nor shall Sublessor be liable to Sublessee, nor shall the obligations of Sublessee under this Sublease be impaired or the performance of Sublessee be excused, because of any failure or delay on Prime Lessor’s part in furnishing such services, repairs, restorations, equipment, access or insurance coverage.

c. Notwithstanding anything to the contrary contained in the Prime Lease, the time limits (the “Notice Periods”) contained in the Prime Lease for the giving of notices, making of demands or performing of any act, condition or covenant on the part of the “Tenant” (including any grace periods set forth in Article 19 of the Prime Lease), under the Prime Lease, or for the exercise by “Tenant” under the Prime Lease of any right, remedy or option, are changed for the purposes of incorporation in this Sublease by reference by shortening the same in each instance by five (5) days (or by three (3) days if the notice period is ten (10) days or less), so that in each instance Sublessee shall have five (5) (or three (3), as applicable) fewer days to observe or perform under this Sublease than Sublessor has as “Tenant” under the Prime Lease; provided, however, that if the Prime Lease allows a Notice Period of five (5) days or less, then Sublessee shall nevertheless be allowed the number of days equal to one-half of the number of days in each Notice Period to give any such notices, make any such demands, perform any such acts, conditions or covenants or exercise any such rights, remedies or options; provided, further, that if one-half of the number of days in the Notice Period is not a whole number, Sublessee shall be allowed the number of days equal to one-half of the number of days in the Notice Period rounded up to the next whole number.

d. Representations and Warranties of Sublessor. Notwithstanding anything to the contrary contained in this Sublease (including, without limitation, the provisions of the Prime Lease incorporated in this Sublease by reference), Sublessor makes no representations or warranties whatsoever with respect to the Subleased Premises, this Sublease, the Prime Lease or any other matter, either express or implied, except as expressly set forth in this Sublease. Sublessor represents and warrants, as of the date of execution of this Sublease (i) that it is the holder of the interest of the “Tenant” under the Prime Lease and said interest is not the subject of any lien, assignment, conflicting sublease, or other hypothecation or pledge, (ii) that the Prime Lease is in full force and effect, unmodified and constitutes the entire agreement between Prime Lessor and Sublessor in respect of the Subleased Premises, (iii) that no default exists on the part of Prime Lessor or Sublessor under the Prime Lease, nor to the best of Sublessor’s knowledge, does

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any circumstance currently exist that, but for the giving of notice or the passage of time, or both, would be such a default, (iv) there are no agreements between Prime Lessor and Sublessor other than the Prime Lease and (v) there are no parking fees currently being charged by Prime Lessor for the 110 non-reserved and 10 reserved parking spaces described in Paragraph 32 of this Sublease.

12. Certain Services and Rights. Except to the extent otherwise expressly provided in Paragraph 11.b of this Sublease, the only services or rights to which the Sublessee is entitled under this Sublease, including without limitation rights relating to the repair, maintenance and restoration of the Subleased Premises, are those services and rights to which Sublessor is entitled under the Prime Lease. Sublessor has no obligation to furnish any services whatsoever to Sublessee, any such obligation being that of Prime Lessor under the Prime Lease, and that, as set forth in Paragraph 11.b of this Sublease, the sole obligation of Sublessor under this Sublease is to enforce Prime Lessor’s performance as set forth in Section 11.b of this Sublease.

13. Compliance with Prime Lease.

a. By Sublessee. Sublessee shall neither do, nor permit anything to be done, that could, after notice and failure to timely cure, if applicable, cause the Prime Lease to be terminated or forfeited by reason of any right of termination or forfeiture reserved or vested in Prime Lessor under the Prime Lease as a result of a “Tenant” default under the Prime Lease, and Sublessee shall defend, indemnify and hold Sublessor harmless from and against any and all liabilities, claims, suits, demands, judgments, costs, losses, interest and expenses (including, without being limited to, reasonable attorneys’ fees and expenses) of any kind whatsoever by reason of any breach or default on the part of Sublessee by reason of which the Prime Lease is or could be so terminated or forfeited. Sublessee covenants that Sublessee will not do anything that would constitute a default under the provisions of the Prime Lease or omit to do anything that Sublessee is obligated to do under the terms of this Sublease that would constitute a default under the Prime Lease.

b. By Sublessor. Sublessor will not commit an event of default under the provisions of the Prime Lease that, after any applicable notice and cure period, results in a termination of the Prime Lease.

14. Default. If Sublessee shall default in any of its obligations under this Sublease beyond applicable cure periods, Sublessor shall have available to it all of the rights and remedies available to Prime Lessor under the Prime Lease, including without limitation Articles 19 and 20 of the Prime Lease as incorporated in this Sublease by reference, as though Sublessor were the “Landlord” and Sublessee the “Tenant” under the Prime Lease. Sublessee shall reimburse Sublessor for all costs and expenses, including reasonable attorneys’ fees, incurred by Sublessor in asserting or enforcing its rights under this Sublease against Sublessee or any assignee, sub-subtenant or other person claiming under Sublessee.

15. Brokerage. Sublessee and Sublessor represent that they have not dealt with any broker in connection with this Sublease other than Newmark Grubb Knight Frank (the “Broker”). Each party shall indemnify and hold harmless the other from and against any and all liabilities, claims, suits, demands, judgments, costs, losses, interest and expenses (including, without being limited to, reasonable attorneys’ fees and expenses) which the indemnified party may be subject to

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or suffer by reason of any claim made by any person, firm or corporation other than the Broker for any commission, expense or other compensation as a result of the execution and delivery of this Sublease, which is based on alleged conversations or negotiations by said person, firm or corporation with the indemnifying party. Sublessor shall pay the Broker the brokerage commission or other compensation due the Broker in connection with this Sublease under separate agreements between Sublessor and Broker.

16. Security Deposit. Upon the satisfaction of the Consent Contingency, Sublessee shall deliver to Sublessor a security deposit in the amount of $83,014.80 as security for the full and faithful performance and observance by Sublessee of Sublessee’s covenants and obligations under this Sublease (the “Security Deposit”). Should Sublessee fail to cure an event of default after notice and an opportunity to cure thereof as provided in this Sublease, including but not limited to Rent specified in Paragraph 4 of this Sublease, Sublessor may use such portion of the Security Deposit to the extent required for the payment of any Rent or any other sums as to which Sublessee is in default or for any sum which Sublessor may expend or may be required to expend by reason of Sublessee’s default in respect of any of the terms, covenants and conditions of this Sublease, including, but not limited to, any damages or deficiency in the reletting of all or any portion of the Subleased Premises, whether such damages or deficiency accrue before or after summary proceedings or other re-entry by Sublessor. If Sublessor utilizes any portion of the Security Deposit to cure Sublessee’s default, Sublessee shall cause the Security Deposit to be restored to its original amount and failure to do so within ten (10) days after receiving written notice from Sublessor shall be deemed a default under this Sublease. Sublessee understands that its potential liability under this Sublease is not limited to the amount of the Security Deposit. Use of said Security Deposit by Sublessor shall not constitute a waiver, but is in addition to other remedies to Sublessor under this Sublease and under law. In the event of any transfer of Sublessor’s interest in the Subleased Premises, Sublessor shall either return the Security Deposit to Sublessee or assign its interest in the Security Deposit to the transferee or assignee and Sublessor shall thereupon be released by Sublessee from all liability for the return or payment of the Security Deposit; and Sublessee shall look solely to the new sublessor for the return or payment of the same; and the provisions of this Paragraph 16 shall apply to every transfer or assignment made of the same to a new sublessor. Sublessee shall not assign or encumber or attempt to assign or encumber the Security Deposit and neither Sublessor nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. Within thirty (30) days of the later of the termination of this Sublease or Sublessee’s surrender of the Subleased Premises in the condition required by this Sublease, Sublessor shall return to Sublessee that portion of the Security Deposit not used or applied by Sublessor.

17. Notices. All notices, consents, approvals, demands, bills, statements and requests which are required or permitted to be given by either party to the other under this Sublease shall be in writing and shall be governed by Article 26 of the Prime Lease as incorporated in this Sublease by reference and the mailing addresses for Sublessor and Sublessee shall be those first set forth above. All notices to Sublessor shall be addressed to the attention of the Vice President of Finance with a copy to the attention of the Vice President of Real Estate. Communications and payments to the Prime Lessor shall be given in accordance with, and subject to, Article 26 of the Prime Lease.

18. Interpretation. This Sublease shall be construed without regard to any presumption or other rule suggesting construction or interpretation against the party causing this Sublease to be

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drafted. Each covenant, agreement, obligation or other provision of this Sublease shall be deemed and construed as a separate and independent covenant of the party bound by, undertaking or making the same, which covenant, agreement, obligation or other provision shall be construed and interpreted in the context of the Sublease as a whole. All terms and words used in this Sublease, regardless of the number or gender in which they are used, shall be deemed to include any other number and any other gender as the context may require. The word “person” as used in this Sublease shall mean a natural person or persons, a partnership, a corporation or any other form of business or legal association or entity.

19. Fire or Casualty. In the event the Subleased Premises (or access thereto or systems serving the same) are subjected to a fire or other casualty that interferes with the use and enjoyment by Sublessee of a material portion of the Subleased Premises, Sublessee shall, to the extent Sublessor is entitled to an abatement of rent pursuant to the Prime Lease, be entitled to an equitable adjustment of Rent until tenantable occupancy is restored. If the estimated time for repairs will exceed, or such interference has not been remedied and tenantable occupancy restored after, one hundred eighty (180) days from the date such interference was first experienced, Sublessor or Sublessee may, by notice to the other, terminate this Sublease.

20. Signage. Subject to the consent of Prime Lessor if required under the terms and provisions of the Prime Lease, Sublessee shall have the right, at its sole cost and expense, to install interior and exterior signage consistent with Sublessor’s signage rights under Section 27.15 of the Prime Lease. Within ninety (90) days after the Commencement Date, Sublessor shall, at its sole cost, remove Sublessor’s existing signage in, on and from the Building and the Subleased Premises. Should Sublessor fail to so remove its signage, Sublessee shall have the right to remove such signage at Sublessor’s cost and expense.

21. Right to Cure Sublessee’s Defaults. If Sublessee shall at any time fail to make any payment or perform any other obligation of Sublessee under this Sublease, then Sublessor shall have the right, but not the obligation, only after notice to Sublessee and an opportunity to cure as set forth in this Sublease, except no notice shall be required to Sublessee in the case of any emergency, and without waiving or releasing Sublessee from any obligations of Sublessee under this Sublease, to make such payment or perform such other obligation of Sublessee in such manner and to such extent as Sublessor shall deem necessary, and in exercising any such right, to pay any incidental costs and expenses, employ attorneys, and incur and pay reasonable attorneys’ fees. Sublessee shall pay to Sublessor upon demand as additional rent all sums so paid by Sublessor and all incidental costs and expenses of Sublessor in connection therewith, together with interest thereon at an annual rate equal to the rate two percent (2%) above the base rate or prime rate then published as such in the Wall Street Journal, or, if less, the maximum rate permitted by law. Such interest shall be payable with respect to the period commencing on the date such expenditures are made by Sublessor and ending on the date such amounts are repaid by Sublessee. The provisions of this Paragraph shall survive the Expiration Date or the sooner termination of this Sublease.

22. Termination of Prime Lease; Surrender. If for any reason the term of the Prime Lease shall terminate prior to the Expiration Date, this Sublease shall thereupon automatically terminate, except as otherwise expressly set forth in this Paragraph 22, and Sublessor shall not be liable to Sublessee by reason of any termination of the Prime Lease or this Sublease; provided, however, so long as Sublessee is not in default under this Sublease beyond any applicable notice

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and cure period, Sublessor shall not voluntarily surrender the Prime Lease, except in accordance with rights expressly reserved to Sublessor as “Tenant” under the Prime Lease, including, without limitation, such rights as are available under Articles 17 and 18 of the Prime Lease in the event of a taking or casualty. Notwithstanding anything in this Sublease to the contrary, if the Prime Lease gives Sublessor any right to terminate the Prime Lease in the event of the partial or total damage, destruction, or condemnation of the Subleased Premises or the Building, the exercise of such right by Sublessor shall not constitute a default or breach under this Sublease. Nothing in this Sublease shall prevent an assignment of the Prime Lease or the subleasing of additional space covered by the Prime Lease to any third parties and in no event shall Sublessor have any liability to Sublessee for any defaults or termination of the Prime Lease by such other subtenants or defaults under such other subleases.

Upon the expiration or termination of this Sublease, whether by forfeiture, lapse of time or otherwise, or upon the termination of Sublessee’s right of possession, Sublessee shall (i) remove (and restore any damage resulting from such removal) (a) any and all of Sublessee’s movable personal property and signage and (b) such alterations, installations, additions and improvements made by or on behalf of Sublessee that Sublessor requires to be removed and restore the Subleased Premises to its condition prior to such alterations, installations, additions and improvements, (ii) at once surrender and deliver to Sublessor the Subleased Premises in the condition and repair required by, and in accordance with the provisions of, this Sublease, and (iii) remove the Furniture (excluding the networking and cabling lines and equipment) from the Subleased Premises if this Sublease terminates on October 31, 2018, otherwise the Furniture shall remain in the Subleased Premises. If Sublessee shall fail to remove the Furniture or any of Sublessee’s personal property from the Subleased Premises, such property shall be deemed abandoned (and Sublessee will be deemed to have relinquished all right, title and interest in such property), and Sublessor is authorized, without liability to Sublessee for loss or damage thereto, at the sole risk of Sublessee, to (a) remove and store such property at Sublessee’s risk and expense; (b) retain such property, in which case all right, title and interest in such property shall accrue to Sublessor; (c) sell such property and retain the proceeds from such sale; or (d) otherwise dispose or destroy such property.

23. Consents and Approvals. All references in this Sublease to the consent or approval of Prime Lessor and/or Sublessor shall be deemed to mean the written consent or approval of Prime Lessor and/or Sublessor, as the case may be, and no such consent or approval of Prime Lessor and/or Sublessor, as the case may be, shall be effective for any purpose unless such consent or approval is set forth in a written instrument executed by Prime Lessor and/or Sublessor, as the case may be. In all provisions requiring the approval or consent of Sublessor (whether pursuant to the express terms of this Sublease or the terms of the Prime Lease incorporated in this Sublease), Sublessee shall be required to obtain the approval or consent of Prime Lessor as well as obtain like approval or consent of Sublessor. If Sublessor is required or has determined to give its consent or approval to a matter as to which consent or approval has been requested by Sublessee, Sublessor shall cooperate reasonably with Sublessee in endeavoring to obtain any required Prime Lessor’s consent or approval upon and subject to the following terms and conditions: (i) Sublessee shall reimburse Sublessor for any out-of-pocket costs incurred by Sublessor in connection with seeking such consent or approval, (ii) Sublessor shall not be required to make any payments to Prime Lessor or to enter into any agreements or to modify the Prime Lease or this Sublease in order to obtain any such consent or approval, (iii) if Sublessee agrees or is otherwise obligated to make any payments to Sublessor or Prime Lessor in connection with such request for such consent or

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approval, Sublessee shall have made arrangements satisfactory to Sublessor for such payments and (iv) Sublessee shall indemnify and hold Sublessor harmless from and against all liabilities, claims, suits, demands, judgments, costs, losses, interest and expenses (including, without being limited to, reasonable attorneys’ fees and expenses) Sublessor shall suffer or incur in connection with seeking such consent or approval (including, without being limited to, claims by prospective subtenants, sub-subtenants, assignees and brokers if consent to a sublease or sub-sublease or assignment is not granted or is unreasonably conditioned). Nothing contained in this Article shall be deemed to require Sublessor to give any consent or approval simply because Prime Lessor has given such consent or approval and, unless provision to the contrary is expressly made in this Sublease, Sublessor’s consent may be withheld in its sole discretion.

24. No Privity of Estate. Nothing contained in this Sublease shall be construed to create privity of estate or of contract between Sublessee and Prime Lessor and Prime Lessor is not obligated to recognize or to provide for the non-disturbance of the rights of Sublessee under this Sublease.

25. No Waiver. The failure of Sublessor to insist in any one or more cases upon the strict performance or observance of any obligation of Sublessee under this Sublease or to exercise any right or option contained in this Sublease shall not be construed as a waiver or relinquishment for the future of any such obligation of Sublessee or any right or option of Sublessor. Sublessor’s receipt and acceptance of Rent, or Sublessor’s acceptance of performance of any other obligation by Sublessee, with knowledge of Sublessee’s breach of any provision of this Sublease, shall not be deemed a waiver of such breach. No waiver by Sublessor of any term, covenant or condition of this Sublease shall be deemed to have been made unless expressed in writing and signed by Sublessor.

26. Complete Agreement. This Sublease constitutes the entire agreement between the parties and there are no representations, agreements, arrangements or understandings, oral or written, between the parties relating to the subject matter of this Sublease which are not fully expressed in this Sublease. This Sublease cannot be changed or terminated orally or in any manner other than by a written agreement executed by both parties. This Sublease shall not be binding upon either party unless and until it is signed and delivered by and to both parties. This Sublease may be executed in several counterparts, each of which shall be deemed an original, and all of such counterparts together shall constitute one and the same instrument.

27. Successors and Assigns. Except as otherwise specifically provided in this Sublease, the provisions of this Sublease shall extend to bind and inure to the benefit of the parties hereto and their respective personal representatives, heirs, successors and permitted assigns.

28. Waiver of Jury Trial and Right to Counterclaim. Sublessor and Sublessee each waive any rights which they may have to trial by jury in any summary action or other action, proceeding or counterclaim arising out of or in any way connected with this Sublease, the relationship of Sublessor and Sublessee, the Subleased Premises and the use and occupancy of the Subleased Premises, and any claim for injury or damages.

29. Consent of Prime Lessor. Notwithstanding anything to the contrary contained in this Sublease, the effectiveness of this Sublease is subject to and conditioned upon the written approval of, and consent to, this Sublease by Prime Lessor in form reasonably acceptable to

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Sublessor and Sublessee (the “Consent”). This Sublease shall not become effective unless and until the Consent is fully executed and delivered by Prime Lessor, Sublessor and Sublessee (the “Consent Contingency”). Each of Sublessor and Sublessee will execute and deliver the Consent in the form provided by Prime Lessor and reasonably approved by Sublessor and Sublessee, even if the Consent has not been signed by Prime Lessor. If the Consent Contingency is not satisfied prior to the date that is sixty (60) days after submission of the request for the Consent, then from and after such date, either party may terminate this Sublease by providing written notice to the other unless the Consent Contingency is satisfied prior to the date on which such notice of termination is provided. If this Sublease is terminated pursuant to this Paragraph 29, then this Sublease will cease to have any further force or effect and the parties hereto will have no further obligations to each other with respect to this Sublease, except that any Rent or other funds paid under this Sublease by Sublessee shall be promptly refunded by Sublessor, including but not limited to the Security Deposit.

30. Limitation of Liability. No director, officer, shareholder, employee, adviser or agent of Sublessor shall be personally liable in any manner or to any extent under or in connection with this Sublease. In no event shall Sublessor or any of its directors, officers, shareholders, employees, advisers or agents be responsible for (i) any indirect or consequential/special damages, (ii) any damages in the nature of interruption or loss of business or (iii) claims for constructive eviction, nor shall Sublessor be liable for loss of or damage to personal property of Sublessee, its agents, contractors, employees or invitees.

31. Holdover. If Sublessee shall fail to surrender and deliver the Subleased Premises as and when required under this Sublease, Sublessee shall become a tenant at sufferance only, subject to all of the terms, covenants and conditions in this Sublease specified, except the rate of Base Rent shall increase to (i) 150% of the rate of Base Rent then in effect for the first thirty (30) days of such holdover and (ii) thereafter Sublessee shall pay 200% of the rate of Base Rent then in effect for the remainder of such holdover. In addition, Sublessee shall protect, defend (with counsel reasonably approved by Sublessor), indemnify and hold harmless Sublessor and its officers, directors, agents and employees from and against any and all liability, claims, suits, demands, judgments, costs, losses, interest and expenses (including, without being limited to, reasonable attorneys’ fees and expenses) that Sublessor may suffer, under Article 22 of the Prime Lease or otherwise, by reason of any holdover by Sublessee under this Sublease or any holdover by any party claiming through or under Sublessee. The terms and provisions of this Paragraph 31 shall survive the expiration or earlier termination of this Sublease.

32. Appurtenant Rights. Sublessee shall have (as appurtenant to the Subleased Premises) rights to use in common with Sublessor and others entitled thereto Sublessor’s rights in driveways, walkways, hallways, stairways and passenger elevators convenient for access to the Subleased Premises and the lavatories nearest thereto as shown on Exhibit B attached hereto. In addition, Sublessor grants Sublessee a license to use in common with others entitled thereto 110 non-reserved parking spaces and 10 reserved parking spaces in the Parking Facility located at the Project (defined in Section 1.2 of the Prime Lease) as all in accordance with Exhibit E to the Prime Lease, but excluding the 8 additional parking spaces described in Section 11 of the First Amendment for which Sublessor pays a fee and for which Sublessee shall have no right to use. Sublessee shall not be charged any fees for such parking rights.

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33. Authority. Sublessee hereby represents and warrants that (i) Sublessee is duly organized, validly existing and in good standing and has all required power and authority to own, sublease, hold and operate properties and conduct business in the State of California and (ii) the individuals signing this Sublease on behalf of Sublessee have the authority to bind Sublessee to this Sublease. Sublessor hereby represent and warrant that (i) Sublessor is duly organized, validly existing and in good standing and has all required power and authority to own, sublease, hold and operate properties and conduct business in the State of California and (ii) the individuals signing this Sublease on behalf of Sublessor have the authority to bind Sublessor to this Sublease.

34. Execution of Sublease; Counterparts. The submission of this Sublease to Sublessee for examination or execution does not constitute a reservation of or option on the Subleased Premises or an offer of Sublessor to sublease the Subleased Premises. This Sublease shall become effective as a Sublease, and Sublessor shall become obligated hereunder, only upon the execution and delivery of this Sublease (theretofore executed by Sublessee) by Sublessor to Sublessee. This Sublease may be executed in counterparts, each of which shall be deemed an original as against the party whose signature is affixed thereto, and which together shall constitute but one and the same agreement.

35. Survival. Paragraphs 4 (Base Rent), 5 (Utilities), 9 (Indemnification), 15 (Brokerage), 28 (Waiver of Jury Trial, and 30 (Limitation on Liability) of this Sublease shall survive the expiration or earlier termination of this Sublease.

36. List of Exhibits.


Exhibit A				Prime Lease
Exhibit B				Plan Showing Subleased Premises
Exhibit C				Form of Commencement Date Letter
Exhibit D				List of Furniture
Exhibit E				Commencement Letter (Prime Lease, Amended)

[The rest of this page intentionally left blank]

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IN WITNESS WHEREOF, Sublessor and Sublessee have executed this Sublease as a sealed instrument as of the date first written above.


SUBLESSOR:

AVANIR PHARMACEUTICALS, INC.

By:		/s/ Christine G. Ocampo


Name:		Christine G. Ocampo


Title:		Vice President of Finance

SUBLESSEE:

TELOGIS, INC.

By:		/s/ Theodore Serentelos


Name:		Theodore Serentelos


Title:		COO

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EXHIBIT A

PRIME LEASE

[see attached]

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EXHIBIT B

PLAN SHOWING SUBLEASED PREMISES

LOGO

EXHIBIT B-2

DESCRIPTION OF TELOGIS EXPANSION ALTERATIONS (left side of above)

•

Removing 15 offices along the back wall (sections B,C,D,E) and replacing with cubicles

•

Removing the wall from the training area to open the area up

•

Removing 3 inside offices on the front side of the training room

•

Adding a vestibule opposite of the lobby

•

Replacing the carpet.

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EXHIBIT C

FORM OF COMMENCEMENT DATE LETTER

In accordance with and pursuant to Paragraph 2 of that certain Sublease by and between AVANIR PHARMACEUTICALS, INC., a Delaware corporation (“Sublessor”), and TELOGIS, INC., a Delaware corporation (“Sublessee”), the parties hereby confirm the following with respect to certain dates described in the Sublease: (a) the Commencement Date is , 2014; and (b) the Expiration Date is 11:59pm, October 31, 2018, unless the Sublease is sooner terminated in accordance with its terms.

DATE: , 2014


SUBLESSOR:

AVANIR PHARMACEUTICALS, INC.
a Delaware corporation

By:


Name:


Its:

SUBLESSEE:

TELOGIS, INC., a Delaware corporation

By:


Name:


Its:

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EXHIBIT D

FURNITURE

Avanir Pharmaceuticals, Inc.

Furniture Plan / Purchase for 20 Enterprise, Suite 200, Aliso Viejo, CA 92656

May, 2011

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EXHIBIT E

COMMENCEMENT LETTER

DATED JUNE 23, 2014

Re: FIRST AMENDMENT TO SUMMIT OFFICE LEASE

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Exhibit 10.38

CHANGE OF CONTROL AGREEMENT

This Change of Control Agreement (the “Agreement”), dated as of December 1, 2014 (the “Effective Date”), is made by and between Avanir Pharmaceuticals, Inc., a Delaware corporation having its principal offices at 30 Enterprise, Suite 400, Aliso Viejo, California (the “Company”) and Keith Katkin (“Employee”).

RECITALS

1. Definitions.

1.2 “Base Salary” means Employee’s gross monthly salary on the date of calculation, which, for the avoidance of doubt, excludes any bonus or other incentive compensation.

1.4 “CCC” means the California Code of Civil Procedure.

1.5 A “Change of Control” shall have occurred if, and only if:

1.9 “COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1985.

1.10 “Code” means the Internal Revenue Code of 1986, as amended.

(a) a material diminution in Employee’s authority, duties, reporting relationship, or responsibilities;

(b) a material diminution in Employee’s Base Salary;

(d) any other action or inaction that constitutes a material breach of the terms of an Employment Agreement, if any.

1.14 “Severance Payment” means severance pay in an amount equal to 24 months of Base Salary, plus an amount equal to two times the greater of (A) the aggregate annual cash bonus payment(s) received by Employee in the Company’s preceding fiscal year or (B) Employee’s target annual cash bonus amount, such payments to be paid in accordance with the terms in Section 2.1(b) below. Notwithstanding the foregoing, if the tenure of Employee’s employment with the Company at the time of termination is less than one year, then the bonus amount calculated under this Section 1.11 shall be pro rated for the partial year of service.

1.15 “Severance Period” means the 12-month period following a Change of Control Termination.

2. Change of Control Termination.

2.1 Payment upon Change of Control Termination. Subject to Sections 2.2 and 2.3, in the event of a Change of Control Termination:

(c) Employee may elect to continue insurance coverage as afforded to Employee according to COBRA, and, if such election is made, Employee shall be entitled to reimbursement of COBRA coverage for 24 months following the end of the existing coverage as an active employee. Nothing in this Agreement will extend Employee’s COBRA period beyond the period allowed under COBRA, nor is Company assuming any responsibility for Employee’s election to continue coverage. Notwithstanding the foregoing, the foregoing benefit can be provided, at the Company’s sole discretion, in the form of a lump sum taxable severance payment in lieu of the COBRA subsidy if the COBRA subsidy is found to be discriminatory pursuant to applicable law; and

stated therein; provided, however, that the Severance Payment shall be pro rated by a fraction, the numerator of which is the number of days elapsed from the date of the Change of Control (or the signing of an agreement the consummation of which will result in a Change of Control, if such death or termination occurs prior to the actual Change of Control) through the date of death or termination, as the case may be, and the denominator of which is 365.

3. Excise Tax Cutback.

as is reasonably requested by the Company or the Employee. For purposes of this determination, the Accounting Firm may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of the Code, and other applicable legal authority. Any determination by the Accounting Firm shall be binding upon the Company and Employee.

6. General Provisions.

6.1 Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of California, without regard to conflict-of-law principles.

6.10 Withholding of Taxes. The Company shall withhold appropriate federal, state, local (and foreign, if applicable) income and employment taxes from any payments hereunder.

6.12 Prior Agreement. This Agreement amends and restates that certain Change of Control Agreement, dated December 13, 2011, by and between the Company and Employee.

6.13 Section 409A Compliance.

In witness whereof, this Change of Control Agreement has been executed as of the date first set forth above.


AVANIR Pharmaceuticals, Inc.

By:		/s/ DAVID J. MAZZO, PH.D.
		David J. Mazzo
		Chairman, Compensation Committee

Employee

/s/ KEITH A. KATKIN
Keith A. Katkin


(Print Name)

EXHIBIT A

GENERAL RELEASE

RECITALS

B. The parties desire to dispose of, fully and completely, all claims that Employee may have against the Company in the manner set forth in this Release.

AGREEMENT

16. Amendment. This Agreement may be amended or supplemented only by writing signed by Employee and the Company.


Dated:
						Employee Name

Exhibit 10.39

, 2014

Name

[insert employee’s home address]

Dear Name,

As you know, as a member of the senior management team of Avanir Pharmaceutical, Inc. (the “Company”), you are eligible to receive change of control severance benefits under your Change of Control Agreement with the Company, as amended from time to time. This letter is to inform you that the Company has determined to provide you with severance payments and benefits in connection with a qualifying termination that occurs outside the change in control context, as described in further detail below.

If the Company terminates your employment without Cause or you Resign for Good Reason (each, as defined in your Change of Control Agreement) other than under circumstances that would constitute a “Change of Control Termination” as defined in the Change of Control Agreement, then, subject to your timely execution of the Company’s standard form of release of claims in favor of the Company (and substantially similar to the form attached to your Change of Control Agreement) and such release of claims becoming effective and irrevocable within thirty days following your termination date, you will be entitled to severance pay equal to number (X) months of your annual base salary, plus a pro-rated annual cash bonus amount at target based on service during the year of termination, with such severance benefits to be paid in one lump sum on the first payroll date that is thirty days following the date of termination.

Additionally, subject to your timely execution and non-revocation of a release as described above, in the event of such a termination of your employment without Cause or a Resignation for Good Reason, if you elect to continue insurance coverage as afforded according to COBRA, and, if such election is made, you will be entitled to reimbursement for the cost to you of such COBRA coverage for number (X) months following the date your coverage as an active employee ceases. Nothing in this letter will extend the COBRA period beyond the period allowed under COBRA, nor is the Company assuming any responsibility for your election to continue coverage. Notwithstanding the foregoing, the foregoing benefit will be provided in the form of a lump sum taxable payment in lieu of the COBRA subsidy (or remaining portion thereof) if the Company determines in its sole discretion that payment of the COBRA subsidy would violate applicable law or otherwise result in adverse tax consequences or penalties to you or the Company.

Anything in this letter to the contrary notwithstanding, if at the time of your separation from service (within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”)), you are determined by the Company to be a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code, and if any payment that you become entitled to under this letter would be considered deferred compensation subject to interest and additional tax imposed pursuant to Section 409A(a) of the Code as a result of the application of Section 409A(a)(2)(B)(i) of the Code, then no such payment shall be payable prior to the date that is the earlier of (1) six months and one day after your separation from service, or (2) your death. This letter is intended to comply with or be exempt from the requirements of Section 409A of the Code and shall be interpreted in a manner consistent with that intent. Each payment made hereunder will be treated as a “separate payment” within the meaning of Section 409A of the Code.

We look forward to your continued contributions to Avanir.

Respectfully,

Avanir Pharmaceuticals, Inc.

Keith Katkin

President & Chief Executive Officer

Accepted:

Name

Title

Exhibit 10.40

AMENDMENT TO CHANGE OF CONTROL AGREEMENT

This AMENDMENT TO CHANGE OF CONTROL AGREEMENT (the “Amendment”), dated as of [ ], is made and entered into by and between Avanir Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and [ ] (the “Employee”).

RECITALS

WHEREAS, the Company, [ ], a Japanese joint stock company, and Bigarade Corporation, a Delaware corporation (the “Merger Sub”), have entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Merger Sub will merge with and into the Company, with the Company as the surviving corporation of such merger (the “Merger”);

WHEREAS, the Company and the Employee are parties to a Change of Control Agreement, dated as of [ ] (the “Agreement”); and

WHEREAS, in connection with the Merger, the Company and the Employee desire to enter into this Amendment with respect to the effect of the Merger under the Agreement.

AMENDMENT

The parties hereto hereby amend the Agreement as follows, effective as of the date on which the Merger Agreement is entered into.

1.	Section 3 of the Agreement is hereby deleted in its entirety and replaced with the following:

3. “Certain Additional Payments by the Company.

3.1 Gross-Up Payment. If it shall be determined that any Payment (as defined below) would be subject to the Excise Tax (as defined below), then the Employee shall be entitled to receive an additional payment (the “Gross-Up Payment”) in an amount such that, after payment by the Employee of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, but excluding any income taxes and penalties imposed pursuant to Section 409A of the Code, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. The Company’s obligation to make Gross-Up Payments under this Section 3 shall not be conditioned upon the Employee’s termination of employment.

3.2 Determinations. Subject to the provisions of Section 3.3 below, all determinations required to be made under this Section 3, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment, and the assumptions to be utilized in arriving at such determination, shall be made by Deloitte & Touche LLP (the “Accounting Firm”). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the receipt of notice from the Employee that there has been a Payment or such earlier

time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (the “Underpayment”), consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Section 3.3 below and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Employee.

3.3 Claims by the IRS. The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than 10 business days after the Employee is informed in writing of such claim. The Employee shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which the Employee gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that the Company desires to contest such claim, the Employee shall:

(a) give the Company any information reasonably requested by the Company relating to such claim;

(b) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company;

(d) permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 3.3, the Company shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings, and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either pay the tax claimed to the appropriate taxing authority on behalf of the Employee and direct the Employee to sue for a refund or to contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative

tribunal, in a court of initial jurisdiction, and in one or more appellate courts, as the Company shall determine; provided, however, that, if the Company pays such claim and directs the Employee to sue for a refund, the Company shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such payment or with respect to any imputed income in connection with such payment; and provided, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

3.4 Refunds. If, after the receipt by the Employee of a Gross-Up Payment or payment by the Company of an amount on the Employee’s behalf pursuant to Section 3.3 above, the Employee becomes entitled to receive any refund with respect to the Excise Tax to which such Gross-Up Payment relates or with respect to such claim, the Employee shall (subject to the Company’s complying with the requirements of Section 3.3 above, if applicable) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after payment by the Company of an amount on the Employee’s behalf pursuant to Section 3.3 above, a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then the amount of such payment shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

3.5 Payment of the Gross-Up Payment. Any Gross-Up Payment, as determined pursuant to this Section 3, shall be paid by the Company within five days of the receipt of the Accounting Firm’s determination; provided that the Gross-Up Payment shall in all events be paid no later than the end of the Employee’s taxable year next following the Employee’s taxable year in which the Excise Tax (and any income or other related taxes or interest or penalties thereon) on a Payment are remitted to the Internal Revenue Service or any other applicable taxing authority or, in the case of amounts relating to a claim described in Section 3.3 above that does not result in the remittance of any federal, state, local, and foreign income, excise, social security, and other taxes, the calendar year in which the claim is finally settled or otherwise resolved. Notwithstanding any other provision of this Section 3, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of the Employee, all or any portion of any Gross-Up Payment, and the Employee hereby consents to such withholding.

3.6 Certain Definitions. The following terms shall have the following meanings for purposes of this Agreement:

(a) “Excise Tax” shall mean the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax.

(b) The “Parachute Value” of a Payment shall mean the present value as of the date of the change of control for purposes of Section 280G of the Code of the portion of such Payment that constitutes a “parachute payment” under Code Section 280G(b)(2), as determined by the Accounting Firm for purposes of determining whether and to what extent the Excise Tax will apply to such Payment.

(c) A “Payment” shall mean any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Employee, whether paid or payable pursuant to this Agreement or otherwise.”

2.	To the extent applicable, the Agreement shall be deemed amended to the extent necessary to effectuate the provisions and intent of this Amendment, and such amendments shall be incorporated in and form a part of such agreements.

3.	In the event the Merger Agreement is terminated prior to consummation of the Merger, this Amendment shall automatically and without further action terminate.

4.	This Amendment shall be administered, interpreted and enforced under the internal laws of the State of California without regard to the principles of conflicts of laws thereof.

5.	If any provision of this Amendment is determined to be invalid or unenforceable, it shall be adjusted rather than voided, to achieve the intent of the parties to the extent possible, and the remainder of the Amendment shall be enforced to the maximum extent possible.

6.	This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. The parties hereto agree to accept a signed facsimile copy of this Amendment as a fully binding original.

(Signature page follows)

IN WITNESS WHEREOF, this Amendment has been executed and delivered by the parties hereto.


AVANIR PHARMACEUTICALS, INC.,
a Delaware corporation

By
[Keith Katkin
President & Chief Executive Officer]

EMPLOYEE

By
[ ]

S-1

Exhibit 10.41

LOGO


TO:		[name]

DATE:		, 2014

RE:		Waiver of Good Reason

As you may know, [Orange], Inc., a Delaware corporation (the “Company”) is in the process of negotiating an Agreement and Plan of Merger by and among , a Japanese joint stock company, Bigarade Corporation, a Delaware corporation and a direct or indirect wholly-owned subsidiary of Parent, and the Company (the “Merger Agreement”).

You are party to a Change of Control Agreement with the Company dated as of , 2014 (the “Change of Control Agreement”) and either an Employment Agreement or severance letter agreement with the Company dated as of , 2014 (the “Severance Agreement”), each of which contains a definition of “Good Reason.”

For receipt of $1.00 and such other consideration the sufficiency of which is hereby agreed to and acknowledged, you hereby further agree and acknowledge that the signing of the Merger Agreement, the consummation of the transactions provided for by the Merger Agreement, and/or any change in your position, authority, duties, reporting relationship or responsibilities that is caused by such signing or consummation solely by reason of the Company no longer being a publicly traded company, will not constitute Good Reason for purposes of the Change of Control Agreement and the Severance Agreement. For the avoidance of doubt, it is expressly understood and agreed that your operating authority will not be reduced in connection with such signing or consummation.

By your signature below, you hereby provide your agreement and assent to the terms of this letter.


Respectfully,

Avanir Pharmaceuticals, Inc.				Acceptance:


[Keith Katkin				[NAME]
President & Chief Executive Officer]

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-38094, 333-83089, 333-84183, 333-108716, 333-125743, 333-144221, 333-150253, 333-158595, 333-166067, 333-173206, 333-181564, 333-188860 and 333-197557 on Form S-8 and Registration Statement Nos. 333-183153, 333-189831 and 333-198878 on Form S-3 of our reports dated December 10, 2014, relating to the consolidated financial statements and internal control over financial reporting of AVANIR Pharmaceuticals, Inc. and subsidiaries appearing in this Annual Report on Form 10-K of AVANIR Pharmaceuticals, Inc. for the year ended September 30, 2014.

/s/ KMJ Corbin & Company LLP

Costa Mesa, California

December 10, 2014

EXHIBIT 31.1

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

I, Keith A. Katkin, certify that:

I have reviewed this Form 10-K of Avanir Pharmaceuticals, Inc.;

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;

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;

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:

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;

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;

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

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

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):

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

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.

EXHIBIT 31.2

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

I, Christine G. Ocampo, certify that:

I have reviewed this Form 10-K of Avanir Pharmaceuticals, Inc.;

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.

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 Annual Report of Avanir Pharmaceuticals, Inc. (the “Company”) on Form 10-K for the fiscal year ended September 30, 2014 (the “Report”), I, Keith A Katkin, 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.

EXHIBIT 32.2

CERTIFICATION PURSUANT TO SECTION 906 OF

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

In connection with the accompanying Annual Report of Avanir Pharmaceuticals, Inc. (the “Company”) on Form 10-K for the fiscal year ended September 30, 2014 (the “Report”), I, Christine G. Ocampo, 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.

Exhibit 99.1

NUEDEXTA Safety Information

NUEDEXTA is indicated for the treatment of pseudobulbar affect (PBA). PBA occurs secondary to a variety of otherwise unrelated neurological conditions, and is characterized by involuntary, sudden, and frequent episodes of laughing and/or crying. PBA episodes typically occur out of proportion or incongruent to the underlying emotional state.

Studies to support the effectiveness of NUEDEXTA were performed in patients with amyotrophic lateral sclerosis (ALS) and multiple sclerosis (MS). NUEDEXTA has not been shown to be safe and effective in other types of emotional lability that can commonly occur, for example, in Alzheimer’s disease and other dementias.

NUEDEXTA and certain other medicines can interact, causing serious side effects. If you take certain drugs or have certain heart problems, NUEDEXTA may not be right for you.

NUEDEXTA causes dose-dependent QTc prolongation. When initiating NUEDEXTA in patients at risk for QT prolongation and torsades de pointes, electrocardiographic (ECG) evaluation should be conducted at baseline and 3-4 hours after the first dose.

The most common adverse reactions are diarrhea, dizziness, cough, vomiting, asthenia, peripheral edema, urinary tract infection, influenza, increased gamma-glutamyltransferase, and flatulence. NUEDEXTA may cause dizziness.

These are not all the risks from use of NUEDEXTA. Please refer to full Prescribing Information at www.NUEDEXTA.com.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company