e10vq

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WPZtvkSBhIUWM9pWAQkYkXKJ4WxvDY08UY6U40Irtpcb64yYTPP+BUTRmS1FG0FC xu5ezivR5jJQKfIBAOHgQw== 0000936392-08-000369.txt : 20080514 0000936392-08-000369.hdr.sgml : 20080514 20080514133636 ACCESSION NUMBER: 0000936392-08-000369 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20080331 FILED AS OF DATE: 20080514 DATE AS OF CHANGE: 20080514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVANIR PHARMACEUTICALS CENTRAL INDEX KEY: 0000858803 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 330314804 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15803 FILM NUMBER: 08830801 BUSINESS ADDRESS: STREET 1: 101 ENTERPRISE STREET 2: SUITE 300 CITY: ALISO VIEJO STATE: CA ZIP: 92656 BUSINESS PHONE: 949-389-6700 MAIL ADDRESS: STREET 1: 101 ENTERPRISE STREET 2: SUITE 300 CITY: ALISO VIEJO STATE: CA ZIP: 92656 FORMER COMPANY: FORMER CONFORMED NAME: LIDAK PHARMACEUTICALS DATE OF NAME CHANGE: 19920703 10-Q 1 a40842e10vq.htm FORM 10-Q e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2008


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

For the transition period from _________ to __.

Commission File No. 1-15803

AVANIR PHARMACEUTICALS

(Exact name of registrant as specified in its charter)


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

101 Enterprise Suite 300, Aliso Viejo, California (Address of principal executive offices)		92656 (Zip Code)

(949) 389-6700
(Registrant’s telephone number, including area code)

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

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company þ

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

As of May 9, 2008, the registrant had 69,453,353 shares of common stock issued and outstanding.

Table of Contents


		Page
PART I. FINANCIAL INFORMATION			3

Item 1.	Financial Statements		3
	Condensed Consolidated Balance Sheets		3
	Condensed Consolidated Statements of Operations		4
	Condensed Consolidated Statements of Cash Flows		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		31
Item 4.	Controls and Procedures		31

PART II. OTHER INFORMATION			32
Item 1.	Legal Proceedings		32
Item 1A.	Risk Factors		32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 3.	Defaults Upon Senior Securities		40
Item 4.	Submission of Matters to a Vote of Security Holders		40
Item 5.	Other Information		41
Item 6.	Exhibits		41

Signatures			42
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.0

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

AVANIR PHARMACEUTICALS
CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31,			September 30,
	2008			2007
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	23,416,363		$	30,487,962
Short-term investments in marketable securities		—			1,747,761
Receivables, net		815,632			988,450
Inventories		17,000			17,000
Prepaid expenses		926,383			1,479,992
Other current assets		237,752			—
Current portion of restricted investments in marketable securities		388,122			688,122

Total current assets		25,801,252			35,409,287
Investments in marketable securities		—			249,078
Restricted investments in marketable securities, net of current portion		468,475			468,475
Property and equipment, net		1,002,645			1,215,666
Intangible assets, net		21,005			41,048
Long-term inventories		1,316,277			1,337,991
Other assets		355,527			374,348

TOTAL ASSETS	$	28,965,181		$	39,095,893


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	1,208,509		$	307,700
Accrued expenses and other liabilities		2,001,355			2,050,864
Accrued compensation and payroll taxes		772,378			1,191,677
Current portion of deferred revenues		2,566,400			2,267,594
Current portion of notes payable		99,569			254,676
Current liabilities of discontinued operations		867,969			—

Total current liabilities		7,516,180			6,072,511
Accrued expenses and other liabilities, net of current portion		1,016,270			1,170,396
Deferred revenues, net of current portion		11,484,804			13,052,836
Notes payable, net of current portion		11,806,920			11,769,916

Total liabilities		31,824,174			32,065,659

Commitments and contingencies (Note 12)
Shareholders’ equity (deficit):
Preferred stock — no par value, 10,000,000 shares authorized, no shares issued or outstanding as of March 31, 2008 and September 30, 2007		—			—
Common stock — no par value, 200,000,000 shares authorized; 43,204,802 and 43,117,358 shares issued and outstanding as of March 31, 2008 and September 30, 2007, respectively		246,478,232			245,531,712
Accumulated deficit		(249,337,752	)		(238,498,733	)
Accumulated other comprehensive income (loss)		527			(2,745	)

Total shareholders’ equity (deficit)		(2,858,993	)		7,030,234

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)	$	28,965,181		$	39,095,893

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

AVANIR PHARMACEUTICALS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	Three Months Ended March 31,						Six Months Ended March 31,
	2008			2007			2008			2007
REVENUES FROM PRODUCT SALES
Net revenues	$	90,270		$	—		$	126,270		$	—
Cost of revenues		15,510			—			21,714			—

Product gross margin		74,760			—			104,556			—


REVENUES AND COST OF RESEARCH SERVICES AND OTHER
Revenues from research and development services		—			920,448			—			2,190,692
Revenues from government research grant services		311,758			266,728			479,404			353,076
Revenues from license agreements		56,643			56,019			113,907			113,284
Revenue from royalties and royalty rights		571,825			779,673			2,409,678			1,502,713

Revenues from research services and other		940,226			2,022,868			3,002,989			4,159,765
Cost of research and development services		(26,817	)		(607,164	)		(76,807	)		(1,771,239	)
Cost of government research grant services		(431,948	)		(369,261	)		(557,534	)		(464,988	)

Research services and other gross margin		481,461			1,046,443			2,368,648			1,923,538

Total gross margin		556,221			1,046,443			2,473,204			1,923,538


OPERATING EXPENSES
Research and development		3,524,665			5,967,739			6,950,925			11,164,992
Selling, general and administrative		2,418,894			2,157,245			5,547,013			11,415,839

Total operating expenses		5,943,559			8,124,984			12,497,938			22,580,831



Loss from operations		(5,387,338	)		(7,078,541	)		(10,024,734	)		(20,657,293	)

OTHER INCOME (EXPENSES)
Interest income		283,224			144,862			710,386			336,338
Interest expense		(191,214	)		(134,598	)		(425,215	)		(552,693	)
Other		1,889			161,246			1,185			195,323


Loss from continuing operations before provision for income taxes		(5,293,439	)		(6,907,031	)		(9,738,378	)		(20,678,325	)

Provision for income taxes		15,159			13,404			15,159			13,404


Loss before discontinued operations		(5,308,598	)		(6,920,435	)		(9,753,537	)		(20,691,729	)

Loss from discontinued operations		(11,787	)		(3,329,927	)		(1,085,482	)		(3,176,160	)


Net loss	$	(5,320,385	)	$	(10,250,362	)	$	(10,839,019	)	$	(23,867,889	)


BASIC AND DILUTED NET LOSS PER SHARE:
Loss from continuing operations	$	(0.12	)	$	(0.18	)	$	(0.23	)	$	(0.56	)
Loss from discontinued operations		—			(0.08	)		(0.02	)		(0.09	)


Net loss per share	$	(0.12	)	$	(0.26	)	$	(0.25	)	$	(0.65	)


Basic and diluted weighted average number of common shares outstanding		43,173,143			39,047,597			43,139,573			36,797,202

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

AVANIR PHARMACEUTICALS

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Six Months Ended March 31,
	2008			2007
OPERATING ACTIVITIES:

Net loss	$	(10,839,019	)	$	(23,867,889	)
Loss from discontinued operations		1,085,482			3,176,160
Adjustments to reconcile loss before discontinued operations to net cash used in operating activities:
Depreciation and amortization		234,317			1,294,692
Share-based compensation expense		906,751			1,336,894
Amortization of debt discount		69,833			122,000
Loss on disposal of assets		638			—
Changes in operating assets and liabilities (net of effects of acquisition/disposition of FazaClo):
Receivables		172,818			55,978
Inventories		21,714			2,628,748
Prepaid and other assets		341,691			295,384
Accounts payable		900,809			(8,815,296	)
Accrued expenses and other liabilities		(203,631	)		(82,832	)
Accrued compensation and payroll taxes		(419,299	)		(1,598,218	)
Deferred revenue		(1,269,226	)		(1,214,790	)

Net cash used in operating activities of continuing operations		(8,997,122	)		(26,669,169	)
Net cash used in operating activities of discontinued operations		(203,608	)		(6,646,984	)

Net cash used in operating activities		(9,200,730	)		(33,316,153	)


INVESTING ACTIVITIES:
Investments in securities		—			(350,922	)
Proceeds from sales and maturities of investments in securities		2,300,107			16,900,000
Purchase of property and equipment		(13,804	)		(96,312	)
Proceeds from sales of fixed assets		4,900			—

Net cash provided by investing activities		2,291,203			16,452,766


FINANCING ACTIVITIES:
Proceeds from issuances of common stock and warrants, net of commissions and offering costs		42,956			22,096,389
Tax withholding payments reimbursed by restricted stock		(17,092	)		—
Payments on notes and capital lease obligations		(187,936	)		(4,735,729	)

Net cash (used in) provided by financing activities of continuing operations		(162,072	)		17,360,660
Net cash used in financing activities of discontinued operations		—			(108,688	)

Net cash (used in) provided by financing activities		(162,072	)		17,251,972


Net (decrease) increase in cash and cash equivalents		(7,071,599	)		388,585
Cash and cash equivalents at beginning of period		30,487,962			4,898,214

Cash and cash equivalents at end of period	$	23,416,363		$	5,286,799


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	355,242		$	795,973
Income taxes paid	$	15,159		$	13,404
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase price adjustment of assumed liabilities	$	—		$	4,067,889
Issuance of note payable	$	—		$	2,000,000
Accrued liabilities of discontinued operations in connection with Net Working Capital Adjustment	$	867,969		$	—

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

AVANIR PHARMACEUTICALS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Avanir Pharmaceuticals (“Avanir,” “we,” or the “Company”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting including the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. These condensed statements do not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for annual audited financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2007. We believe these condensed consolidated financial statements reflect all adjustments (consisting only of normal, recurring adjustments) that are necessary for a fair presentation of the financial position and results of operations for the periods presented. Results of operations for the interim periods presented are not necessarily indicative of results to be expected for the year. Certain prior period amounts have been reclassified to conform to the current period presentation.

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

On August 3, 2007, the Company sold its rights to the FazaClo^® product and the related assets and operations. The sale was made pursuant to an agreement entered into with Azur Pharma, Inc. (“Azur”) in July 2007. In connection with the sale, the Company transferred certain assets and liabilities related to FazaClo to Azur. The accompanying unaudited condensed consolidated financial statements of Avanir Pharmaceuticals include adjustments to reflect the classification of our FazaClo business as discontinued operations. See Note 3 in the Notes to our Condensed Consolidated Financial Statements for information on discontinued operations.

2. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Avanir Pharmaceuticals is a pharmaceutical company focused on acquiring, developing and commercializing novel therapeutic products for the treatment of chronic diseases. Our product candidates address therapeutic markets that include the central nervous system, inflammatory diseases and infectious diseases. Our lead product candidate, Zenvia^TM (dextromethorphan hydrobromide/quinidine sulfate), is currently in Phase III clinical development for the treatment of pseudobulbar affect (“PBA”) and diabetic peripheral neuropathic pain (“DPN pain”). Our first commercialized product, docosanol 10% cream, (sold as Abreva® by our marketing partner GlaxoSmithKline Consumer Healthcare in North America) is the only over-the-counter treatment for cold sores that has been approved by the FDA. Our inflammatory disease program, which targets macrophage migration inhibitory factor (“MIF”), is currently partnered with Novartis. Our infectious disease program has historically been focused primarily on anthrax antibodies. In March 2008, we entered into an Asset Sale and License Agreement with Emergent Biosolutions for the sale of the Company’s anthrax antibodies and license to use the Company’s proprietary Xenerex technology (see Note 14).

Our operations are subject to certain risks and uncertainties frequently encountered by companies in similar stages of operations, particularly in the evolving market for small biotech and specialty pharmaceuticals companies. Such risks and uncertainties include, but are not limited to, timing and uncertainty of achieving milestones in clinical trials and in obtaining approvals by the FDA and regulatory agencies in other countries. Our ability to generate revenues in the future will depend principally on 1) license arrangements, 2) the timing and success of reaching development milestones, 3) obtaining regulatory approvals and 4) ultimately attaining market acceptance of Zenvia (formerly referred to as Neurodex™) for the treatment of PBA, assuming the FDA approves our new drug application. Our operating expenses depend substantially on the level of expenditures for clinical development activities for Zenvia for the treatment of PBA and DPN pain, and program funding for Xenerex authorized by our research grant and the rate of progress being made on such programs.

Income Taxes

On July 13, 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 . FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN No. 48, the impact of an uncertain income tax position on the income tax return must be recognized 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. Additionally, FIN No. 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006.

The Company adopted the provisions of FIN No. 48 on October 1, 2007. The total amount of unrecognized tax benefits as of the date of adoption was $3.0 million. As a result of the implementation of FIN No. 48, the Company recognized a $2.6 million decrease in deferred tax assets and a corresponding decrease in the valuation allowance. There are no unrecognized tax benefits included in the consolidated balance sheet that would, if recognized, affect the effective tax rate.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had $0 accrued for interest and penalties on the Company’s condensed consolidated balance sheets at September 30, 2007 and at March 31, 2008, and has recognized $0 in interest and/or penalties in the condensed consolidated statements of operations for the three and six months ended March 31, 2008.

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

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.

We recognize revenue in accordance with the SEC’s Staff Accounting Bulletin Topic 13 (“Topic 13”), “Revenue Recognition.” Revenue is recognized 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 seller’s price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured. Certain product sales are subject to rights of return. In accordance with Statement of Financial Accounting Standards No. 48, “Revenue Recognition When Right of Return Exists” (“FAS 48”), we recognize such product revenues at the time of sale only if we have met all the criteria of FAS 48, including the ability to reasonably estimate future returns. FAS 48 states that revenue from sales transactions where the buyer has the right to return the product shall be recognized at the time of sale only if (1) the seller’s price to the buyer is substantially fixed or determinable at the date of sale, (2) the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product, (3) the buyer’s obligation to the seller 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 seller 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. We recognize such product revenues when either we have met all the criteria of FAS 48, including that ability to reasonably estimate future returns, when we can reasonably estimate that the return privilege has substantially expired, or when the return privilege has substantially expired, whichever occurs first.

We allocate amounts to separate elements in multiple element arrangements in accordance with Emerging Issues Task Force Issue No. 00-21 (“EITF 00-21”), “Accounting for Revenue Arrangements with Multiple Deliverables.” Revenues are allocated to a delivered product or service when all of the following criteria are met: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item; and (3) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. We use the relative fair values of the separate deliverables to allocate revenue. For arrangements with multiple elements that

are separated, we recognize revenues in accordance with Topic 13. Revenue is recognized 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 seller’s price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured. Certain sales transactions include multiple deliverables.

Product Sales

Active Pharmaceutical Ingredient Docosanol (“API Docosanol”). Revenue from sales of our API Docosanol is recorded when title and risk of loss have passed to the buyer and provided the criteria in SAB Topic 13 are met. We sell the API Docosanol to various licensees upon receipt of a written order for the materials. Shipments generally occur fewer than five times a year. Our contracts for sales of the API Docosanol include buyer acceptance provisions that give our buyers the right of replacement if the delivered product does not meet specified criteria. That right requires that they give us notice within 30 days after receipt of the product. We have the option to refund or replace any such defective materials; however, we have historically demonstrated that the materials shipped from the same pre-inspected lot have consistently met the specified criteria and no buyer has rejected any of our shipments from the same pre-inspected lot to date. Therefore, we recognize revenue at the time of delivery without providing any returns reserve.

FazaClo. (Sales from Discontinued Operations). In August 2007, we sold FazaClo to Azur and as a result, all revenues, cost of revenues, and operating expenses related to FazaClo for fiscal 2007 have been classified as discontinued operations in the accompanying condensed consolidated financial statements (See Note 3 “Acquisition of Alamo Pharmaceuticals, Inc. / Sale of FazaClo”).

As discussed in Note 3, “Acquisition of Alamo Pharmaceuticals, Inc. / Sale of FazaClo” , we acquired Alamo Pharmaceuticals LLC (“Alamo”) on May 24, 2006, with one marketed product, FazaClo (clozapine, USP), that began shipping to wholesale customers in July 2004 in 48-pill boxes. At that time, FazaClo had a two-year shelf life. In June 2005, Alamo received FDA approval to extend the product expiration date to three years. In October 2005, Alamo began shipping 96-pill boxes and accepted returns of unsold or undispensed 48-pill boxes.

During fiscal 2007, we sold FazaClo to pharmaceutical wholesalers. They resold our product to outlets such as pharmacies, hospitals and other dispensing organizations. We had agreements with our wholesale customers, various states, hospitals, certain other medical institutions and third-party payers throughout the U.S. These agreements frequently contained commercial incentives, which may have included pricing allowances and discounts payable at the time the product was sold to the dispensing outlet or upon dispensing the product to patients. 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. Additionally, several of our dispensing outlets have the right to return expired product at any time. Once products have been dispensed to patients the right of return expires. However, upon the sale of the FazaClo assets, Azur assumed all future liabilities for returns and allowances related to the FazaClo sales that were made by the Company. Therefore, as of the date of the sale of the FazaClo assets, we no longer had responsibility for returns and allowances related to our sales of FazaClo.

Beginning in the first quarter of fiscal 2007, we obtained third-party information regarding certain wholesaler inventory levels, a sample of outlet inventory levels and third-party market research data regarding FazaClo sales. The third-party data included, (i) IMS Health Audit - National Sales Perspective reports (“NSP”), which is a projection of near-census data of wholesaler shipments of product to all outlet types, including retail and non-retail and; (ii) IMS Health National Prescription Audit (“NPA”) Syndicated data, which captures end-user consumption from retail dispensed prescriptions based upon projected data from pharmacies estimated to represent approximately 60% to 70% of the U.S. prescription universe. Further, we analyzed historical rebates and chargebacks earned by State Medicaid, Medicare Part D and managed care customers. Based upon this additional information and analysis obtained, we estimated the amount of product that was shipped that was no longer in the wholesale or outlet channels, and hence no longer subject to a right of return. Therefore, we began recognizing revenues, net of returns, chargebacks, rebates, and discounts, in the first quarter of fiscal 2007, for product that we estimated had been sold to patients and that was no longer subject to a right of return.

FazaClo product revenues were recorded net of provisions for estimated product pricing allowances including: State Medicaid base and supplemental rebates, Medicare Part D discounts, managed care contract discounts and prompt payment discounts were at an aggregate rate of approximately 25.8% of gross revenues for the fiscal year ended September 30, 2007. Provisions for these allowances were estimated based upon contractual terms and require management to make estimates regarding customer mix to reach. We considered our current contractual rates with States related to Medicaid base and supplemental rebates, with private organizations for Medicare Part D discounts and contracts with managed care organizations.

Multiple Element Arrangements.

We have arrangements whereby we deliver to the customer multiple elements including technology and/or services. Such arrangements have generally included some combination of the following: antibody generation services; licensed rights to technology, patented products, compounds, data and other intellectual property; and research and development services. In accordance with EITF 00-21, we analyze our multiple element arrangements to determine whether the elements can be separated. We perform our analysis at the inception of the arrangement and as each product or service is delivered. If a product or service is not separable, the combined deliverables will be accounted for as a single unit of accounting.

When a delivered element meets the criteria for separation in accordance with EITF 00-21, we allocate amounts based upon the relative fair values of each element. We determine the fair value 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 fair value. 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.

License Arrangements. License arrangements may consist of non-refundable upfront license fees, data transfer fees, research reimbursement payments, exclusive licensed rights to patented or patent pending compounds, technology access fees, various performance or sales milestones and future product royalty payments. 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 upfront 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 revenues upon the achievement of the milestones as specified in the underlying agreements when they represent the culmination of the earnings process.

Research Services Arrangements. Revenues from research services are recognized during the period in which the services are performed and are based upon the number of full-time-equivalent personnel working on the specific project at the agreed-upon rate. Reimbursements from collaborative partners for agreed upon direct costs including direct materials and outsourced services, or subcontracted, pre-clinical studies are classified as revenues in accordance with EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” and recognized in the period the reimbursable expenses are incurred. Payments received in advance are deferred until the research services are performed or costs are incurred. These arrangements are often multiple element arrangements.

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 require that royalties are earned only if a sales threshold is exceeded. Under these types of arrangements, the threshold is typically based on annual sales. We recognize royalty revenue in the period in which the threshold is 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 upfront payments and recognize them as revenues over the life of the license agreement. We recognize 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 to be recognized in each period is calculated by multiplying the ratio of the royalty payments due to Drug Royalty USA by GlaxoSmithKline for the period to the total remaining royalties that is expected GlaxoSmithKline will pay Drug Royalty USA over the remaining term of the agreement by the unamortized deferred revenues.

Government Research Grant Revenues. We recognize revenues from federal research grants during the period in which the related expenditures are incurred.

Cost of Revenues

Cost of revenues includes direct and indirect costs to manufacture product sold, including the write-off of obsolete inventory, and to provide research and development services. Amortization of acquired FazaClo product rights is classified within cost of revenues under discontinued operations.

Recognition of Expenses in Outsourced Contracts

Pursuant to management’s assessment of the services that have been performed on clinical trials and other contracts, we recognize expenses as the services are provided. Such management assessments include, but are not limited to: (1) an evaluation by the project manager of the work that has been completed during the period, (2) measurement of progress prepared internally and/or provided by the third-party service provider, (3) analyses of data that justify the progress, and (4) management’s judgment. Several of our contracts extend across multiple reporting periods, including our largest contract, representing a $7.1 million Phase III clinical trial contract that was entered into in the first fiscal quarter of 2008. A 3% variance in our estimate of the work completed in our largest contract could increase or decrease our quarterly operating expenses by approximately $213,000.

Capitalization and Valuation of Long-Lived and Intangible Assets

In accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (“FAS 141”) and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment on an annual basis or more frequently if certain indicators arise. Goodwill represents the excess of purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. The Company had no goodwill as of March 31, 2008 as a result of the sale of FazaClo. (See Note 3 “Acquisition of Alamo Pharmaceuticals, Inc. / Sale of FazaClo”). There was no impairment of goodwill for the six month period ended March 31, 2007.

Intangible assets with finite useful lives are amortized over their respective useful lives and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”.) The method of amortization shall reflect the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. If that pattern cannot be reliably determined, a straight-line amortization method will be used. Identifiable intangible assets acquired with the May 2006 purchase of Alamo represent expected benefits of the FazaClo product rights, customer relationships, trade name and non-compete agreement. These acquired intangible assets were disposed of in fiscal 2007 with the sale of FazaClo to Azur. As of March 31, 2008, intangible assets with indefinite useful lives are comprised of trade names which are not amortized.

In accordance with FAS 144, intangible assets and other long-lived assets, except for goodwill, are evaluated for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the review indicates that intangible assets or long-lived assets are not recoverable (i.e. the carrying amount is less than the future projected undiscounted cash flows), their carrying amount would be reduced to fair value. Factors we consider 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 our use of the acquired asset or the strategy for our overall business; and/or

	•		A significant negative industry or economic trend.

Legal expenses for patent related costs are expensed as incurred and classified as research and development expenses in our condensed consolidated statements of operations.

Share-Based Compensation

The Company accounts for awards of share-based compensation to employees under the fair value method required by Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”). The fair value of each award of share-based compensation is measured at the date of grant. Share-based compensation awards generally vest over time, subject to continued service to the Company and/or the satisfaction of certain performance conditions. The Company recognizes the estimated fair value of employee stock options over the service period using the straight-line method.

Share-based compensation expense recognized in the condensed consolidated statements of operations is based on awards ultimately expected to vest, reduced for estimated forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeiture rates differ from those estimates. The estimation of the number of stock awards that will ultimately be forfeited requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period in which estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. During the second quarter of fiscal 2007, the Company updated its projected forfeiture rates as it applies to stock-based compensation considering recent actual data following the implementation of various restructuring initiatives earlier that year. Pre-vesting forfeiture rates for the six month periods ended March 31, 2008 and 2007 were estimated to be 30% for all employees, officers and directors. Such estimates have been based on our historical experience. Future estimates and actual results may differ substantially from the Company’s current estimates.

Total compensation expense related to all of our share-based awards, recognized under FAS 123R, for the three and six month periods ended March 31, 2008 and 2007 was classified as cost of research, selling general and administrative expenses and research and development expenses and was comprised of the following:


	For the three months ended				For the six months ended
	March 31,				March 31,
	2008		2007		2008		2007
From Continuing Operations:
Selling, general and administrative expense	$	283,630	$	420,101	$	572,994	$	1,128,706
Research and development expense		187,468		85,381		333,757		208,188

Share-based compensation expense related to continuing operations		471,098		505,482		906,751		1,336,894
From Discontinued Operations:		5,649		167,982		13,905		181,087

Total	$	476,747	$	673,464	$	920,656	$	1,517,981


	For the three months ended				For the six months ended
	March 31,				March 31,
	2008		2007		2008		2007
Share-based compensation expense from:
Stock options	$	147,052	$	243,053	$	361,176	$	657,901
Restricted stock units		225,142		218,194		442,812		634,598
Restricted stock awards		104,553		212,217		116,668		225,482

Total	$	476,747	$	673,464	$	920,656	$	1,517,981

Since we have a net operating loss carryforward as of March 31, 2008, no excess tax benefits for the tax deductions related to share-based awards were recognized in the condensed consolidated statements of operations. Additionally, no incremental tax benefits were recognized from stock options exercised in the three and six month periods ended March 31, 2008 and 2007 that would have resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase in net cash provided by financing activities. (See Note 11 “Employee Equity Incentive Plans.”)

Recently Issued Accounting Pronouncements

Financial Accounting Standards No. 161 (“FAS 161”). In March 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FAS 133". The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity’s financial position, financial performance and cash flows. FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Therefore, we will be required to adopt FAS 161 for the fiscal year beginning October 1, 2009.

Financial Accounting Standards No. 160 (“FAS 160”). In December 2007, the FASB issued FAS 160, "Noncontrolling Interests in Consolidated Financials, an Amendment of ARB No. 51", which is intended to improve the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing certain required accounting and reporting standards. FAS 160 is effective for fiscal years beginning on or after December 15, 2008. Therefore, we will be required to adopt FAS 160 for the fiscal year beginning October 1, 2009. The Company is evaluating the options provided under FAS 160 and their potential impact on its financial condition and results of operations if implemented. We do not expect the adoption of FAS 160 to significantly affect our consolidated financial condition or results of operations.

Financial Accounting Standards No. 141(R) (“FAS 141R”). In December 2007, the FASB issued FAS 141R, "Business Combinations: Applying the Acquisition Method", which retains the fundamental requirements of FAS 141 but provides additional guidance on applying the acquisition method when accounting for similar economic events by establishing certain principles and requirements. FAS 141R is effective for fiscal years beginning on or after December 15, 2008. Therefore, we will be required to adopt FAS 141R for the fiscal year beginning October 1, 2009. The Company is evaluating the options provided under FAS 141R and their potential impact on its financial condition and results of operations when implemented. We do not expect the adoption of FAS 141R to significantly affect our consolidated financial condition or results of operations.

EITF Issue No. 07-1. In November 2007, the FASB’s Emerging Issues Task Force issued EITF Issue No. 07-1, “Accounting for Collaborative Arrangements,” (“EITF 07-1”) which defines collaborative arrangements and establishes reporting and disclosure requirements for such arrangements. EITF 07-1 is effective for fiscal years beginning after December 15, 2008. Therefore, we will be required to adopt EITF 07-1 for the fiscal year beginning October 1, 2009. The Company is continuing to evaluate the impact of adopting the provisions of EITF 07-1; however, it does not anticipate that adoption will have a material effect on our consolidated financial condition or results of operations.

EITF Issue No. 07-3. In June 2007, the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (“EITF 07-3”) that would require nonrefundable advance payments made by the Company for future R&D activities to be capitalized and recognized as an expense as the goods or services are received by the Company. EITF 07-3 is effective with respect to new arrangements entered into beginning January 1, 2008. The Company’s adoption of EITF 07-3 did not have a material impact on our consolidated financial condition or results of operations.

Financial Accounting Standards No. 159 (“FAS 159”). In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities— Including an amendment of FASB Statement 115", which provides companies with an option to measure eligible financial assets and liabilities in their entirety at fair value. The fair value option may be applied instrument by instrument, and may be applied only to entire instruments. If a company elects the fair value option for an eligible item, changes in the item’s fair value must be reported as unrealized gains and losses in earnings at each subsequent reporting date. FAS 159 is effective for fiscal years beginning after November 15, 2007. Therefore, we will be required to adopt FAS 159 for the fiscal year beginning October 1, 2008. The Company is evaluating the options provided under FAS 159 and their potential impact on its financial condition and results of operations if implemented. We do not expect the adoption of FAS 159 to significantly affect our consolidated financial condition or results of operations.

Financial Accounting Standards No. 157 (“FAS 157”). In September 2006, the FASB issued FAS 157, "Fair Value Measurements.” FAS 157 defines fair value, established a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Therefore, we will be required to adopt FAS 157 for the fiscal year beginning October 1, 2008. In December 2007, the FASB released a proposed FASB Staff Position (FSP FAS 157-b- Effective Date of FASB Statement No. 157) which, if adopted as proposed, would delay the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We are currently evaluating the effect of FAS 157 on our financial statements.

3. ACQUISITION OF ALAMO PHARMACEUTICALS, INC. / SALE OF FAZACLO

On May 24, 2006, pursuant to a Unit Purchase Agreement dated May 22, 2006 (the “Acquisition Agreement”), we acquired all of the outstanding equity interests in Alamo from the former members of Alamo (the “Selling Holders”) for approximately $29.2 million in consideration, consisting of approximately $4.0 million in cash, promissory notes with an aggregate face value of $25.1 million and an estimated fair value of $24.3 million, and $912,000 in acquisition-related transaction costs. The purchase price exceeded the net assets acquired, resulting in our recording $22.1 million of goodwill. The results of operations of Alamo were included in our consolidated financial statements from the date of acquisition until our sale of the Alamo assets in fiscal 2007, at which time the Alamo-related results of operations for all periods presented were reclassified as discontinued operations. The Company intended to leverage the FazaClo sales force to assist with the commercial launch of Zenvia, which was planned for early 2007; however, due to the receipt of the FDA approvable letter and resulting delay in the planned launch of Zenvia, we entered into an agreement to sell FazaClo in July 2007. Details of the sale of FazaClo are described below.

In connection with the Alamo acquisition, we also agreed to pay the Selling Holders up to an additional $39,450,000 in revenue-based earn-out payments, based on future sales of FazaClo (clozapine USP), an orally disintegrating drug for the treatment of refractory schizophrenia. On May 15, 2007, we issued an additional $2,000,000 promissory note based on FazaClo sales rates through that quarter and on August 15, 2007, we issued a second promissory note, also in the principal amount of $2,000,000. The remaining earn-out payments of $35,450,000 are based on the achievement of certain target levels of FazaClo sales in the U.S. from the closing date of the acquisition through December 31, 2018. In connection with the FazaClo sale, Azur assumed these remaining contingent payment obligations, however, we are still contingently liable in the event of default by Azur.

We also previously agreed to pay the Selling Holders one-half of all net licensing revenues that we may receive through December 31, 2018 from licenses of FazaClo outside of the U.S., if any (“Non-US Licensing Revenues”). There were no Non-US Licensing Revenues through August 3, 2007, the date of sale of FazaClo, and these future obligations have been assumed by Azur as described below.

We also agreed to apply a portion of any future net equity offering proceeds to repay the promissory notes and through March 31, 2008, we have paid approximately $6.1 million of the principal amounts due under the notes. In August 2007, we paid an additional $11.0 million of outstanding principal under these notes and amended our agreement with the Selling Holders to partially suspend the early payment obligations remaining under the promissory notes.

In the first quarter of fiscal 2007, we recognized a reduction of $3.1 million to the purchase price of Alamo as a result of a reduction in the estimated amount of certain assumed liabilities acquired, and thereby reduced the carrying value of goodwill. Additionally, through the sale of FazaClo in August 2007, the purchase price of Alamo was cumulatively increased by a net of approximately $20,000, as a result of the issuance of additional notes payable in fiscal 2007 totaling $4.0 as additional consideration (see above), less cumulative reductions of $3.98 million to the assumed liabilities.

Sale of FazaClo, Presentation of Discontinued Operations, and Contingency for Working Capital Adjustment

In August 2007, we sold FazaClo and our related assets and operations to Azur. In connection with the sale, we received approximately $43.9 million in upfront consideration and have the right to receive up to an additional $10.0 million in contingent payments in 2009, subject to the satisfaction of certain regulatory conditions. In addition, Azur is obligated to pay up to $2.0 million in royalties, based on 3% of annualized net product revenues in excess of $17.0 million. Our earn-out obligations that would have been payable to the prior owner of Alamo upon the achievement of certain milestones were assumed by Azur; however, the Company is contingently liable in the event of default. The Company transferred all FazaClo related business operations to Azur in August 2007.

In accordance with FAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets", the financial results relating to FazaClo have been classified as discontinued operations in the accompanying condensed consolidated statements of operations for all periods presented.

The Asset Purchase Agreement (the “Agreement”) with Azur provides for an adjustment to the sale price of FazaClo in connection with the final determination of the amount of net working capital (as defined in the agreement) included as part of the sale (“Net Working Capital Adjustment”). The Agreement also stipulates that an adjustment to net working capital shall only exist if the final

Net Working Capital Adjustment is greater than $250,000. As of September 30, 2007, based on the knowledge and information that we had at the time, we estimated that the Net Working Capital Adjustment was less than the $250,000 threshold. However, based upon current information, we have estimated the Net Working Capital Adjustment to result in an $868,000 reduction in the sale price. In accordance with FAS 154 “Accounting for Changes and Error Corrections” the Net Working Capital Adjustment is considered a change in estimate and represents new information that was not available as of September 30, 2007. As a result, in the quarter ended December 31, 2007, we accrued a liability for the adjustment and it was reflected in current liabilities of discontinued operations and loss from discontinued operations.

Azur has made claims that the Net Working Capital Adjustment should reduce the sale price by approximately $2.0 million, which is approximately $1.1 million more than the amount that we have accrued. As a result, as provided by the Agreement, we and Azur have engaged the services of a U.S. national accounting firm to serve as an independent arbitrator to resolve this dispute of the Net Working Capital Adjustment. We expect the arbitrator to render a decision in the fourth fiscal quarter of 2008. As of March 31, 2008, $868,000 is reflected in current liabilities of discontinued operations. We believe we have adequately provided for the loss related to the Net Working Capital Adjustment in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies"; however, there can be no assurance as to ultimate settlement of the amount. If the final determination of the Net Working Capital Adjustment exceeds our accrual of $868,000, the amount in excess of $868,000 will be recognized as a loss on discontinued operations in that period.

In addition to the accrued loss on the Net Working Capital Adjustment of $868,000, we recognized an additional $217,000 of other costs related to the operations of FazaClo business during the six months ended March 31, 2008, which, we initially estimated were assumed by Azur.

A summarized statement of operations for the discontinued operations for the three and six months ended March 31, 2007 is as follows:


	For the three			For the six
	months ended			months ended
	March 31, 2007			March 31, 2007
REVENUES FROM PRODUCT SALES
Net revenues	$	3,829,111		$	10,099,815
Cost of revenues		1,047,604			2,394,788

Product gross margin		2,781,507			7,705,027

OPERATING EXPENSES
Research and development		949,766			1,658,514
Selling, general and administrative		4,980,756			8,856,828

Loss from operations		(3,149,015	)		(2,810,315	)

OTHER EXPENSE
Interest expense		(180,912	)		(365,845	)

Loss before provision for income taxes		(3,329,927	)		(3,176,160	)

Provision for income taxes		—			—

NET LOSS	$	(3,329,927	)	$	(3,176,160	)

4. RELOCATION OF COMMERCIAL AND GENERAL AND ADMINISTRATIVE OPERATIONS

In fiscal 2006, we relocated all operations other than research from San Diego, California to Aliso Viejo, California. In fiscal 2007, following the Company’s receipt of a non-renewal and termination notice from AstraZeneca and the successful completion of the development services under our agreement with Novartis, the Board of Directors approved a plan of disposition to exit the Company’s facilities in San Diego. Pursuant to this plan, the Company subleased a total of approximately 48,000 square feet of laboratory and office space in San Diego and relocated remaining personnel and clinical trial support functions to the Company’s offices in Orange County, California.

The following table presents the restructuring activities for the six months ended March 31, 2008:


	September 30,			Payments/			March 31,
	2007			Adjustments			2008

Accrued Restructuring:
Employee severance and relocation benefits	$	75,790		$	(67,320	)	$	8,470
Lease restructuring liabilities		2,223,802			(706,545	)		1,517,257

Total		2,299,592		$	(773,865	)		1,525,727

Less: current portion		(1,163,627	)					(552,379	)

Non-current portion	$	1,135,965					$	973,348

The current portion of the lease restructuring liability of $544,000 is included in “Accrued Expenses and Other Liabilities” and the non-current portion of lease restructuring liability of $973,000 is included in “Accrued Expenses and Other Liabilities, net of Current Portion” in the accompanying condensed consolidated balance sheet at March 31, 2008.

5. INVENTORIES

The composition of inventories is as follows:


	March 31,			September 30,
	2008			2007

Raw materials	$	1,333,277		$	1,354,991
Less: current portion		(17,000	)		(17,000	)

Long-term portion	$	1,316,277		$	1,337,991

Inventories relate to the active pharmaceutical ingredients docosanol and Zenvia. The amount classified as long-term inventories is comprised of docosanol and the raw material components for Zenvia, dextromethorphan and quinidine, which will be used in the manufacture of Zenvia capsules in the future.

6. ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities are as follows:


	March 31, 2008			September 30, 2007

Accrued research and development expenses	$	978,914		$	419,989
Accrued sales and marketing expenses		75,000			—
Accrued general and administrative expenses		314,137			287,517
Deferred rent		42,922			34,432
Lease restructuring liabilities		1,517,257			2,223,802
Other		89,395			255,520

Total accrued expenses and other liabilities		3,017,625			3,221,260
Less: current portion		(2,001,355	)		(2,050,864	)

Non-current total accrued expenses and other liabilities	$	1,016,270		$	1,170,396

See Note 3 for a description of current liabilities of discontinued operations.

7. DEFERRED REVENUES

The following table sets forth as of March 31, 2008 the deferred revenue balances for our sale of future Abreva^® royalty rights to Drug Royalty USA and other agreements.

13. Net Deferred Revenues


	Drug Royalty
	USA			Other
	Agreement			Agreements			Total

Deferred revenues as of October 1, 2007	$	14,738,509		$	581,921		$	15,320,430
Changes during the period:
Additions		—			250,000			250,000
Recognized as revenues during period		(1,335,045	)		(184,181	)		(1,519,226	)

Deferred revenues as of March 31, 2008	$	13,403,464		$	647,740		$	14,051,204


Classified and reported as:
Current portion of deferred revenues	$	2,089,209		$	477,191		$	2,566,400
Deferred revenues, net of current portion		11,314,255			170,549			11,484,804

Total deferred revenues	$	13,403,464		$	647,740		$	14,051,204

8. COMPUTATION OF NET LOSS PER COMMON SHARE

Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period, excluding restricted stock that has been issued but is not yet vested. Diluted net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period plus additional weighted average common equivalent shares outstanding during the period. Common equivalent shares result from the assumed exercise of outstanding stock options and warrants (the proceeds of which are then presumed to have been used to repurchase outstanding stock using the treasury stock method) and the vesting of restricted shares of common stock. In loss periods, certain of the common equivalent shares have been excluded from the computation of diluted net loss per share, because their effect would have been anti-dilutive. For the six month period ended March 31, 2008, a total of 677,282 stock options, 269,305 stock warrants, 6,000 restricted stock awards and 2,400,565 restricted stock units were excluded from the computation of diluted net loss per share. For the six month period ended March 31, 2007 a total of 1,097,965 stock options, 1,018,943 stock warrants and 2,137,123 restricted stock units were excluded from the computation of diluted net loss per share.

9. COMPREHENSIVE LOSS

Comprehensive loss consists of the following:


	For the three months						For the six months
	ended March 31,						ended March 31,
	2008			2007			2008			2007
Net loss	$	(5,320,385	)	$	(10,250,362	)	$	(10,839,019	)	$	(23,867,889	)
Other comprehensive loss, net of tax:
Unrealized (loss) gain on available-for-sale securities		(563	)		11,298			3,272			79,299

Total comprehensive loss	$	(5,320,948	)	$	(10,239,064	)	$	(10,835,747	)	$	(23,788,590	)

10. SHAREHOLDERS’ EQUITY (DEFICIT)

During the six month period ended March 31, 2008, we issued 73,134 shares of common stock in connection with the vesting of restricted stock units. In connection with the vesting, two officers exercised their option to pay for minimum required withholding taxes associated with the vesting of restricted stock by surrendering 13,275 shares of common stock at an average market price of $1.53 per share.

Also during the six months ended March 31, 2008, 2,000 shares of common stock, previously issued as a restricted stock award, were surrendered upon the termination of an employee and 4,983 shares of restricted stock were surrendered to pay for the minimum required withholding taxes associated with the vesting of the restricted stock award.

During January 2008, we sold and issued a total of 34,568 shares of our Class A common stock for aggregate gross offering proceeds of $44,200 ($42,700 after offering expenses, including underwriting discounts and commissions).

In November 2007, warrants to purchase 1,053,000 shares of our common stock at an exercise price of $3.30 per share expired unexercised. As of March 31, 2008, warrants to purchase 269,305 shares of common stock at a weighted-average price per share of $8.92 remained outstanding, all of which are exercisable.

11. EMPLOYEE EQUITY INCENTIVE PLANS

We currently have five equity incentive plans (the “Plans”): the 2005 Equity Incentive Plan (the “2005 Plan”), the 2003 Equity Incentive Plan (the “2003 Plan”), the 2000 Stock Option Plan (the “2000 Plan”), the 1998 Stock Option Plan (the “1998 Plan”) and the 1994 Stock Option Plan (the “1994 Plan”), which are described in our Annual Report on Form 10-K for the year ended September 30, 2007. All of the Plans were approved by the shareholders, except for the 2003 Equity Incentive Plan, which was approved solely by the Board of Directors. Stock-based awards are subject to terms and conditions established by the Compensation Committee of our Board of Directors. Our policy is to issue new common shares upon the exercise of stock options, conversion of share units or purchase of restricted stock.

During the six month periods ended March 31, 2008 and 2007, we granted share-based awards under both the 2003 Plan and the 2005 Plan. Under the 2003 Plan and 2005 Plan, options to purchase shares, restricted stock units, restricted stock and other share-based awards may be granted to our employees and consultants. Under the Plans, as of March 31, 2008, we had an aggregate of 7,963,607 shares of our common stock reserved for future issuance. Of those shares, 3,083,847 were subject to outstanding options and other awards and 4,879,760 shares were available for future grants of share-based awards. As of March 31, 2008, no options were outstanding to consultants. We may also, from time to time, issue share-based awards outside of the Plans to the extent permitted by NASDAQ rules. As of March 31, 2008, there were no options to purchase shares of our common stock that were issued outside of the Plans (inducement option grants) outstanding. None of the share-based awards is classified as a liability as of March 31, 2008.

Stock Options. Stock options are granted with an exercise price equal to the current market price of our common stock at the grant date and have 10-year contractual terms. For option grants to employees, 25% of the option shares vest and become exercisable on the first anniversary of the grant date and the remaining 75% of the option shares vest and become exercisable quarterly in equal installments thereafter over three years; for option grants to non-employee directors, one-third of the option shares vest and become exercisable on the first anniversary of the grant date and the remaining two-thirds of the option shares vest and become exercisable daily or quarterly in equal installments thereafter over two years; and for certain option grants to non-employee directors, options have been granted as fully vested and exercisable at the date of grant. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans).

Summaries of stock options outstanding and changes during the six month period ended March 31, 2008 are presented below.


						Weighted
				Weighted		average
				average		remaining
				exercise		contractual		Aggregate
				price per		term		intrinsic
	Number of shares			share		(in years)		value
Outstanding, October 1, 2007		1,040,581		$	7.69
Forfeited		(363,299	)	$	8.72

Outstanding, March 31, 2008		677,282		$	7.13		7.4	$	—


Vested and expected to vest in the future, March 31, 2008		506,619		$	8.46		6.9	$	—

Exercisable, March 31, 2008		297,991		$	10.54		5.7	$	—

There were no options granted during the six month period ended March 31, 2008. The weighted average grant-date fair values of options granted during the six month period ended March 31, 2007 was $2.14 per share. There were no options exercised in the six month period ended March 31, 2008. The total intrinsic value of options exercised during the six month period ended March 31, 2007

was $270,000 based on the differences in market prices on the dates of exercise and the option exercise prices. As of March 31, 2008, the total unrecognized compensation cost related to unvested options was $1,097,000 which is expected to be recognized over the weighted-average period of 2.1 years, based on the vesting schedules.

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

Assumptions used in the Black-Scholes model for options granted during the six month period ended March 31, 2007 were as follows:


	2007
Expected volatility		75%-103	%
Weighted-average volatility		88	%
Average expected term in years		6.0
Risk-fee interest rate (zero coupon U.S. Treasury Note)		4.7	%
Expected dividend yield		0	%

The following table summarizes information concerning outstanding and exercisable stock options as of March 31, 2008:


	Options Outstanding
			Weighted				Options Exercisable
			Average		Weighted				Weighted
			Remaining		Average				Average
Range of	Number		Contractual		Exercise		Number		Exercise
Exercise Prices	Outstanding		Life in Years		Price		Exercisable		Price
$1.20 - $1.29		150,960		9.0	$	1.28		5,000	$	1.20
$2.41 - $2.88		128,504		8.9	$	2.44		7,723	$	2.88
$4.50 - $6.80		69,085		5.6	$	5.72		48,773	$	5.59
$6.92 - $9.92		67,854		5.2	$	7.86		50,667	$	8.18
$10.24 — $11.76		155,479		7.3	$	11.65		105,529	$	11.62
$12.12 — $16.60		92,125		6.7	$	14.39		67,024	$	14.04
$19.38 — $19.38		13,275		3.3	$	19.38		13,275	$	19.38

		677,282		7.4	$	7.13		297,991	$	10.54

Restricted stock units. RSUs generally vest based on three years of continuous service and may not be sold or transferred until the awardee’s termination of service. The following table summarizes the RSU activities for the six months ended March 31, 2008:


				Weighted
	Number of			average grant
	shares			date fair value
Unvested, October 1, 2007		1,914,988		$	2.17
Granted		866,751		$	1.49
Vested		(218,086	)	$	2.89
Forfeited		(163,088	)	$	1.78

Unvested, March 31, 2008		2,400,565		$	1.88

During the six month period ended March 31, 2008, we awarded 866,751 shares of restricted stock units to employees with a weighted average grant date fair value of $1.49 and exercisable at a purchase price of $0.00 per share.

At March 31, 2008, there were 142,000 shares of restricted stock with a weighted-average grant date fair value of $2.93 awarded to directors that have vested but are still restricted until the directors resign.

The grant-date fair value of RSUs granted during the six month periods ended March 31, 2008 and 2007 was $1,287,500 and $4,002,000, respectively. As of March 31, 2008, the total unrecognized compensation cost related to unvested shares was $3,426,000 which is expected to be recognized over a weighted-average period of 2.3 years, based on the vesting schedules.

Restricted stock awards. Restricted stock awards are grants that entitle the holder to acquire shares of restricted common stock at a fixed price, which is typically nominal. The shares of restricted stock cannot be sold, pledged or otherwise disposed of until the award vests, and any unvested shares may be reacquired by us for the original purchase price following the awardee’s termination of service. The restricted stock awards typically vest on the second or third anniversary of the grant date or on a graded vesting schedule over three years of employment. A summary of our unvested restricted stock awards as of March 31, 2008 and changes during the six month periods ended March 31, 2008 are presented below.


				Weighted
	Number of			average grant
	shares			date fair value
Unvested, October 1, 2007		22,500		$	11.87
Vested		(14,500	)	$	14.79
Forfeited		(2,000	)	$	6.91

Unvested, March 31, 2008		6,000		$	6.48

There were no restricted stock awards granted in the six month period ended March 31, 2008. The grant-date fair value of restricted stock awards granted in the six month period ended March 31, 2007 was $110,000. As of March 31, 2008, the total unrecognized compensation cost related to unvested shares was $22,000 which is expected to be recognized over a weighted-average period of 0.3 years.

We received no cash from exercised options and restricted stock awards under all share-based payment arrangements during the six month period ended March 31, 2008. During the six month period ended March 31, 2007, we received a total of $289,000 in cash from exercised options and restricted stock awards under all share-based payment arrangements. No tax benefit was realized for the tax deductions from option exercise of the share-base payment arrangements in the six-month periods ended March 31, 2008 and 2007.

12. COMMITMENTS AND CONTINGENCIES

See Note 3 “Acquisition of Alamo Pharmaceuticals, Inc. / Sale of FazaClo” regarding a contingency on the Net Working Capital Adjustment on the sale of FazaClo to Azur.

Center for Neurologic Study (“CNS”) — We hold the exclusive worldwide marketing rights to Zenvia for certain indications pursuant to an exclusive license agreement with CNS. We will be obligated to pay CNS up to $400,000 in the aggregate in milestones to continue to develop for both PBA and DPN pain, assuming they are both approved for marketing by the FDA. We are not currently developing, nor do we have an obligation to develop, any other indications under the CNS license agreement. In fiscal 2005, we paid $75,000 to CNS under the CNS license agreement, and will need to pay a $75,000 milestone if the FDA approves Zenvia for the treatment of PBA. In addition, we are obligated to pay CNS a royalty on commercial sales of Zenvia with respect to each indication, if and when the drug is approved by the FDA for commercialization. Under certain circumstances, we may have the obligation to pay CNS a portion of net revenues received if we sublicense Zenvia to a third party. Under our agreement with CNS, we are required to make payments on achievements of up to a maximum of ten milestones, based upon five specific medical indications. Maximum payments for these milestone payments could total approximately $2.1 million if we pursued the development of Zenvia for all of the licensed indications. Of the clinical indications that we currently plan to pursue, expected milestone payments could total $800,000. In general, individual milestones range from $150,000 to $250,000 for each accepted new drug application (“NDA”) and a similar amount for each approved NDA. In addition we are obligated to pay CNS a royalty ranging from approximately 5% to 8% of net revenues.

Eurand, Inc. In August 2006, we entered into a development and license agreement (“Eurand Agreement”) with Eurand, Inc. (“Eurand”), under which Eurand will provide research and development services using Eurand’s proprietary technology to develop a once-a-day controlled release capsule, a new formulation of Zenvia for the treatment of PBA (“Controlled-Release Zenvia”). Under the terms of the Eurand Agreement, we will pay Eurand for development services on a time and material basis. We will be required to make payments up to $7.6 million contingent upon achievement of certain development milestones and up to $14.0 million contingent upon achievement of certain sales targets. In addition, we will be required to make royalty payments based on sales of Controlled-Release Zenvia. No such payments were made in the first six months of fiscal 2008. In December 2006, we suspended further work under this agreement until resolution of further development plans for Zenvia resulting from our meeting with the FDA in late February 2007. All material remaining obligations would only be due in the event we re-initiate the agreement in the future. As of March 31, 2008, we had not yet reinitiated work under this agreement.

Contingencies. 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 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 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 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 and lawsuits will not likely have a material effect on our operations or financial position.

In September 2007, a court awarded us reimbursement of attorneys’ fees spent over a four-year period in connection with the enforcement of a settlement agreement entered into with a former employee. In April 2008, the Company received the proceeds from the settlement in the amount of $1.25 million. The proceeds will be recorded as Other Income in the third fiscal quarter of 2008.

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

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

The maximum amount of potential future payments under such indemnifications is not determinable. We have not incurred significant amounts related to these guarantees and indemnifications, and no liability has been recorded in the condensed consolidated financial statements for guarantees and indemnifications as of March 31, 2008.

13. SEGMENT INFORMATION

We operate our business on the basis of a single reportable segment, which is the business of discovery, development 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 geographic area based on selling location. All our operations are currently located in the U.S.; therefore, total revenues for the three and six month periods ended March 31, 2008 and 2007 are attributed to the U.S. All long-lived assets at March 31, 2008 and September 30, 2007 are located in the U.S.

For the three month periods ended March 31, 2008 and 2007, the revenues from our prior sale of rights to royalties under the GlaxoSmithKline (“GSK”) license agreement were 48% and 39% of our total net revenues, respectively. For the six month periods ended March 31, 2008 and 2007, the sale of rights to royalties under the GSK license agreement were 73% and 36% of our total net revenues, respectively. The increase in GSK royalties as a percentage of our total revenue is attributed to royalty revenue of $934,000 recorded in the first fiscal quarter of 2008 pursuant to the GSK license agreement in which we are entitled to receive 50% of all royalties for annual net sales of Abreva in North America in excess of $62 million during each calendar year. For the three and six month periods ended March 31, 2007, 28% and 29%, respectively, of our total net revenues were derived from our license agreement with AstraZeneca. For the three and six month periods ended March 31, 2007, 25% and 24% of our total net revenues, respectively, were derived from our license agreement with Novartis, respectively. No revenues were derived from AstraZeneca or Novartis in the three month period ended March 31, 2008.

Net trade-related receivables for docosanol product sales accounted for 10% of net receivables as of March 31, 2008.

14. LICENSE AGREEMENTS

2008 quarter until the remaining work is completed under the NIH grant. The $2 million NIH grant was awarded to the Company in July 2006 in order to establish a cGMP manufacturing process for AVP-21D9 and test efficacy of the fully human monoclonal antibody in non-human primates.

15. SUBSEQUENT EVENTS

In April 2008, we closed a registered securities offering raising $40 million in gross proceeds from a select group of institutional investors led by ProQuest Investments and joined by Clarus Ventures, Vivo Ventures, and OrbiMed Advisors. In connection with the offering, approximately 35 million shares of common stock were issued at a price of $1.14 per share unit with 35% warrant coverage. The warrants, which represent the right to acquire up to approximately 12.2 million common shares, are exercisable at $1.43 per share and have a 5 year exercise term. As of March 31, 2008, deferred financing costs in connection with the financing in the amount of $167,000 were recorded and classified as other current assets. The proceeds are expected to provide adequate capital to ensure continuing operations through the anticipated timing of the FDA approval decision for Zenvia for the PBA indication.

In April 2008, we received $1.25 million in proceeds from a legal settlement which was awarded to us in connection with the enforcement of a settlement agreement entered into with a former employee. The proceeds will be recorded as Other Income in the third fiscal quarter of 2008.

In April 2008, we notified Brinson Patrick Securities Corporation that we intend to terminate our financing facility with the Corporation.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements concerning future events and performance of the Company. When used in this report, the words “intend,” “estimate,” “anticipate,” “believe,” “plan” or “expect” and similar expressions are included to identify forward-looking statements. These forward-looking statements are based on our current expectations and assumptions and many factors could cause our actual results to differ materially from those indicated in these forward-looking statements. You should review carefully the factors identified in this report under the caption, “Risk Factors” and in our most recent Annual Report on Form 10-K filed with the SEC. We disclaim any intent to update or announce revisions to any forward-looking statements to reflect actual events or developments. Except as otherwise indicated herein, all dates referred to in this report represent periods or dates fixed with reference to the calendar year, rather than our fiscal year ending September 30. The three month period ended March 31, 2008 may also be referred to as the second quarter of fiscal 2008.

EXECUTIVE OVERVIEW

We are a pharmaceutical company focused on developing, acquiring and commercializing novel therapeutic products for the treatment of chronic diseases. Our product candidates address therapeutic markets that include the central nervous system, inflammatory diseases and infectious diseases. Our lead product candidate, Zenvia (dextromethorphan hydrobromide/quinidine sulfate), is currently in Phase III clinical development for the treatment of PBA and DPN pain. Our first commercialized product, docosanol 10% cream, (sold as Abreva^® by our marketing partner GlaxoSmithKline Consumer Healthcare in North America) is the only over-the-counter treatment for cold sores that has been approved by the FDA. Our inflammatory disease program, which targets macrophage migration inhibitory factor (“MIF”), is currently partnered with Novartis. Our infectious disease program has historically been focused primarily on anthrax antibodies. In March 2008, we entered into an Asset Purchase and License Agreement with Emergent Biosolutions for the sale of the Company’s anthrax antibodies and license to use our proprietary Xenerex Technology platform. Under the terms of the Agreement, we are obligated to complete the remaining work under the Company’s NIH/NIAID grant. The $2 million NIH/NIAID grant was awarded to the Company in July 2006 in order to establish a cGMP manufacturing process for AVP-21D9 and test efficacy of the fully human monoclonal antibody in non-human primates.

Zenvia Status

Zenviais currently in Phase III clinical development for the treatment of two conditions: (1) pseudobulbar affect (“PBA”), which is an involuntary emotional expression disorder and (2) diabetic peripheral neuropathic (“DPN pain”).

In October 2006, we received an “approvable” letter from the FDA for Zenviain the treatment of patients with PBA. The approvable letter raised certain safety and efficacy concerns and the safety concerns will require additional clinical development to resolve. Based on discussions with the FDA, we were able to successfully resolve the outstanding efficacy concern of the original dose formulation. However, in order to address safety concerns, we agreed to re-formulate Zenviaand conduct one additional confirmatory Phase III clinical trial using lower dose formulations. The goal of the study is to demonstrate improved safety while maintaining significant efficacy. In October 2007, we reached agreement with the FDA under the Special Protocol Assessment (“SPA”) process, on the design of a single confirmatory Phase III clinical trial of Zenviafor the treatment of patients with PBA. We enrolled our first patient in this trial in December 2007 and as of May 2008, we are on target with our expected enrollment numbers. In May 2008, we informed the FDA of our intention to increase the planned patient enrollment numbers from 270 to approximately 300 in order to provide additional statistical power to the trial and increase the size of our safety database. We continue to expect this study to be completed (as defined as top-line safety and efficacy data becomes available) during the second half of calendar 2009, even after allowing for the increase in the size of the trial.

In April 2007, we announced positive top-line data results from our first Phase III clinical trial of Zenviafor DPN pain. We are currently conducting a formal pharmacokinetic (“PK”) study to identify a lower quinidine dose formulation that may have similar efficacy to the doses tested in the Phase III study before discussing a further Phase III trial with the FDA. While we have received no formal direction from the FDA to lower quinidine dose formulation for DPN pain, we believe it is the most prudent course of action given the current regulatory environment and the FDA’s concerns raised over Zenviafor PBA.

Docosanol 10% Cream

Docosanol 10% cream is a topical treatment for cold sores. In 2000, we received FDA approval for marketing docosanol 10% cream as an over-the-counter product. Since that time, docosanol 10% cream has been approved by regulatory agencies in Canada, Denmark, Finland, Israel, Korea, Norway, Portugal, Spain, Poland, Greece and Sweden and is sold by our marketing partners in these territories. In 2000, we granted a subsidiary of GlaxoSmithKline, SB Pharmco Puerto Rico, Inc. (“GlaxoSmithKline”) the exclusive rights to market docosanol 10% cream in North America. GlaxoSmithKline markets the product under the name Abreva^® in the United States and Canada. In fiscal 2003, we sold an undivided interest in our GlaxoSmithKline license agreement for docosanol 10% cream to Drug Royalty USA, Inc. (“Drug Royalty USA”) for $24.1 million. We retained the right to receive 50% of all royalties under the GlaxoSmithKline license agreement for annual net sales of Abreva in North America in excess of $62 million. Starting in fiscal 2007, annual Abreva sales exceeded this threshold and we began participating in the excess royalties at that time.

Inflammation Program

In April 2005, we entered into an exclusive Research Collaboration and License Agreement with Novartis regarding the license of certain compounds that regulate macrophage migration inhibitory factor (“MIF”) in the treatment of various inflammatory diseases. We initially provided contract research services to Novartis to support this program for two years and, in March 2007, Novartis made the decision to continue the MIF research program internally and to allow the research collaboration portion of this agreement to expire without renewal. Under the terms of the license agreement, we are eligible to receive over $200 million in combined upfront and milestone payments upon achievement of development, regulatory, and sales objectives. We are also eligible to receive escalating royalties on any worldwide product sales generated from this program.

Xenerex Human Antibody Technology — Anthrax/Other Infectious Diseases

Our patented Xenerex antibody technology can be used to develop human monoclonal antibodies for use as prophylactic and therapeutic drugs, which may be used to prevent or treat anthrax and other infectious diseases. This proprietary technology provides a platform for accessing human monoclonal antibodies against disease antigens. The Xenerex technology is capable of generating fully human antibodies to target antigens and draws on the natural diversity of the human donor population. Using Xenerex technology, we have discovered a human monoclonal antibody, AVP-21D9, that provides immediate post-exposure neutralization and immediate immunity to animals exposed to a lethal dose of recombinant anthrax toxins.

In March 2008, we entered into an Asset Purchase and License Agreement with Emergent Biosolutions for the sale of the Company’s anthrax antibodies and license to use our proprietary Xenerex Technology platform. Under the terms of the Agreement, we are obligated to complete the remaining work under the Company’s NIH/NIAID grant (“NIH grant”). As such, revenue resulting from upfront payments totaling $250,000 that were received in the second fiscal quarter of 2008 will be deferred until the third fiscal 2008 quarter until the remaining work is completed under the NIH grant. The $2 million NIH grant was awarded to the Company in July 2006 in order to establish a cGMP manufacturing process for AVP-21D9 and test efficacy of the fully human monoclonal antibody in non-human primates.

Restructuring Activities

In May 2006, we acquired FazaClo^® (clozapine, USP), a product marketed for the management of treatment-resistant schizophrenia and the reduction in the risk of recurrent suicidal behavior in schizophrenia or schizoaffective disorders. We had intended to leverage the FazaClo sales force to assist with the commercial launch of Zenviafor PBA, a launch that was planned for early 2007. However, due to the receipt of the approvable letter and the resulting delay in the planned launch of Zenvia, the strategic rationale for continued marketing of FazaClo by Avanir no longer existed. Therefore, we entered into an agreement in July 2007 to sell FazaClo to Azur Pharma. The sale, which closed August 3, 2007, provided approximately $43.9 million in an up-front cash payment and may provide up to an additional $10.0 million in contingent payments to be paid in calendar year 2009, subject to certain regulatory conditions. In addition, the Company is eligible to receive up to $2.0 million in royalties, based on 3% of annualized net product revenues in excess of $17.0 million. Azur acquired the FazaClo sales force and support operations, representing approximately 80 employees in total. As a result, we became a substantially smaller organization following the sale of FazaClo, as well as the divestiture of our drug discovery operations in San Diego, and will be principally focused over the next two to three years on seeking regulatory approval of Zenviafor the treatment of patients with PBA and patients with DPN pain. We have suspended all funding activities for our selective cytokine inhibitor program and have also ended all further prosecution and maintenance of associated patents.

As a result of these initiatives, we have undergone significant organizational changes since fiscal 2007. Our principal focus is currently on gaining regulatory approval for Zenvia^TM, first for the treatment of patients with PBA and then for patients with DPN pain. We believe that the proceeds from the sale of FazaClo and the proceeds from the April 2008 common stock offering will be sufficient to fund our operations, including our ongoing confirmatory Phase III trial for Zenvia in patients with PBA, through the anticipated date the decision is made by the FDA. For additional information about the risks and uncertainties that may affect our business and prospects, please see “Risk Factors.”

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

To understand our financial statements, it is important to understand our critical accounting policies and estimates. The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in the determination of revenue recognition and sales deductions for estimated chargebacks, rebates, sales incentives and allowances, certain royalties and returns and losses. Significant estimates and assumptions are also required in the appropriateness of capitalization and amortization periods for identifiable intangible assets, inventories, the potential impairment of goodwill and other intangible assets, income taxes, contingencies, estimate on net working capital adjustment and stock-based compensation. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. For any given individual estimate or assumption made by us, there may also be other estimates or assumptions that are reasonable. Although we believe that our estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions are made. Actual results may differ significantly from our estimates.

A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in Part II, Item 7 of our Annual Report on Form 10-K for the year ended September 30, 2007 in the “Critical Accounting Policies and Estimates” section and in Note 2 of the Notes to our condensed consolidated financial statements included herein.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2008 AND 2007


	Three Months ended
	March 31,
	2008		2007		$ Change			% Change
PRODUCT SALES
Net revenues	$	90,270	$	—	$	90,270			100	%
Cost of revenues		15,510		—		15,510			100	%

Gross margin	$	74,760	$	—	$	74,760			100	%


LICENSES, RESEARCH SERVICES AND GRANTS
Revenues:
Research services	$	—	$	920,448	$	(920,448	)		-100	%
Government research grant		311,758		266,728		45,030			17	%
License agreements		56,643		56,019		624			1	%
Royalty and sale of royalty rights		571,825		779,673		(207,848	)		-27	%

Revenues from licenses, research services and grants		940,226		2,022,868		(1,082,642	)		-54	%

Costs:
Research services		26,817		607,164		(580,347	)		-96	%
Government research grant		431,948		369,261		62,687			17	%

Costs from research services and grants		458,765		976,425		(517,660	)		-53	%

Research services and other gross margin		481,461		1,046,443		(564,982	)		-54	%

Total gross margin	$	556,221	$	1,046,443	$	(490,222	)		-47	%

Revenues

Net product revenues for the three months ended March 31, 2008 include sales of docosanol 10% cream of $90,000. Revenues from licenses, royalties, research services and grants declined by $1.1 million to $940,000 for the second quarter of fiscal 2008 compared to $2.0 million in the second quarter of fiscal 2007. The decrease in revenues is attributed to a decline in revenue of $920,000 from research services from our agreements with AstraZeneca and Novartis and a decline in revenue related to royalties of $208,000. The decline in royalties is primarily attributed to a decrease in royalty revenue recognized related to the GSK license agreement. In the second fiscal quarter of 2008, neither the AstraZeneca and Novartis agreements were still active.

Potential revenue-generating contracts that remained active as of March 31, 2008 include several docosanol 10% cream license agreements and our license agreement with Novartis for the Company’s MIF technology. Partnering, licensing and research collaborations have been, and may continue to be, an important part of our business development strategy. We may continue to seek partnerships with pharmaceutical companies that can help fund our operations in exchange for sharing in the success of any licensed compounds or technologies.

Cost of Revenues

Cost of product revenues for the three months ended March 31, 2008 include the cost of docosanol 10% cream. Cost of licenses, research services and grants declined to $459,000 or 49% of revenues for the second quarter of fiscal 2008 compared with $976,000 or 48% of revenues for the second quarter of fiscal 2007. The decline in cost of revenues is primarily attributed to a 96% decline in the cost of research services due to the termination of the AstraZeneca agreement and non-renewal of the Novartis agreement. The cost of licenses, research services and grants includes primarily direct and indirect payroll costs and the costs of outside vendors.


	Three Months ended
	March 31,
	2008		2007		$ Change			% Change
OPERATING EXPENSES
Research and development	$	3,524,665	$	5,967,739	$	(2,443,074	)		-41	%
Selling, general and administrative		2,418,894		2,157,245		261,649			12	%

Total Operating Expenses	$	5,943,559	$	8,124,984	$	(2,181,425	)		-27	%

Research and Development Expenses

Research and development expenses decreased by $2.5 million from $6.0 million in the second quarter of fiscal 2007 to $3.5 million for the second quarter of fiscal 2008. The decrease is primarily due to decreased costs incurred for Zenvia as the Company was completing a study in the second quarter of fiscal 2007 for the DPN pain indication of Zenvia.

Over the next two years, we expect that our research and development costs will consist mainly of expenses related to the confirmatory Phase III trial for Zenvia for PBA.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased slightly by $277,000 from $2.2 million for the second quarter of fiscal 2007 compared to $2.4 million for the second quarter of fiscal 2008. In the second quarter of fiscal 2007, we adjusted forfeiture rates used in the calculated of share-based compensation expense which resulted in a decrease of non-cash expenses of $151,000.

In September 2007, a court awarded us reimbursement of attorneys fees spent over a four-year period in connection with the enforcement of a settlement agreement entered into with a former employee. In April 2008, the Company received the settlement in the amount of $1.25 million. The settlement will be recorded in Other Income in the third quarter of fiscal 2008.

Share-Based Compensation

During the second quarter of fiscal 2007, the Company updated its projected forfeiture rates as it applies to stock-based compensation considering recent actual data. Forfeiture rates for the six month periods ended March 31, 2008 and 2007 were estimated to be approximately 30% based on our historical experience. Future estimates may differ substantially from the Company’s current estimates.

Total compensation expense for our share-based payments in the three month period ended March 31, 2008 and the same period in 2007 was $477,000 and $673,000, respectively. Selling, general and administrative expense in the three month periods ended March 31, 2008 and 2007 include share-based compensation expense of $284,000 and $420,000, respectively. Research and development expense in the three month periods ended March 31, 2008 and 2007 include share-based compensation expense of $187,000 and $85,000, respectively. As of March 31, 2008, $4.5 million of total unrecognized compensation costs related to nonvested options and awards is expected to be recognized over a weighted average period of 2.3 years. See Note 11, “Employee Equity Incentive Plans” in the Notes to Condensed Consolidated Financial Statements (Unaudited) for further discussion.

Interest Expense and Interest Income

For the three month period ended March 31, 2008, interest expense increased to $191,000, compared to $135,000 for the same period in the prior year. The increase in interest expense in 2008 is primarily due to $4 million in Seller Notes issued in the last six months of fiscal 2007. The Seller Notes were issued in connection with the purchase of Alamo.

For the three month period ended March 31, 2008, interest income increased to $283,000, compared to $145,000 for the same period in the prior year. The increase is due to approximately a 103% increase in the average balance of cash, cash equivalents and investments in securities for the quarter ended March 31, 2008, compared to the same period in the prior year.

Loss from Discontinued Operations

Loss from discontinued operations was $12,000 in the three month period ended March 31, 2008, compared to loss from discontinued operations of $3.3 million for the three month period ended March 31, 2007. The loss recognized in the three month period ended March 31, 2008 is attributed to the additional trailing costs of $12,000 related to the operations of FazaClo during the quarter ended March 31, 2008.

Net Loss

Net loss was $5.3 million, or $0.12 per share, in the three month period ended March 31, 2008, compared to a net loss of $10.3 million, or $0.26 per share for the three month period ended March 31, 2007.

COMPARISON OF SIX MONTHS ENDED MARCH 31, 2008 AND 2007


	Six Months ended
	March 31,
	2008		2007		$ Change			% Change
PRODUCT SALES
Net revenues	$	126,270	$	—	$	126,270			100	%
Cost of revenues		21,714		—		21,714			100	%

Gross margin	$	104,556	$	—	$	104,556			100	%


LICENSES, RESEARCH SERVICES AND GRANTS
Revenues:
Research services	$	—	$	2,190,692	$	(2,190,692	)		-100	%
Government research grant		479,404		353,076		126,328			36	%
License agreements		113,907		113,284		623			1	%
Royalty and sale of royalty rights		2,409,678		1,502,713		906,965			60	%

Revenues from licenses, research services and grants		3,002,989		4,159,765		(1,156,776	)		-28	%

Costs:
Research services		76,807		1,771,239		(1,694,432	)		-96	%
Government research grant		557,534		464,988		92,546			20	%

Costs from research services and grants		634,341		2,236,227		(1,601,886	)		-72	%

Research services and other gross margin		2,368,648		1,923,538		445,110			23	%

Total gross margin	$	2,473,204	$	1,923,538	$	549,666			29	%

Revenues

Net product revenues for the six months ended March 31, 2008 include sales of docosanol 10% cream of $126,000. Revenues from licenses, royalties, research services and grants declined by $1.2 million to $3.0 million for the first six months of fiscal 2008 compared to $4.2 million in the first six months of fiscal 2007. The decrease in revenues is attributed to a decline in revenue of $2.2 million from research services from our agreements with AstraZeneca and Novartis. In the second fiscal quarter of 2008, neither of the collaboration services agreements with AstraZeneca or Novartis were still active, although our license agreement with Novartis remained in effect at that time.

The revenue decrease was partially offset by an increase in revenue from royalties of $907,000. The increase in royalty revenue is related to royalty revenue from GSK of $934,000 recorded in the first quarter of 2008 pursuant to the royalty sale arrangement relating to our GSK license agreement in which we are entitled to receive 50% of all royalties for annual net sales of Abreva in North America in excess of $62 million.

Cost of Revenues

Cost of product revenues for the six months ended March 31, 2008 include the cost of docosanol 10% cream. Cost of licenses, research services and grants declined to $634,000 or 21% of revenues for the first six months of second quarter of fiscal 2008 compared with $2.2 million or 54% of revenues for the first six months of fiscal 2007. The decline in cost of revenues is primarily attributed to a 96% decline in the cost of research services due to the termination of the AstraZeneca agreement and non-renewal of the Novartis agreement. The cost of licenses, research services and grants includes primarily direct and indirect payroll costs and the costs of outside vendors.


	Six Months ended
	March 31,
	2008		2007		$ Change			% Change
OPERATING EXPENSES
Research and development	$	6,950,925	$	11,164,992	$	(4,214,067	)		-38	%
Selling, general and administrative		5,547,013		11,415,839		(5,868,826	)		-51	%

Total Operating Expenses	$	12,497,938	$	22,580,831	$	(10,082,893	)		-45	%

Research and Development Expenses

Research and development expenses decreased by $4.2 million from $11.2 million in the first six months of fiscal 2007 to $7.0 million for the first six months of fiscal 2008. The decrease is primarily due to decreased costs incurred for Zenvia as the Company was conducting a study in the first six months of fiscal 2007 for the DPN pain indication of Zenvia.

Over the next two years, we expect that our research and development costs will consist mainly of expenses related to the confirmatory Phase III trial for Zenvia for PBA.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $5.8 million from $11.4 million for the first six months of fiscal 2007 compared to $5.6 million for the first six months of fiscal 2008. The decrease resulted primarily from expenses incurred in the first fiscal quarter of 2007 in preparation for commercial readiness for the launch of Zenvia which were not repeated in the first fiscal quarter of 2008.

Share-Based Compensation

Total compensation expense for our share-based payments in the six month period ended March 31, 2008 and the same period in 2007 was $921,000 and $1.5 million, respectively. Selling, general and administrative expense in the six month periods ended March 31, 2008 and 2007 include share-based compensation expense of $573,000 and $1.1 million, respectively. Research and development expense in the six month periods ended March 31, 2008 and 2007 include share-based compensation expense of $334,000 and $208,000, respectively. As of March 31, 2008, $4.5 million of total unrecognized compensation costs related to nonvested options and awards is expected to be recognized over a weighted average period of 2.3 years. See Note 11, “Employee Equity Incentive Plans” in the Notes to Condensed Consolidated Financial Statements (Unaudited) for further discussion.

Interest Expense and Interest Income

For the six month period ended March 31, 2008, interest expense decreased to $425,000, compared to $553,000 for the same period in the prior year. The decrease in interest expense in 2008 is primarily due to a decrease in the interest rate applied to the Seller Notes. The average interest rate has decreased by 1% from the first six months of fiscal 2008 compared to the same period in 2007. The Seller Notes were issued in connection with the purchase of Alamo.

For the six month period ended March 31, 2008, interest income increased to $710,000, compared to $336,000 for the same period in the prior year. The increase is due to approximately a 105% increase in the average balance of cash, cash equivalents and investments in securities for the six months ended March 31, 2008, compared to the same period in the prior year.

Loss from Discontinued Operations

Loss from discontinued operations was $1.1 million in the six month period ended March 31, 2008, compared to loss from discontinued operations of $3.2 million for the six month period ended March 31, 2007. The loss recognized in the six month period ended March 31, 2008 is attributed to the accrual for the Net Working Capital Adjustment of $868,000 as well as additional costs related to the operations of FazaClo during the six months ended March 31, 2008.

Net Loss

Net loss was $10.8 million, or $0.25 per share, in the six months ended March 31, 2008, compared to a net loss of $23.9 million, or $0.65 per share for the six months ended March 31, 2007.

LIQUIDITY AND CAPITAL RESOURCES

We assess our liquidity by 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 accounts receivable, inventories, accounts payable and capital expenditures; the timing and extent of cash received from milestone payments under license agreements; funds required for acquisitions; funds required to repay notes payable and capital lease obligations as they become due; adequate credit facilities; and financial flexibility to attract long-term equity capital on favorable terms. Historically, cash required to fund on-going business operations has been provided by financing activities and used to fund operations and net working capital requirements and investing activities.

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


			Increase
	March 31,		(Decrease)			September 30,
	2008		During Period			2007
Cash, cash equivalents and investment in securities	$	24,272,960	$	(9,368,438	)	$	33,641,398
Cash and cash equivalents	$	23,416,363	$	(7,071,599	)	$	30,487,962
Net working capital	$	18,285,072	$	(11,051,704	)	$	29,336,776


	Six Months						Six Months
	Ended			Change			Ended
	March 31,			Between			March 31,
	2008			Periods			2007
Net cash used in operating activities	$	(9,200,730	)	$	24,115,423		$	(33,316,153	)
Net cash provided by investing activities		2,291,203			(14,161,563	)		16,452,766
Net cash (used in) provided by financing activities		(162,072	)		(17,414,044	)		17,251,972

Net (decrease) increase in cash and cash equivalents	$	(7,071,599	)	$	(7,460,184	)	$	388,585

Operating activities. Net cash used in operating activities amounted to $9.2 million in the first six months of fiscal 2008 compared to $33.3 million in the first six months of fiscal 2007. The decrease in cash used for operating activities is primarily related to the decrease in overall operating costs including a $13.0 million decrease in net loss coupled with a $9.7 million decrease in cash used for accounts payable.

Investing activities. Net cash provided by investing activities was $2.3 million in the first six months of fiscal 2008, compared to $16.5 million provided in the first six months of fiscal 2007. The decrease in cash provided by investing activities is primarily related to the decrease in proceeds from the sale of securities which provided $16.9 million in the first six months of fiscal 2007 compared to $2.3 million in the same period in 2008.

Financing activities. Net cash used in financing activities was $162,000 in the first six months of fiscal 2008 compared to net cash provided by financing activities of $17.3 million in the first six months of fiscal 2007. The decrease in net cash provided by financing activities is primarily related to approximately $22.1 million received from the sale of our common stock through private placements in the first six months of fiscal 2007.

In June 2005, we filed a shelf registration statement on Form S-3 with the SEC to sell an aggregate of up to $100 million in Class A common stock and preferred stock, depositary shares, debt securities and warrants. This shelf registration statement was declared effective on August 3, 2005. In February 2008, we filed a shelf registration statement on Form S-3 with the SEC to sell an aggregate of up to $25 million in Class A common stock and preferred stock, depositary shares, debt securities and warrants. This shelf registration statement was declared effective on February 19, 2008. Through March 31, 2008, we had sold a total of 14,441,323 shares of Class A common stock under the 2005 registration statement, raising gross offering proceeds of approximately $71.5 million and net offering proceeds of approximately $69.6 million. We have also issued under the 2005 registration statement common stock warrants to purchase a total of 1,053,000 shares of our Class A common stock at an exercise price of $3.30 per share. The warrants expired in November 2007 unexercised.

In December 2006 we entered into a financing facility with Brinson Patrick Securities Corporation (“Brinson Patrick”). Under this facility, through April 30, 2008, we have offered and sold an aggregate of 6,160,200 shares of Class A common stock, which resulted in net proceeds of $16.2 million. In April 2008, we notified Brinson Patrick that we intend to terminate our financing facility with the Corporation.

As of March 31, 2008, we have contractual obligations for long-term debt, capital (finance) lease obligations and operating lease obligations, as summarized in the table that follows.


	Payments Due by Period
			Less than						More than
	Total		1 Year		1-3 Years		3-5 Years		5 Years
Long-term debt (principal and interest)	$	12,822,510	$	884,730	$	11,937,780	$	—	$	—
Operating lease obligations		7,137,249		1,808,802		3,061,308		2,267,139		—
Purchase obligations (1)		13,135,380		6,831,515		6,303,865		—		—

Total	$	33,095,139	$	9,525,047	$	21,302,953	$	2,267,139	$	—


(1)		Purchase obligations consist of the total of trade accounts payable and trade related accrued expenses at March 31, 2008 which approximates our contractual commitments for goods and services in the normal course of our business.

As part of the purchase consideration of the Alamo acquisition, we initially issued three promissory notes in the principal amounts of $14,400,000, $6,675,000 and $4,000,000 (the “First Note,” “Second Note” and “Third Note”, respectively) (collectively, the “Notes”). The Notes bear interest at an average rate equal to the London Inter-Bank Offered Rate, or “LIBOR,” plus 1.33%. Interest accruing on the Notes is payable monthly and the principal amount of the Notes matures on May 24, 2009, provided that we must apply a portion of any future net offering proceeds from equity offerings and other financing transactions to repay the Notes, and must repay the Notes in full if we have raised in an offering more than $100,000,000 in future aggregate net proceeds. In connection with the equity offering we completed in the first nine months of fiscal year 2007, and in accordance with the terms of the Notes, we used approximately $6.1 million or 20% of the net proceeds received to pay down the First Note. In connection with our sale of FazaClo in August 2007, we agreed to prepay $11 million of outstanding principal due under the Notes, and the Note holder agreed to suspend the Company’s obligation to use a portion of future equity offering proceeds to repay the Notes, up to $55 million in future net offering proceeds.

Twenty percent of any offering proceeds above this amount will need to be paid to the Note holders, as per the original agreement. In August 2007, there was no balance remaining on the First Note.

We have the right to prepay, in cash or in common stock, the amounts due under the Notes at any time, provided that we may only pay the Notes in common stock if the Stock Contingency has occurred prior to the maturity date and if we have registered the shares on an effective registration statement filed with the SEC. If we elect to prepay the Notes with common stock, the shares will be valued at 95% of the average closing price of the common stock, as reported on the NASDAQ Global Market, for the five trading days prior to repayment, subject to a price floor.

Contingency on Net Working Capital Adjustment. The Asset Purchase Agreement (the “Agreement”) with Azur provides for an adjustment to the sale price of FazaClo in connection with the final determination of the amount of net working capital (as defined in the Agreement) included as part of the sale (“Net Working Capital Adjustment”). The Agreement also stipulates that an adjustment to net working capital shall only exist if the final Net Working Capital Adjustment is greater than $250,000. As of September 30, 2007, we estimated that there would not be a Net Working Capital Adjustment. However, based upon current information, we have estimated the Net Working Capital Adjustment to result in an $868,000 reduction in the sale price which would be an additional use of working capital.

Azur has made claims that the Net Working Capital Adjustment should reduce the sale price by approximately $2.0 million, which is approximately $1.1 million more than the amount that we have accrued. As a result, as provided by the Agreement, we and Azur have engaged the services of a U.S. national accounting firm to serve as independent arbitrator to resolve this dispute of the Net Working Capital Adjustment. We expect the arbitrator to render a decision in the fourth fiscal quarter of 2008. As of March 31, 2008, $868,000 is reflected in current liabilities of discontinued operations. We believe we have adequately provided for the loss related to the Net Working Capital Adjustment in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”; however, there can be no assurance as to ultimate settlement of the amount. If the final determination of the Net Working Capital Adjustment exceeds our accrual of $868,000, the amount in excess of $868,000 will be recognized as a loss on discontinued operations in that period.

Alamo Earn-Out Payments. In connection with the Alamo acquisition, we agreed to pay up to an additional $39,450,000 in revenue-based earn-out payments, based on future sales of FazaClo. These earn-out payments are based on FazaClo sales in the U.S. from the closing date of the acquisition through December 31, 2018 (the “Contingent Payment Period”). Based on the results of the quarters ended March 31, 2007 and June 30, 2007, we issued the first and second of these revenue-based payments through the issuance of additional promissory notes in the principal amount of $2,000,000 per note. As previously discussed in this filing, we sold the FazaClo product line to Azur Pharma. Our future earn-out obligations that would have been payable to the prior owner of Alamo Pharmaceuticals upon the achievement of certain milestones were assumed by Azur Pharma; however, we are still contingently liable in the event of default by Azur.

Eurand Milestone and Royalty Payments. In August 2006, we entered into a development and license agreement (“Eurand Agreement”) with Eurand, Inc. (“Eurand”), under which Eurand will provide R&D services using Eurand’s proprietary technology to develop a once-a-day controlled release capsule, a new formulation, of Zenvia for the treatment of PBA (“Controlled-Release Zenvia”). Under the terms of the Eurand Agreement, we will pay Eurand for development services on time and material basis. We will be required to make payments up to $7.6 million contingent upon achievement of certain development milestones and up to $14.0 million contingent upon achievement of certain sales targets. In addition, we will be required to make royalty payments based on sales of Controlled-Release Zenvia, if it is approved for commercialization. Development milestone events include program initiation, delivery of prototypes, delivery of clinical trial material for phase 1, achieving target PK Profile in the pilot clinical study, delivery of clinical trial material for phase 3, filing of the first NDA for the Product with the FDA, completion of manufacturing validation and approval of the NDA with the FDA. Sales target milestones are $2.0 million upon achieving $100 million of U.S. net revenues, $4.0 million upon achieving $200 million of U.S. net revenues and $8.0 million upon achieving $400 million of U.S. net revenues. The agreement remains in effect on a country-by-country basis for the longer of 10 years after first commercial sale or the life of any Eurand patent, unless earlier terminated in accordance with the agreement. In November 2006, we provided Eurand with notification to suspend activity on this project until further notice. The Company may terminate the agreement upon 30 days notice in the event the company receives a response from the FDA that is something other than an unconditional approval of the original formulation of Zenvia. Upon expiration of the agreement the Company shall own a fully-paid irrevocable license. Effective December 2006, we suspended further work under this agreement until resolution of further development plans for Zenvia resulting from our meeting with the FDA in late February 2007. All material remaining obligations would only be due in the event we re-initiate the agreement in the future.

Zenvia License Milestone Payments. We hold the exclusive worldwide marketing rights to Zenvia for certain indications pursuant to an exclusive license agreement with the Center for Neurologic Study (“CNS”). We will be obligated to pay CNS up to $400,000 in the aggregate in milestones to continue to develop both indications, assuming they are both approved for marketing by the FDA. We are not currently developing, nor do we have an obligation to develop, any other indications under the CNS license agreement. In fiscal 2005, we paid $75,000 to CNS under the CNS license agreement, and will need to pay a $75,000 milestone if the FDA approves our NDA for Zenvia for the treatment of PBA. In addition, we are obligated to pay CNS a royalty on commercial sales of Zenvia with respect to each indication, if and when the drug is approved by the FDA for commercialization. Under certain circumstances, we may have the obligation to pay CNS a portion of net revenues received if we sublicense Zenvia to a third party.

Under our agreement with CNS, we are required to make payments on achievements of up to a maximum of ten milestones, based upon five specific medical indications. Maximum payments for these milestone payments could total approximately $2.1 million if we pursued the development of Zenvia for all of the licensed indications. Of the clinical indications that we currently plan to pursue, expected milestone payments could total $800,000. In general, individual milestones range from $150,000 to $250,000 for each accepted NDA and a similar amount for each approved NDA. In addition, we are obligated to pay CNS a royalty ranging from approximately 5% to 8% of net revenues.

Management Outlook

In April 2008, we closed a registered securities offering raising $40 million in gross proceeds. In connection with the offering, approximately 35 million shares of common stock were issued at a price of $1.14 per share unit with 35% warrant coverage. The warrants, which represent the right to acquire up to approximately 12.2 million shares, are exercisable at $1.43 per share and have a 5 year exercise term. We believe that cash and investments in securities of approximately $24.3 million at March 31, 2008 and the net proceeds of $38 million from the April 2008 common stock offering will be sufficient to sustain our planned level of operations through the clinical development of Zenvia and the anticipated FDA approval decision for Zenvia for PBA. However, the Company 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 “Risk Factors.”

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest rate sensitivity

Our investment portfolio consists primarily of fixed income instruments with an average duration of approximately 9-12 months. The primary objective of our investments in debt securities is to preserve principal while achieving attractive yields, without significantly increasing risk. We classify our investments in securities as of March 31, 2008 as available-for-sale and our restricted investments in securities as held-to-maturity. These available-for-sale securities are subject to interest rate risk. In general, we would expect that the volatility of this portfolio would decrease as its duration decreases. Based on the average duration of our investments as of March 31, 2008 and 2007, an increase of one percentage point in the interest rates would have resulted in increases in interest income of approximately $263,000 and $29,000, respectively.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Vice President, Finance, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this report,

have concluded that, based on such evaluation, as of March 31, 2008 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 SEC rules and forms. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Controls over Financial Reporting

There has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the Company’s fiscal quarter ended March 31, 2008, that has materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

Item 1A. RISK FACTORS

Risks Relating to Our Business

We must conduct additional clinical trials for Zenvia and there can be no assurance that the FDA will approve Zenvia or that an approval, if granted, will be on terms we may seek.

In October 2006, we received an “approvable letter” from the FDA for our new drug application (“NDA”) submission for Zenvia in the treatment of patients with PBA. The approvable letter raised certain safety and efficacy concerns and the safety concerns will require additional clinical development to resolve. Based on discussions with the FDA, we were able to successfully resolve the outstanding efficacy concerns of the original dose formulation that was tested in earlier trials. In order to address the safety concerns, however, we agreed to re-formulate Zenvia and conduct one additional confirmatory Phase III clinical trial using lower dose formulations. The goal of the study is to demonstrate improved safety while maintaining a significant degree of the efficacy seen in our earlier trials testing higher doses. The study is expected to be completed (as defined as top-line safety and efficacy data becomes available) during the second half of calendar 2009. It is possible that the efficacy will be so reduced that we will not be able to satisfy the FDA’s efficacy requirements and there can be no assurance that the FDA will approve Zenvia for commercialization.

Even if the confirmatory trial is successful, the additional development work will be costly and time consuming. Because our patents covering Zenvia expire at various times from 2011 through 2019 (without accounting for potential extensions that might be available or new patents that may be issued), any substantial delays in regulatory approval would negatively affect the commercial potential for Zenvia for this indication. Additionally, it is possible that Zenvia may not be approved with the labeling claims or for the patient population that we consider most desirable for the promotion of the product. Less desirable labeling claims could adversely affect the commercial potential for the product and could also affect our long-term prospects.

Additionally, although we have a Special Protocol Assessment (“SPA”) from the FDA for our recently completed Phase III trial for DPN pain and for our confirmatory Phase III trial for Zenvia for PBA, there can be no assurance that the terms of the SPA will ultimately be binding on the FDA. An SPA is intended to serve as a binding agreement from the FDA on the adequacy of the design of a planned clinical trial. Even where an SPA has been granted, however, additional data may subsequently become available that causes the FDA to reconsider the previously agreed upon scope of review and the FDA may have subsequent safety or efficacy concerns that override the SPA. For example, it is possible that we will not obtain enough data on cardiac risks in our ongoing Phase III trials to satisfy FDA safety concerns, which could necessitate further clinical trials. Additionally, because we expect to seek FDA approval to expand the number of patients enrolled in the ongoing PBA Phase III trial, the FDA may need to agree to amend our SPA. They may not agree to such an amendment and, even if they agree, they may request other amendments to the trial design that could add to the trial’s cost and/or time, as well as degree of difficulty in reaching clinical endpoints. As a result, even with an SPA, we cannot be certain that the trial results will be found to be adequate to support an efficacy claim and product approval.

The FDA’s safety concerns regarding Zenvia for the treatment of PBA may extend to other clinical indications that we are pursuing, including DPN pain. Due to these concerns, we expect to develop Zenvia for other indications using alternative doses, which may negatively affect efficacy.

We are currently developing Zenvia for the treatment of DPN pain, for which we have completed a Phase III trial. Although the FDA has not expressly stated that the safety concerns and questions raised in the PBA approvable letter would apply to other indications such as DPN pain, we believe that it is possible that the FDA will raise similar concerns for this indication. Accordingly, we are investigating the potential use of alternative formulations with lower doses of quinidine and various DM levels in the next Phase III trial for Zenvia for this indication. Although we achieved positive results in our initial Phase III trial, an alternative lower dose may not yield the same levels of efficacy as seen in the earlier trials and any drop in efficacy may be so great that the drug does not demonstrate a statistically significant improvement over placebo. Additionally, any alternative dose that we develop may not sufficiently satisfy the FDA’s safety concerns. If this were to happen, we may not be able to pursue the development of Zenvia for other indications or may need to undertake significant additional clinical trials, which would be costly and cause potentially substantial delays. There is also a risk that due to the change in dosage levels, the FDA may require two additional Phase III trials for regulatory approval, which would be costly and delay the potential commercial launch of this drug.

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

We have experienced significant operating losses in funding the research, development and clinical testing of our drug candidates, accumulating operating losses totaling $249 million as of March 31, 2008, and we expect to continue to incur substantial operating losses for the foreseeable future. As of April 30, 2008, we had approximately $61 million in cash, cash equivalents, investments in marketable securities and restricted investments in marketable securities. Additionally, we currently do not have any meaningful sources of recurring revenue or cash flow.

In light of our current capital resources, lack of near-term revenue opportunities and substantial long-term capital needs, we will need to raise additional capital in the future to finance our long-term operations until we expect to be able to generate meaningful amounts of revenue from product sales. Based on our current loss rate and existing capital resources as of the date of this filing, including the proceeds from our recently completed securities offering, we estimate that we have sufficient funds to sustain our operations at their current levels through the anticipated timing of the FDA approval decision (at least 24 months). Although we expect to be able to raise additional capital and/or curtail current levels of operations to be able to continue to fund our operations beyond that time, there can be no assurance that we will be able to do so or that the available terms of any financing would be acceptable to us. If we are unable to raise additional capital to fund future operations, then we may be unable to fully execute our development plans for Zenvia and DPN pain. This may result in significant delays in our planned clinical trial of Zenvia for PBA and may force us to further curtail our operations.

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

Although we have adequate capital reserves to fund operations through the anticipated timing of the FDA approval decision completion of our Zenvia trials for PBA, we expect that we will need to raise additional capital in the future. We may do so through various financing alternatives, including licensing or sales of our technologies, drugs and/or drug candidates, selling shares of common or preferred stock, or through the issuance of debt. Each of these financing alternatives carries certain risks. Raising capital through the issuance of common stock may depress the market price of our stock. Any such financing will dilute our existing shareholders and, if our stock price is relatively depressed at the time of any such offering, the levels of dilution would be greater. If we instead seek to raise capital through licensing transactions or sales of one or more of our technologies, drugs or drug candidates, as we have stated we are actively considering with certain investigational compounds, then we will likely need to share a significant portion of future revenues from these drug candidates with our licensees. Additionally, the development of any drug candidates licensed or sold to third parties will no longer be in our control and thus we may not realize the full value of any such relationships.

We have licensed out or sold most of our non-core drug development programs and related assets and these and other possible future dispositions carry certain risks.

We have entered into agreements for the licensing out or sale of most of our non-core drug development programs, including FazaClo, macrophage migration inhibitory factor (“MIF”), and our anthrax antibody program, as well as docosanol in major markets worldwide. We are seeking to monetize our remaining non-core assets to help fund the development of Zenvia and may out-license or otherwise partner Zenvia for PBA and/or DPN pain indications if we are able to find a licensee / partner willing to offer attractive terms. These transactions involve numerous risks, including:

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

	•		Disputes over earn-outs, working capital adjustments or contingent payment obligations;

	•		Insufficient proceeds to offset expenses associated with the transactions; and

	•		The potential loss of key employees following such a transaction.

Transactions such as these may result in disputes regarding representations and warranties, indemnities, earn-outs, and other provisions in the transaction agreements. [For example, we are currently in discussions with Azur to resolve a dispute over a Net Working Capital adjustment whereby Azur seeks to be repaid approximately $1.1 million that we have disputed. The dispute is currently under review by a US Accounting Firm. We expect the arbitrator to render a decision in the fourth quarter of fiscal 2008. If this or other 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.

In addition, our financial projections are based on the receipt of contingent payment obligations. Should we encounter difficulty with our partners in receiving timely payments, our projections could vary from what has been stated. For example, our contract with Azur Pharma includes $10 million in contingent payment obligation to Avanir in calendar year 2009.

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

Our patents may be challenged and our patent applications may be denied. Either result would seriously jeopardize our ability to compete in the intended markets for our proposed products.

We have invested in an extensive patent portfolio and we rely substantially on the protection of our intellectual property through our ownership or control of issued patents and patent applications. Such patents and patent applications cover Zenvia, docosanol 10% cream and other potential drug candidates that could come from our technologies such as anti-inflammatory compounds and antibodies. Because of the competitive nature of the biopharmaceutical industry, we cannot assure you that:

	•		The claims in any pending patent applications will be allowed or that patents will be granted;

	•		Competitors will not develop similar or superior technologies independently, duplicate our technologies, or design around the patented aspects of our technologies;

	•		Our technologies will not infringe on other patents or rights owned by others, including licenses that may not be available to us;

	•		Any of our issued patents will provide us with significant competitive advantages; or

	•		Challenges will not be instituted against the validity or enforceability of any patent that we own or, if instituted, that these challenges will not be successful.

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

might be non-exclusive, and our competitors could have access to the same technology licensed to us. If we were to 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 currently have only a limited term of patent coverage for Zenvia in the U.S., which could result in the introduction of generic competition within in a few years of product launch.

Our PBA related patents for Zenvia in the U.S. expire at various times from 2011 through 2012 and our DPN pain patents for Zenvia expire in 2016. These expirations do not account for any potential patent term restoration nor does this account for the issuance of any patents pending. If Zenvia is approved, we can apply for an up to five-year extension to one patent covering Zenvia; however, as Zenvia is not a new chemical entity, it is unknown whether or not Zenvia will qualify for patent term restoration under the U.S. Patent and Trademark Office guidelines. Once the patents covering Zenvia expire or the three-year Hatch Waxman exclusivity period has passed, generic drug companies would be able to introduce competing versions of the drug. Although we have filed additional new patents for Zenvia, there can be no assurance that these patents will issue or that any patents will have claims that are broad enough to prevent generic competition. If we are unsuccessful in strengthening our patent portfolio, our long-term revenues from Zenvia sales may be less than expected.

If we fail to obtain regulatory approval in foreign jurisdictions, we would not be able to market our products abroad and our revenue prospects would be limited.

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

We have recently experienced significant turnover in senior management.

In the past 12 months, we have experienced significant turnover in our senior management team, including the departures of our Chief Financial Officer and Interim Chief Financial Officer and Vice President of Drug Discovery. As a result of these changes, we essentially have a new management team. It is not yet possible to assess how effective this management team will be and whether they will be able to work together to accomplish the Company’s business objectives. Additionally, changes in management are disruptive to the organization and any further changes may slow the Company’s progress toward its goals. Further, the Board of Directors may elect to reduce its size to streamline operations and to reflect the fact that the Company is significantly smaller than it was previously. Changes in Board composition may also be disruptive and the loss of the experience and capabilities of any of our Board members may reduce the effectiveness of the Board.

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

The industry in which we compete has a high level of employee mobility and aggressive recruiting of skilled employees. This type of environment creates intense competition for qualified personnel, particularly in clinical and regulatory affairs, sales and marketing and accounting and finance. Because we have a relatively small organization, the loss of any executive officers or other key employees could adversely affect our operations. For example, if we were to lose one or more of the senior members of our clinical and regulatory affairs team, the pace of clinical development for Zenvia could be slowed significantly. We have experienced extensive employee turnover recently, as discussed above, and the loss of any additional key employees could adversely affect our business and cause significant disruption in our operations.

Risks Relating to Our Industry

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

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

In addition, the possibility exists that:

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

	•		institutional review boards or regulators, including the FDA, may hold, suspend or terminate our clinical research or the clinical trials of our product candidates for various reasons, including noncompliance with regulatory requirements or if, in their opinion, the participating subjects are being exposed to unacceptable health risks;

	•		subjects may drop out of our clinical trials;

	•		our preclinical studies or clinical trials may produce negative, inconsistent or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical studies or clinical trials; and

	•		the cost of our clinical trials may be greater than we currently anticipate.

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

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

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

	•		delays in our ability to submit an NDA;

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

	•		requests for additional studies or data;

	•		delays of an approval; or

	•		the rejection of an application.

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

Clinical trials can be delayed for a variety of reasons. If we experience any such delays, we would be unable to commercialize our product candidates on a timely basis, which would materially harm our business.

Clinical trials may not begin on time or may need to be restructured after they have begun. Additionally, clinical trials can experience delays for a variety of other reasons, including delays related to:

	•		identifying and engaging a sufficient number of clinical trial sites;

	•		negotiating acceptable clinical trial agreement terms with prospective trial sites;

	•		obtaining institutional review board approval to conduct a clinical trial at a prospective site;

	•		recruiting eligible subjects to participate in clinical trials;

	•		competition in recruiting clinical investigators;

	•		shortage or lack of availability of supplies of drugs for clinical trials;

	•		the need to repeat clinical trials as a result of inconclusive results or poorly executed testing;

	•		the placement of a clinical hold on a study;

	•		the failure of third parties conducting and overseeing the operations of our clinical trials to perform their contractual or regulatory obligations in a timely fashion; and

	•		exposure of clinical trial subjects to unexpected and unacceptable health risks or noncompliance with regulatory requirements, which may result in suspension of the trial.

If we experience significant delays in or termination of clinical trials, our financial results and the commercial prospects for our product candidates or any other products that we may develop will be adversely impacted. In addition, our product development costs would increase and our ability to generate revenue could be impaired.

The pharmaceutical industry is highly competitive and most of our competitors are larger and have greater resources. As a result, we face significant competitive hurdles.

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 similar areas as our research. For example, we expect that Zenvia will compete against antidepressants, atypical anti-psychotic agents and other agents.

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

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

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

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

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

Developing and marketing pharmaceutical products for human use involves product liability risks, for which we currently have limited insurance coverage.

The testing, marketing and sale of pharmaceutical products involves the risk of product liability claims by consumers and other third parties. Although we maintain product liability insurance coverage, product liability claims can be high in the pharmaceutical industry and our insurance may not sufficiently cover our actual liabilities. If product 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 affect materially and adversely our business and financial condition. Furthermore, various distributors of pharmaceutical products require minimum product liability insurance coverage before their purchase or acceptance of products for distribution. Failure to satisfy these insurance requirements could impede our ability to achieve broad distribution of our proposed products and the imposition of higher insurance requirements could impose additional costs on us.

Risks Related to Reliance on Third Parties

Because we depend on clinical research centers and other contractors for clinical testing and for certain research and development activities, the results of our clinical trials and such research activities are, to a certain extent, beyond our control.

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

We depend on third parties to manufacture, package and distribute compounds for our drugs and drug candidates. The failure of these third parties to perform successfully could harm our business.

We have utilized, and intend to continue utilizing, third parties to manufacture, package and distribute Zenvia and the Active Pharmaceutical Ingredient (“API”) for docosanol 10% cream and supplies for our drug candidates. We have no experience in manufacturing and do not have any manufacturing facilities. Currently, we have sole suppliers for the API for docosanol and Zenvia, and a sole manufacturer for the finished form of Zenvia. Any material disruption in manufacturing could cause a delay in shipments and possible loss of sales. We do not have any long-term agreements in place with our current docosanol supplier or Zenvia supplier. Any delays or difficulties in obtaining APIs or in manufacturing, packaging or distributing our products and product candidates could delay Zenvia clinical trials for PBA and/or DPN pain. Additionally, the third parties we rely on for manufacturing and packaging are subject to regulatory review, and any regulatory compliance problems with these third parties could significantly delay or disrupt our commercialization activities.

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 license arrangement for our MIF compound, we have no direct control over the development of this drug candidate and have only limited, if any, input on the direction of development efforts. These development efforts are ongoing 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, as was the case in early 2007 when AstraZeneca terminated our license and collaboration agreement for our RCT mechanism technology. 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.

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

In the event that we attempt to enter into international markets, we expect to rely on collaborative partners to obtain regulatory approvals and to market and sell our product(s) in those markets. We have not yet entered into any collaborative arrangement with respect to marketing or selling Zenvia, with the exception of one such agreement relating to Israel. We may be unable to enter into any other arrangements on terms favorable to us, or at all, and even if we are able to enter into sales and marketing arrangements with collaborative partners, we cannot assure you that their sales and marketing efforts will be successful. If we are unable to enter into favorable collaborative arrangements with respect to marketing or selling Zenvia in international markets, or if our collaborators’ efforts are unsuccessful, our ability to generate revenue from international product sales will suffer.

Risks Relating to Our Stock

Our common stock could be delisted from The NASDAQ Global Market, which could negatively impact the price of our common stock and our ability to access the capital markets.

Our common stock is currently listed on The NASDAQ Global Market. The listing standards of The NASDAQ Global Market provide, among other things, that a company may be delisted if the bid price of its stock drops below $1.00 for a period of 30 consecutive business days. Additionally, we must satisfy at least one of the following conditions: (A) stockholders. equity of at least $10 million, (B) total market value of listed securities of at least $50 million or (C) at least $50 million of total assets and $50 million of total revenue.

Recently our stock has traded near $1.00 and, in March 2008, our total market value of listed securities has dropped below $50 million for more than ten consecutive trading days. In April 2008 after the completion of the $40 million registered direct offering, we received notification from NASDAQ that we regained compliance with the listing standards set forth for the NASDAQ Global Market. If the bid price of our stock drops below $1.00 for a period of 30 consecutive business days, or if our total market value of listed securities drops below $50 million for more than ten consecutive trading days, we may receive a NASDAQ Staff Determination Letter informing us that we have 30 days to regain compliance with listing requirements or face delisting. Announcements by us of potential or pending NASDAQ delisting actions could further depress our stock price and market value and, even if we satisfy the market capitalization requirement, our stock price will need to trade above $1.00 on a sustained basis to remain listed. If our stock price drops below $1.00, we may seek to implement a reverse stock split. Reverse stock splits frequently result in a loss in stockholder value as the actual post-split price is often lower than the pre-split price, adjusted for the split.

If we fail to comply with the listing standards, our common stock listing may be moved to the NASDAQ Capital Market, which is a lower tier market, or our common stock may be delisted and traded on the over-the-counter bulletin board network. Moving our listing to the NASDAQ Capital Market could adversely affect the liquidity of our common stock and the delisting of our common stock would significantly affect the ability of investors to trade our securities and could significantly negatively affect the value and liquidity of our common stock. In addition, the delisting of our common stock could materially adversely affect our ability to raise capital on terms acceptable to us or at all. Delisting from NASDAQ could also have other negative results, including the potential loss of confidence by suppliers and employees, the loss of institutional investor interest and fewer business development opportunities.

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

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

	•		Announcements by us regarding our non-compliance with continued listing standards on the NASDAQ stock market;

	•		Comments made by securities analysts, including changes in their recommendations;

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

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

	•		Sales of our Class A common stock by our directors, officers, or significant shareholders;

	•		Announcements by our competitors of clinical trial results or product approvals; and

	•		Market and economic conditions.

Additionally, our stock price has been volatile as a result of announcements of regulatory actions and decisions relating to our product candidates, including Zenvia, and periodic variations in our operating results. We expect that our operating results will continue to vary from quarter-to-quarter. Our operating results and prospects may also vary depending on our partnering arrangements for our MIF technology, which has been licensed to a third party that controls the continued progress and pace of development, meaning that the achievement of development milestones is outside of our control.

As a result of these factors, we expect that our stock price may continue to be volatile and investors may be unable to sell their shares at a price equal to, or above, the price paid. Additionally, any significant drops in our stock price, such as the one we experienced following the announcement of the Zenvia approvable letter, could give rise to shareholder lawsuits, which are costly and time consuming to defend against and which may adversely affect our ability to raise capital while the suits are pending, even if the suits are ultimately resolved in favor of the Company.

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

Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The 2008 Annual Meeting of Shareholders of AVANIR Pharmaceuticals was held on February 21, 2008. There were issued and outstanding on December 26, 2007, the record date, 43,164,402 shares of Class A common stock, each share being entitled to one vote, constituting all of our outstanding voting securities. The following proposals received the number of votes set forth below, such votes being sufficient to pass all of the proposals. Proposal No. 3, which related to the proposed re-domiciling of the Company from California to Delaware, was withdrawn from consideration prior to the meeting. Although the votes cast on the proposal were significantly in favor, an insufficient number of shares were actually voted in order for the proposal to carry.

Proposal No. 1: Election of Directors


Director Nominee	For		Withhold
Stephen G. Austin		32,964,663		2,249,298
Dennis G. Podlesak		32,959,809		2,254,152

Proposal No. 2: Ratification of Selection of KMJ Corbin & Company LLP as Independent Registered Public Accounting Firm


For	Against		Abstain
33,903,503		579,971		730,486

Item 5. OTHER INFORMATION

Not applicable.

Item 6. EXHIBITS


Exhibits
10.1		Asset Purchase and License Agreement, dated March 6, 2008, by and among Avanir Pharmaceuticals, Xenerex Biosicences and Emergent Biosolutions, Inc. *
31.1		Certification of Principal Executive Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2		Certification of Principal Financial Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.0		Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.


*		Confidential treatment has been requested for certain portions of this document and these confidential portions have been redacted from the filing made herewith.

SIGNATURES

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


Signature	Title	Date

/s/ Keith A. Katkin	President and Chief Executive Officer	May 13, 2008

Keith A. Katkin	(Principal Executive Officer)

/s/ Christine G. Ocampo	Vice President, Finance

Christine G. Ocampo	(Principal Financial and Accounting Officer)	May 13, 2008

EX-10.1 2 a40842exv10w1.htm EXHIBIT 10.1 exv10w1

Exhibit 10.1

EXECUTION COPY

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

ASSET PURCHASE AND LICENSE AGREEMENT

BETWEEN

AVANIR PHARMACEUTICALS INC.

XENEREX BIOSCIENCES INC.

EMERGENT PRODUCT DEVELOPMENT GAITHERSBURG INC.

AND

EMERGENT BIOSOLUTIONS INC.

Dated as of March 6, 2008

ASSET PURCHASE AND LICENSE AGREEMENT

This Asset Purchase and License Agreement is entered into as of March 6, 2008 (the “Agreement”) by and between Emergent Product Development Gaithersburg Inc., a Delaware corporation (“Buyer”), Emergent BioSolutions Inc., a Delaware corporation (“Buyer Parent”), Avanir Pharmaceuticals Inc., a California corporation (“Seller Parent”), and Xenerex Biosciences Inc., a California corporation (“Seller” and, together with Seller Parent, the “Sellers”). Each party to this Agreement is sometimes referred to herein as a “Party” or collectively, the “Parties.” Capitalized terms used in this Agreement shall have the meanings ascribed to them where defined or in Article IX.

INTRODUCTION

WHEREAS, Seller Parent is a pharmaceutical company focused on developing, acquiring and commercializing therapeutic products for the treatment of chronic diseases; and

WHEREAS, Seller is a wholly-owned subsidiary of Seller Parent; and

WHEREAS, Seller owns the Product and Sellers desire to transfer ownership of the Product and certain rights related to the Product Line Operations to Buyer; and

WHEREAS, Buyer is the wholly-owned subsidiary of Emergent BioSolutions Inc. and as an inducement to the Sellers to enter into the transactions contemplated by this Agreement, Buyer Parent will concurrently with the execution hereof enter into this agreement with the Sellers whereby Buyer Parent will assure payment of all of the financial obligations of the Buyer; and

WHEREAS, upon the terms and subject to the conditions of this Agreement, Sellers wish to sell the Acquired Assets (including the Product and the Product Line Operations), license the Xenerex Technology for use in the Anthrax Field, and assign the Assumed Liabilities to Buyer, and Buyer wishes to purchase the Acquired Assets (including the Product and the Product Line Operations), license the Xenerex Technology and assume the Assumed Liabilities from Seller.

NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants, agreements and provisions set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Parties hereto agree as follows:

ARTICLE I

THE ASSET PURCHASE

1.1 Purchase and Sale of Assets. Upon the terms and subject to conditions of this Agreement, Buyer shall purchase from Seller, and Seller shall sell, transfer, convey, license,

assign and deliver to Buyer, at the Closing, for the consideration specified below in Article II, all of its right, title and interest in, to and under the Acquired Assets.

1.2 Assumption of Liabilities.

(a) Upon the terms and subject to the conditions of this Agreement, Buyer shall assume and become responsible for, from and after the Closing, the Assumed Liabilities.

(b) Notwithstanding the terms of Section 1.2(a) or any other provision of this Agreement to the contrary, Buyer shall not assume or become responsible for, and Seller shall remain liable for, the Retained Liabilities.

1.3 Consent of Third Parties.

(a) Assigned Contracts. On the Closing Date, Seller shall assign to Buyer, and Buyer shall assume, the Assigned Contracts to the extent provided in this Agreement. The list of all Assigned Contracts is set forth in Schedule 1.3(a) hereto. To the extent that the assignment of all or any portion of any Assigned Contract shall require the consent of the other party thereto or any other third party, this Agreement shall not constitute an agreement to assign any such Assigned Contract if an attempted assignment without any such consent would constitute a breach or violation thereof. In order, however, to seek to provide Buyer the full realization and value of every Assigned Contract of the character described in the immediately preceding sentence (i) as soon as practicable after the Closing, Seller and Buyer shall cooperate, in all reasonable respects, to obtain any necessary consents to the assignment of the Assigned Contracts, provided that neither Party shall be required to make any payments or agree to any material undertakings in connection therewith, and (ii) until all such consents are obtained or all such Assigned Contracts expire or are terminated, Seller and Buyer shall cooperate, in all reasonable respects, to provide to Buyer the benefits under the Assigned Contracts (with Buyer entitled to all the gains and responsible for all the losses, Taxes, liabilities and/or obligations thereunder). In connection with clause (ii) of this Section 1.3(a), if requested in writing by Buyer, Seller shall, at Buyer’s cost and expense, seek to enforce for the benefit of Buyer all claims or rights of Seller arising under the Assigned Contracts, and Buyer shall perform and comply with, at Buyer’s cost, all of Seller’s obligations under the Assigned Contracts as if Buyer was Seller thereunder.

(b) Registrations and Applicable Permits. On the Closing Date, Seller shall assign or transfer to Buyer, and Buyer shall assume, the Registrations and Applicable Permits to the extent provided in this Agreement. To the extent that the assignment or transfer of all or any portion of any Registration or Applicable Permit shall require the consent of the other party thereto or any other third party, this Agreement shall not constitute an agreement to assign or transfer any such Registration or Applicable Permit if an attempted assignment or transfer without any such consent would constitute a breach or violation thereof. In order, however, to seek to provide Buyer the full realization and value of the Registrations and Applicable Permits (a) as soon as practicable after the Closing, Seller shall use commercially reasonable efforts to obtain and Buyer shall cooperate, in all reasonable respects to obtain any necessary consents to the assignment of the Registrations and Applicable Permits, provided that neither Party shall be required to make any payments or agree to any material undertakings in connection therewith,

and (b) until all such consents are obtained or all such Registrations and Applicable Permits expire or are terminated, Seller and Buyer shall cooperate, in all reasonable respects, to provide to Buyer the benefits under the Registrations and Applicable Permits.

1.4 Asset License. Sellers hereby grants to Buyer an exclusive (even as to Sellers) limited to the Anthrax Field, worldwide, perpetual license under the Xenerex Technology to Develop and Commercialize Products intended for use in the Anthrax Field, with the right to grant sublicenses (the “Asset License”). Any sublicense granted to a Third Party, shall be in writing and include provisions which obligate such a party to comply with all the terms and conditions of this Agreement. Buyer shall remain fully responsible to Sellers for performance of this Agreement.

1.5 Third Party Agreements. Seller shall be solely responsible for all obligations under the agreements listed in Schedule 1.5 (each such agreement a “Third Party Agreement”). Seller shall maintain the Third Party Agreements in good standing and not take any actions (or omit or fail to take any actions) which would result in a breach of any of such Third Party Agreements other than as contemplated by this section. Seller agrees that it shall not amend, modify or supplement or take any action or inaction with respect to any of the Third Party Agreements in any manner that would materially adversely affect Buyer’s rights under this Agreement without the consent of Buyer, such consent not to be unreasonably withheld or delayed. In the alternative, Seller may arrange for the assignment of such Third Party Agreements (with the consent of the applicable third party licensor, if required) to Buyer at no transactional expense to Buyer. In addition, Seller shall not sell, assign (except as permitted in Section 10.4 hereof), convey, pledge, hypothecate or otherwise transfer any of the Third Party Agreements or Seller’s rights or obligations thereunder, or otherwise make any commitments or offers in a manner that materially conflicts with Buyer’s rights hereunder without the consent of Buyer, such consent not to be unreasonably withheld or delayed. Seller shall immediately notify Buyer upon receipt by Seller of any notice from a licensor under any Third Party Agreements of such licensor’s intent to (i) terminate Seller’s rights that are sublicensed to Buyer hereunder, or (ii) exercise its respective rights or remedies thereunder, or (iii) otherwise take any other action, in each case that would reasonably be expected to materially and adversely affect Buyer’s rights. This provision shall not affect, in any manner, the parties’ rights to assign this Agreement or rights to the Xenerex Technology not transferred under this Agreement as provided for in Section 10.4 of this Agreement.

1.6 Technology Transfer. Sellers shall, as reasonably requested by Buyer, furnish Buyer with copies of, and provide Buyer with ongoing access to, all information or documentation in the control of Sellers or any of their Affiliates relating to, or necessary or useful to exploit the Product, which information and documentation includes, but is not limited to: (i) all Seller Know-How and (ii) all data, documentation and information relating to or that may be necessary or useful for the filing of an Investigational New Drug Application, a Biologics License Application or their foreign counterparts for any product having the Product as an active ingredient (including all databases, toxicology reports, and other regulatory, scientific and safety information). Sellers shall make available to Buyer appropriate personnel of Sellers and any of their Affiliates as reasonably requested by Buyer from time to time, to assist in the effectuation of the technology transfer contemplated by Section 6.3, at Seller’s expense for the four-week period following the Closing, not to exceed eight (8) hours per week during such

period (with any out-of-pocket expenses incurred during such period by the Seller’s representatives and approved by Buyer in writing to be reimbursed by Buyer to Seller), and at Buyer’s expense thereafter. Sellers hereby assign to Buyer their rights in any regulatory filings for products having the Product as an active ingredient, to the extent any such regulatory filings exist. Sellers agree to work diligently and in good faith to complete the transfers set forth in this Section 1.6 from Seller to Buyer.

1.7 Further Assurances. At any time and from time to time after the Closing, at the reasonable request of Buyer and without further consideration, Sellers shall execute and deliver such other instruments of sale, transfer, conveyance and assignment and take such actions as Buyer may reasonably request to transfer, convey and assign to Buyer, and to confirm Buyer’s rights to, title in and ownership of, the Acquired Assets and to place Buyer in actual possession and operating control thereof.

ARTICLE II

PURCHASE PRICE; ADDITIONAL PAYMENTS

2.1 Execution Date Payment. In consideration of the transactions contemplated by this Agreement, Buyer shall assume the Assumed Liabilities and pay to Seller, by wire transfer of immediately available funds directly to an account designated by Seller $100,000 (the “Execution Date Payment”) and make the additional payments, if applicable, set forth in this Article II. The parties acknowledge that Buyer previously paid a non-refundable amount of $50,000 (the “Proposal Payment”) in conjunction with the submission of the Proposal on November 7, 2007 and that such amount shall constitute part of the purchase price for the Acquired Assets. Buyer Parent agrees to be jointly and severally liable for the complete and prompt payment of Buyer’s payment obligations under this Agreement.

2.2 GMP Payment. In addition to any other amounts due hereunder, upon release by AppTec of the GMP Clinical Materials to Buyer and Buyer’s written acceptance thereof (which acceptance will not be unreasonably withheld, conditioned or delayed), Buyer shall, upon receipt of Seller’s invoice, promptly pay to Seller, by wire transfer of immediately available funds directly to an account designated by Seller $100,000 (the “GMP Payment”).

2.3 Milestone Payments. Subject to the achievement of the following, Buyer shall, upon receipt of Seller’s invoice, promptly pay to Seller:

(a) In addition to any other amounts due hereunder, upon the terms and subject to the conditions set forth herein, upon the receipt of official notification of an award of a grant or contract (a copy of such notification to be promptly provided to the Sellers) from NIAID (excluding grants or contracts for Commercial Sales) with respect to AVP-21D9 in response to the Proposal (the “NIAID Grant”):

	(i)		$^{* * } if the aggregate amount of the NIAID Grant award is equal to or greater than $ * *; or

	(ii)		$* * * if the aggregate amount of the NIAID Grant award is less than $* * *.

In the event the Buyer does not receive a NIAID Grant in response to the Proposal, upon the acceptance by Buyer or any Affiliate of a grant or contract from NIAID (excluding grants or contracts for Commercial Sales) with respect to AVP-21D9 in response to any proposal other than the Proposal:

	(i)		$* * * if the aggregate amount of the NIAID Grant award is equal to or greater than $* * *; or

	(ii)		$* * * if the aggregate amount of the NIAID Grant award is less than $* * * but greater than $* * *.

Buyer shall make only one payment to Seller under this Section 2.3(a). The payment under subsections (i) and (ii) above shall be payable only one time. In no event shall aggregate payments due under this Section 2.3(a) exceed $* * *.

(b) If (and only if) Buyer or any Affiliate receives aggregate payments from the NIAID pursuant to the NIAID Grant of at least $* * * , Buyer shall promptly pay Seller, in addition to all other amounts payable under this Article II, an amount equal to $* * *. The payment due under this Section 2.3(b) is a one-time payment and shall only be paid upon receipt of the first $* * * paid under the NIAID Grant.

(c) If (and only if) Buyer, any Affiliate or any sublicensee achieves Net Sales of at least $* * * (for the avoidance of doubt, the $* * * of Net Sales does not include the $* * * NIAID Grant described in clause (b) above), Buyer shall promptly pay Seller, in addition to all other amounts payable under this Article II, an amount equal to $* * *. The payment due under this Section 2.3(c) is a one-time payment and shall only be paid upon receipt of the first $* * * of Net Sales.

2.4 Sales-Based Contingent Purchase Price Payments.

(a) In addition to any other amounts due under Article II, upon the terms and subject to the conditions set forth herein, in consideration of the sale, transfer, conveyance, assignment and delivery of the Acquired Assets, Buyer shall pay, or cause to be paid, to Seller quarterly payments in arrears in accordance with this Section 2.4(a) and Section 2.4(b) (the “Sales-Based Contingent Purchase Price Payments”) based upon cumulative Net Sales of the Product or any product or antibody made, produced, manufactured or sublicensed under the Asset License. The payments shall be determined in accordance with the following scale:


^{* * *}		Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission.

(i) until the amount of cumulative Net Sales is equal to $^{* * *}, * * * percent (* * *%) of such Net Sales;

(ii) for that portion of cumulative Net Sales equal to or greater than
$* * * but less than $* * * , * * * percent (* * *%) of such Net Sales; and

(iii) for that portion of cumulative Net Sales equal to or greater than $* * * but less than $* * *, *** percent (***%) of such Net Sales; and

(iv) for that portion of cumulative Net Sales equal to or greater than $* * *, * * * percent (* * *%) of such Net Sales.

(b) Payment and Reports.

(i) Quarterly Payment Reports. Buyer shall deliver to Seller, within forty-five (45) days after the end of each calendar quarter, a written accounting of Net Sales during the prior calendar quarter. Such quarterly reports shall indicate (i) gross sales of Product, an itemization of deductions made to gross sales to reach Net Sales, Net Sales and cumulative Net Sales, and (ii) the calculation of payment amounts owed to Seller from such gross sales and Net Sales. Buyer shall deliver amounts due pursuant to Section 2.4(a) to Seller for each calendar quarter concurrently with the delivery to Seller of the accounting for such calendar quarter.

(ii) Audits. Buyer shall keep, and shall require its Affiliates and its and their sublicensees to keep, records of the latest three (3) years relating to gross sales and Net Sales. For the sole purpose of verifying the reports provided for in Section 2.4(b), Buyer further agrees to permit such records to be examined by an independent accounting firm selected by Seller at Seller’s cost and expense and in the location(s) where such records are maintained by Buyer and its Affiliates upon reasonable notice, during regular business hours and without unreasonable disruption to Buyer’s and its Affiliates’ operations. Unless Seller obtains the prior written consent of Buyer, which consent shall not be unreasonably withheld, such accounting firms must be selected from U.S. accounting firms that are AICPA registered accounting firms. Such audit shall not be performed more frequently than once per calendar year nor more frequently than once with respect to records covering any specific period of time. Seller shall provide a copy of the results (and backup) of such review promptly after Seller receives such results. If the review reflects an underpayment to Seller, Buyer shall promptly remit such underpayment to Seller, Together with a rate of interest equal to an annual percentage rate of nine percent (9%), provided, that if Buyer notifies Seller that Buyer disagrees with the determination of the underpayment amount and if thereafter the Parties are unable to agree in good faith as to such underpayment amount, then such matter shall be referred to a mutually agreed independent auditor or valuation expert for resolution, and the determination of such auditor or valuation expert shall be conclusive and binding on the parties. If the underpayment is equal to or greater than ten percent (10%) of the amount that was otherwise due, Seller shall be entitled to have Buyer pay all of the costs of such review, including the cost of the independent auditor.


^{* * *}		Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission.

(i) If, in any calendar quarter, sales of Follow-On Biological Products reach *** percent (***%) worldwide market share (calculated on a unit basis), then, the payment owed under Section 2.4 for Net Sales shall be decreased by *** percent (***%) for the remainder of the time period that payments are due pursuant to Section 2.4.

(ii) On a country-by-country basis, Buyer may reduce the amount of any payments otherwise due to Seller under this Section 2.4 with respect to Net Sales in such country by up to ^{* *
*} percent (* * *%) of any royalties or other amounts paid to Third Party(ies) to permit the Development or Commercialization of the Product (or any amounts paid to such Third Party(ies) in settlement of a claim of infringement by the Product).

(d) Duration of Payments. The amounts payable under this Section 2.4 shall be paid on a country-by-country basis until the earlier of (i) seven (7) years following the first Commercial Sale of the Product in such country or (ii) expiration or discontinuation of the last to expire Valid Claim that Covers the Development or Commercialization of the Product in such country.

ARTICLE III

CLOSING

3.1 Closing. Upon the terms and subject to the conditions of this Agreement, the Closing shall take place concurrently with the execution of this Agreement by the Parties hereto (the “Closing Date”). The Parties to this Agreement will exchange (or cause to be exchanged) at the Closing the funds, agreements, instruments, certificates and other documents, and do, or cause to be done, all of the things respectively required of each Party as specified in Sections 3.2(a) and 3.2(b)

3.2 Transactions at Closing.

(a) Seller’s Actions and Deliveries. At the Closing, Seller shall:

(i) execute and deliver to Buyer this Agreement;

(ii) execute and deliver to Buyer a bill of sale in the form attached hereto as Exhibit A;

(iii) execute and deliver to Buyer one or more patent assignments in the form attached hereto as Exhibit B;

(iv) execute and deliver such other instruments of conveyance as Buyer may reasonably request in order to effect the sale, transfer, conveyance, assignment and license to Buyer of valid ownership of the Acquired Assets;


^{* * *}		Confidential Information, indicated by [***], has been omitted from this filing and filed separately with the Securities and Exchange Commission.

(v) deliver to Buyer, or otherwise put Buyer in possession and control of, all of the Acquired Assets of a tangible nature;

(vi) execute and deliver to each other a cross-receipt evidencing the transactions referred to in this Section 3.2(a); and

(vii) execute and deliver an Incumbency and Officer’s Certificate from each of Seller and Seller Parent in form and substance reasonably satisfactory to Buyer.

(b) Buyer’s Actions and Deliveries. At the Closing Buyer shall:

(i) execute and deliver to Sellers this Agreement;

(ii) execute and deliver to Seller an instrument of assumption in the form attached hereto as Exhibit C;

(iii) execute and deliver such other instruments as Sellers may reasonably request in order to effect the assumption by Buyer of the Assumed Liabilities;

(iv) pay to Seller, payable by wire transfer of immediately available funds to an account designated by Seller, the Execution Date Payment;

(v) execute and deliver to each other a cross-receipt evidencing the transactions referred to in this Section 3.2(b); and

(vi) execute and deliver an Incumbency and Officer’s Certificate from each of Buyer and Buyer Parent in form and substance reasonably satisfactory to Sellers.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF SELLER AND SELLER PARENT

Each of the Sellers, jointly and severally, represents and warrants to Buyer that, except as set forth in the Disclosure Schedule, the statements contained in this Article IV are true and correct. The Disclosure Schedule shall be arranged in sections and subsections corresponding to the numbered sections and subsections contained in this Article IV. The disclosures in any section or subsection of the Disclosure Schedule shall qualify the corresponding section or subsection in this Article IV as well as any other section or subsection to which the nature of the disclosure made relates but only to the extent it is reasonably apparent from a reading of the disclosure that such disclosure is applicable to such other section and subsection. Nothing in the Disclosure Schedules is intended to broaden the scope of any representation, warranty or covenant of Sellers contained in this Agreement. The inclusion of any information in the Disclosure Schedules (or any update thereto) shall not be deemed to be an admission or acknowledgment, in and of itself, that such information is required by the terms hereof to be disclosed, is material to the Business, has resulted in or would result in a Material Adverse Effect or is outside the Ordinary Course of Business.

4.1 Organization, Qualification and Corporate Power. Each of the Sellers is a corporation duly organized, validly existing and in corporate and tax good standing under the laws of the State of California. Seller has all requisite corporate power and authority to own, lease and operate, as applicable, the Acquired Assets.

4.2 Authorization of Transaction. Each of the Sellers has all requisite power and authority to execute and deliver this Agreement and the Ancillary Agreements to which it is a party and to perform its obligations hereunder and thereunder. The execution and delivery by each of the Sellers of this Agreement and the Ancillary Agreements to which it is a party and the performance by each of the Sellers of this Agreement and each Ancillary Agreement to which it is a party and the consummation by each of the Sellers of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of each of the respective Sellers. Each of this Agreement and the Ancillary Agreements has been duly and validly executed and delivered by each of Sellers that is a party thereto and constitutes a valid and binding obligation of Sellers, enforceable against each of the Sellers in accordance with its terms except as may be limited by the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar Laws relating to or affecting creditors’ rights generally and general equitable principles (whether considered in a proceeding in equity or at law).

4.3 Noncontravention. Except as disclosed on Schedule 4.3(c), neither the execution and delivery by Sellers of this Agreement or any of the Ancillary Agreements, nor the consummation by Sellers of the transactions contemplated hereby or thereby, does or will (a) conflict with or violate any provision of the Articles of Incorporation or by-laws of either of the Sellers, (b) require on the part of either of the Sellers any notice to or filing with, or any permit, authorization, consent or approval of, any Governmental Entity, (c) conflict with, result in a breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of obligations under, create in any party the right to terminate, modify or cancel, or require any notice, consent or waiver under, any contract or instrument to which either of the Sellers is a party or by which either of the Sellers is bound or to which any of its assets is subject, (d) result in the imposition of any Lien upon any of the Acquired Assets or (e) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Seller or any of its respective properties or assets.

4.4 Absence of Certain Changes. Between December 31, 2006 and the date of this Agreement, there has not been with respect to the Product Line Operations:

(a) any Material Adverse Effect, except that Sellers have reorganized and downsized their operations and have terminated the employment of all personnel working on the Product Line Operations and the Xenerex Technology except for one person, and Sellers have greatly reduced the amount of laboratory and research space used for the development of the Product Line Operations and the Xenerex Technology, resulting in a substantial slowdown in development efforts;

(b) any incurrence, assumption or guarantee of any material Liability in the Ordinary Course of Business other than restructuring and other restructuring charges for

personnel and facilities incurred in connection with the downsizing described in Section 4.4(a); or

(c) any material transaction, agreement or event except as described in Section 4.4(a) outside the Ordinary Course of Business.

4.5 Taxes. There are no Liens for Taxes upon the Acquired Assets except those relating to Taxes that are not yet due and payable.

4.6 Ownership and Condition of Assets.

(a) Except with respect to Product Line Intellectual Property (which is subject to Section 4.7) and the Books and Records, Seller is the true, lawful and sole owner, and has good title to the Product and Seller’s rights in the Assigned Contracts (subject to the rights of each counterparty in such Assigned Contracts), free and clear of all Liens. Upon execution and delivery by Seller to Buyer of the instruments of conveyance referred to in Section 3.2, Buyer will become the true, lawful and sole owner of, and will receive good title to, the Product and Seller’s rights in the Assigned Contracts (subject to the rights of each counterparty in such Assigned Contracts), free and clear of all Liens.

(b) Seller has the lawful right to use the Books and Records. Upon execution and delivery by Seller to Buyer of the instruments of conveyance referred to in Section 3.2, Buyer will have the lawful right to use the Books and Records.

(c) The Acquired Assets, together with the assets licensed pursuant to the license set forth in Section 1.4 are sufficient for the conduct of the Product Line Operations except that Seller does not have any right to Commercialize any Product other than AVP-21D9. Each tangible Acquired Asset is free from material defects, has been maintained in accordance with normal industry practice, and is in good operating condition and repair (subject to normal wear and tear).

4.7 Intellectual Property. Notwithstanding anything to the contrary set forth in this Agreement, the representations set forth in this Section 4.7 constitute Seller Parent’s and Seller’s sole representations with respect to Product Line Intellectual Property, except for the representations set forth in Sections 4.2, 4.3, 4.5, and 4.10.

(a) Ownership; Sufficiency. The AVP Anthrax Patents constitute all patents and patent applications owned by Sellers necessary or useful for the exploitation of the Product and the conduct of the Product Line Operations. Section 4.7(a) of the Disclosure Schedule lists, with respect to the AVP Anthrax Patents, the applicable application or patent number, title, and jurisdiction in which filing was made, date of filing or issuance. Seller is the owner of and has good title to the AVP Anthrax Patents in existence as of the Closing Date, free and clear of any Lien. All assignments to the Seller of AVP Anthrax Patents in existence as of the Closing Date have been properly executed and recorded. All issuance, renewal, maintenance and other payments that are or have become due with respect thereto have been timely paid by or on behalf of Seller. The AVP Anthrax Patents will be owned by the Buyer immediately following the

Closing on the same terms and conditions as they were held by the Seller immediately prior to the Closing.

(b) Prosecution Matters. Subject to 4.7(a), there are no inventorship challenges, opposition or nullity proceedings or interferences declared, commenced or provoked, or to the knowledge of Seller, threatened, with respect to any AVP Anthrax Patents in existence as of the Closing Date. In Application No. 11/041,763, the Seller copied claims from U.S. Patent Publication No. 20060258842, published on November 16, 2006 to Groen et al. and PCT Publication No. WO 2005/120567, published on December 22, 2005 to Groen et al. (IQ Corporation), which claims were subsequently cancelled. Seller and entities involved in the prosecution of the AVP Anthrax Patents (such as Seller’s attorneys, inventors, agents) have complied with their duty of candor and disclosure to the United States Patent and Trademark Office and any foreign patent office requiring such disclosure with respect to all patent applications filed by or on behalf of Seller and have made no material misrepresentation in such applications. To the extent that patent applications are pending, Seller may still be in the process submitting Information Disclosure Statements in the United States, or equivalent submissions in Foreign Patent Offices.

(c) Protection Measures. Seller has taken reasonable measures to protect the proprietary nature of the Product Line Intellectual Property, and to maintain in confidence all trade secrets and information comprising a part thereof. To the Knowledge of the Seller, there has been no: (i) unauthorized disclosure of any third party proprietary information in the possession, custody or control of Seller, or (ii) breach of Seller’s security procedures wherein information has been disclosed to a third person.

(d) Non-infringement of Third Party Rights. To the knowledge of the Seller, the Product Line Operations do not infringe or violate, or constitute a misappropriation of, any Patents and Know-How rights of any Third Party. Sellers have not received any complaint, claim or notice, or threat of any of the foregoing (including any notification that a license under any patent is or may be required. Sellers have provided or made available to Buyer copies of all complaints, claims, notices or threats concerning any alleged infringement by the Product, in its possession.

(e) Infringement of Seller’s Rights. To the knowledge of Seller, no third party (including, without limitation, any current or former employee, founder, inventor of any Product Line Patent, or consultant to Seller) is infringing, violating or misappropriating any of the Product Line Intellectual Property. Sellers have provided or made available to Buyer copies of all complaints, claims, notices or threats concerning the infringement, violation or misappropriation of any Product Line Intellectual Property.

(f) Outbound IP Agreements. Section 4.7(f) of the Disclosure Schedule identifies each license, covenant or other agreement pursuant to which Seller has assigned, transferred, licensed, distributed or otherwise granted any right or access to any person or entity, or covenanted not to assert any right, with respect to any past, existing or future Product Line Intellectual Property. Neither of the Sellers is a member of or party to any patent pool, industry standards body, trade association or other organization pursuant to the rules of which it is obligated to license any existing or future Product Line Intellectual Property to any person.

(g) Inbound IP Agreements. Section 4.7(g) of the Disclosure Schedule identifies each agreement, contract, assignment or other instrument between Seller and a third party which are part of the Acquired Assets.

(h) Employee and Inventor Assignments. Schedule 4.7(h) identifies each employee of Seller materially involved in the research or development of the Product, and any inventor of the AVP Anthrax Patents has executed a valid and binding written agreement expressly or in substance assigning to Seller all right, title and interest in any inventions and works of authorship, whether or not patentable, invented, created, developed, conceived and/or reduced to practice during the term of such employee’s employment and all Patents and Know-How rights therein.

(i) Support and Funding. The U.S. Government may have certain rights to the AVP Anthrax Patents by virtue of one or more Grants Received. Except as set forth on Schedule 4.7(i) of the Disclosure Schedule, Seller has not received any direct support, funding, resources or assistance from any federal, state, local or foreign governmental or quasi-governmental agency or funding source in connection with the development or exploitation of the Product or conduct of the Product Line Operations or any facilities or equipment used in connection therewith.

4.8 Biological Materials. To Seller’s Knowledge, the Biological Materials listed on Schedule 9.1(d) constitute all of the Biological Materials. To Sellers’ Knowledge, all Biological Materials in the possession of AppTec have been developed, produced and stored in accordance with Good Laboratory Practices as defined by the U.S. Food and Drug Administration (“GLP”).

4.9 Contracts. Seller has made available or delivered to Buyer a complete and accurate copy of each Assigned Contract. The Assigned Contracts include all of the contracts and agreements to which Seller or any of its Affiliates is a party that relate primarily or exclusively to the Product Line Operations. Neither Seller nor any of its Affiliates is a party to or bound by any contract, agreement or arrangement (written or oral) that is material to the Product Line Operations, except for the Assigned Contracts. All of the Assigned Contracts are in full force and effect. All of the Assigned Contracts are valid and binding and are enforceable in accordance with their terms against Seller and, to Seller’s Knowledge, all other parties thereto. Except as set forth in Section 4.9 of the Disclosure Schedule, all of the Assigned Contracts are freely assignable to Buyer pursuant to this Agreement without the consent of any party thereto. To the knowledge of Seller, no condition exists or event has occurred as a result of action or inaction by Seller or any other person that, with notice or lapse of time or both, would constitute (a) default of any Assigned Contract by Seller, or any other party thereto or (b) a basis for force majeure or other claim of excusable delay or non-performance under any Assigned Contract against Seller or against any other party thereto.

4.10 Litigation. There is no action, suit, litigation, proceeding, claim, governmental investigation or administrative action pending or, to Seller’s Knowledge, threatened directly or indirectly involving the Product, the Product Line Operations, the Acquired Assets, any Assigned Contract or the transactions contemplated hereby or by any of the Ancillary Agreements, which has had or would, individually or in the aggregate, reasonably be expected to cause a Material Adverse Effect.

4.11 Permits. All permits, licenses, franchises or authorizations from any Governmental Entity that are required for the Product Line Operations are listed on Schedule 4.11 (collectively, the “Applicable Permits”) and are valid and in full force and effect and Seller is not in violation of or in default under any Applicable Permit. No suspension or cancellation of any such Applicable Permit has been threatened in writing.

4.12 Legal Compliance. Seller is, and has since December 31, 2005 been, in material compliance with all applicable laws (including rules and regulations thereunder) of any Governmental Entity, relating to the Product Line Operations, the Acquired Assets and the use of the Acquired Assets.

4.13 Regulatory Compliance.

(a) Seller has delivered or made available to Buyer true, correct and complete copies of all material written communications between Seller, on the one hand, any applicable Medical Product Regulatory Authority on the other hand, relating to the Product, including copies of any pre-Investigational New Drug Application meeting packages submitted by Seller for the Product, and any similar state or foreign regulatory submission made by or on behalf of Seller, including all supplements and amendments thereto. There have been no meetings or oral discussions between Seller, on the one hand, any applicable Medical Product Regulatory Authority on the other hand, relating to the Product.

(b) The conduct of the production and Development activities related to the Product Line Operations has been conducted in material compliance with current Good Manufacturing Practices and other applicable rules and regulations of the FDA. Buyer acknowledges and Seller represents that Product scale up has been outsourced to Third Parties. Sellers agree to require vendors to conduct studies to be performed under the U01 in accordance with Good Laboratory Practices.

(c) Seller has not been and is not, and to Sellers Knowledge none of its subcontractors engaged in the Development or production of the product have been or is, subject to any adverse FDA inspection, finding of deficiency, finding of non-compliance, warning, investigation, penalty for corrective or remedial action or other compliance or enforcement action relating to Seller’s operations, the Product, or any of Seller’s other products.

(d) Neither Seller nor any of Seller’s officers, employees or agents acting for Seller is subject to any pending or threatened investigation by (A) the FDA pursuant to its “Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities” policy set forth in 56 Fed. Reg. 46191 (September 10, 1991) or any amendments thereto, (B) the Department of Health and Human Services Office of Inspector General, Department of Justice, or other Governmental Entity pursuant to the Federal Anti-Kickback Statute (42 U.S.C. §1320a-7(b)), or the Federal False Claims Act, or similar state or foreign law. Neither Seller nor any of Seller’s officers, employees or agents acting for Seller has committed any act, made any statement or failed to make any statement that would reasonably be expected to provide a basis for action under any of the statutes, regulations or policy referred to in the preceding sentence. Neither Seller nor any of Seller’s officers, employees or agents acting for Seller has been convicted of any crime or engaged in any conduct that would reasonably be expected to result in (A)

debarment under 21 U.S.C. §335a or any similar state or foreign law or (B) exclusion under 42 U.S.C. §1320a-7 or any similar state or foreign law.

4.14 Environmental Matters.

(a) Seller and the conduct of the Product Line Operations are and have been in compliance with applicable Environmental Laws, except for any failure to comply with Environmental Laws that would not reasonably be expected to result in a Material Adverse Effect.

(b) There is no pending or, to the knowledge of Seller, threatened action, suit, notice of violation or judicial or administrative proceeding, investigation or claim relating to Environmental Matters, including Off-Site Liabilities or any violation of Environmental Law, involving the Product Line Operations, or any property currently, or, to the knowledge of Seller, formerly owned or operated by Seller in connection with the Product Line Operations.

4.15 Specifications. The specifications included in Schedule 4.15 of the Disclosure Schedule (the “Specifications”) are the specifications that are used by Seller to produce AVP-21D9 at a 100 liter scale as of the date hereof, and the GMP Clinical Materials to be released by Apptec shall satisfy the Specifications.

4.16 Clinical and Scientific Data.

(a) To Sellers’ knowledge, Seller has made available to Buyer all available pre-clinical study data, including raw data and reports, created by Seller, or any third party on behalf of Seller relating to the Product (“Scientific Data”) and in Seller’s possession. Seller will following the Closing, continue to take commercially reasonable steps to make available or assist Buyer in obtaining access to all Scientific Data.

(b) Seller either owns and has possession, or has the right to use and full rights of access to, all Scientific Data.

(d) The Proposal is materially consistent with the Scientific Data.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF BUYER AND BUYER PARENT

Buyer and Buyer Parent, as the case may be, represent and warrant to Seller as follows:

5.1 Organization and Corporate Power. Buyer and Buyer Parent are corporations duly organized, validly existing and in good standing under the laws of the State of Delaware. Buyer and Buyer Parent have all requisite corporate power and authority to carry on the businesses in which they are engaged and to own and use the properties owned and used by them.

5.2 Authorization of the Transaction. Buyer and Buyer Parent have all requisite power and authority to execute and deliver this Agreement and the Ancillary Agreements and to perform their respective obligations hereunder and thereunder. The execution and delivery by Buyer and Buyer Parent of this Agreement and the Ancillary Agreements and the consummation by Buyer of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of Buyer and Buyer Parent. This Agreement and the Ancillary Agreements have been duly and validly executed and delivered by Buyer and Buyer Parent and constitute valid and binding obligations of Buyer and Buyer Parent enforceable against them in accordance with their respective terms.

5.3 Noncontravention. Neither the execution and delivery by Buyer and Buyer Parent of this Agreement or the Ancillary Agreements, nor the consummation by Buyer and Buyer Parent of the transactions contemplated hereby or thereby, will (a) conflict with or violate any provision of the Certificate of Incorporation or by-laws of Buyer or Buyer Parent, (b) require on the part of Buyer or Buyer Parent any filing with, or permit, authorization, consent or approval of, any Governmental Entity, (c) conflict with, result in breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of obligations under, create in any party any right to terminate, modify or cancel, or require any notice, consent or waiver under, any contract or instrument to which Buyer or Buyer Parent is a party or by which it is bound or to which any of its assets is subject, except for (i) any conflict, breach, default, acceleration, termination, modification or cancellation which would not adversely affect the consummation of the transactions contemplated hereby or (ii) any notice, consent or waiver the absence of which would not reasonably be expected to adversely affect or delay the consummation of the transactions contemplated hereby, or (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Buyer, Buyer Parent or any of their respective properties or assets.

5.4 Compliance with Applicable Law. Buyer conducts its business in compliance with all applicable laws, except for violations, if any, which would not, individually or in the aggregate, reasonably be expected to materially affect or delay the ability of Buyer to consummate the transactions contemplated hereby.

5.5 Litigation. There is no material action, suit, litigation, proceeding, claim or investigation pending, or to the knowledge of Buyer, threatened that is reasonably likely to adversely affect or delay Buyer’s or Buyer Parent’s performance under this Agreement or the consummation of the transactions contemplated herein.

5.6 Brokers’ Fees. Buyer does not have any liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement.

ARTICLE VI

COVENANTS; OTHER AGREEMENTS

6.1 Proprietary Information. From and after the Closing, Sellers shall not disclose or make use of (except to pursue its rights, under this Agreement or the Ancillary Agreements), and shall use their best efforts to cause all of its Affiliates not to disclose or make use of, any knowledge, information or documents of a confidential nature or not generally known to the public with respect to Acquired Assets or Buyer or its business, except to the extent that such knowledge, information or documents shall have become public knowledge other than through improper disclosure by Seller or an Affiliate. Sellers shall enforce, for the benefit of Buyer, all confidentiality, invention assignments and similar agreements between either Seller or Seller Parent and any other party relating to the Acquired Assets. Except with respect to the Xenerex Technology not licensed or assets not sold under this Agreement, the Buyer shall be entitled to assume the control of any litigation, action, arbitration or proceeding in connection with the enforcement of any of the rights associated with the Acquired Assets at Buyer’s expense. Notwithstanding the foregoing or any other provision in this Agreement, Sellers may market, sell, hypothecate, transfer or otherwise assign any asset or right not specifically sold, transferred or licensed under this Agreement subject to Sellers’ confidentiality and non-disclosure agreements.

6.2 Tax Matters.

(a) After the Closing Date, Buyer and Sellers shall cooperate in the filing of any Tax returns or other Tax-related forms or reports, to the extent such filing requires providing each other with necessary relevant records and documents relating to the Acquired Assets or the Product, or providing reasonable access to employees. Sellers and Buyer shall cooperate in the same manner: (i) in defending or resolving any Tax audit, examination or tax-related litigation relating to the Acquired Assets or the Product; and (ii) to minimize any transfer, sales and use Taxes and notarial and registry fees and recording costs.

(b) All transfer, documentary, sales, use, stamp, registration and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement shall be paid by Buyer when due, and Buyer will, at its own expense, file all necessary Tax returns and other documentation with respect to such transfer, documentary, sales, use, stamp, registration and other Taxes and fees.

6.3 Books and Records.

(a) Sellers shall not destroy any Books and Records retained by them without first providing Buyer with the opportunity to obtain or copy the portion thereof at Buyer’s expense. Following the Closing, Sellers shall promptly make available to Buyer all Books and Records that are discovered to be in the possession of Sellers and that have not previously been furnished to the Buyer at Buyer’s expense, provided that Seller may restrict Buyer’s right to access attorney client privileged communications or work product if such restriction is exercised by Sellers in a reasonable manner. Sellers may retain one copy of the Books and Records for archival purposes only.

(b) Promptly upon request by Buyer made at any time following the Closing Date, Sellers shall authorize the release to Buyer the portion of any files pertaining to the Acquired Assets or the conduct of the Product Line Operations held by any Governmental Entity.

(c) The Parties agree that Sellers may maintain copies of the Other Books and Records that are jointly necessary or useful for the exploitation of the other Seller assets not sold transferred or licensed under this Agreement. Such Other Books and Records are not exclusively transferred to the Buyer and may be disclosed to, jointly transferred to or jointly licensed to other Third Parties subject to the terms of this Agreement, provided that the party to which such Other Books and Records are disclosed, transferred or licensed agrees to not use such Other Books and Records to exploit any product in the Anthrax Field.

6.4 Use of Name. Except in the circumstances described in Section 8.3(a) pertaining to Sellers’ disclosure obligations, compliance with this Agreement, and for Sellers’ own internal reporting purposes, Sellers shall not use, and shall not permit any Affiliate to use, the name AVP-21D9 or any name reasonably similar thereto after the Closing Date in connection with any business related to, competitive with, or an outgrowth of, the business conducted by Seller on the date of this Agreement.

6.5 Employees. Buyer shall be permitted to offer employment to any employee of Sellers necessary for the operation of the Product Line Operations. Each of the Sellers hereby consents to the hiring of any such employees by Buyer and waives, with respect to the employment by Buyer of such employees, any claims or rights it may have against Buyer or any such employee under any non-competition, confidentiality or employment agreement.

6.6 Patent Extension. Buyer shall be solely responsible for all patent term extensions, including supplementary protection certificates and any other extensions that are now or become available in the future, that are applicable to any AVP Anthrax Patents. Upon Buyer’s request, Seller shall execute all documents for such applications and take any additional action as Buyer reasonably requests in connection therewith at Buyer’s expense. Except as specifically set forth in this Agreement, Sellers shall have no further or ongoing obligation to extend or maintain any of the AVP Anthrax Patents or to support any Product Line Intellectual Property.

6.7 Patent Prosecution. After the Closing Date, Buyer shall have the sole right, obligation and option to file and prosecute any patent applications and to maintain any patents included in the AVP Anthrax Patents, at Buyer’s cost and expense. If and to the extent reasonably requested by Buyer, Sellers will provide reasonable assistance to Buyer at Buyer’s expense in prosecuting any administrative action brought by Buyer against a Third Party in order to oppose or secure reexamination of a patent held by such Third Party that is deemed to Cover exploitation of a Product, or defending any action brought against Buyer by a Third Party asserting a patent alleged to Cover exploitation of a Product.

6.8 Due Diligence Development and Commercialization Obligations. Buyer agrees to use commercially reasonable efforts to Develop and Commercialize a Product.

6.9 Performance of the Outstanding Tasks Under Seller’s U01 Grant.

(a) Seller shall perform its remaining obligations under its current U01 grant as required by the NIAID (the “Services”). The obligation to perform the Services shall terminate upon completion of the Services as determined jointly by the NIAID and Seller. In the course of performing the Services, Seller shall consult with Gary Nabors, or any alternate contact specified by Buyer (the “Emergent Contact”), and perform the Services in a collaborative manner. Buyer agrees not to interpose or add any additional requirements to the Services unless such additional requirements are required by the NIAID in writing, agreed to in writing and in advance by Sellers, such agreement not to be unreasonably withheld, delayed or conditioned (it being understood that if the work is not required by the NIAID, Seller is not obligated to perform such work). Sellers represent and warrant that the Services to be performed hereunder by the Sellers will be performed in a competent, diligent and workmanlike manner, and to the extent the work is done by Third Parties, Sellers shall contract that the work will be performed in a competent, diligent and workmanlike manner and using Good Laboratory Practices.

(b) Any work requested by Buyer that expands the resources required to perform the work required by NIAID, or the technology transfer work beyond what will be provided by Seller to Buyer pursuant to Section 1.6, shall be paid for by Buyer at a rate of one hundred fifty U.S. Dollars ($150) an hour, or fraction thereof, pursuant to a mutually agreeable work order. Work performed shall be acceptable to Buyer. Seller shall submit invoices on a monthly basis accompanied by a timesheet detailing the hours worked and signed by an authorized representative of the Seller. Buyer will reimburse Seller for reasonable out-of-pocket expenses that have are accompanied by receipts submitted for reimbursement with an invoice. Invoices will not be processed and paid unless they refer to the applicable Accounting Code which Buyer shall provide in advance of any work order. Invoices shall be payable within thirty (30) days of receipt by Buyer.

(c) Representatives of Sellers performing Services hereunder will not receive employee benefits from Buyer, including but not limited to paid vacation, sick leave or any insurance benefits.

(d) All right, title, and interest in and to all reports, data, information, documents, materials and inventions arising out of the direct performance of Services provided hereunder, subject to any rights to such items asserted by the U. S government or any agency thereof, shall belong to and be the property of Buyer. Sellers agree, without further payment by Buyer, to make any assignments, and shall cause any other employees or agents as applicable to assign, and execute all documents necessary to effect Buyer’s title thereto in all countries of the world. Furthermore, all documents and materials prepared by Sellers in the performance of duties hereunder will constitute works-made-for-hire and shall belong to and be the exclusive property of Buyer and shall be surrendered by Sellers to Buyer upon completion of the Services. Sellers hereby assign to Buyer all rights that Sellers may have to data, information, documents, materials and inventions referred to in this paragraph.

(e) In performing the Services, Sellers shall comply with all applicable existing and future laws, rules and regulations.

ARTICLE VII

INDEMNIFICATION

7.1 Indemnification by Seller and Seller Parent. Seller and Seller Parent shall, jointly and severally, indemnify Buyer in respect of, and hold Buyer harmless against, Damages incurred or suffered by Buyer or any Affiliate thereof resulting from, relating to or constituting:

(a) any breach of any representation or warranty of either of the Sellers contained in this Agreement, any Ancillary Agreement or any other agreement or instrument furnished by either of the Sellers to Buyer pursuant to this Agreement;

(b) any failure to perform any covenant or agreement of either of the Sellers contained in this Agreement, any Ancillary Agreement or any agreement or instrument furnished by either of the Sellers to Buyer pursuant to this Agreement;

7.2 Indemnification by Buyer. Buyer shall indemnify Seller in respect of, and hold it harmless against, any and all Damages incurred or suffered by Seller resulting from, relating to or constituting:

(a) any breach of any representation or warranty of Buyer contained in this Agreement, any Ancillary Agreement or any other agreement or instrument furnished by Buyer to Sellers pursuant to this Agreement;

(b) any failure to perform any covenant or agreement of Buyer contained in this Agreement, any Ancillary Agreement or any other agreement or instrument furnished by Buyer to Sellers pursuant to this Agreement; or

7.3 Limitations on Indemnification.

(a) Notwithstanding anything to the contrary set forth in this Agreement, the right to indemnification under Section 7.1(a) shall, unless otherwise explicitly stated in this Agreement, be subject to the following limitations:

(i) With respect to Damages arising of out of a breach of Sections 4.1, 4.2, 5.1, and 5.2, Buyer and Seller shall be liable for all such Damages suffered by the other Party.

(ii) With respect to Damages arising of out of a breach of a representation or warranty not expressly covered by Section 7.3(a)(i), Sellers shall not be liable for any Damages suffered by Buyer unless the Damages arising out of the applicable breach are in excess of $150,000 (the “Deductible”) at which point Sellers shall be liable for 50% of all Damages in excess of the Deductible, provided that Damages actually paid by Sellers shall not

exceed the lesser of $800,000 or the aggregate amount actually paid by Buyer pursuant to this agreement (the “Overall Cap”).

(iii) Nothing in this Article VII shall be deemed to limit Buyer Parent’s financial obligations set forth in this Agreement.

(b) Except in the event of fraud or for the breach by Buyer of any obligation to pay any amounts pursuant to Article II, the indemnification provisions contained in this Article VII shall be the Parties’ exclusive remedy for any inaccuracy in or breach of any representation, warranty, covenant or obligation set forth in this Agreement or any Ancillary Agreement; provided, however, that nothing contained in this Section 7.3 or elsewhere in this Agreement shall limit the rights of a Party to seek or obtain injunctive relief or any other equitable remedy to which such Party is otherwise entitled.

(c) Following the Closing Date, each Indemnified Party agrees to use commercially reasonable efforts to mitigate any Damages, including seeking recovery (i) under any available insurance policy that would insure any claim with respect to such Damages or (ii) from any third party. Subject to the limitations contained herein, all costs and expenses reasonably incurred in connection with such mitigation shall be Damages reimbursable as part of the relevant indemnification claim. In the event that any Party receives a payment with respect to any Damages, and thereafter such Party receives payment with respect to such Damages from any insurer or other third party, such Party shall pay to the other Party such amount received from such insurer or third party in respect of such Damages for which the Party received an indemnification payment.

7.4 Indemnification Claims.

(a) An Indemnified Party shall give prompt written notification to the Indemnifying Party of the commencement of any Third Party Action. In any event, such notification shall be given within 20 days after receipt by the Indemnified Party of notice of such Third Party Action, and shall describe in reasonable detail (to the extent known by the Indemnified Party) the facts constituting the basis for such Third Party Action and the amount of the claimed damages; provided, however, that no delay or failure on the part of the Indemnified Party in so notifying the Indemnifying Party shall relieve the Indemnifying Party of any liability or obligation hereunder except to the extent of any damage or liability caused by or arising out of such failure. Within 20 days after delivery of such notification, the Indemnifying Party may, upon written notice thereof to the Indemnified Party, assume control of the defense of such Third Party Action with counsel reasonably satisfactory to the Indemnified Party; provided that (i) the Indemnifying Party may only assume control of such defense if (A) it acknowledges in writing to the Indemnified Party that any damages, fines, costs or other liabilities that may be assessed against the Indemnified Party in connection with such Third Party Action constitute Damages for which the Indemnified Party shall be indemnified pursuant to this Article VII and (B) the ad damnum is less than or equal to the amount of Damages for which the Indemnifying Party is liable under this Article VII and (ii) the Indemnifying Party may not assume control of the defense of a Third Party Action if (i) the Third Party Action involves criminal liability or seeks equitable relief against the Indemnified Party or (ii) the Indemnified Party has different defenses

available to it with respect to such Third Party Action. If the Indemnifying Party does not, or is not permitted under the terms hereof to, so assume control of the defense of a Third Party Action, the Indemnified Party shall control such defense. The non-Controlling Party may participate in such defense at its own expense. The Controlling Party shall keep the non-Controlling Party reasonably advised of the status of such Third Party Action and the defense thereof and shall consider in good faith recommendations made by the non-Controlling Party with respect thereto. The non-Controlling Party shall furnish the Controlling Party with such information as it may have with respect to such Third Party Action (including copies of any summons, complaint or other pleading which may have been served on such party and any written claim, demand, invoice, billing or other document evidencing or asserting the same) and shall otherwise cooperate with and assist the Controlling Party in the defense of such Third Party Action. The fees and expenses of counsel to the Indemnified Party with respect to a Third Party Action shall be considered Damages for purposes of this Agreement only if the Indemnified Party controls the defense of such Third Party Action pursuant to the terms of this Section 7.4(d). The Indemnifying Party shall not agree to any settlement of, or the entry of any judgment arising from, any Third Party Action without the prior written consent of the Indemnified Party, which shall not be unreasonably withheld, conditioned or delayed; provided that the consent of the Indemnified Party shall not be required if (i) such settlement is purely monetary and (ii) the Indemnifying Party agrees in writing to pay any amounts payable pursuant to such settlement or judgment and such settlement or judgment includes a complete release of the Indemnified Party from further liability. The Indemnified Party shall not agree to any settlement of, or the entry of any judgment arising from, any such Third Party Action without the prior written consent of the Indemnifying Party, which shall not be unreasonably withheld, conditioned or delayed.

(b) In order to seek indemnification under this Article VII, an Indemnified Party shall deliver a Claim Notice to the Indemnifying Party.

(c) Within 20 days after delivery of a Claim Notice, the Indemnifying Party shall deliver to the Indemnified Party a Response, in which the Indemnifying Party shall: (i) agree that the Indemnified Party is entitled to receive all of the Claimed Amount (in which case the Response shall be accompanied by a payment by the Indemnifying Party to the Indemnified Party of the Claimed Amount, by check or by wire transfer), (ii) agree that the Indemnified Party is entitled to receive the Agreed Amount (in which case the Response shall be accompanied by a payment by the Indemnifying Party to the Indemnified Party of the Agreed Amount, by check or by wire transfer), or (iii) dispute that the Indemnified Party is entitled to receive any of the Claimed Amount.

(d) If the Indemnifying Party delivers a Response to the Indemnified Party indicating that there is an amount in Dispute, the Indemnifying Party and the Indemnified Party shall attempt in good faith to resolve the Dispute related to such amount. If the Indemnifying Party and the Indemnified Party resolve such dispute in writing, then their resolution of such dispute shall be binding on the Indemnifying Party and the Indemnified Party and a settlement agreement stipulating the amount owed to the Indemnified Party (the “Stipulated Amount”) shall be signed by the Indemnifying Party and the Indemnified Party. Within three days after the execution of such settlement agreement, the Indemnifying Party shall pay to the Indemnified Party the Stipulated Amount by check or by wire transfer.

(e) If the Indemnifying Party and the Indemnified Party are unable to resolve the dispute relating to any amount in Dispute during the 30-day period commencing upon the delivery of the Response to the Indemnifying Party, then either the Indemnifying Party or the Indemnified Party may submit the amount in Dispute to binding arbitration in the State of California in accordance with the JAMS Comprehensive Arbitration Rules and Procedures then in effect. Arbitration will be conducted by one arbitrator, mutually selected by the Indemnified Party and the Indemnifying Party; provided, however, that if the Indemnified Party and the Indemnifying Party fail to mutually select an arbitrator within 15 business days after the contested portion of the indemnification claim is submitted to arbitration, then the arbitrator shall be selected by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures then in effect. The parties agree to use commercially reasonable efforts to cause the arbitration hearing to be conducted within 75 days after the appointment of the arbitrator, and to use commercially reasonable efforts to cause the decision of the arbitrator to be furnished within 15 days after the conclusion of the arbitration hearing. The arbitrator’s authority shall be confined to: (i) whether the Indemnified Party is entitled to recover the amount in Dispute (or a portion thereof), and the portion of the amount in Dispute the Indemnified Party is entitled to recover; and (ii) whether either party to the arbitration shall be required to bear and pay all or a portion of the other party’s attorneys’ fees and other expenses relating to the arbitration. The final decision of the arbitrator shall include the dollar amount of the award to the Indemnified Party, if any (the “Award Amount”), and shall be furnished in writing to the Indemnifying Party, the Indemnified Party and shall constitute a conclusive determination of the issues in question, binding upon the Indemnifying Party and the Indemnified Party. Within three days following the receipt of the final award of the arbitrator setting forth the Award Amount, if any, the Indemnifying Party shall pay to the Indemnified Party the Award Amount by check or by wire transfer.

7.5 Survival of Representations and Warranties. All representations and warranties of the Parties shall (a) survive the Closing and (b) shall expire on the date that is the twenty-four (24) month anniversary of the Closing Date, except that (i) the representations and warranties set forth in Sections 4.1, 4.2, 4.3, 5.1, 5.2 and 5.3 shall survive the Closing without limitation and (ii) the representations and warranties set forth in Sections 4.7, 4.13, 4.14, 4,15 and 4.16 shall survive until 30 days following expiration of all statutes of limitation applicable to the matters referred to therein (with respect to each of the foregoing, the “Designated Date”). If an Indemnified Party acting in good faith delivers to an Indemnifying Party, either a Claim Notice or an Expected Claim Notice prior to the applicable Designated Date, then the claim asserted in such notice shall survive until such time as such claim is fully and finally resolved in accordance with the provisions of Article VII. If the legal proceeding or written claim with respect to which an Expected Claim Notice has been given is definitively withdrawn or resolved in favor of the Indemnified Party, the Indemnified Party shall promptly so notify the Indemnifying Party.

7.6 Additional Limitations. Notwithstanding anything herein to the contrary, in no event shall an Indemnified Party be entitled to any consequential, punitive or special damages except in the event of fraud or willful misconduct.

7.7 Treatment of Indemnity Payments. Any payments made to an Indemnified Party pursuant to this Article VII shall be treated as an adjustment to the Purchase Price for tax purposes.

ARTICLE VIII

CONFIDENTIAL INFORMATION

8.1 Confidential Information. As used in this Agreement, the term “Confidential Information” means all secret, confidential or proprietary information or data, whether provided in written, oral, graphic, video, computer, electronic or other form, provided pursuant to this Agreement or generated pursuant to this Agreement by one Party (the “Disclosing Party”) to the other Party (the “Receiving Party”), including information relating to the Disclosing Party’s existing or proposed research, development efforts, patent applications, business or products, and all notes, analyses, compilations, studies, interpretations or other documents whether in tangible form or on electronic or other data storage media, prepared by the Receiving Party and its directors, managers, employees, independent contractors, agents or consultants (collectively, “Representatives”), which contain, reflect or are based on, in whole or in part, Confidential Information furnished to the Receiving Party or its Representatives by the Disclosing Party or any to its Representatives, and any other materials that have not been made available by the Disclosing Party to the general public. Notwithstanding the foregoing sentence, Confidential Information shall not include any information or materials that:

(a) were already known to the Receiving Party (other than under an obligation of confidentiality), at the time of disclosure by the Disclosing Party;

(b) were generally available to the public or otherwise part of the public domain at the time of disclosure thereof to the Receiving Party;

(c) became generally available to the public or otherwise part of the public domain after disclosure or development thereof, as the case may be, and other than through any act or omission of the Receiving Party in breach of the Receiving Party’s confidentiality obligations under this Agreement;

(d) were disclosed to a Party, other than under an obligation of confidentiality, by a Third Party who had no obligation to the Disclosing Party not to disclose such information to others; or

(e) were independently discovered or developed by or on behalf of the Receiving Party without the use of the Confidential Information belonging to the other Party.

8.2 Confidentiality Obligations. Each Receiving Party shall keep all Confidential Information received from the other Party with the same degree of care it maintains the confidentiality of its own Confidential Information. The Receiving Party shall not use such Confidential Information for any purpose other than in performance of this Agreement or disclose the same to any other Person other than to such of its and its Affiliates’ directors, managers, employees, independent contractors, agents or consultants who have a need to know such Confidential Information to implement the terms of this Agreement or enforce its rights under this Agreement; provided, however, that a Receiving Party shall advise any of its and its

Affiliates’ directors, managers, employees, independent contractors, agents or consultants who receives such Confidential Information of the confidential nature thereof and of the obligations contained in this Agreement relating thereto, and the Receiving Party shall be responsible for the compliance by such Representatives with such obligations as if they had been a party hereto. Upon termination of this Agreement, the Receiving Party shall return or destroy all documents, tapes or other media containing Confidential Information of the Disclosing Party that remain in the possession of the Receiving Party’s Representatives. It is understood that receipt of Confidential Information under this Agreement will not limit the Receiving Party from assigning its employees to any particular job or task in any way it may choose, subject to the terms and conditions of this Agreement.

8.3 Permitted Disclosure and Use. Notwithstanding Section 8.2, either Party may disclose Confidential Information belonging to the other Party only to the extent such disclosure is reasonably necessary to: (a) comply with or enforce any of the provisions of this Agreement; (b) comply with a bona fide legal requirement (including by deposition, interrogatories, requests for information or documents, subpoena, civil investigative demand, or similar legal process); or (c) comply with applicable securities laws and regulations, applicable stock exchange, New York Stock Exchange regulation or NASDAQ regulation. Seller may disclose the terms of the license being granted pursuant to this Agreement by Seller to a Third Party under a confidentiality or nondisclosure agreement in connection with potential divestitures of the Sellers’ assets that are the subject of the license. Seller may disclose to a Third Party under a confidentiality or nondisclosure agreement regarding assets, business and operations of the Sellers in connection with capital raising and other potential transactions involving the Sellers’ assets that are not the subject of this Agreement. If a Party deems it necessary to disclose Confidential Information (other than disclosures being made under a confidentiality or nondisclosure agreement in connection with capital raising and potential divestitures of the Sellers’ assets as permitted by the previous two sentences) of the other Party pursuant to this Section 8.3, such Party shall give prompt prior (to the extent possible) notice of such disclosure to the other Party.

8.4 Notification. The Receiving Party shall notify the Disclosing Party promptly upon discovery of any unauthorized use or disclosure of the Disclosing Party’s Confidential Information, and will cooperate with the Disclosing Party, at the Disclosing Party’s expense, in any reasonably requested fashion to assist the Disclosing Party to regain possession of such Confidential Information and to prevent its further unauthorized use or disclosure.

8.5 Confidentiality of this Agreement. Subject to the applicable obligations required under securities laws as advised by Sellers’ outside securities counsel and the provisions of Section 10.1, the terms of this Agreement shall be Confidential Information of each Party and, as such, shall be subject to the provisions of this Article VIII.

ARTICLE IX

DEFINITIONS

For purposes of this Agreement, each of the following terms shall have the meaning set forth below.

“Acquired Assets” shall mean the following assets, properties and rights of Seller existing as of the Closing:

	a)		all right, title and interest to the Product;

	b)		all rights under Assigned Contracts;

	c)		all rights of Seller to Product Line Intellectual Property;

	d)		all Biological Materials listed on Schedule 9.1(d);

	e)		Applicable Permits listed on Schedule 4.11;

	f)		all Anthrax Books and Records and Other Books and Records; and

	g)		all right, title and interest to the assets listed on Schedule 9.1(g).

“Affiliate” shall mean an affiliate, as defined in Rule 12b-2 under the Securities Exchange Act of 1934.

“Agreed Amount” shall mean part, but not all, of the Claimed Amount.

“Ancillary Agreements” shall mean the bill of sale and other instruments of conveyance referred to in Section 3.2(a), and the instrument of assumption and other instruments referred to in Section 3.2(b).

“Applicable Permits” is defined in Section 4.11.

“Anthrax Books and Records” shall mean all books, records, accounts, ledgers, files, documents, correspondence, manufacturing and procedural manuals, Product Line Intellectual Property records, studies, reports and other printed or written materials relating solely to the Product or the Product Line Operations.

“Anthrax Field” shall mean the treatment or prevention of infections, diseases or conditions in humans caused by exposure to Bacillus anthracis.

“Apptec” shall mean App Tec Laboratory Services, Inc. located in Philadelphia Pennsylvania or any successor entity thereto.

“Assigned Contracts” shall mean the contracts, licenses, agreements and other instruments relating to the Product or the Product Line Operations set forth on Schedule 1.3(a).

“Assumed Liabilities” shall mean all Liabilities, whether or not accruing, arising out of or relating to events or occurrences happening or conditions existing, before, on or after the Closing

Date, which relate directly to the Acquired Assets, other than Retained Liabilities. Without limiting the foregoing, Assumed Liabilities include:

(a) the Liabilities of Seller arising under the Assigned Contracts (other than as a result of a breach thereunder prior to the Closing Date); and

(b) the Liabilities arising from the Product excluding (i) tort claims related to periods on or prior to the Closing Date, (ii) any and all Liability for Taxes payable by Seller and any Taxes related to or associated with the Product to the extent attributable to taxable periods on or before the Closing Date, and (iii) claims arising under any violation or breach of law, rule or regulation of any Governmental Entity to the extent attributable to periods on or before the Closing Date.

“AVP-1C6” shall mean the monoclonal antibody which binds to the protective antigen of Bacillus anthracis having a heavy chain variable domain amino acid sequence (VH) and a light chain variable domain amino acid sequence (VK) as depicted as depicted in Figure 8 of U.S. Patent Application Publication No. 2006-0246079.

“AVP-21D9” shall mean the monoclonal antibody which binds to the protective antigen of Bacillus anthracis having a heavy chain variable domain amino acid sequence as depicted in Figure 5 and a light chain variable domain amino acid sequence as depicted in Figure 6 of U.S. Patent Application Publication No. 2006-0246079.

“AVP-22G12” shall mean the monoclonal antibody which binds to the protective antigen of Bacillus anthracis having a heavy chain variable domain amino acid sequence (VH) and a light chain variable domain amino acid sequence (VL) as depicted as depicted in Figure 10 of U.S. Patent Application Publication No. 2006-0246079.

“AVP-4H7” shall mean the monoclonal antibody which binds to the protective antigen of Bacillus anthracis having a heavy chain variable domain amino acid sequence (VH) and a light chain variable domain amino acid sequence (VL) as depicted as depicted in Figure 9 of U.S. Patent Application Publication No. 2006-0246079.

“AVP Anthrax Patents” shall mean any existing or future patents which disclose the Product or methods of making or using the Product in the Anthrax Field, including those patents listed in Schedule 4.7(a) of the Disclosure Schedule and any substitutions, divisions, continuations, continuations-in-part, reissues, renewals, registrations, confirmations, re-examinations, extensions, supplementary protection certificates and the like, and any provisional applications, of those patents listed in Section 4.7(a) of the Disclosure Schedule.

“Biological Materials” shall mean media (other than commercially available), cell banks, cDNA, vectors, plasmids, cell lines, and protein antibodies directly related to the Product.

“Biologics License Application” shall mean a biologics license application filed with the FDA pursuant to 21 C.F.R §601 for the authorization to market a biological product in the United States.

“Books and Records” shall mean Anthrax Books and Records and Other Books and Records.

“Buyer” shall have the meaning set forth in the first paragraph of this Agreement.

“CERCLA” shall mean the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended.

“Claim Notice” shall mean written notification which contains (i) a description of the Damages incurred or reasonably expected to be incurred by the Indemnified Party and the Claimed Amount of such Damages, to the extent then known, (ii) a statement that the Indemnified Party is entitled to indemnification under Article VII for the Claimed Amount and a reasonable explanation of the basis therefor, and (iii) a demand for payment in the amount of such Damages.

“Claimed Amount” shall mean the amount of any Damages incurred or reasonably expected to be incurred by the Indemnified Party.

“Closing” shall mean the closing of the transactions contemplated by this Agreement.

“Closing Date” is defined in Section 3.1.

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Combination Product” means any pharmaceutical product that includes both (x) a Licensed Product and (y) other active ingredient(s).

“Commercial Sale” means, the sale of (i) the Product or (ii) any product Developed or Commercialized under a sublicense of the rights granted under the Asset License in this Agreement, to a Third Party for end use consumption by Buyer, any of its Affiliates, or by Buyer’s or its Affiliate’s sublicensees. Commercial Sale excludes any sale or other distribution for use in a clinical trial or other Development activity, for compassionate or named-patient use or for test marketing.

“Commercialization” or “Commercialize” means any activities directed to producing, manufacturing, marketing, promoting, distributing, importing, exporting or selling a Product.

“Competitive Product” shall mean a pharmaceutical product incorporating a monoclonal antibody used for the treatment and prevention of infections, diseases or conditions in humans caused by exposure to Bacillus anthracis.

“Controlling Party” shall mean the party controlling the defense of any Third Party Action.

“Cover,” “Covering” or “Covered” shall mean, with respect to a product, that, but for a license granted to a Party under a Valid Claim, the Development or Commercialization of such product would infringe such Valid Claim.

“Damages” shall mean any and all Liabilities, monetary damages, fines, fees, penalties, interest obligations, deficiencies, losses and expenses (including amounts paid in settlement, interest, court costs, costs of investigators, fees and expenses of attorneys, accountants, financial advisors and other experts, and other expenses of litigation). Notwithstanding anything herein to the contrary the amount of any Damages for which indemnification is provided shall be reduced to take account of any amounts for which an indemnified party actually recovers against an insurance policy or against any third party other than pursuant to this Agreement.

“Development” or “Develop” shall mean all research, development, and regulatory activities regarding the Product. This includes (a) research, preclinical testing, toxicology, formulation, and clinical studies of the Product; and (b) preparation, submission, review, and development of data or information for the purpose of submission to a Governmental Entity to obtain Regulatory Approval of the Product. Development shall include development and regulatory activities for additional forms or formulations for the Product after Regulatory Approval of the Product, including, post-approval clinical trials or phase 4 clinical trials with respect to an approved indication.

“Disclosure Schedule” shall mean the disclosure schedule provided by Seller to Buyer on the date hereof.

“Dispute” shall mean the dispute resulting if the Indemnifying Party in a Response disputes its liability for all or part of the Claimed Amount.

“Environmental Law” shall mean any federal, state or local law, statute, rule, order, directive, judgment, Permit or regulation relating to the environment, occupational health and safety, or exposure of persons or property to Materials of Environmental Concern, including any statute, regulation, administrative decision or order pertaining to: (i) the presence of or the treatment, storage, disposal, generation, transportation, handling, distribution, manufacture, processing, use, import, export, labeling, recycling, registration, investigation or remediation of Materials of Environmental Concern or documentation related to the foregoing; (ii) air, water and noise pollution; (iii) groundwater and soil contamination; (iv) the release, threatened release, or accidental release into the environment, the workplace or other areas of Materials of Environmental Concern, including emissions, discharges, injections, spills, escapes or dumping of Materials of Environmental Concern; (v) transfer of interests in or control of real property which may be contaminated; (vi) community or worker right-to-know disclosures with respect to Materials of Environmental Concern; (vii) the protection of wild life, marine life and wetlands, and endangered and threatened species; (viii) storage tanks, vessels, containers, abandoned or discarded barrels and other closed receptacles; and (ix) health and safety of employees and other persons. As used above, the term “release” shall have the meaning set forth in CERCLA.

“Environmental Matters” shall mean any Liability arising under Environmental Law, whether arising under theories of contract, tort, negligence, successor or enterprise liability, strict liability or other legal or equitable theory, including (i) any failure to comply with an applicable Environmental Law and (ii) any Liability arising from the presence of, release or threatened release of, or exposure of persons or property to, Materials of Environmental Concern at the Acquired Assets or elsewhere. As used above, the term “release” shall have the meaning set forth in CERCLA.

“Expected Claim Notice” shall mean a notice that, as a result of a legal proceeding instituted by or written claim made by a third party, an Indemnified Party reasonably expects to incur Damages for which it is entitled to indemnification under Article VII.

“FDA” shall mean the United States Food and Drug Administration, or any successor agency thereto.

“Follow-On Biologic Product” shall mean a product developed by or on behalf of a person or entity other than Buyer, its Affiliates or its or their sublicensees (a) that contains an antibody having identical or substantially identical amino acid sequences in its complementarity determining regions (CDR’s) to the CDR amino acid sequences of the antibody that is the active pharmaceutical ingredient in the Product; and (b) that has received regulatory approval for use through any current or future regulatory approval process by which the sponsor or the regulatory agency relies, in whole or in part, directly or indirectly, upon the data supporting the Product.

“GAAP” shall mean United States generally accepted accounting principles.

“Governmental Entity” shall mean any court, arbitrational tribunal, administrative agency or commission or other governmental or regulatory authority or agency.

“GMP Clinical Materials” shall mean the following provided by Seller for review and inspection by Buyer’s authorized representatives:

	1)		All vials of the finished and released drug product (“FDP”) as contracted with Apptec for delivery under the U01 Grant and authorized for release by AppTec less a sufficient amount to enable Seller to complete its obligations under the U01 Grant;

	2)		AppTec’s documentation authorizing the release of the FDP, which for the avoidance of doubt includes the Certificate of Analysis;

	3)		Seller’s toxin neutralization assay (“TNA”) potency results as reflected in Seller’s report from tests performed by the Seller on a sample of the FDP provided by Apptec;

“Grants Received” shall mean U.S. Government funding provided to Seller listed in Schedule 4.7(i).

“Indemnified Party” shall mean a party entitled, or seeking to assert rights, to indemnification under Article VII of this Agreement.

“Indemnifying Party” shall mean the party from whom indemnification is sought by the Indemnified Party.

“Know-How” means inventions, discoveries, trade secrets, information, experience, data, formulas, procedures, technology and results (whether or not patentable), including without limitation discoveries, formulae, materials including biological materials, practices, methods, processes, experience and test data (including physical, chemical, biological, toxicological, pharmacological, clinical, and veterinary data), control assays, product specifications, analytical and quality control data.

“Investigational New Drug Application” shall mean an investigational new drug application submitted to the FDA, or equivalent application submitted to a regulatory authority in any regulatory jurisdiction outside the United States, seeking authorization to test a biological product in humans in order to generate data necessary for submission of a Biologics License Application or an equivalent application in any regulatory jurisdiction outside the United States

“Liabilities” shall mean all debts, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or unmatured or determined or determinable, including those arising under any contract, agreement, arrangement, commitment or undertaking.

“Liens” shall mean any mortgage, pledge, security interest, encumbrance, charge, easement, reversion or purchase right (whether arising by contract or by operation of law), other than (i) mechanic’s, materialmen’s, warehousemen’s, landlords’, suppliers’ and similar liens, (ii) liens arising under worker’s compensation, unemployment insurance, social security, retirement, and similar legislation, (iii) unmatured Liens securing the payment of Taxes which are not yet due and payable, and (iv) liens on goods in transit incurred pursuant to documentary letters of credit, in each case arising in the Ordinary Course of Business of Seller and not material to Seller.

“Licensed Product” means the Product as licensed or approved by any applicable Regulatory Authority or any product Developed or Commercialized under a sublicense of the rights granted under the Asset License in this Agreement.

“Material Adverse Effect” shall mean any change or effect that is materially adverse to the Product or the Product Line Operations, taken as a whole in accordance with and as contemplated under this Agreement, other than any change or effect arising out of (a) changes to the economy or financial markets in general except to the extent such changes have a disproportionate impact on the Product or the Product Line Operations, (b) conditions affecting the industries in which the Product or the Product Line Operations participates generally, except to the extent such conditions have a disproportionate impact on the Product or the Product Line Operations, (c) actions taken by the Parties pursuant to the transactions contemplated by this Agreement or (d) the negotiation, execution or announcement of this Agreement and the transactions contemplated hereby, including any impact thereof on relationships, contractual or otherwise with customers, suppliers, distributors, consultants or employees.

“Materials of Environmental Concern” shall mean any: pollutants, contaminants or hazardous substances (as such terms are defined under CERCLA), pesticides (as such term is defined under the Federal Insecticide, Fungicide and Rodenticide Act), solid wastes and hazardous wastes (as such terms are defined under the Resource Conservation and Recovery Act), chemicals, other radioactive or toxic materials, oil, petroleum and petroleum products (and fractions thereof), or any other material (or article containing such material) listed or subject to regulation under any law, statute, rule, regulation, order, Permit, or directive due to its potential, directly or indirectly, to harm the environment or the health of humans or other living beings.

“Medical Product Regulatory Authority” means any Governmental Entity that is concerned with the safety, efficacy, reliability, manufacture, investigation, sale or marketing of pharmaceuticals, medical products, biologics or biopharmaceuticals, including the FDA.

“NDA” shall mean a new drug application, submitted to the FDA for commercial sale or use of the Product, including any supplements, amendments or modifications thereto, or divisions thereof, submitted to or required by the FDA.

“Net Sales” shall mean with respect to the Product or any product or antibody made, produced, manufactured or sublicensed under the Asset License, the gross amount invoiced by Buyer or any of its Affiliates or any sublicensee of Buyer or any of its Affiliates in respect of Commercial Sales of the Product or other product by Buyer or any of its Affiliates (or such sublicensee) for which delivery has been made to Third Parties (but, for the avoidance of doubt, excluding amounts paid by NIAID in grants), in each case less the following deductions:

(a) normal and customary trade, cash and quantity discounts actually allowed and taken directly with respect to such sales or dispositions (including retrospective price reductions), and normal and customary inventory management fees actually paid to wholesalers and reasonably allocated to Product;

(b) tariffs, duties, excises and sales taxes imposed upon and paid with respect to such sales or dispositions (which does not include income, withholding or similar taxes);

(c) normal and customary commissions actually paid to third party distributors or selling representatives or agents (to the extent included in the invoice);

(d) amounts repaid or credited by reason of rejections, defects, recalls or returns or because of adjustments, billing errors, or trial prescriptions;

(e) reasonably allocated freight, transportation, transit, logistics and shipping insurance expenses; and

(f) invoiced amounts that are written off as uncollectible in accordance with Buyer’s accounting policies, as consistently applied.

Such amounts shall be determined in accordance with GAAP, consistently applied.

In the event the Product is sold as part of a Combination Product, the Net Sales from the Combination Product, for the purposes of determining royalty payments, shall be determined by multiplying the Net Sales (as determined above) of the Combination Product, during the applicable royalty reporting period, by the fraction, A/(A+B), where A is the average sale price of the Product when sold separately in finished form and B is the average sale price of the other active ingredient(s) included in the Combination Product when sold separately in finished form, in each case during the applicable royalty reporting period or, if sales of both the Product and the other active ingredient(s) did not occur in such period, then in the most recent royalty reporting period in which sales of both occurred. In the event that such average sale price cannot be determined for both the Product and all other active ingredient(s) included in such Combination Product, Net Sales for the purposes of determining royalty payments shall be calculated by multiplying the Net Sales of the Combination Product by the fraction of C/(C+D) where C is the fair market value of the Product and D is the fair market value of all other active ingredient(s) included in the Combination Product. In such event, Buyer shall in good faith make a

determination of the respective fair market values of the Product and all other active ingredient(s) included in the Combination Product, and shall notify Seller of such determination and provide Seller with data to support such determination. Seller shall have the right to review such determination of fair market values and, if Seller disagrees with such determination, to notify Buyer of such disagreement within sixty (60) days after Buyer notifies Seller of such determination. If Seller notifies Buyer that Seller disagrees with such determination within such sixty (60) day period and if thereafter the Parties are unable to agree in good faith as to such respective fair market values, then such matter shall be referred to a mutually agreed independent Third Party with experience regarding the pricing of pharmaceutical products for resolution, and the determination of such Third Party shall be conclusive and binding on the parties. If Seller does not notify Buyer that Seller disagrees with such determination within such sixty (60) day period, such determination shall be conclusive and binding on the Parties.

“NIAID” shall mean the National Institute of Allergy and Infectious Diseases.

“NIAID Payments” shall mean the amounts payable by Buyer pursuant to Section 2.3.

“non-Controlling Party” shall mean the Party that does not Control the defense of any Third Party Action.

“Off-Site Liabilities” shall mean Environmental Matters resulting from any transportation, treatment, storage, disposal or Release, or the arrangement therefor, in connection with the Product Line Operations, of any Materials of Environmental Concern, to or at any property, location, site or facility.

“Ordinary Course of Business” shall mean the ordinary course of business consistent with past custom and practice.

“Other Books and Records” shall mean all books, records, accounts, ledgers, files, documents, correspondence, manufacturing and procedural manuals, Product Line Intellectual Property records, studies, reports and other printed or written materials, other than the Anthrax Books and Records, necessary or useful to exploit the Product or the Product Line Operations.

“Parties” shall mean Buyer, Buyer Parent, Seller and Seller Parent. Party means any of the foregoing.

“Patent” means (a) all patents and patent applications in any country or supranational jurisdiction, and (b) any substitutions, divisions, continuations, continuations-in-part, reissues, renewals, registrations, confirmations, re-examinations, extensions, supplementary protection certificates and the like, and any provisional applications, of any such patents or patent applications.

“Product” shall mean the anthrax monoclonal antibodies AVP-21D9, AVP-1C6, AVP-4H7, and AVP-22G12 as well as any anthrax monoclonal antibodies which would be rendered unpatentable by the disclosure of the AVP Anthrax Patents, any compositions of matter comprising the variable domains of these anthrax monoclonal antibodies or any fragment or variants thereof, including any one or more complementarity determining regions (CDR’s) of

these anthrax monoclonal antibodies, or nucleic acids encoding any such anthrax monoclonal antibodies or fragments.

“Product Line Intellectual Property” shall mean all AVP Anthrax Patents and Seller Know-How and any in-licenses necessary or useful to exploit the Product and carry out Product Line Operations, including a royalty-free paid up internal use license to the Xenerex Technology solely insofar as such technology may have been used to identify the Product or may in the future be used to identify a monoclonal antibody for use in the Anthrax Field. As set forth below, the Xenerex Technology shall exclude the use of human splenocytes to make human monoclonal antibodies, as claimed in U.S. Patent 5,958,765 and insofar as claimed in any Patent that claims priority to or from U.S. Patent 5,958,765.

“Product Line Operations” shall mean the research, development, manufacturing, exploitation and sale of the Product as currently conducted.

“Proposal” shall mean the proposal submitted to NIAID in response to Broad Agency Announcement NIH-NIAID-DMID-08-20 “Development of Therapeutic Agents for Select Biodefense Pathogens.”

“Purchase Price” shall mean the Proposal Payment, the Execution Date Payment, NIAID Payments, the GMP Payment, and the Sales-Based Contingent Purchase Price Payments.

“Registrations” shall mean the regulatory approvals, licenses and applications held or made by Seller relating to the Product as listed on Schedule 9.2, and all related correspondence, reports and other submissions to Governmental Entities.

“Regulatory Approval” shall mean the approvals (including any applicable governmental price and reimbursement approvals), licenses, registrations or authorizations of Regulatory Authorities necessary for the Commercialization of a product in a country or territory.

“Response” shall mean a written response containing the information provided for in Section 7.3(c).

“Retained Liabilities” means the following, and only the following, Liabilities of Sellers which, notwithstanding any other provision of this Agreement, will not be assumed by Buyer:

(a) all Liabilities of Sellers to the extent not related to the Acquired Assets other than as set forth in this definition;

(b) all obligations and Liabilities of Sellers for the performance of work required under the U01 Grant including, unless waived by the NIAID:

	•		New Zealand Rabbit tissue cross reactivity study;

	•		viral clearance study;

	•		Apptec 100 liter scale development of the Product;

	•		stability and other studies as agreed to between Seller and Apptec; and

	•		four week single dose toxicology study in New Zealand White rabbits.

(c) all amounts due and payable to Lonza Biologics PLC, Lonza Sales AG, or any successors or assigns that have accrued on or prior to the date hereof;

(d) all liabilities and obligations to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement;

(e) all Liabilities of Sellers for Taxes incurred, or arising out of the conduct of the Product Line Operations through the Closing;

(f) all Liabilities for wages, pensions, incentive compensation, equity compensation, severance, retiree or other benefits, overtime, workers compensation benefits, occupational safety and health liabilities and other similar Liabilities in respect of Sellers’ employees relating to the period through the Closing and in respect of employees of the Sellers who do not become employed by Buyer as a result of the transactions contemplated by this Agreement, whether relating to the period before or after the Closing;

(g) all Liabilities of Sellers for costs and expenses (including legal fees and expenses) that Sellers have incurred in connection with this Agreement and the transactions contemplated hereby; and

(h) any liability or obligation of Sellers under this Agreement and the Ancillary Agreements.

“Seller” shall have the meaning set forth in the first paragraph of this Agreement.

“Seller Know-How” shall mean Know-How controlled by Seller or its Affiliates and reasonably necessary or useful for the development and commercialization of the Product.

“Seller Knowledge” whenever a phrase in this Agreement is qualified “to the knowledge of Seller,” “ to Seller’s knowledge” or a similar phrase, it shall mean, with respect to a fact, (a) the current actual knowledge of any of the following individuals: Keith Katkin, Greg Flesher, Wolfgang Scholz, Randall Kaye, and Neil Abdollahian and (b) the knowledge of such individuals obtained after making inquiry of their direct reports most likely to have knowledge of such fact; provided, however, that with respect to this subsection (b), with respect to facts related to any in-licensed intellectual property, the knowledge of Seller shall only relate to actually known facts.

“Services” shall have the meaning set forth in Section 6.9 of this Agreement.

“Taxes” shall mean any and all taxes, charges, fees, duties, contributions, levies or other similar assessments or liabilities in the nature of a tax, including income, gross receipts, corporation, ad valorem, premium, value-added, net worth, capital stock, capital gains, documentary, recapture, alternative or add-on minimum, disability, estimated, registration, recording, excise, real property, personal property, sales, use, license, lease, service, service use,

transfer, withholding, employment, unemployment, insurance, social security, national insurance, business license, business organization, environmental, workers compensation, payroll, profits, severance, stamp, occupation, windfall profits, customs duties, franchise and other taxes of any kind whatsoever imposed by the United States of America or any state, local or foreign Governmental Entity, and any interest, fines, penalties, assessments or additions to tax imposed with respect to such items or any contest or dispute thereof.

“Tax Benefit” means, with respect to any Damages for which indemnity is paid, all items of deduction, loss or credit arising out of any such Damages, and in the case of any carryback of any such item, any interest received from any Tax authority as a result of the carryback of such item.

“Third Party” shall mean any person or entity other than a Party or its Affiliates.

“Third Party Action” shall mean any suit or proceeding by a person or entity other than a Party for which indemnification may be sought by a Party under Article VII.

“U01 Grant” shall mean NIAID grant award number 1U01AI070493-01 awarded by the U.S. National Institute of Allergy and Infectious Diseases of the National Institutes of Health awarded on June 27, 2006, as amended.

“Valid Claim” means a claim in any issued patent or pending patent application in the patents included in the Acquired Assets, that such claim (a) has not been held invalid or unenforceable by a non-appealed or un-appealable decision of a Governmental Entity (b) has not been admitted invalid through disclaimer or dedication to the public, or (c) has not expired, been determined to be unenforceable, been cancelled, withdrawn, or abandoned.

“Xenerex Technology” means Know-How or intellectual property owned, or licensed, by Seller reasonably necessary or useful in connection with the development or commercialization of pharmaceutical products incorporating human monoclonal antibodies. For purposes of this Agreement, the Xenerex Technology shall exclude the use of human splenocytes to make human monoclonal antibodies, as claimed in U.S. Patent 5,958,765 and insofar as claimed in any Patent that claims priority to or from U.S. Patent 5,958,765.

ARTICLE X

MISCELLANEOUS

10.1 Publicity.

(a) Generally. The Parties agree to the form of press release attached as Exhibit E. With respect to any future press release to be issued in connection with the transactions contemplated by this Agreement, and the Parties will cooperate in the release thereof as soon as practicable after the execution of this Agreement by the Parties. The Parties also recognize that each Party may from time to time desire to issue additional press releases and make other public statements or disclosures regarding the terms of this Agreement. In such event, the Party desiring to issue an additional press release or make a public statement or

disclosure shall provide the other Party with a copy of the proposed press release, statement or disclosure for review and approval in advance, which advance approval shall not be unreasonably withheld, conditioned or delayed. Notwithstanding the foregoing, if the parties are unable to agree on the disclosures on a timely basis to permit compliance with a party’s disclosure and filing obligations under the securities laws of the United States, rules and regulations of the Securities and Exchange Commission, or any applicable stock exchange or NASDAQ regulation, the parties may nonetheless make such disclosures as they are required to make after consultation with their outside securities law counsel, provided that such disclosures shall not include any Specially Designated Confidential Terms (defined below) for which confidential treatment has been granted. Except as permitted by Section 8.3, no other public statement or disclosure concerning the terms of this Agreement shall be made, either directly or indirectly, by either Party hereto, without first obtaining the approval of the other Party (which may be provided electronically). Once any public statement or disclosure has been approved in accordance with this Section 10.1, then either Party may appropriately communicate information contained in such permitted statement or disclosure.

(b) Confidential Treatment Request. The Parties agree that the royalty rates set forth in Section 2.4 (the “Specially Designated Confidential Terms”) are competitively sensitive information. In addition to the Parties’ general agreement to keep the terms of this Agreement confidential, the Parties agree to take additional measures to keep confidential the Specially Designated Confidential Terms. The Parties agree that Buyer and Seller will make a one-time request for confidential treatment of the Specially Designated Confidential Terms (at a minimum) in connection with any filing of this Agreement as an exhibit to any registration statement or periodic report filed with the Securities and Exchange Commission, and will not disclose the Specially Designated Confidential Terms in any such filing unless such request for confidential treatment of the Specially Designated Confidential Terms is denied. Any confidentiality request shall be submitted to and approved by the other Party in advance of filing, such approval not to be unreasonably conditioned, delayed, or withheld.

10.2 No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any person other than the Parties and their respective successors and permitted assigns.

10.3 Entire Agreement; Amendments. This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof, and supersedes all previous arrangements with respect to the subject matter hereof, whether written or oral. Any amendment or modification to this Agreement shall be made in writing signed by both Parties.

10.4 Assignment. Neither Seller nor Buyer may assign this Agreement in whole or in part without the consent of the other, except if such assignment occurs in connection with the merger, consolidation, reorganization or similar transaction sale or transfer of all or substantially all of the business and assets of Sellers, on the one hand, or Buyer, on the other, to which the subject matter of this Agreement pertains. Notwithstanding the foregoing, any Party may assign its rights pursuant to this Agreement in whole or in part to an Affiliate of such Party. For the avoidance of doubt, Seller may license, assign, hypothecate, pledge or otherwise transfer or sell the Xenerex Technology, or other rights of Sellers not sold or licensed under this Agreement, to

Third Parties for applications or other uses that are not in the Anthrax Field without the consent of Buyer, provided that the party to which Seller so assigns, hypothecates, pledges or otherwise transfers the Xenerex Technology agrees to be bound by the limited exclusive and non-exclusive license-related obligations of Seller hereunder.

10.5 Counterparts and Facsimile Signature. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. This Agreement may be executed by facsimile signature.

10.6 Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement.

10.7 Notices. All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly delivered (a) four business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, or (b) one business day after it is sent for next business day delivery via a reputable nationwide overnight courier service, or (c) on the date on which delivered if sent by facsimile transmission, in each case to the intended recipient as set forth below:


If to Seller or Seller Parent:		Copy to:

Avanir Pharmaceuticals Inc.		Knobbe Martens Olson & Bear LLP
101 Enterprise, Suite 300		2040 Main Street, 14th Floor
Aliso Viejo, CA 92656		Irvine, CA 92614-3641

Attn:		Attn:

Gregory J. Flesher		Salima Merani, Ph.D.
Vice President, Business Development		Fax: 949-760-9502
Facsimile No.: (949) 643-6869		Email: Salima.Merani@kmob.com

Christine Ocampo
Vice President, Finance
Facsimile No.: (949) 643-6807

If to Buyer or Buyer Parent:

Emergent BioSolutions Inc.
2273 Research Boulevard, Suite 400
Rockville, MD 20850

Attn: General Counsel
Facsimile No.: (301) 795-1899

Any Party may change its address by giving notice to the other Party in the manner herein provided.

10.8 Governing Law. This Agreement shall be construed and the respective rights of the Parties determined according to the substantive laws of the State of New York, notwithstanding the provisions governing conflict of laws under such New York law to the contrary.

10.9 Severability. If, under applicable law or regulation, any provision of this Agreement is invalid or unenforceable, or otherwise directly or indirectly affects the validity of any other material provision(s) of this Agreement (such invalid or unenforceable provision, a “Severed Clause”), this Agreement shall endure except for the Severed Clause. The Parties shall consult one another and use reasonable efforts to agree upon a valid and enforceable provision that is a reasonable substitute for the Severed Clause in view of the intent of this Agreement.

10.10 Expenses. Except as set forth in Article VII or as expressly provided in this Agreement, each Party shall bear its own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby.

10.11 Submission to Jurisdiction. Except as provided with respect to the resolution of Disputes in Section 7.4(e), each Party (a) submits to the jurisdiction of any state or federal court sitting in the State of New York in any action or proceeding arising out of or relating to this Agreement or the Ancillary Agreements, (b) agrees that all claims in respect of such action or proceeding may be heard and determined in any such court, (c) waives any claim of inconvenient forum or other challenge to venue in such court, (d) agrees not to bring any action or proceeding arising out of or relating to this Agreement or the Ancillary Agreements in any other court. Each party agrees to accept service of any summons, complaint or other initial pleading made in the manner provided for the giving of notices in Section 10.7, provided that nothing in this Section 10.11 shall affect the right of either Party to serve such summons, complaint or other initial pleading in any other manner permitted by law.

10.12 Specific Performance. Each Party acknowledges and agrees that the other Party would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each Party agrees that the other Party shall be entitled to an injunction or other equitable relief to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having jurisdiction over the Parties and the matter, in addition to any other remedy to which it may be entitled, at law or in equity.

10.13 Buyer Parent Payment Obligation. From and after the date of this Agreement, Buyer Parent agrees to be jointly and severally liable for the complete and prompt payment of all Buyer’s payment obligations under this Agreement.

10.14 Construction.

a) The language used in this Agreement shall be deemed to be the language chosen by the Parties to express their mutual intent, and no rule of strict construction or contra preferentum shall be applied against either Party.

b) Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise.

c) Any reference to any Article, Section or paragraph shall be deemed to refer to an Article, Section or paragraph of this Agreement, unless the context clearly indicates otherwise.

10.15 No Implied Waivers; Rights Cumulative. No failure on the part of Seller or Buyer to exercise, and no delay in exercising, any right, power, remedy or privilege under this Agreement, or provided by statute or at law or in equity or otherwise, shall impair, prejudice or constitute a waiver of any such right, power, remedy or privilege or be construed as a waiver of any breach of this Agreement or as an acquiescence therein, nor shall any single or partial exercise of any such right, power, remedy or privilege preclude any other or further exercise thereof or the exercise of any other right, power, remedy or privilege.

IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first above written.


EMERGENT PRODUCT DEVELOPMENT GAITHERSBURG INC.
By:	/s/ Michael J. Langford
	Name:	Michael J. Langford
	Title:	President, EPDG
	Date:	March 6, 2008

XENEREX BIOSCIENCES INC.
By:	/s/ Keith A. Katkin
	Name:	Keith A. Katkin
	Title:	President and CEO
	Date:	3-6-08


AVANIR PHARMACEUTICALS INC.
By:	/s/ Keith A. Katkin
	Name:	Keith A. Katkin
	Title:	President and CEO
	Date:	3-6-08


Buyer Parent joins this Agreement solely for purposes of making the representations set forth in Article V and agreeing to be jointly and severally liable for complete and prompt payment of all Buyer’s financial obligations set forth in this Agreement. EMERGENT BIOSOLUTIONS INC.
By:	/s/ Daniel J. Abdun-Nabi
	Name:	Daniel J. Abdun-Nabi
	Title:	President and COO
	Date:	March 6, 2008

EX-31.1 3 a40842exv31w1.htm EXHIBIT 31.1 exv31w1

Exhibit 31.1

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

I, Keith A. Katkin, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Avanir Pharmaceuticals;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

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

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

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

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

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

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



Dated: May 13, 2008	/s/ Keith A. Katkin
	Keith A. Katkin
	President and Chief Executive Officer [Principal Executive Officer]

EX-31.2 4 a40842exv31w2.htm EXHIBIT 31.2 exv31w2

Exhibit 31.2

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

I, Christine G. Ocampo, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Avanir Pharmaceuticals;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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



Dated: May 13, 2008	/s/ Christine G. Ocampo
	Christine G. Ocampo
	Vice President, Finance [Principal Financial and Accounting Officer]

EX-32.0 5 a40842exv32w0.htm EXHIBIT 32.0 exv32w0

Exhibit 32

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

In connection with the accompanying Quarterly Report of Avanir Pharmaceuticals (the “Company”) on Form 10-Q for the fiscal quarter ended March 31, 2008 (the “Report”), I, Keith A. Katkin, as Chief Executive Officer of the Company, and Christine G. Ocampo, as Vice President, Finance of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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



Dated: May 13, 2008	/s/ Keith A. Katkin
	Keith A. Katkin
	President and Chief Executive Officer [Principal Executive Officer]


Dated: May 13, 2008	/s/ Christine G. Ocampo
	Christine G. Ocampo
	Vice President, Finance [Principal Financial and Accounting Officer]

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