UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
September 30,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission File
No. 1-15803
Avanir
Pharmaceuticals,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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33-0314804
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer Identification
No.)
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101 Enterprise Suite 300,
Aliso Viejo, California
(Address of principal
executive offices)
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92656
(Zip
Code)
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(949) 389-6700
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $.0001 par value
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The NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES o NO þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15
(d) of the
Act. YES o NO þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). YES o NO o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company þ
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(Do not check if a smaller reporting company)
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
The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant as of
March 31, 2009 was approximately $32.0 million, based
upon the closing price on the Nasdaq Stock Market reported for
such date. Shares of common stock held by each officer and
director and by each person who is known to own 10% or more of
the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates of the Company. This
determination of affiliate status is not necessarily a
conclusive determination for other purposes.
83,169,838 shares of the registrants Common Stock
were issued and outstanding as of November 18, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain information required to be disclosed in Part III of
this report is incorporated by reference from the
registrants definitive Proxy Statement for the 2010 Annual
Meeting of Stockholders, which will be held on February 18,
2010 and which proxy statement will be filed not later than
120 days after the end of the fiscal year covered by this
report.
PART I
This Annual Report on
Form 10-K
contains forward-looking statements concerning future events and
performance of our Company. When used in this report, the words
intend, estimate,
anticipate, believe, plan,
goal and expect and similar expressions
as they relate to
Avanir
PHARMACEUTICALS, INC.
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 included in this report in Item 1A, Risk
Factors. We disclaim any intent to update or announce
revisions to any forward-looking statements to reflect actual
events or developments.
Executive
Overview
AVANIR is a pharmaceutical company focused on acquiring,
developing and commercializing novel therapeutic products for
the treatment of central nervous system disorders. Our lead
product candidate,
Zenviatm
(dextromethorphan hydrobromide/quinidine sulfate), has
successfully completed three Phase III clinical trials for
the treatment of pseudobulbar affect (PBA) and has
successfully completed a Phase III trial for the treatment
of patients with diabetic peripheral neuropathic pain (DPN
pain). In addition to our focus on products for the
central nervous system, we also have a number of partnered
programs in other therapeutic areas which may generate future
income for the Company. Our first commercialized product,
docosanol 10% cream, (sold in the United States and Canada as
Abreva®
by our marketing partner GlaxoSmithKline Consumer Healthcare) is
the only
over-the-counter
treatment for cold sores that has been approved by the
U.S. Food and Drug Administration (FDA). In
2008, we licensed all of our monoclonal antibodies and we remain
eligible to receive milestone payments and royalties related to
the sale of these assets.
Avanir was
incorporated in California in August 1988 and was reincorporated
in Delaware in March 2009.
Zenvia
for the treatment of PBA
Zenvia has successfully completed three Phase III clinical
trials in the treatment of patients with PBA, also known as
emotional lability, and has successfully completed a
Phase III trial for the treatment of patients with DPN pain.
In August 2009, we reported top line safety and efficacy data
from the STAR trial. The STAR trial (Safety, Tolerability and
Efficacy Results of AVP-923 in PBA) is a confirmatory
Phase III trial of Zenvia in patients with PBA. The study
results demonstrated that both doses of Zenvia met the primary
efficacy endpoint in the treatment of PBA and were generally
safe and well tolerated. Both doses of Zenvia provided a
statistically significant reduction in episode rates over the
course of the study when compared to placebo (p<0.0001). In
an additional analysis of the primary endpoint, at week twelve
(end of study), patients in the Zenvia 30/10 mg group reported a
statistically significant mean reduction of 88% from baseline in
PBA episode rates (p=0.01).
In November 2009, we reported safety, efficacy and tolerability
data from the 12-week open-label extension phase of the STAR
trial. The study results demonstrated that patients maintained
on Zenvia 30/10 mg demonstrated statistically significant
incremental improvement in their CNS-LS scores over the
additional 12-week treatment period of the open-label study
(p<0.0001). In addition, patients that were titrated from
Zenvia 20/10 mg to Zenvia 30/10 mg demonstrated statistically
significant improvement in their CNS-LS scores (p<0.0001)
and patients originally on placebo that initiated Zenvia 30/10
mg demonstrated statistically significant improvement in their
CNS-LS scores as well.
The STAR trial was conducted as a result of an approvable letter
we received from the FDA for Zenvia in October of 2006. The
approvable letter raised certain safety and efficacy concerns
that have required additional clinical development to resolve.
Based on discussions with the FDA, we were able to successfully
resolve the outstanding efficacy concern relating to the
original dose formulation that was tested in our earlier trials.
However, to address the remaining safety concerns, we agreed to
re-formulate Zenvia and conduct one additional
1
confirmatory Phase III clinical trial using lower quinidine
dose formulations. The goal of this study was to demonstrate
improved safety while maintaining significant efficacy at a
lower quinidine exposure.
In October 2007, we reached agreement with the FDA under the
Special Protocol Assessment (SPA) process on the
design of the STAR trial. We enrolled our first patient in the
STAR trial in December 2007 and in March 2009, we completed
enrollment with a total of 326 patients.
In addition to conducting the STAR trial, we have conducted
various pre-clinical and clinical safety studies to enhance our
complete response to the 2006 approvable letter and to assist
with planned label discussions with the FDA. We expect that the
FDAs approval decision for Zenvia will depend on the
agencys overall assessment of benefits versus potential
risks. (See additional information included in this report in
Item 1A, Risk Factors.)
After completion of the STAR trial and pre-clinical and clinical
safety studies, we engaged in constructive written communication
with the FDA. Based on the feedback we received, we will proceed
with filing the full response with existing Zenvia data as
planned, early in the second calendar quarter of 2010.
Zenvia
for the treatment of neuropathic pain
In April 2007, we announced positive top-line data from our
first Phase III clinical trial of Zenvia for DPN pain.
Before discussing a second Phase III trial with the FDA, we
made the decision to conduct a formal pharmacokinetic
(PK) study to identify a lower quinidine dose
formulation that may have similar efficacy to the doses tested
in the Phase III study, anticipating that some of the
concerns with the quinidine component that were raised in the
PBA approvable letter could affect the clinical development of
this indication as well.
In May 2008, we reported a positive outcome of the formal PK
study and announced that we identified alternative lower
quinidine dose formulations of Zenvia for the next DPN pain
phase III clinical trial. The new dose is intended to
deliver similar efficacy and improved safety/tolerability versus
the formulations previously tested in DPN pain.
In September 2008, we submitted our Phase III protocol and
related program questions for Zenvia in the treatment of
patients with DPN pain to the FDA under the SPA process. In
recent communications regarding the continued development of
Zenvia for DPN pain, the FDA has expressed that the safety
concerns and questions raised in the PBA approvable letter would
be expected to necessitate the testing of a lower quinidine dose
formulation in the DPN pain indication, as we had expected.
Additionally, based on feedback we have received from the FDA on
the proposed continued development of Zenvia for DPN pain, it is
possible that two large well controlled Phase III trials
utilizing a new lower quinidine dose formulation would be needed
to support a New Drug Application (NDA) filing for
this indication. Due to our limited capital resources and
current focus on gaining approval for the PBA indication, we do
not expect that we will be able to initiate the trials needed
for this indication without additional capital or a development
partner for Zenvia. Accordingly, we are evaluating our options
to fund this program, including the potential for a development
partner.
In September 2009, we reported on secondary efficacy endpoints
from the double-blind phase of the Zenvia STAR trial in PBA,
including an endpoint measuring reduction of pain in patients
with underlying multiple sclerosis (MS). Zenvia
30/10 mg demonstrated statistically significant relief of
MS-related pain compared to placebo in the subset of MS patients
with
moderate-to-severe
pain. Based on these data and the previous proof of concept pain
data in MS patients with PBA, we are conducting a strategic
assessment of the optimal clinical development path for Zenvia
to obtain a pain indication.
Drug
Candidates and Marketed Products
Zenvia
Pseudobulbar Affect (PBA) Indication
PBA is a distinct neurologic syndrome that is characterized by a
lack of control of emotional expression, typically involving
episodes of involuntary or exaggerated motor expression of
emotion such as laughing, crying or other emotional displays.
PBA occurs secondary to progressive neurologic diseases such as
amyotrophic lateral sclerosis (ALS), dementias
including Alzheimers disease, multiple sclerosis, and
Parkinsons disease, as well as neurologic injuries such as
stroke or traumatic brain injury. While the exact number of
patients suffering from PBA
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is unknown, based on our review of medical literature,
independent surveys and our latest market research, we believe
that there are an estimated two million patients in the
U.S. suffering from the symptoms of moderate to severe PBA.
In addition, our research also demonstrates that there are a
significant number of patients who suffer from mild PBA and who
would also be eligible for treatment. We believe that the
availability of an FDA-approved treatment option for these
patients may lead to the correct diagnosis of additional PBA
patients. If the FDA approves Zenvia, it would be the first drug
approved for the treatment of PBA. Zenvia is a patented, orally
administered combination of two well-characterized compounds;
the therapeutically active ingredient dextromethorphan
(DM) and the enzyme inhibitor quinidine
(Q), which serves to increase the bioavailability of
dextromethorphan in the human body.
We received an approvable letter from the FDA in October 2006
for our NDA submission for Zenvia for the treatment of patients
with PBA. In October 2007, we reached agreement with the FDA
under the SPA process on the design, conduct and analysis of the
STAR trial. For this trial, we developed two new lower dose
formulations of Zenvia; the first contains 30 mg of DM and
10 mg of Q (Zenvia 30/10) and the second contains
20 mg of DM and 10 mg of Q (Zenvia 20/10). The new
lower quinidine dose formulations of Zenvia were expected to
improve the safety and tolerability profile while maintaining
statistically significant and clinically meaningful efficacy.
At the conclusion of enrollment, we had enrolled a total of
326 patients (197 with underlying ALS and 129 with
underlying MS) who exhibited signs and symptoms of PBA across 52
sites in the U.S. and Latin America. The primary efficacy
analysis was based on the changes in crying/laughing episode
rates recorded in patient diaries over the course of the study.
Secondary endpoints for this clinical trial included other CNS
relevant measures such as: 1) Center for Neurologic
Study-Lability Scale (CNS-LS) score; 2) Neuropsychiatric
Inventory Questionnaire (NPI-Q); 3) SF-36 Health Survey;
4) Beck Depression Inventory (BDI-II); and 5) Pain
Rating Scale score (MS patients only).
Top Line
Safety and Efficacy Data from STAR Trial
In August 2009, we reported top line safety and efficacy data
from the 12-week double-blind phase of the STAR trial. The study
results demonstrated that Zenvia met the primary efficacy
endpoint in the treatment of PBA and were generally safe and
well tolerated. Zenvia 30/10 mg provided a 47.2% incremental
reduction in episode rates compared to placebo over the course
of the study (p<0.0001). In an additional analysis of the
primary endpoint, at week twelve (end of study), patients in the
Zenvia 30/10 mg group reported a statistically significant mean
reduction of 88% from baseline in PBA episode rates compared to
placebo (p=0.01). Finally, in a secondary analysis of the
primary endpoint, Zenvia 20/10 mg also provided a statistically
significant incremental reduction of episode rates compared to
placebo (p<0.0001). In addition, Zenvia demonstrated
statistically significant improvement versus placebo on a number
of secondary endpoints including CNS-LS score, SF-36 Mental
Health Summary and Beck Depression Inventory.
Overall, in the STAR trial, both doses of Zenvia were generally
safe and well tolerated. In the STAR trial, 90.9%, 82.2% and
86.2% of patients completed the 12-week double blind phase of
the study in the Zenvia 30/10 mg, Zenvia 20/10 mg and placebo
groups, respectively. The most common reason for early
withdrawals was due to adverse events (AEs). Early withdrawal
due to AEs occurred in 3.7%, 7.8% and 1.9% for the Zenvia 30/10
mg, Zenvia 20/10 mg and placebo groups, respectively. Reported
AEs were generally mild to moderate in nature. The most commonly
reported adverse events that appeared to be more frequent than
placebo were dizziness, nausea and diarrhea.
The proportion of patients reporting at least one serious
adverse event (SAE) was 6.5% in the Zenvia 30/10 mg group, 8.8%
in the Zenvia 20/10 mg group and 10.4% in the placebo group. A
total of 38 SAEs occurred in 27 patients over the course of
the study. Of the 38 SAEs reported in the study, only two were
deemed by the investigators to be possibly or probably
treatment-related; zero in the Zenvia 30/10 mg group, two in the
Zenvia 20/10 mg
group and zero in the placebo group. In addition, there was a
numerical difference in respiratory SAEs with five patients
(4.7%) in the Zenvia 30/10 mg group, three patients (2.9%) in
the Zenvia 20/10 mg group and two patients (1.9%) in the placebo
group experiencing respiratory SAEs.
Overall, there were seven deaths in the study, all related to
patients with underlying ALS. In total, three deaths occurred in
the Zenvia 30/10 mg arm, three in the 20/10 mg arm and one in
the placebo arm. Of the seven deaths that
3
were reported, five of the deaths (four in the Zenvia treatments
arms and one in the placebo arm) occurred at least five days
after study drug had been discontinued. There was one reported
death in the Zenvia 20/10 mg group that was considered possibly
treatment-related, which occurred five days after study drug had
been discontinued. The ALS mortality rate in the Zenvia
treatment groups was in line with historical norms and the rate
in the placebo group was below historical norms.
Open
Label Safety and Efficacy Data from STAR Trial
In November 2009, we reported safety, efficacy and tolerability
data from the 12-week open-label extension phase of the STAR
trial. The study results demonstrated that patients maintained
on Zenvia 30/10 mg demonstrated statistically significant
incremental improvement in their CNS-LS scores over the
additional 12-week treatment period of the open-label study
(p<0.0001). In addition, patients that were titrated from
Zenvia 20/10 mg to Zenvia 30/10 mg demonstrated statistically
significant improvement in their CNS-LS scores (p<0.0001)
and patients originally on placebo that initiated Zenvia 30/10
mg demonstrated statistically significant improvement in their
CNS-LS scores as well.
Overall, Zenvia 30/10 mg was generally safe and well tolerated,
with 92.9% of patients completing the 12-week treatment period
of the open-label study. Reported adverse events were low
overall, mild to moderate in nature and consistent with the
reported adverse events in the double-blind phase. The overall
mortality rate observed in patients with ALS was consistent with
historic norms.
Based on the results from the STAR trial, we intend to submit
our complete response to the approvable letter early in the
second quarter of calendar 2010. The complete response will
include the results from the STAR trial, data from the
pre-clinical and clinical safety studies we have conducted, and
the data from the open-label safety study.
Zenvia
Neuropathic Pain Indications
Diabetic peripheral neuropathic pain (DPN pain),
which arises from nerve injury, can result in a chronic and
debilitating form of pain that has historically been poorly
diagnosed and treated. It is often described as burning,
tingling, stabbing, or pins and needles in the feet, legs, hands
or arms. An estimated 3.5 million people in the United
States experience diabetic peripheral neuropathic pain according
to the American Diabetes Association. DPN pain currently is most
commonly treated with antidepressants, anticonvulsants, opioid
analgesics and local anesthetics. Most of these treatments have
limited effectiveness or undesirable side effects resulting in a
high degree of unmet medical need. The neuropathic pain market
is continuing to grow rapidly, and in 2006, was estimated to be
worth $2.6 billion in sales among the seven largest markets
(i.e. the United States, Japan, France, Germany, Italy, Spain
and the United Kingdom.)
In April 2007, we announced positive top-line data from our
first Phase III clinical trial of Zenvia for the treatment
of patients with DPN pain. The primary endpoint of the trial was
based on the daily diary entries for the Pain Rating Scale as
defined in the SPA with the FDA. In the trial, two doses of
Zenvia, 45/30 mg DMQ dosed twice daily (Zenvia
45/30) and 30/30 mg DMQ dosed twice daily (Zenvia
30/30), were compared to placebo based on daily patient
diary entries for the Pain Rating Scale. Both Zenvia treatment
groups had lower pain ratings than placebo patients (p
<0.0001 in both cases). In the Zenvia 45/30 patient group,
average reductions were significantly greater than placebo
patients at Days 30, 60, and 90 (p <0.0001 at each time
point). In the Zenvia 30/30 patient group, average reductions
were also significantly greater than placebo patients at Days 30
and 60 (p <0.0001) and Day 90 (p=0.007).
Zenvia also demonstrated statistically significant improvements
in a number of key secondary endpoints including the Pain Relief
Ratings Scale and the Pain Intensity Ratings Scale. The
secondary endpoints compared the baseline value to the average
rating values at each study visit after randomization. The
average pain relief reductions, as measured on the Pain Relief
Rating Scale, were greater for the Zenvia 45/30 patient group
(p=0.0002) and for the Zenvia 30/30 patient group (p=0.0083),
compared with placebo. In addition, the DMQ 45, but not the DMQ
30, patient group demonstrated statistically significant
improvements in the Pain Intensity Rating Scale compared with
placebo (p=0.029). Although not powered to detect differences in
the secondary endpoint of the Peripheral Neuropathy Quality of
Life Scale Composite score and thus not achieving statistical
significance, the
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Zenvia 45/30 patients showed a greater improvement than placebo
patients (p=0.05) and the Zenvia 30/30 patients showed a trend
towards greater improvement than placebo patients (p=0.08).
The most commonly reported adverse events from this
Phase III study were dizziness, nausea, diarrhea, fatigue
and somnolence, which were mild to moderate in nature. A higher
number of patients in the Zenvia 45/30 and Zenvia 30/30
treatment groups (25.2% and 21.0%, respectively) discontinued
due to an adverse event than compared to placebo (11.4%). There
were no statistically significant differences in serious adverse
event with 7.6%, 4.8% and 4.1% reported in the Zenvia 45/30,
Zenvia 30/30 and placebo groups, respectively, and no deaths
occurred during the study.
After receipt of these positive results, we conducted 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. In May 2008, we
reported a positive outcome of the formal PK study and announced
that we identified an alternative lower quinidine dose
formulation of Zenvia for DPN pain. The new dose is intended to
deliver similar efficacy and improved safety/tolerability versus
the formulations previously tested for this indication. In
September 2008, we submitted our Phase III protocol and
related questions for Zenvia for DPN pain to the FDA under a
Special Protocol Assessment (SPA). We received the
FDAs initial response to the SPA and are evaluating our
options to fund this program, including the potential for a
development partner.
In September 2009, we reported on secondary efficacy
endpoints from the double-blind phase of the Zenvia STAR trial
in PBA, including an endpoint measuring reduction of pain in
patients with underlying multiple
sclerosis (MS). Zenvia 30/10 mg demonstrated
statistically significant relief of MS-related pain compared to
placebo in the subset of MS patients with moderate-to-severe
pain. Based on these data and the previous proof of concept
pain data in MS patients with PBA, we are conducting a strategic
assessment of the optimal clinical development path for Zenvia
to obtain a pain indication.
Other
Programs
Docosanol
10% Cream Cold Sores
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, Germany, 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. (GSK)
the exclusive rights to market docosanol 10% cream in the
U.S. and Canada. GSK markets the product under the name
Abreva®
in the United States and Canada. In fiscal 2003, we sold an
undivided interest in our GSK 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 (a net of 4%) under the GSK license
agreement for annual net sales of Abreva in the U.S. and
Canada in excess of $62 million. We also retained the
rights to develop and license docosanol 10% cream outside the
U.S. and Canada for the treatment of cold sores and other
potential indications. We currently have several other
collaborations for docosanol around the world. Two of these
collaborations currently generate royalty revenue and the others
may generate future royalty revenue for the Company depending on
clinical and regulatory success outside of the United States.
Under the terms of our docosanol license agreements, our
partners are generally responsible for all regulatory approvals,
sales and marketing activities, and manufacturing and
distribution of the product in the licensed territories. The
terms of the license agreements typically provide for us to
receive a data transfer fee, potential milestone payments and
royalties on product sales. We purchase the active
pharmaceutical ingredient (API), docosanol, from a
large supplier in Western Europe and sell the material to our
licensees for commercialization. We currently store our API in
the United States. Any material disruption in manufacturing
could cause a delay in shipments and possible loss of sales.
Xenerex
Human Antibody Technology Anthrax/Other Infectious
Diseases
In March 2008, we entered into an Asset Purchase and License
Agreement with Emergent Biosolutions for the sale of our anthrax
antibodies and license to use our proprietary Xenerex Technology
platform, which was used to
5
generate fully human antibodies to target antigens. Under the
terms of the Agreement, we completed the remaining work under
our NIH/NIAID grant (NIH grant) and transferred all
materials to Emergent. Under the terms of the agreement, we are
eligible to receive milestone payments and royalties on any
product sales generated from this program. In connection with
the sale of the anthrax antibody program, we also ceased all
ongoing research and development work related to other
infectious diseases on June 30, 2008.
In September 2008, we entered into an Asset Purchase Agreement
with a San Diego based biotechnology company for the sale
of our non-anthrax related antibodies as well as the remaining
equipment and supplies associated with the Xenerex Technology
platform. In connection with this sale, we received an upfront
payment of $210,000 and are eligible to receive future royalties
on potential product sales, if any.
Competition
The pharmaceutical industry is characterized by rapidly evolving
technology and intense competition. A large number of companies
of all sizes, including major pharmaceutical companies and
specialized biotechnology companies, engage in activities
similar to our activities. Many of our competitors have
substantially greater financial and other resources available to
them. In addition, colleges, universities, governmental agencies
and other public and private research organizations continue to
conduct research and are becoming more active in seeking patent
protection and licensing arrangements to collect royalties for
use of technologies that they have developed. Some of our
competitors products and technologies are in direct
competition with ours. We also must compete with these
institutions in recruiting highly qualified personnel.
Zenvia for Pseudobulbar Affect. Although we
anticipate that Zenvia, if approved, could be the first product
to be marketed for the treatment of PBA, we are aware that
physicians may prescribe other products in an off-label manner
for the treatment of this disorder. For example, Zenvia may face
competition from the following products:
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Antidepressants, including
Prozac®,
Celexa®,
Zoloft®,
Paxil®,
Elavil®
and
Pamelor®
and others;
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Atypical antipsychotic agents, including
Zyprexa®,
Risperdal®,
Seroquel,
Abilify®,
Geodon®
and others; and
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Miscellaneous agents, including
Symmetrel®,
Lithium and others.
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It is also possible that compounding pharmacies could produce
Zenvia in an unauthorized fashion.
Zenvia for DPN pain. We anticipate that Zenvia
for the treatment of DPN pain, if further developed by us and
approved by the FDA for marketing, would compete with other drug
products that are currently prescribed by physicians, including
these identified below. Additionally, many other companies are
developing drug candidates for this indication and we expect
competition for Zenvia, if approved to treat DPN pain, to be
intense. Current approved competitors include:
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Cymbalta®;
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Lyrica®
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Narcotic products; and
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Off-label uses of non-narcotic products, such as the
anticonvulsants phenytoin, carbamazepine and topamax, and the
antidepressant amitriptyline.
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Docosanol 10% cream. Abreva faces intense
competition in the U.S. and Canada from the following
established products:
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Over-the-counter
preparations, including
Carmex®,
Zilactin®,
Campho®,
Orajel®,
Herpecin®
and others;
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Zovirax®
acyclovir (oral and topical) and
Valtrex®
valacyclovir (oral) prescription products marketed by Biovail
Corporation and GSK, respectively, and
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Famvir®
famciclovir (oral) and
Denavir®
penciclovir (topical) prescription products marketed by Novartis.
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6
Manufacturing
We currently have no manufacturing or production facilities and,
accordingly, rely on third parties for clinical production of
our products and product candidates. We obtain the API for
Zenvia from one of several available commercial suppliers.
Further, we licensed to various pharmaceutical companies the
exclusive rights to manufacture and distribute docosanol 10%
cream.
Patents
and Proprietary Rights
As of November 1, 2009, we owned or had the rights to 207
issued patents (59 U.S. and 148 foreign) and 213 pending
applications (25 U.S. and 188 foreign). Patents and patent
applications owned or licensed by the Company include Zenvia and
other technologies, including but not limited to
docosanol-related products and technologies, MIF inhibitor
technologies, and TNF-alpha inhibitor technologies.
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United States
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Foreign
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Description
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Issued
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Expiration
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Pending
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Issued
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Expiration
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Pending
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Zenvia
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7
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Up to 2025
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2
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43
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Up to 2023
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17
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Other
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52
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23
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105
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171
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Total
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59
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25
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148
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188
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In June 2008, the European Patent Office granted a new patent
which extends the period of commercial exclusivity for Zenvia
into 2023. The new European patent expands the available Zenvia
dose ranges under prior patent protection and encompasses our
current clinical development programs in PBA and DPN pain, as
well as other neurologic conditions.
In October 2009, we received a Notice of Allowance
from the United States Patent and Trademark Office
(USPTO) announcing that the office intends to grant
the Company a new patent, extending the period of commercial
exclusivity for Zenvia into 2025. Upon issuance, the patent will
provide Avanir with patent protection for low-dose quinidine
formulations of Zenvia used to treat PBA.
In addition to this newly allowed U.S. patent, the Company
has exclusive rights under a royalty-bearing license to a family
of patents and patent applications that claim methods of
treating PBA, chronic pain, as well as other neurologic
conditions, using combinations of dextromethorphan and
quinidine, the two active agents in Zenvia.
Information regarding the status of our various research and
development programs, and the amounts spent on major programs
through the last two fiscal years, can be found in Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Government
Regulations
The FDA and comparable regulatory agencies in foreign countries
extensively regulate the manufacture and sale of the
pharmaceutical products that we have developed or are currently
developing. The FDA has established guidelines and safety
standards that are applicable to the nonclinical evaluation and
clinical investigation of therapeutic products and stringent
regulations that govern the manufacture and sale of these
products. The process of obtaining regulatory approval for a new
therapeutic product usually requires a significant amount of
time and substantial resources. The steps typically required
before a product can be tested in humans include:
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Animal pharmacology studies to obtain preliminary information on
the safety and efficacy of a drug; and
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Nonclinical evaluation in vitro and in vivo
including extensive toxicology studies.
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The results of these nonclinical studies may be submitted to the
FDA as part of an Investigational New Drug (IND)
application. The sponsor of an IND application may commence
human testing of the compound 30 days after submission of
the IND, unless notified to the contrary by the FDA.
7
The clinical testing program for a new drug typically involves
three phases:
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Phase I investigations are generally conducted in healthy
subjects. In certain instances, subjects with a life-threatening
disease, such as cancer, may participate in Phase I studies that
determine the maximum tolerated dose and initial safety of the
product;
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Phase II studies are conducted in limited numbers of
subjects with the disease or condition to be treated and are
aimed at determining the most effective dose and schedule of
administration, evaluating both safety and whether the product
demonstrates therapeutic effectiveness against the
disease; and
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Phase III studies involve large, well-controlled
investigations in diseased subjects and are aimed at verifying
the safety and effectiveness of the drug.
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Data from all clinical studies, as well as all nonclinical
studies and evidence of product quality, typically are submitted
to the FDA in a NDA. Although the FDAs requirements for
clinical trials are well established and we believe that we have
planned and conducted our clinical trials in accordance with the
FDAs applicable regulations and guidelines, these
requirements, including requirements relating to testing the
safety of drug candidates, may be subject to change or new
interpretation. Additionally, we could be required to conduct
additional trials beyond what we had planned due to the
FDAs safety
and/or
efficacy concerns or due to differing interpretations of the
meaning of our clinical data. (See Item 1A, Risk
Factors).
The FDAs Center for Drug Evaluation and Research must
approve a NDA for a drug before it may be marketed in the
U.S. If we begin to market our proposed products for
commercial sale in the U.S., any manufacturing operations that
may be established in or outside the U.S. will also be
subject to rigorous regulation, including compliance with
current good manufacturing practices. We also may be subject to
regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substance Control Act,
the Export Control Act and other present and future laws of
general application.
Regulatory obligations continue post-approval, and include the
reporting of adverse events when a drug is utilized in the
broader commercial population. Promotion and marketing of drugs
is also strictly regulated, with penalties imposed for
violations of FDA regulations, the Lanham Act (trademark
statute), and other federal and state laws, including the
federal anti-kickback statute.
We currently intend to continue to seek, directly or through our
partners, approval to market our products and product candidates
in foreign countries, which may have regulatory processes that
differ materially from those of the FDA. We anticipate that we
will rely upon pharmaceutical or biotechnology companies to
license our proposed products or independent consultants to seek
approvals to market our proposed products in foreign countries.
We cannot assure you that approvals to market any of our
proposed products can be obtained in any country. Approval to
market a product in any one foreign country does not necessarily
indicate that approval can be obtained in other countries.
Product
Liability Insurance
We maintain product liability insurance on our products and
clinical trials that provides coverage in the amount of
$10 million per incident and $10 million in the
aggregate. We expect that we would increase our product
liability insurance coverage if Zenvia is approved and we
commence marketing the drug.
Executive
Officers and Key Employees of the Registrant
Information concerning our executive officers and key employees,
including their names, ages and certain biographical information
can be found in Part III, Item 10 under the caption,
Executive Officers and Key Employees of the
Registrant. This information is incorporated by reference
into Part I of this report.
Employees
As of November 18, 2009, we employed 20 persons,
including 8 engaged in research and development activities,
including clinical development, and regulatory affairs, and 12
in general and administrative functions such as human resources,
finance, accounting, business development and investor relations.
8
Financial
Information about Segments
We operate in a single accounting segment the
development and commercialization of novel treatments that
target the central nervous system. Refer to Note 16,
Segment Information in the Notes to the Consolidated
Financial Statements.
General
Information
Our principal executive offices are located at 101 Enterprise,
Suite 300, Aliso Viejo, California 92656. Our telephone
number is
(949) 389-6700
and our
e-mail
address is info@avanir.com. Our Internet website address
is www.avanir.com.
You are advised to read this
Form 10-K
in conjunction with other reports and documents that we file
from time to time with the Securities and Exchange Commission
(SEC). In particular, please read our Quarterly
Reports on
Form 10-Q
and any Current Reports on
Form 8-K
that we may file from time to time. You may obtain copies of
these reports after the date of this annual report directly from
us or from the SEC at the SECs Public Reference Room at
100 F Street, N.E. Washington, D.C. 20549. In
addition, the SEC maintains information for electronic filers
(including Avanir) at its website at www.sec.gov. The public may
obtain information regarding the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
We make our periodic and current reports available on our
internet website, free of charge, as soon as reasonably
practicable after such material is electronically filed with, or
furnished to, the SEC. No portion of our website is incorporated
by reference into this Annual Report on
Form 10-K.
Risks
Relating to Our Business
There can be no assurance that the FDA will approve Zenvia
for PBA or any other indication.
In October 2006, we received an approvable letter
from the FDA for our NDA submission for Zenvia in the treatment
of patients with PBA. The approvable letter raised certain
safety and efficacy concerns. Based on discussions with the FDA,
we were able to successfully resolve the outstanding efficacy
concern of the original dose formulation that was tested in
earlier clinical trials. However, the safety concerns require
additional clinical development to resolve. To address the
safety concerns, we re-formulated Zenvia and conducted one
additional confirmatory Phase III clinical trial using new
lower quinidine dose formulations. Although we believe that the
data from the confirmatory trial, combined with additional
clinical and pre-clinical data, should be sufficient to address
the issues outlined in the FDA approvable letter, it is possible
that the FDA will continue to have safety concerns that could
prevent or delay approval. Accordingly, there can be no
assurance that the FDA will approve Zenvia for commercialization.
Additionally, although we have a Special Protocol Assessment
(SPA) from the FDA for our recently completed
confirmatory Phase III trial for Zenvia in patients with
PBA, there can be no assurance that the terms of the SPA will
ultimately be binding on the FDA. An SPA is intended to serve as
a binding agreement with the FDA on the adequacy of the planned
design, conduct and analysis of a clinical trial. Even where an
SPA has been granted, however, additional data may subsequently
become available that causes the FDA to reconsider the
previously agreed upon SPA and the FDA may have subsequent
safety or efficacy concerns that override this agreement. As a
result, even with positive data obtained under an SPA, we cannot
be certain that the trial results will be found to be adequate
to demonstrate a favorable risk-benefit profile required for
product approval.
The FDAs safety concerns regarding Zenvia for the
treatment of PBA extend to other clinical indications that we
have been pursuing, including DPN pain. Due to these concerns,
any future development of Zenvia for other indications is
expected to use an alternative lower-dose quinidine formulation,
which may negatively affect efficacy.
We have successfully completed a single Phase III trial for
Zenvia in the treatment of DPN pain. In communications regarding
the continued development of Zenvia for this indication, the FDA
has expressed that the safety concerns and questions raised in
the PBA approvable letter necessitate the testing of a low-dose
quinidine formulation in the DPN pain indication as well.
Additionally, based on feedback we have received from the FDA on
9
the proposed continued development of Zenvia for this
indication, it is possible that two large well-controlled
Phase III trials would be needed to support an NDA filing
for this indication. Due to our limited capital resources and
current focus on gaining approval for the PBA indication, we do
not expect that we will be able to conduct the trials needed for
this indication without additional capital or a development
partner for Zenvia. Moreover, although we achieved positive
results in our initial Phase III trial, an alternative
low-dose quinidine formulation may not yield the same levels of
efficacy as seen in the earlier trials or as predicted based on
our subsequent PK study. Any decrease in efficacy may be so
great that the drug does not demonstrate a statistically
significant improvement over placebo. Additionally, any
alternative low-dose quinidine formulation that we develop may
not sufficiently satisfy the FDAs 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.
Even if Zenvia receives marketing approval from the FDA, the
approval may not be on the terms that we seek and could limit
the marketability of the drug.
Even if the FDA approves Zenvia for marketing in one or more
indications, approval could be granted on terms less favorable
than those we are seeking. This may, in turn, limit our ability
to commercialize Zenvia and generate substantial revenues from
its sales. In addition to the confirmatory Phase III trial
in PBA, we recently completed additional pre-clinical and
clinical cardiac safety studies designed to enhance our response
to the FDAs approvable letter and to support planned label
discussions with the FDA. Although we believe these studies
showed an improvement in the margin of cardiac safety with the
new lower dose of quinidine, it did show QTc prolongation of a
duration that is above the FDAs threshold of concern (5 ms
mean increase) in approving new drugs. As a result, we could
face one or more of the following risks:
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regulatory authorities may require the addition of labeling
statements, such as a black box warning, which is
the strongest type of warning that the FDA can require for a
drug and is generally reserved for warning prescribers about
adverse drug reactions that can cause serious injury or death;
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regulatory authorities may withdraw approval of the product
after its initial approval;
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product labeling may be amended to restrict use in certain
populations;
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physicians may be required to conduct additional tests prior to
dispensing product or monitor patients taking Zenvia;
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we may be required to conduct additional studies either
post-marketing or before approval; and
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Zenvia may not be approved by the FDA for commercialization as
the FDA may perceive that the benefit does not outweigh the
potential risk.
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Additionally, we experienced a total of seven deaths in the
double-blind phase of the STAR trial, all among ALS patients.
Although the overall mortality rate in the trial is consistent
with published mortality rates, it is possible that these deaths
may negatively affect the FDA decision on our PBA application.
Any of these events could prevent us from achieving or
maintaining market acceptance of our product, even if it
receives marketing approval, or could substantially increase the
cost of commercialization, which in turn could impair our
ability to generate revenues from the product candidate.
We have limited capital resources and will need to raise
additional funds to support our operations.
We have experienced significant operating losses in funding the
research, development and clinical testing of our drug
candidates, accumulating losses totaling $278.0 million as
of September 30, 2009, and we expect to continue to incur
substantial operating losses for the foreseeable future. As of
September 30, 2009, we had approximately $32.0 million
in cash and cash equivalents and restricted investments in
marketable securities. Additionally, we currently do not have
any meaningful sources of recurring revenue or cash flow from
operations.
In light of our current capital resources, lack of near-term
revenue opportunities and substantial long-term capital needs,
we will need to raise additional capital in the future to
finance our long-term operations, including the planned launch
of Zenvia, until we expect to be able to generate meaningful
amounts of revenue from product sales. Based on our current loss
rate and existing capital resources as of the date of this
filing, we estimate that we have
10
sufficient funds to sustain our operations at their current
levels through calendar 2010, which includes the anticipated
timing of the FDA approval decision for Zenvia in PBA in the
second half of calendar year 2010. Although we expect to be able
to raise additional capital, there can be no assurance that we
will be able to do so or that the available terms of any
financing would be acceptable to us. If we are unable to raise
additional capital to fund future operations, then we may be
unable to fully execute our development plans for Zenvia. This
may result in significant delays in the development of Zenvia
and may force us to further curtail our operations.
Any transactions that we may engage in to raise capital could
dilute our stockholders and diminish certain commercial
prospects.
Although we believe that we will have adequate capital reserves
to fund operations beyond the anticipated timing of the FDA
approval decision for Zenvia in PBA, we expect that we will need
to raise additional capital in the future. We may do so through
various financing alternatives, including licensing or sales of
our technologies, drugs
and/or drug
candidates, selling shares of common or preferred stock, through
the acquisition of other companies, or through the issuance of
debt. Each of these financing alternatives carries certain
risks. Raising capital through the issuance of common stock may
depress the market price of our stock. Any such financing will
dilute our existing stockholders and, if our stock price is
relatively depressed at the time of any such offering, the
levels of dilution would be greater. In addition, debt
financing, to the extent available, may involve agreements that
include covenants limiting or restricting our ability to take
specific actions, such as making capital expenditures or
entering into licensing transactions. If we seek to raise
capital through licensing transactions or sales of one or more
of our technologies, drugs or drug candidates, as we have
previously done with certain investigational compounds and
docosanol 10% cream, then we will likely need to share a
significant portion of future revenues from these drug
candidates with our licensees. Additionally, the development of
any drug candidates licensed or sold to third parties will no
longer be in our control and thus we may not realize the full
value of any such relationships.
In July 2009, we entered into a financing facility with Cantor
Fitzgerald & Co., providing for the sale of up to
12.5 million shares of our common stock from time to time
into the open market at prevailing prices. As of
November 1, 2009, we had sold a total of 4.7 million
shares under this facility. We may or may not sell additional
shares under this facility, depending on the volume and price of
our common stock, as well as our capital needs and potential
alternative sources of capital, such as a development partner
for Zenvia. If we actively sell shares under this facility, a
significant number of shares of common stock could be issued in
a short period of time, although we would attempt to structure
the volume and price thresholds in a way that minimizes market
impact. Notwithstanding these control efforts, these sales, or
the perceived risk of dilution from potential sales of stock
through this facility, may depress our stock price or cause
holders of our common stock to sell their shares, or it may
encourage short selling by market participants, which could
contribute to a decline in our stock price. A decline in our
stock price might impede our ability to raise capital through
the issuance of additional shares of common stock or other
equity securities, and may cause our stockholders to lose part
or all of the value of their investment in our stock.
We have licensed out or sold most of our non-core drug
development programs and related assets and these and other
possible future dispositions carry certain risks.
We have entered into agreements for the licensing out or sale of
our non-core assets, including FazaClo, macrophage migration
inhibitory factor (MIF), our anthrax antibody
program, and other antibodies in our infectious disease program,
as well as docosanol in major markets worldwide. From time to
time, we have been and will continue to be engaged in
discussions with potential licensing or development partners for
Zenvia for PBA
and/or other
indications and we may choose to pursue a partnership or license
involving Zenvia, if the terms are attractive. However, these
transactions involve numerous risks, including:
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diversion of managements attention from normal daily
operations of the business;
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disputes over earn-outs, working capital adjustments or
contingent payment obligations;
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insufficient proceeds to offset expenses associated with the
transactions; and
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the potential loss of key employees following such a transaction.
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Transactions such as these may result in disputes regarding
representations and warranties, indemnities, earn-outs, and
other provisions in the transaction agreements. If disputes are
resolved unfavorably, our financial
11
condition and results of operations may be adversely affected
and we may not realize the anticipated benefits from the
transactions.
Disputes relating to these transactions can lead to expensive
and time-consuming litigation and may subject us to
unanticipated liabilities or risks, disrupt our operations,
divert managements attention from
day-to-day
operations, and increase our operating expenses.
Our issued patents may be challenged and our patent
applications may be denied. Either result would seriously
jeopardize our ability to compete in the intended markets for
our proposed products.
We have invested in an extensive patent portfolio and we rely
substantially on the protection of our intellectual property
through our ownership or control of issued patents and patent
applications. Because of the competitive nature of the
biopharmaceutical industry, we cannot assure you that:
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the claims in any pending patent applications will be allowed or
that patents will be granted;
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competitors will not develop similar or superior technologies
independently, duplicate our technologies, or design around the
patented aspects of our technologies;
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our technologies will not infringe on other patents or rights
owned by others, including licenses that may not be available to
us;
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any of our issued patents will provide us with significant
competitive advantages;
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challenges will not be instituted against the validity or
enforceability of any patent that we own or, if instituted, that
these challenges will not be successful; or
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we will be able to secure additional worldwide intellectual
property protection for our Zenvia patent portfolio.
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Even if we successfully secure our intellectual property rights,
third parties, including other biotechnology or pharmaceutical
companies, may allege that our technology infringes on their
rights or that our patents are invalid. Intellectual property
litigation is costly, and even if we were to prevail in such a
dispute, the cost of litigation could adversely affect our
business, financial condition, and results of operations.
Litigation is also time-consuming and would divert
managements 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
competitors patent, we would be unable to sell or continue
to develop some of our products, which would have a material
adverse effect on our business, financial condition and results
of operations.
It is unclear whether we would be eligible for patent-term
restoration in the U.S. under applicable law and we
therefore do not know whether our patent-term can be
extended.
Depending upon the timing, duration and specifics of FDA
approval, if any, of Zenvia, some of our U.S. patents may
be eligible for limited patent term extension under the Drug
Price Competition and Patent Term Restoration Act of 1984,
referred to as the Hatch-Waxman Amendments. If Zenvia is
approved, the Hatch-Waxman Amendments may permit a patent
restoration term of up to five years for one of our patents
covering Zenvia as compensation for the patent term lost during
product development and the regulatory review process. The
patent term restoration period is generally one-half the time
between the effective date of an IND and the submission date of
an NDA, plus the time between the submission date of an NDA and
the approval of that application. We intend to apply for patent
term restoration. However, because Zenvia is not a new chemical
entity, but is a combination of two previously approved
products, it is uncertain whether Zenvia will be granted any
patent term restoration under the U.S. Patent and Trademark
Office guidelines. In addition, the patent term restoration
cannot extend the remaining term of a patent beyond a total of
14 years after the products approval date.
Market exclusivity provisions under the Federal Food, Drug and
Cosmetic Act, or the FDCA, also may delay the submission or the
approval of certain applications for competing product
candidates. The FDCA provides three
12
years of non-patent marketing exclusivity for an NDA if new
clinical investigations, other than bioavailability studies,
that were conducted or sponsored by the applicant are deemed by
the FDA to be essential to the approval of the application. This
three-year exclusivity covers only the conditions associated
with the new clinical investigations and does not prohibit the
FDA from approving abbreviated NDAs for drugs containing the
original active agent.
Once the three-year FDCA exclusivity period has passed and after
the patents (including the patent restoration term, if any) that
cover Zenvia expire, generic drug companies would be able to
introduce competing versions of the drug. If we are unsuccessful
in defending our patents against generic competition, our
long-term revenues from Zenvia sales may be less than expected
and we may have greater difficulty finding a development partner
or licensee for Zenvia.
If we fail to obtain regulatory approval in foreign
jurisdictions, we would not be able to market our products
abroad and our revenue prospects would be limited.
We may seek to have our products or product candidates marketed
outside the United States. In order to market our products in
the European Union and many other foreign jurisdictions, we must
obtain separate regulatory approvals and comply with numerous
and varying regulatory requirements. The approval procedure
varies among countries and jurisdictions and can involve
additional testing. The time required to obtain approval may
differ from that required to obtain FDA approval. The foreign
regulatory approval processes may include all of the risks
associated with obtaining FDA approval. We may not obtain
foreign regulatory approvals on a timely basis, if at all. For
example, our development partner in Japan encountered
significant difficulty in seeking approval of docosanol in that
country and was forced to abandon efforts to seek approval in
that country. Approval by the FDA does not ensure approval by
regulatory authorities in other countries or jurisdictions, and
approval by one foreign regulatory authority does not ensure
approval by regulatory authorities in other foreign countries or
jurisdictions or by the FDA. We may not be able to file for
regulatory approvals and may not receive necessary approvals to
commercialize our products in any market. The failure to obtain
these approvals could materially adversely affect our business,
financial condition and results of operations.
We face challenges retaining members of management and other
key personnel.
The industry in which we compete has a high level of employee
mobility and aggressive recruiting of skilled employees. This
type of environment creates intense competition for qualified
personnel, particularly in clinical and regulatory affairs,
research and development and accounting and finance. Because we
have a relatively small organization, the loss of any executive
officers, including the Chief Executive Officer, key members of
senior management or other key employees, could adversely affect
our operations. For example, if we were to lose one or more of
the senior members of our clinical and regulatory affairs team,
the pace of clinical development for Zenvia could be slowed
significantly.
Risks
Relating to Our Industry
There are a number of difficulties and risks associated with
clinical trials and our trials may not yield the expected
results.
There are a number of difficulties and risks associated with
conducting clinical trials. For instance, we may discover that a
product candidate does not exhibit the expected therapeutic
results, may cause harmful side effects or have other unexpected
characteristics that may delay or preclude regulatory approval
or limit commercial use if approved. It typically takes several
years to complete a late-stage clinical trial and a clinical
trial can fail at any stage of testing. If clinical trial
difficulties or failures arise, our product candidates may never
be approved for sale or become commercially viable.
In addition, the possibility exists that:
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the results from earlier clinical trials may not be predictive
of results that will be obtained from subsequent clinical
trials, particularly larger trials;
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institutional review boards or regulators, including the FDA,
may hold, suspend or terminate our clinical research or the
clinical trials of our product candidates for various reasons,
including noncompliance with
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regulatory requirements or if, in their opinion, the
participating subjects are being exposed to unacceptable health
risks;
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subjects may drop out of our clinical trials;
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our 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;
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trial results derived from top-line data, which is based on a
preliminary analysis of efficacy and safety data related to
primary and secondary endpoints, may change following a more
comprehensive review of the complete data set derived from a
particular clinical trial or may change due to FDA requests to
analyze the data differently; and
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the cost of our clinical trials may be greater than we currently
anticipate.
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It is possible that earlier clinical and pre-clinical trial
results may not be predictive of the results of subsequent
clinical trials. If earlier clinical
and/or
pre-clinical trial results cannot be replicated or are
inconsistent with subsequent results, our development programs
may be cancelled or deferred. In addition, the results of these
prior clinical trials may not be acceptable to the FDA or
similar foreign regulatory authorities because the data may be
incomplete, outdated or not otherwise acceptable for inclusion
in our submissions for regulatory approval.
Additionally, the FDA has substantial discretion in the approval
process and may reject our data or disagree with our
interpretations of regulations or draw different conclusions
from our clinical trial data or ask for additional information
at any time during their review. For example, the use of
different statistical methods to analyze the efficacy data from
our Phase III trial of Zenvia in DPN pain results in
significantly different conclusions about the efficacy of the
drug. Although we believe we have legitimate reasons to use the
methods that we have adopted as outlined in our SPA with the
FDA, the FDA may not agree with these reasons and may disagree
with our conclusions regarding the results of these trials.
Although we would work to be able to fully address any such FDA
concerns, we may not be able to resolve all such matters
favorably, if at all. Disputes that are not resolved favorably
could result in one or more of the following:
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delays in our ability to submit an NDA;
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the refusal by the FDA to accept for filing any NDA we may
submit;
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requests for additional studies or data;
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delays in obtaining an approval;
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the rejection of an application; or
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the approval of the drug, but with adverse labeling claims that
could adversely affect the commercial market.
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If we do not receive regulatory approval to sell our product
candidates or cannot successfully commercialize our product
candidates, we would not be able to generate meaningful levels
of sustainable revenues.
The pharmaceutical industry is highly competitive and most of
our competitors have larger operations and have greater
resources. As a result, we face significant competitive
hurdles.
The pharmaceutical and biotechnology industries are highly
competitive and subject to significant and rapid technological
change. We compete with hundreds of companies that develop and
market products and technologies in areas similar to those in
which we are performing our research. For example, we expect
that Zenvia will face competition from antidepressants, atypical
anti-psychotic agents and other agents in the treatment of PBA
and from a variety of pain medications and narcotic agents for
the treatment of DPN pain.
Our competitors may have specific expertise and development
technologies that are better than ours and many of these
companies, which include large pharmaceutical companies, either
alone or together with their research partners, have
substantially greater financial resources, larger research and
development capabilities and substantially greater experience
than we do. Accordingly, our competitors may successfully
develop competing products.
14
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.
We rely on insurance companies to mitigate our exposure for
business activities, including developing and marketing
pharmaceutical products for human use.
The conduct of our business, including the testing, marketing
and sale of pharmaceutical products, involves the risk of
liability claims by consumers stockholders and other third
parties. Although we maintain various types of insurance,
including product liability and director and officer liability,
claims can be high and our insurance may not sufficiently cover
our actual liabilities. If liability claims were made against
us, it is possible that our insurance carriers may deny, or
attempt to deny, coverage in certain instances. If a lawsuit
against us is successful, then the lack or insufficiency of
insurance coverage could 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. Additionally, we are potentially at risk if our insurance
carriers become insolvent. Although we have historically
obtained coverage through well rated and capitalized firms, the
ongoing financial crisis may affect our ability to obtain
coverage under existing policies or purchase insurance under new
policies at reasonable rates.
Risks
Related to Reliance on Third Parties
Because we depend on clinical research centers and other
contractors for clinical testing and for certain research and
development activities, the results of our clinical trials and
such research activities are, to a certain extent, beyond our
control.
The nature of clinical trials and our business strategy of
outsourcing a substantial portion of our research require that
we rely on clinical research centers and other contractors to
assist us with research and development, clinical testing
activities, patient enrollment and regulatory submissions to the
FDA. As a result, our success depends partially on the success
of these third parties in performing their responsibilities.
Although we pre-qualify our contractors and we believe that they
are fully capable of performing their contractual obligations,
we cannot directly control the adequacy and timeliness of the
resources and expertise that they apply to these activities.
Additionally, the current global economic slowdown may affect
our development partners and vendors, which could adversely
affect their ability to timely perform their tasks. If our
contractors do not perform their obligations in an
15
adequate and timely manner, the pace of clinical development,
regulatory approval and commercialization of our drug candidates
could be significantly delayed and our prospects could be
adversely affected.
We depend on third parties to manufacture, package and
distribute compounds for our drugs and drug candidates. The
failure of these third parties to perform successfully could
harm our business.
We have utilized, and intend to continue utilizing, third
parties to manufacture, package and distribute Zenvia and the
Active Pharmaceutical Ingredient (API) for docosanol
10% cream and to provide clinical supplies of our drug
candidates. We have no experience in manufacturing and do not
have any manufacturing facilities. Currently, we have sole
suppliers for the API for docosanol and Zenvia, and a sole
manufacturer for the finished form of Zenvia. In addition, these
materials are custom and available from only a limited number of
sources. Any material disruption in manufacturing could cause a
delay in shipments and possible loss of sales. We do not have
any long-term agreements in place with our current docosanol
supplier or Zenvia supplier. If we are required to change
manufacturers, we may experience delays associated with finding
an alternate manufacturer that is properly qualified to produce
supplies of our products and product candidates in accordance
with FDA requirements and our specifications. Any delays or
difficulties in obtaining APIs or in manufacturing, packaging or
distributing Zenvia could delay our clinical trials of this
product candidate for DPN pain. The third parties we rely on for
manufacturing and packaging are also subject to regulatory
review, and any regulatory compliance problems with these third
parties could significantly delay or disrupt our
commercialization activities. Additionally, the ongoing economic
crisis creates risk for us if any of these third parties suffer
liquidity or operational problems. If a key third party vendor
becomes insolvent or is forced to lay off workers assisting with
our projects, our results and development timing could suffer.
We generally do not control the development of compounds
licensed to third parties and, as a result, we may not realize a
significant portion of the potential value of any such license
arrangements.
Under our typical license arrangement, we have no direct control
over the development of drug candidates and have only limited,
if any, input on the direction of development efforts. These
development efforts are made by our licensing partner and if the
results of their development efforts are negative or
inconclusive, it is possible that our licensing partner could
elect to defer or abandon further development of these programs.
We similarly rely on licensing partners to obtain regulatory
approval for docosanol in foreign jurisdictions. Because much of
the potential value of these license arrangements is contingent
upon the successful development and commercialization of the
licensed technology, the ultimate value of these licenses will
depend on the efforts of licensing partners. If our licensing
partners do not succeed in developing the licensed technology
for whatever reason, or elect to discontinue the development of
these programs, we may be unable to realize the potential value
of these arrangements. If we were to license Zenvia to a third
party or a development partner, it is likely that much of the
long-term success of that drug will similarly depend on the
efforts of the licensee.
We expect to rely entirely on third parties for international
registration, sales and marketing efforts.
In the event that we attempt to enter into international
markets, we expect to rely on collaborative partners to obtain
regulatory approvals and to market and sell our product(s) in
those markets. We have not yet entered into any collaborative
arrangement with respect to marketing or selling Zenvia, with
the exception of one such agreement relating to Israel. We may
be unable to enter into any other arrangements on terms
favorable to us, or at all, and even if we are able to enter
into sales and marketing arrangements with collaborative
partners, we cannot assure you that their sales and marketing
efforts will be successful. If we are unable to enter into
favorable collaborative arrangements with respect to marketing
or selling Zenvia in international markets, or if our
collaborators efforts are unsuccessful, our ability to
generate revenues from international product sales will suffer.
16
Risks
Relating to Our Stock
Our stock price has historically been volatile and we expect
that this volatility will continue for the foreseeable
future.
The market price of our common stock has been, and is likely to
continue to be, highly volatile. This volatility can be
attributed to many factors independent of our operating results,
including the following:
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comments made by securities analysts, including changes in their
recommendations;
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short selling activity by certain investors, including any
failures to timely settle short sale transactions;
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announcements by us of financing transactions
and/or
future sales of equity or debt securities;
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sales of our common stock by our directors, officers or
significant stockholders;
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lack of volume of stock trading leading to low liquidity;
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market and economic conditions; and
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Announcements we may make regarding our compliance with
continued listing standards on the NASDAQ Global Market.
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If a substantial number of shares is sold into the market at any
given time, particularly following any significant announcements
or large swings in our stock price (whether sales are through
the financing facility with Cantor Fitzgerald & Co. or
from an existing stockholder), there may not be sufficient
demand in the market to purchase the shares without a decline in
the market price for our common stock. Moreover, continuous
sales into the market of a number of shares in excess of the
typical trading volume for our common stock, or even the
availability of such a large number of shares, could depress the
trading market for our common stock over an extended period of
time.
Additionally, our stock price has been volatile as a result of
announcements of regulatory actions and decisions relating to
our product candidates, including Zenvia, and periodic
variations in our operating results. We expect that our
operating results will continue to vary from
quarter-to-quarter.
Our operating results and prospects may also vary depending on
the status of our partnering arrangements.
As a result of these factors, we expect that our stock price may
continue to be volatile and investors may be unable to sell
their shares at a price equal to, or above, the price paid.
Additionally, any significant drops in our stock price, such as
the one we experienced following the announcement of the Zenvia
approvable letter, could give rise to stockholder lawsuits,
which are costly and time consuming to defend against and which
may adversely affect our ability to raise capital while the
suits are pending, even if the suits are ultimately resolved in
favor of the Company. We have, from time to time, been a party
to such suits and although none have been material to date,
there can be no assurance that any such suit will not have an
adverse effect on the Company.
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Item 1B.
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Unresolved
Staff Comments
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None.
Our headquarters and commercial and administrative offices are
located in Aliso Viejo, California, where we currently occupy
11,319 square feet. The Aliso Viejo office lease expires in
June 2011. We lease approximately 30,370 square feet in two
buildings in San Diego. The terms of the leases for the
San Diego facilities end in January 2013. The
San Diego buildings are sublet through January 2013.
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Item 3.
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Legal
Proceedings
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In the ordinary course of business, we may face various claims
brought by third parties and we may, from time to time, make
claims or take legal actions to assert our rights, including
intellectual property rights as well as claims relating to
employment matters and the safety or efficacy of our products.
Any of these claims could subject us to costly litigation and,
while we generally believe that we have adequate insurance to
cover many different types of
17
liabilities, our insurance carriers may deny coverage, may be
inadequately capitalized to pay on valid claims, or our policy
limits may be inadequate to fully satisfy any damage awards or
settlements. If this were to happen, the payment of any such
awards could have a material adverse effect on our consolidated
operations, cash flows and financial position. Additionally, any
such claims, whether or not successful, could damage our
reputation and business. Management believes the outcome of
currently pending claims or lawsuits will not likely have a
material effect on our operations or financial position.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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There were no matters submitted to a vote of our security
holders during the fourth quarter of fiscal 2009.
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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The following table sets forth the high and low closing sales
prices for our common stock in each of the quarters over the
past two fiscal years, as quoted on the NASDAQ Global Market.
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Common Stock Price
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Fiscal 2009
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Fiscal 2008
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High
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Low
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High
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Low
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First Quarter
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$
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0.70
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$
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0.23
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$
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2.84
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$
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1.25
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Second Quarter
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$
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0.68
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$
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0.25
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$
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1.43
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$
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0.94
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Third Quarter
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$
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2.62
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$
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0.39
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$
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1.35
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$
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1.00
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Fourth Quarter
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$
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4.09
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$
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1.75
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$
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1.04
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$
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0.40
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On November 18, 2009, the closing sales price of our Common
Stock was $1.84 per share.
As of November 13, 2009, we had approximately 23,023
stockholders, including 366 holders of record and an estimated
22,657 beneficial owners. We have not paid any dividends on our
common stock since our inception and do not expect to pay
dividends on our common stock in the foreseeable future.
Information
About Our Equity Compensation Plans
Information regarding our equity compensation plans is
incorporated by reference in Item 12 of Part III of
this annual report on
Form 10-K.
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Item 6.
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Selected
Financial Data
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We are a smaller reporting company as defined by
Rule 12b-2
of the Exchange Act and are not required to provide the
information required under this item.
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Item 7.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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This Annual Report on
Form 10-K
contains forward-looking statements concerning future events and
performance of the Company. When used in this report, the words
intend, estimate,
anticipate, believe, plan or
expect and similar expressions are included to
identify forward-looking statements. These forward-looking
statements are based on our current expectations and assumptions
and many factors could cause our actual results to differ
materially from those indicated in these forward-looking
statements. You should review carefully the factors identified
in this report in Item 1A, Risk Factors. 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.
In August 2007, we sold our FazaClo business and related
support operations to Azur Pharma, Inc. We have reflected the
financial results of this business as discontinued operations in
the consolidated statements of
18
operations for the year ended September 30, 2008. Unless
otherwise noted, this Managements Discussion and Analysis
of Financial Condition and Results of Operations relates only to
financial results from continuing operations.
Executive
Overview
We are a pharmaceutical company focused on acquiring, developing
and commercializing novel therapeutic products for the treatment
of central nervous system disorders. Our lead product candidate,
Zenviatm
(dextromethorphan hydrobromide/quinidine sulfate), has
successfully completed three Phase III clinical trials for
the treatment of pseudobulbar affect (PBA) and has
successfully completed a Phase III trial for the treatment
of patients with diabetic peripheral neuropathic pain (DPN
pain). In addition to our focus on products for the
central nervous system, we also have a number of partnered
programs in other therapeutic areas which may generate future
income for the Company. Our first commercialized product,
docosanol 10% cream, (sold in the United States and Canada as
Abreva®
by our marketing partner GlaxoSmithKline Consumer Healthcare) is
the only
over-the-counter
treatment for cold sores that has been approved by the
U.S. Food and Drug Administration (FDA). In
2008, we licensed all of our monoclonal antibodies and we remain
eligible to receive milestone payments and royalties related to
the sale of these assets.
Avanir was
incorporated in California in August 1988 and was reincorporated
in Delaware in March 2009.
The following is a summary of significant accomplishments in
fiscal 2009 and subsequent to the end of fiscal 2009 through the
date of this filing that have materially affected our
operations, financial condition and prospects:
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In March 2009, we enrolled the last of 326 patients into
the confirmatory Phase III STAR trial. The final number of
patients exceeded the original target by approximately 20%
allowing a larger safety database and increased statistical
power for the study.
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In April 2009, we completed additional preclinical and clinical
studies that were conducted to enhance the complete response to
the approvable letter and to assist with planned label
discussions with the FDA.
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In June 2009, we were added to the broad-market Russell
3000®
Index, an investment tool comprised of 3,000 of the
countrys largest and most liquid stocks.
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In July 2009, we completed enrollment of the open label
extension of the confirmatory Phase III STAR trial. In
total, 282 of 326 patients (or 86.5%) completed the 12-week
double-blind phase of the study and were eligible to enroll in
the open label extension phase. A total of 253 (or 89.7%) of
eligible patients chose to enroll in the 12-week open label
safety extension.
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In August 2009, we announced the results of the double-blind
phase of the confirmatory Phase III STAR trial which
demonstrated that both doses of Zenvia met the primary efficacy
endpoint in the treatment of patients with PBA and that Zenvia
demonstrated an improved safety and tolerability profile
relative to the original formulation.
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In August 2009, we raised gross proceeds of approximately
$10.6 million through the sale of approximately
4.5 million shares of common stock. The shares were sold
into the open market at prevailing prices through our financing
facility with Cantor Fitzgerald & Co.
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In October 2009, we received a Notice of Allowance
from the United States Patent and Trademark Office
(USPTO) thereby extending the period of commercial
exclusivity for Zenvia into 2025. Upon issuance, the patent will
provide Avanir with patent protection for low-dose quinidine
formulations of Zenvia used to treat patients with PBA.
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In November 2009, we announced results of the 12-week open label
phase of the confirmatory phase III STAR trial which
demonstrated that the following patient groups displayed
statistically significant improvement in their CNS-LS scores:
1) patients maintained on Zenvia 30/10 mg, 2) patients
who titrated from Zenvia 20/10 mg to Zenvia 30/10 mg and
3) patients originally placed on placebo that initiated
Zenvia 30/10 mg.
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We have historically sought to maintain flexibility in our cost
structure by actively managing several outsourced functions,
such as clinical trials, legal counsel, documentation and
testing of internal controls, pre-clinical development work, and
manufacturing, warehousing and distribution services, rather
than maintaining all of these functions in house. We believe
that at this stage of our development the benefits of
outsourcing, which include flexibility and rapid response to
program delays or successes, far outweigh the higher costs often
associated with outsourcing.
Our principal focus is currently on gaining regulatory approval
for Zenvia for the PBA indication. We believe that cash and cash
equivalents and restricted investments of approximately
$32.0 million at September 30, 2009 will be sufficient
to fund our operations for at least the next twelve months and
through the date by which we expect that the FDA will render an
approval decision with respect to Zenvia for PBA. For additional
information about the risks and uncertainties that may affect
our business and prospects, please see Item 1A, Risk
Factors.
Critical
Accounting Policies and Estimates for Continuing
Operations
Our discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial
statements prepared in accordance with accounting principles
generally accepted in the United States. The preparation of
these financial statements requires us to make a number of
assumptions and estimates that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reported periods. Significant estimates and assumptions are
required in the determination of revenue recognition in certain
royalties. Significant estimates and assumptions are also
required in the appropriateness of amounts recognized for
inventories, income taxes, contingencies, estimates on the net
working capital adjustment and stock-based compensation. We base
our estimates on historical experience and various other
assumptions that are available at that time and that we believe
to be reasonable under the circumstances. Some of these
judgments can be subjective and complex. For any given
individual estimate or assumption made by us, there may also be
other estimates or assumptions that are reasonable. These items
are monitored and analyzed by management for changes in facts
and circumstances, and material changes in these estimates could
occur in the future. Changes in estimates are recorded in the
period in which they become known. Actual results may differ
from our estimates if past experience or other assumptions do
not turn out to be substantially accurate.
Share-Based
Compensation
We grant options, restricted stock units and restricted stock
awards to purchase our common stock to our employees, directors
and consultants under our stock option plans. The benefits
provided under these plans are share-based payments that we
account for using the fair value method.
The fair value of each option award is estimated on the date of
grant using a Black-Scholes-Merton option pricing model
(Black-Scholes model) that uses assumptions
regarding a number of complex and subjective variables. These
variables include, but are not limited to, our expected stock
price volatility, actual and projected employee stock option
exercise behaviors, risk-free interest rate and expected
dividends. Expected volatilities are based on historical
volatility of our common stock and other factors. The expected
terms of options granted are based on analyses of historical
employee termination rates and option exercises. The risk-free
interest rates are based on the U.S. Treasury yield in
effect at the time of the grant. Since we do not expect to pay
dividends on our common stock in the foreseeable future, we
estimated the dividend yield to be 0%.
If factors change and we employ different assumptions in
calculating the fair value in future periods, the compensation
expense that we record may differ significantly from what we
have recorded in the current period. There is a high degree of
subjectivity involved when using option pricing models to
estimate share-based compensation. Because changes in the
subjective input assumptions can materially affect our estimates
of fair values of our share-based compensation, in our opinion,
existing valuation models, including the Black-Scholes and
lattice binomial models, may not provide reliable measures of
the fair values of our share-based compensation. Consequently,
there is a risk that our estimates of the fair values of our
share-based compensation awards on the grant dates may bear
little resemblance to the actual values realized upon the
exercise, early termination or
20
forfeiture of those share-based payments in the future. Certain
share-based payments, such as employee stock options, may expire
worthless or otherwise result in zero intrinsic value as
compared to the fair values originally estimated on the grant
date and reported in our financial statements. For awards with a
longer vesting period, such as the three-year cliff vesting
awards issued to certain officers, the actual forfeiture rate
and related expense may not be known for a longer period of
time, which can result in more significant accounting
adjustments once the awards are either vested or forfeited.
Alternatively, values may be realized from these instruments
that are significantly in excess of the fair values originally
estimated on the grant date and reported in our financial
statements. There is no current market-based mechanism or other
practical application to verify the reliability and accuracy of
the estimates stemming from these valuation models, nor is there
a means to compare and adjust the estimates to actual values.
Although the fair value of employee share-based awards is
determined using an option-pricing model, the value derived from
that model may not be indicative of the fair value observed in a
willing buyer/willing seller market transaction.
The application of the fair value method of accounting for
share-based compensation may be subject to further
interpretation and refinement over time. There are significant
differences among valuation models, and there is a possibility
that we will adopt different valuation models in the future.
This may result in a lack of consistency in future periods and
materially affect the fair value estimate of share-based
payments. It may also result in a lack of comparability with
other companies that use different models, methods and
assumptions.
Theoretical valuation models and market-based methods are
evolving and may result in lower or higher fair value estimates
for share-based compensation. The timing, readiness, adoption,
general acceptance, reliability and testing of these methods is
uncertain. Sophisticated mathematical models may require
voluminous historical information, modeling expertise, financial
analyses, correlation analyses, integrated software and
databases, consulting fees, customization and testing for
adequacy of internal controls. Market-based methods are emerging
that, if employed by us, may dilute our earnings per share and
involve significant transaction fees and ongoing administrative
expenses. The uncertainties and costs of these extensive
valuation efforts may outweigh the benefits to investors.
Share-based compensation expense recognized during a period is
based on the value of the portion of share-based payment awards
that is ultimately expected to vest amortized under the
straight-line attribution method. As share-based compensation
expense recognized in the consolidated statements of operations
for fiscal 2009 and 2008 is based on awards ultimately expected
to vest, it has been reduced for estimated forfeitures. The fair
value method requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. We estimate forfeitures
based on our historical experience. Changes to the estimated
forfeiture rate are accounted for as a cumulative effect of
change in the period the change occurred. In the fourth quarter
of fiscal 2009, we reviewed our estimated forfeiture rate
considering recent actual data resulting in a reduction to our
estimated forfeiture rate from 30.0% to 12.6%. Additionally, we
reduced our estimated forfeiture rate on certain restricted
stock unit awards from 30.0% to zero percent, as we expect all
the awards to vest. These changes in the estimated forfeiture
rates resulted in an increase in share-based compensation
expense of $935,000 and an increase to the diluted loss per
share of $0.01 for fiscal 2009.
Revenue
Recognition
General. We recognize revenue when all of the
following criteria are met: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services
have been rendered; (3) our price to the buyer is fixed and
determinable; and (4) collectability is reasonably assured.
Certain product sales are subject to rights of return. For
products sold where the buyer has the right to return the
product, we recognize revenue at the time of sale only if
(1) our price to the buyer is fixed and determinable;
(2) the buyer has paid us, or the buyer is obligated to pay
us and the obligation is not contingent on the resale of the
product; (3) the buyers obligation to us would not be
changed in the event of theft or physical destruction or damage
of the product; (4) the buyer has economic substance apart
form that provided by us; (5) we do not have significant
obligations for future performance to directly bring about
resale of the product by the buyer; and (6) the amount of
future returns can be reasonably estimated.
21
Revenue Arrangements with Multiple
Deliverables. We have revenue arrangements
whereby we deliver to the customer multiple products
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. 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.
A delivered product or service (or group of delivered products
or services) can be separated from other elements when it meets
all of the following criteria: (1) the delivered item has
value to the customer on a standalone basis; (2) there is
objective and reliable evidence of the fair value of the
undelivered item; and (3) if the arrangement includes a
general right of return relative to the delivered item,
delivery, or performance of the undelivered item is considered
probable and substantially in our control. If an element can be
separated, we allocate revenue 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, or research reimbursement payments
and/or
exclusive licensed rights to patented or patent pending
compounds, technology access fees, various performance or sales
milestones and future product royalty payments. Some of these
arrangements are 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 continuing involvement through research and
development services that are required because our know-how and
expertise related to the technology is proprietary to us, or can
only be performed by us, then such up-front fees are deferred
and recognized over the period of continuing involvement.
Payments related to substantive, performance-based milestones in
a research and development arrangement are recognized as revenue
upon the achievement of the milestones as specified in the
underlying agreements when they represent the culmination of the
earnings process.
Royalty Revenues. We recognize royalty
revenues from licensed products when earned in accordance with
the terms of the license agreements. Net sales figures used for
calculating royalties include deductions for returned product,
pricing allowances, managed care charge backs, cash discounts,
freight/warehousing, and miscellaneous write-offs.
Certain royalty agreements 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.
The company recognizes royalty revenue in the period in which
the threshold is exceeded.
Revenues from Sale of Royalty Rights. 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 revenue over the life of the license agreement. We recognize
revenue 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 revenue
to be recognized as revenue in each period is calculated by
multiplying the following: (1) the ratio of the royalty
payments due to Drug Royalty USA for the period to the total
22
remaining royalties that we expect GSK will pay Drug Royalty USA
over the term of the agreement by (2) the unamortized
deferred revenue amount.
Research Services Arrangements. Revenue from
research services is recognized during the period in which the
services are performed and is 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, or
subcontracted, pre-clinical studies are classified as revenue
and recognized in the period the reimbursable expenses are
incurred. Payments received in advance are recorded as deferred
revenue until the research and development services are
performed or costs are incurred. These arrangements are often
multiple element arrangements.
Government Research Grant Revenue. We
recognize revenues from federal research grants during the
period in which the related expenditures are incurred.
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 for
revenue recognition are met. We sell the API Docosanol to
various licensees upon receipt of a written order for the
materials. Shipments generally occur fewer than three 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.
Cost
of Revenues
Cost of revenues includes direct and indirect costs to
manufacture product sold, including the write-off of obsolete
inventory, reserves against inventory and to provide research
and development services.
Recognition
of Expenses in Outsourced Contracts
Pursuant to managements 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) managements 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 fiscal 2008. Management bases its assessments
on estimates that it considers reasonable in the circumstances.
Other estimates could result in different assessments and
different expense recognition.
Research
and Development Expenses
Research and development expenses consist of expenses incurred
in performing research and development activities including
salaries and benefits, facilities and other overhead expenses,
clinical trials, contract services and other outside expenses.
Research and development expenses are charged to operations as
they are incurred. Up-front payments to collaborators made in
exchange for the avoidance of potential future milestone and
royalty payments on licensed technology are also charged to
research and development expense when the drug is still in the
development stage, has not been approved by the FDA for
commercialization and concurrently has no alternative uses.
23
We assess our obligations to make milestone payments that may
become due under licensed or acquired technology to determine
whether the payments should be expensed or capitalized. We
charge milestone payments to research and development expense
when:
|
|
|
|
|
The technology is in the early stage of development and has no
alternative uses;
|
|
|
|
There is substantial uncertainty regarding the future success of
the technology or product;
|
|
|
|
There will be difficulty in completing the remaining
development; and
|
|
|
|
There is substantial cost to complete the work.
|
Acquired contractual rights. Payments to
acquire contractual rights to a licensed technology or drug
candidate are expensed as incurred when there is uncertainty in
receiving future economic benefits from the acquired contractual
rights. We consider the future economic benefits from the
acquired contractual rights to a drug candidate to be uncertain
until such drug candidate is approved by the FDA or when other
significant risk factors are abated.
Effects
of Inflation
We believe the impact of inflation and changing prices on net
revenues and on operations has been minimal during the past two
years.
Results
of Operations
We operate our business on the basis of a single reportable
segment, which is the business of development, acquisition and
commercialization of novel therapeutics for chronic diseases.
Our chief operating decision-maker is the Chief Executive
Officer, who evaluates our company as a single operating segment.
We categorize revenues by type of revenue in five different
categories: 1) royalties and royalty rights,
2) licensing, 3) government research grant services,
4) research and development services and 5) product
sales.
All long-lived assets for fiscal 2009 and 2008 are located in
the United States.
24
Comparison
of Fiscal 2009 and 2008
Revenues
and Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
$ Change
|
|
|
% Change
|
|
|
PRODUCT SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
|
|
|
$
|
129,820
|
|
|
$
|
(129,820
|
)
|
|
|
−100
|
%
|
Cost of revenues
|
|
|
73,135
|
|
|
|
21,714
|
|
|
|
51,421
|
|
|
|
237
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross (loss) margin
|
|
|
(73,135
|
)
|
|
|
108,106
|
|
|
|
(181,241
|
)
|
|
|
−168
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES AND COST OF RESEARCH SERVICES AND OTHER
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from royalties and royalty rights
|
|
|
3,642,675
|
|
|
|
3,616,102
|
|
|
|
26,573
|
|
|
|
1
|
%
|
Revenues from license agreements
|
|
|
533,834
|
|
|
|
2,205,724
|
|
|
|
(1,671,890
|
)
|
|
|
−76
|
%
|
Revenues from government research grant services
|
|
|
|
|
|
|
1,006,922
|
|
|
|
(1,006,922
|
)
|
|
|
−100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from research services and other
|
|
|
4,176,509
|
|
|
|
6,828,748
|
|
|
|
(2,652,239
|
)
|
|
|
−39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of research and development services
|
|
|
10,224
|
|
|
|
249,281
|
|
|
|
(239,057
|
)
|
|
|
−96
|
%
|
Cost of government research grant
|
|
|
|
|
|
|
940,130
|
|
|
|
(940,130
|
)
|
|
|
−100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs from research services and grants
|
|
|
10,224
|
|
|
|
1,189,411
|
|
|
|
(1,179,187
|
)
|
|
|
−99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research services and other gross margin
|
|
|
4,166,285
|
|
|
|
5,639,337
|
|
|
|
(1,473,052
|
)
|
|
|
−26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$
|
4,093,150
|
|
|
$
|
5,747,443
|
|
|
$
|
(1,654,293
|
)
|
|
|
−29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
For the fiscal year ended September 30, 2009, we generated
no product revenues. In fiscal 2008, we received net product
revenues of $130,000. Product revenues for that period were
generated from the sale of the active pharmaceutical ingredient
docosanol.
Revenues from research services and other were $4.2 million
for the fiscal year ended September 30, 2009 compared to
$6.8 million for the fiscal year ended September 30,
2008. The decrease in revenues is attributed to a one-time
milestone payment received from HBI of $1.5 million in
fiscal 2008 that was not repeated in 2009 and a decline in grant
revenue received from the NIH grant of $1.0 million due to
the termination of the anthrax antibody program which ended in
2008, and accordingly, there are no comparable revenues in
fiscal 2009.
Potential revenue-generating contracts that remained active as
of September 30, 2009 include licensing revenue from our
agreement with GSK, potential royalties from our agreements with
Azur Pharma and Emergent Biosolutions, Inc. and modest revenue
generated from various other licensing agreements. Partnering,
licensing and research collaborations have been, and may
continue to be, an important part of our business development
strategy. We may continue to seek partnerships with
pharmaceutical companies that can help fund our operations in
exchange for sharing in the success of any licensed compounds or
technologies. See Note 13 Research, License, Supply
and other Agreements and Note 16 Segment
Information in Notes to Consolidated Financial Statements.
Cost
of Revenues
In fiscal 2009, cost of product revenues was $73,000 compared to
$22,000 in fiscal 2008. Cost of product revenues in fiscal 2009
was primarily attributed to an inventory reserve amount of
$69,000 established for docosanol.
25
Cost of research services and grants was $10,000 for the fiscal
year ended September 30, 2009 compared to $1.2 million
for the fiscal year ended September 30, 2008. The decline
in cost of revenues is primarily attributable to the completion
of the remaining work under the NIH grant and the termination of
all future research and development work related to other
infectious diseases in June 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
$ Change
|
|
|
% Change
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
15,867,049
|
|
|
$
|
14,110,743
|
|
|
$
|
1,756,306
|
|
|
|
12
|
%
|
General and administrative
|
|
|
10,150,766
|
|
|
|
10,599,158
|
|
|
|
(448,392
|
)
|
|
|
−4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
$
|
26,017,815
|
|
|
$
|
24,709,901
|
|
|
$
|
1,307,914
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and Development Expenses
Research and development expenses increased by approximately
$1.8 million or 12% for the fiscal year ended
September 30, 2009 compared to the fiscal year ended
September 30, 2008. The increase is primarily due to costs
incurred for the confirmatory Phase III trial for the PBA
indication of Zenvia. Following the completion of the STAR
trial, we expect these expenses to decrease in fiscal 2010.
General
and Administrative Expenses
General and administrative expenses decreased by approximately
$448,000 or 4% for the fiscal year ended September 30,
2009, compared to the fiscal year ended September 30, 2008.
The decrease is primarily attributed to a decrease in our
overall general and administrative expenses as a result of the
restructuring and the significant organizational changes that we
made to our infrastructure. In addition, our general and
administrative costs have decreased as a result of our focused
efforts to contain costs and negotiate discounts with our
principal vendors.
Share-Based
Compensation
The Company re-examines forfeiture rates as they apply to
stock-based compensation on an annual basis. We estimate
forfeitures based on our historical experience. Changes to the
estimated forfeiture rate are accounted for as a cumulative
effect of change in the period the change occurred. In the
fourth quarter of fiscal 2009, we reviewed our estimated
forfeiture rate considering recent actual data resulting in a
reduction to our estimated forfeiture rate from 30.0% to 12.6%.
Additionally, we reduced our estimated forfeiture rate on
certain restricted stock unit awards from 30.0% to zero percent,
as we expect all the awards to vest. These changes in the
estimated forfeiture rates resulted in an increase in
share-based compensation expense of approximately $935,000 and
an increase to the diluted loss per share of $0.01 for fiscal
2009. Future estimates may differ substantially from the
Companys current estimates.
Total compensation expense for our share-based payments in the
fiscal year ended September 30, 2009 and 2008 was
approximately $2.9 million and $1.6 million (excluding
$14,000 included in discontinued operations), respectively.
General and administrative expense in the fiscal years ended
September 30, 2009 and 2008 includes share-based
compensation expense of approximately $2.2 million and
$1.1 million, respectively. Research and development
expense in the fiscal years ended September 30, 2009 and
2008 includes share-based compensation expense of approximately
$664,000 and $491,000, respectively. As of September 30,
2009, approximately $3.0 million of total unrecognized
compensation costs related to unvested awards is expected to be
recognized over a weighted average period of 2.4 years. See
Note 12, Stockholders Equity
Employee Equity Incentive Plans in the Notes to
Consolidated Financial Statements for further discussion.
Interest
Expense and Interest Income
For the fiscal year ended September 30, 2009, interest
expense was $517, compared to approximately $541,000 for the
prior fiscal year. The decrease in interest expense in 2009 is
primarily due to a decrease in the balance on notes payable as
compared to the prior year, mostly attributed to the accelerated
repayment of the remaining outstanding principal in June 2008.
The notes payable were issued in connection with the purchase of
Alamo Pharmaceuticals, Inc.
26
For the fiscal year ended September 30, 2009, interest
income was approximately $204,000, compared to approximately
$1.3 million for the prior fiscal year. The decrease is due
to an 18% decrease in the average cash balance of our investment
accounts in fiscal 2009 as compared to the prior fiscal year,
coupled with a lower investment yield in fiscal 2009.
Other,
net
Other, net expense was approximately $272,000 in fiscal 2009
compared to income of approximately $1.2 million in fiscal
2008. In fiscal 2009, the company recognized a loss on disposal
of fixed assets of approximately $268,000. In fiscal 2008, the
Company received approximately $1.25 million in proceeds
resulting from a settlement agreement with a former employee.
The proceeds represented court awarded reimbursement of
attorneys fees incurred in connection with the
Companys defense. The proceeds were recorded as other
income in the third fiscal quarter of 2008.
Loss
from Discontinued Operations
There was no loss from discontinued operations for the fiscal
year ended September 30, 2009. For the fiscal year ended
September 30, 2008, approximately a $1.6 million loss
from discontinued operations was recorded as a result of the
final net working capital adjustment of approximately
$1.4 million under our FazaClo asset purchase agreement
with Azur, as well as additional trailing costs related to the
operations of FazaClo.
Net
Loss
Net loss was approximately $22.0 million, or $0.28 per
share, for the fiscal year ended September 30, 2009,
compared to a net loss of approximately $17.5 million, or
$0.30 per share for the fiscal year ended September 30,
2008. The increase in net loss is primarily attributed to the
following: 1) non-cash expenses of approximately
$1.9 million related to share-based compensation expense
and other non-cash expenses, 2) increased spending in research
and development 3) the presence of two non-recurring revenue
sources in 2008 totaling $2.5 million. In addition, in fiscal
2008, we recorded a gain on early extinguishment of debt and
other income which together totaled approximately
$2.2 million.
Liquidity
and Capital Resources
We assess our liquidity based on our ability to generate cash to
fund future operations. Key factors in the management of our
liquidity are: cash required to fund operating activities
including expected operating losses and the levels of
inventories, accounts payable and capital expenditures; the
timing and extent of cash received from milestone payments under
license agreements; adequate credit facilities; and financial
flexibility to attract long-term equity capital on favorable
terms. Historically, cash required to fund on-going business
operations has been provided by financing activities and used to
fund operations, working capital requirements and investing
activities.
Cash, cash equivalents and restricted investments, as well as,
net cash provided by or used in operating, investing and
financing activities, are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
September 30,
|
|
|
(Decrease)
|
|
|
September 30,
|
|
|
|
2009
|
|
|
During Period
|
|
|
2008
|
|
|
Cash, cash equivalents and investments in securities
|
|
$
|
31,954,487
|
|
|
$
|
(10,286,040
|
)
|
|
$
|
42,240,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
31,486,012
|
|
|
$
|
(9,897,918
|
)
|
|
$
|
41,383,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net working capital
|
|
$
|
26,685,567
|
|
|
$
|
(10,486,069
|
)
|
|
$
|
37,171,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Change
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
Between
|
|
|
September 30,
|
|
|
|
2009
|
|
|
Periods
|
|
|
2008
|
|
|
Net cash used in operating activities
|
|
$
|
(20,290,160
|
)
|
|
$
|
(3,611,951
|
)
|
|
$
|
(16,678,209
|
)
|
Net cash provided by investing activities
|
|
|
357,362
|
|
|
|
(671,629
|
)
|
|
|
1,028,991
|
|
Net cash provided by financing activities
|
|
|
10,034,880
|
|
|
|
(16,510,306
|
)
|
|
|
26,545,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(9,897,918
|
)
|
|
$
|
(20,793,886
|
)
|
|
$
|
10,895,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities. Net cash used in
operating activities was approximately $20.3 million in
fiscal year 2009 compared to approximately $16.7 million in
fiscal year 2008. The increase is primarily due to expenses
related to the confirmatory Phase III trial and additional
pre-clinical and clinical studies in support of the response to
the approvable letter.
Investing activities. Net cash provided by
investing activities was approximately $357,000 in fiscal year
2009, compared to approximately $1.0 million in fiscal year
2008. In fiscal year 2009, cash provided by investing activities
arose primarily from sales and maturities of investments. In
fiscal year 2008, proceeds from sales and maturities of
investments of approximately $2.3 million were partially
offset by payments of approximately $1.4 million related to
the net working capital adjustment from our sale of FazaClo.
Financing activities. Net cash provided by
financing activities was approximately $10.0 million in
fiscal year 2009 compared to approximately $26.5 million in
fiscal year 2008. In fiscal 2009, we raised approximately
$10.8 million in gross proceeds (approximately
$10.2 million net of offering costs and commissions) from
an open market offering. In fiscal 2008, we raised gross
proceeds of approximately $40.0 million from sales of our
common stock through a registered common stock offering in April
2008 (approximately $38.0 million net of offering costs and
commissions), offset by $11.3 million to reduce long-term
debt.
In April 2009, we filed a shelf registration statement on
Form S-3
with the SEC to sell an aggregate of up to $35.0 million in
common stock, preferred stock, debt securities and warrants. On
May 6, 2009, the registration statement was declared
effective. On July 30, 2009 we entered into a financing
facility with Cantor Fitzgerald & Co., providing for
the sale of up to 12,500,000 shares of our common stock
from time to time into the open market at prevailing prices. As
of November 1, 2009, 4.7 million shares of common
stock had been sold for total gross proceeds of
$11.0 million through this facility under our registration
statement. We may or may not sell additional shares under this
facility, depending on the volume and price of our common stock,
as well as our capital needs and potential alternative sources
of capital, such as a development partner for Zenvia.
In September 2009, we filed a shelf registration statement on
Form S-3
with the SEC to sell an aggregate of up to $75.0 million in
common stock, preferred stock, debt securities and warrants. On
September 23, 2009, the registration statement was declared
effective. No offerings have been made pursuant to this
registration statement to date.
As of September 30, 2009, we have contractual obligations
for long-term debt and operating lease obligations, as
summarized in the table that follows. We have no off-balance
sheet arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
Operating lease obligations(1)
|
|
$
|
4,587,651
|
|
|
$
|
1,530,249
|
|
|
$
|
2,705,743
|
|
|
$
|
351,659
|
|
Purchase obligations(2)
|
|
|
1,038,294
|
|
|
|
1,038,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,625,945
|
|
|
$
|
2,568,543
|
|
|
$
|
2,705,743
|
|
|
$
|
351,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating lease obligations are exclusive of payments we expect
to receive under sublease agreements. |
|
(2) |
|
Purchase obligations consist of the total of trade accounts
payable and trade related accrued expenses at September 30,
2009 which approximates our contractual commitments for goods
and services in the normal course of our business. |
28
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). As previously discussed
in this filing, we sold the FazaClo product line to Azur in
August 2007. 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,
although we may remain liable for these payments if Azur
defaults on these obligations.
Zenvia License Milestone Payments. We hold the
exclusive worldwide marketing rights to Zenvia for certain
indications pursuant to an exclusive royalty-bearing 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
Zenvia for both PBA and DPN pain, assuming they are both
approved for marketing by the FDA. We are not currently
developing, nor do we have an obligation to develop, any other
indications under the CNS license agreement. The Company will
pay a $75,000 milestone if the FDA approves Zenvia for the
treatment of PBA. In addition, the Company is obligated to pay
CNS a royalty on commercial sales of Zenvia with respect to each
indication, if the drug is approved by the FDA for
commercialization. Under certain circumstances, the Company may
have the obligation to pay CNS a portion of net revenues
received if it sublicenses Zenvia to a third party. Under the
agreement with CNS, the Company is required to make payments on
achievements of up to a maximum of ten milestones, based upon
five specific clinical indications. Maximum payments for these
milestone payments could total approximately $2.1 million
if the Company pursued the development of Zenvia for all of the
licensed indications. Of the clinical indications that the
Company currently plans to pursue, expected milestone payments
could total $800,000. In general, individual milestones range
from $150,000 to $250,000 for each accepted new drug application
(NDA) and a similar amount for each approved NDA. In
addition the Company is obligated to pay CNS a royalty ranging
from approximately 5% to 8% of net revenues.
Management
Outlook
We believe that cash, cash equivalents and restricted
investments of approximately $32.0 million at
September 30, 2009 will be sufficient to sustain our
planned level of operations for at least the next twelve months
and through the anticipated FDA approval decision for Zenvia for
PBA. However, we cannot provide assurances that our plans will
not change, or that changed circumstances or delays in clinical
development will not result in the depletion of capital
resources more rapidly than anticipated.
For information regarding the risks associated with our need to
raise capital to fund our ongoing and planned operations, please
see Item 1A, Risk Factors.
Recent
Authoritative Guidance
See Note 2, Summary of Significant Accounting
Policies in the Notes to Consolidated Financial Statements
for a discussion of recently issued authoritative guidance and
its effect, if any, on the Company.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
As described below, we are exposed to market risks related to
changes in interest rates. Because substantially all of our
revenue, expenses, and capital purchasing activities are
transacted in U.S. dollars, our exposure to foreign
currency exchange rates is immaterial. However, in the future we
could face increasing exposure to foreign currency exchange
rates if we expand international distribution of docosanol 10%
cream and purchase additional services from outside the
U.S. Until such time as we are faced with material amounts
of foreign currency exchange rate risks, we do not plan to use
derivative financial instruments, which can be used to hedge
such risks. We will evaluate the use of derivative financial
instruments to hedge our exposure as the needs and risks should
arise.
Interest
Rate Sensitivity
Our investment portfolio consists primarily of cash equivalent
fixed income instruments invested in government money market
funds. The primary objective of our investments in these
securities is to preserve principal. We classify our restricted
investments, which are primarily certificates of deposit, as of
September 30, 2009 as
29
held-to-maturity.
These
held-to-maturity
securities are subject to interest rate risk. Based on the
average duration of our investments as of September 30,
2009 and 2008, an increase of one percentage point in the
interest rates would have resulted in increases in interest
income of approximately $343,000 and $409,000, respectively.
As of September 30, 2009, $31.1 million of our cash
and cash equivalents were maintained in six separate money
market mutual funds, and approximately $379,000 of our cash and
cash equivalents were maintained at two major financial
institutions in the United States. At times, deposits held with
the financial institution may exceed the amount of insurance
provided on such deposits, and at September 30, 2009, such
uninsured deposits totaled $31.1 million. Generally, these
deposits may be redeemed upon demand and, therefore, bear
minimal risk. Effective October 3, 2008, the Emergency
Economic Stabilization Act of 2008 raised the Federal Deposit
Insurance Corporation deposit coverage limits to $250,000 per
owner from $100,000 per owner. This program is currently
available through December 31, 2009.
Financial instruments that potentially subject us to
concentrations of credit risk consist principally of cash and
cash. Our cash and cash equivalents are placed at various money
market mutual funds and financial institutions of high credit
standing.
We perform ongoing credit evaluations of our customers
financial conditions and would limit the amount of credit
extended if deemed necessary but usually we have required no
collateral.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Our financial statements are annexed to this report beginning on
page F-1.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A(T).
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and our Vice President, Finance, of the effectiveness of
our disclosure controls and procedures as of the end
of the period covered by this report, pursuant to
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended.
In connection with that evaluation, our CEO and Vice President,
Finance concluded that our disclosure controls and procedures
were effective and designed to provide reasonable assurance that
the information required to be disclosed is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission rules and forms as of
September 30, 2009. For the purpose of this review,
disclosure controls and procedures means controls and procedures
designed to ensure that information required to be disclosed by
the Company in the reports that we file or submit is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms. These disclosure
controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to
be disclosed by the Company in the reports that we file or
submit is accumulated and communicated to management, including
our principal executive officer, principal financial officer and
principal accounting officer, as appropriate to allow timely
decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, our
management recognized that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control
objectives, and our management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f)
and
15d-15(f).
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we
30
conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and related COSO guidance. Based on our
evaluation under this framework, our management concluded that
our internal control over financial reporting was effective as
of September 30, 2009.
This annual report does not include an attestation report of the
Companys independent registered public accounting firm
regarding internal control over financial reporting.
Managements report was not subject to attestation by the
Companys independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only
managements report in this annual report.
Changes
in Internal Control over Financial Reporting
There has been no change in the Companys internal control
over financial reporting (as defined in
Rule 13a-15(f)
under the Exchange Act) during the Companys fourth fiscal
quarter ended September 30, 2009, that has materially
affected, or is reasonably likely to materially affect the
Companys internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information relating to our directors that is required by
this item is incorporated by reference from the information
under the captions Election of Directors,
Corporate Governance, and Board of Directors
and Committees contained in our definitive proxy statement
(the Proxy Statement), which will be filed with the
Securities and Exchange Commission in connection with our 2010
Annual Meeting of Stockholders.
Additionally, information relating to reporting of insider
transactions in Company securities is incorporated by reference
from the information under the caption Section 16(a)
Beneficial Ownership Reporting Compliance in the Proxy
Statement.
Executive
Officers and Key Employees of the Registrant
The names of our executive officers and key employees and their
ages as of November 1, 2009 are set forth below. Officers
are elected annually by the Board of Directors and hold office
until their respective successors are qualified and appointed or
until their resignation, removal or disqualification.
|
|
|
|
|
|
|
Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Keith A. Katkin
|
|
|
38
|
|
|
President and Chief Executive Officer
|
Randall E. Kaye, M.D.
|
|
|
47
|
|
|
Senior Vice President, Chief Medical Officer
|
Christine G. Ocampo
|
|
|
37
|
|
|
Vice President, Finance, Secretary
|
Key Employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric S. Benevich
|
|
|
44
|
|
|
Vice President, Communications
|
Gregory J. Flesher
|
|
|
39
|
|
|
Vice President, Business Development
|
Executive
Officers
Keith Katkin. Mr. Katkin joined Avanir in
July of 2005 as Senior Vice President of Sales and Marketing. In
March 2007, Mr. Katkin was appointed President and Chief
Executive Officer and was elected as a member of the Board of
Directors. Prior to joining Avanir, Mr. Katkin previously
served as Vice President, Commercial Development for Peninsula
Pharmaceuticals, playing a key role in the management and
ultimate sale of the
31
company to Johnson & Johnson in 2005. Additionally,
Mr. Katkins employment experience includes leadership
roles at InterMune, Amgen and Abbott Laboratories.
Mr. Katkin also served as strategic advisor to Cerexa, a
pharmaceutical company that was sold to Forest Laboratories in
2007. Mr. Katkin received a B.S. degree in Business and
Accounting from Indiana University and an M.B.A. degree in
Finance from the Anderson School of Management at UCLA,
graduating with honors. Mr. Katkin became a licensed
Certified Public Accountant in 1995.
Randall E. Kaye, M.D. Dr. Kaye
joined Avanir in January 2006 as Vice President of Clinical and
Medical Affairs and assumed the role of Senior Vice President
Clinical Research and Medical Affairs and Chief Medical Officer
in February 2007. Immediately prior to joining Avanir, from 2004
to 2006, Dr. Kaye was the Vice President of Medical Affairs
for Scios Inc., a division of Johnson & Johnson. From
2002 to 2004, Dr. Kaye recruited and managed the Medical
Affairs department for InterMune Inc. Previously, Dr. Kaye
served for nearly a decade in a variety of Medical Affairs and
Marketing positions for Pfizer Inc. Dr. Kaye earned his
Doctor of Medicine, Masters in Public Health and Bachelor of
Science degrees at George Washington University in
Washington, D.C. and was a Research Fellow in Allergy and
Immunology at Harvard Medical School.
Christine G. Ocampo. Ms. Ocampo joined
Avanir in March 2007 as Corporate Controller and was promoted to
Vice President, Finance in February 2008. Prior to joining
Avanir, Ms. Ocampo served as Senior Vice President, Chief
Financial Officer, Chief Accounting Officer, Treasurer and
Secretary of Cardiogenesis Corporation from November 2003 until
April 2006. From 2001 to November 2003, Ms. Ocampo served
in the role of Vice President and Corporate Controller at
Cardiogenesis. Prior to first joining Cardiogenesis in April
1997, Ms. Ocampo held a management position in Finance at
Mills-Peninsula Health Systems in Burlingame, CA, and spent
three years as an auditor for Ernst & Young LLP.
Ms. Ocampo graduated with a Bachelors of Science in
Accounting from Seattle University and became a licensed
Certified Public Accountant in 1996.
Key
Employees
Eric S. Benevich. Mr. Benevich joined
Avanir Pharmaceuticals, Inc. in July 2005 as Senior Director of
Marketing. In August 2007, he was promoted to Vice President of
Communications. Prior to joining Avanir, Mr. Benevich
previously served as the Senior Director of Marketing for
Peninsula Pharmaceuticals. Prior to his tenure at Peninsula
Pharmaceuticals, Mr. Benevich held several Marketing
positions with Amgen Inc., a global biotechnology company. In
addition, Mr. Benevich held several commercial roles at
Astra Merck in Sales, Market Research and Brand Marketing.
Mr. Benevich graduated from Washington State University
with a degree in International Business and has completed
several MBA courses at Villanova University.
Gregory J. Flesher. Mr. Flesher joined
Avanir Pharmaceuticals, Inc. in June 2006 as Senior Director of
Commercial Strategy and in November 2006 assumed the additional
responsibility for Business Development and Portfolio Planning.
In August 2007 he was promoted to Vice President of Business
Development. Prior to joining Avanir, he served as a Sales
Director from 2004 to 2006 and as Director of
Pulmonary & Infectious Disease Marketing from 2002 to
2004 at InterMune, Inc., a biopharmaceutical company. Prior to
his tenure at InterMune, Mr. Flesher held Oncology and
Nephrology marketing positions with Amgen Inc., a global
biotechnology company. Mr. Flesher also held roles in
global marketing and clinical development at Eli Lilly and
Company. Mr. Flesher graduated from Purdue University with
a degree in Biology and has completed his doctorate coursework
in Biochemistry and Molecular Biology at Indiana University
School of Medicine.
Code of
Ethics
We have adopted a code of ethics for directors, officers
(including our principal executive officer, principal financial
officer, and principal accounting officer and controller), and
employees. This code of ethics is available on our website at
www.avanir.com. Any waivers from or amendments to the code of
ethics will be filed with the SEC on
Form 8-K.
You may also request a printed copy of our Code of Ethics,
without charge, by writing to us at 101 Enterprise, Suite
300, Aliso Viejo, California 92656, Attn. Investor Relations.
32
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated by
reference to the information under the captions Executive
Compensation and Compensation Committee Interlocks
and Insider Participation contained in the Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item is incorporated by
reference to the information under the captions Security
Ownership of Certain Beneficial Owners and Management and
Equity Compensation Plan Information contained in
the Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
The information required by this item is incorporated by
reference to the information under the captions Certain
Relationships and Related Party Transactions,
Director Independence and Board
Committees contained in the Proxy Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this item is incorporated by
reference to the information under the caption Fees for
Independent Registered Public Accounting Firm contained in
the Proxy Statement.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Financial Statements and Schedules
Financial statements for the two years ended September 30,
2009 and 2008 are attached. The index to these financial
statements appears on
page F-1.
(b) Exhibits
The following exhibits are incorporated by reference or filed as
part of this report.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference Herein
|
Number
|
|
Description
|
|
Form
|
|
Date
|
|
3.1
|
|
Certificate of Incorporation of the Registrant
|
|
Current Report on Form 8-K, as Exhibit 3.1
|
|
March 25, 2009
|
3.2
|
|
Bylaws of the Registrant
|
|
Current Report on Form 8-K, as Exhibit 3.2
|
|
March 25, 2009
|
3.3
|
|
Certificate of Ownership and Merger merging Avanir
Pharmaceuticals, a California corporation, with and into Avanir
Pharmaceuticals, Inc., a Delaware corporation
|
|
Current Report on Form 8-K, as Exhibit 3.3
|
|
March 25, 2009
|
3.4
|
|
Certificate of Designations of Series A Junior
Participating Cumulative Preferred Stock
|
|
Registration Statement on
Form 8-A/A
(File No. 001-15803), as Exhibit 3.3
|
|
March 25, 2009
|
4.1
|
|
Form of Common Stock Certificate
|
|
Current Report on Form 8-K, as Exhibit 4.1
|
|
March 25, 2009
|
4.2
|
|
Form of Senior Indenture
|
|
Registration Statement on Form S-3 (File No. 333-161789), as
Exhibit 4.3
|
|
September 8, 2009
|
4.3
|
|
Form of Subordinated Indenture
|
|
Registration Statement on Form S-3 (File No. 333-161789), as
Exhibit 4.4
|
|
September 8, 2009
|
33
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference Herein
|
Number
|
|
Description
|
|
Form
|
|
Date
|
|
4.4
|
|
Form of Common Stock Warrant, issued in connection with the
Subscription Agreement dated March 26, 2008
|
|
Current Report on Form 8-K, as Exhibit 10.2
|
|
March 27, 2008
|
4.5
|
|
Stockholder Rights Agreement, dated as of March 20, 2009,
by and between Avanir Pharmaceuticals, Inc. and American Stock
Transfer & Trust Company, LLC
|
|
Registration Statement on
Form 8-A/A
(File No. 001-15803), as Exhibit 4.2
|
|
March 25, 2009
|
4.6
|
|
Form of Rights Certificate with respect to the Stockholder
Rights Agreement, dated as of March 20, 2009
|
|
Registration Statement on
Form 8-A/A
(File No. 001-15803), as Exhibit 4.2
|
|
March 25, 2009
|
10.1
|
|
License Agreement, dated as of March 31, 2000, by and
between Avanir Pharmaceuticals and SB Pharmco Puerto Rico, a
Puerto Rico Corporation
|
|
Current Report on Form 8-K, as Exhibit 10.1
|
|
May 4, 2000
|
10.2
|
|
License Purchase Agreement, dated as of November 22, 2002,
by and between Avanir Pharmaceuticals and Drug Royalty USA,
Inc.
|
|
Current Report on Form 8-K, as Exhibit 99.1
|
|
January 7, 2003
|
10.3
|
|
Research, Development and Commercialization Agreement, dated as
of April 27, 2005, by and between Avanir Pharmaceuticals
and Novartis International Pharmaceutical Ltd.*
|
|
Quarterly Report on Form 10-Q for the quarter ended June 30,
2005, as Exhibit 10.1
|
|
August 15, 2005
|
10.4
|
|
Standard Industrial Net Lease by and between Avanir
Pharmaceuticals and BC Sorrento, LLC, effective as of
September 1, 2000
|
|
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000, as Exhibit 10.1
|
|
August 14, 2000
|
10.5
|
|
Standard Industrial Net Lease by and between Avanir
Pharmaceuticals and Sorrento Plaza, effective as of May 20,
2002
|
|
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002, as Exhibit 10.1
|
|
August 13, 2002
|
10.6
|
|
Office lease agreement, dated as of April 28, 2006, by and
between RREEF America REIT II Corp. FFF and Avanir
Pharmaceuticals
|
|
Annual Report on Form 10-K for the fiscal year ended September
30, 2006, as Exhibit 10.7
|
|
December 18, 2006
|
10.7
|
|
License Agreement, dated as of August 1, 2000, by and
between Avanir Pharmaceuticals and IriSys Research &
Development, LLC*
|
|
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000, as Exhibit 10.2
|
|
August 14, 2000
|
10.8
|
|
Sublease agreement, dated as of September 5, 2006, by and
between Avanir Pharmaceuticals and Sirion Therapeutics,
Inc.
|
|
Annual Report on Form 10-K for the fiscal year ended September
30, 2006, as Exhibit 10.9
|
|
December 18, 2006
|
10.9
|
|
Exclusive Patent License Agreement, dated as of April 2,
1997, by and between IriSys Research & Development,
LLC and the Center for Neurologic Study
|
|
Quarterly Report on Form 10-Q for the quarter ended March 31,
2005, as Exhibit 10.1
|
|
May 13, 2005
|
34
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference Herein
|
Number
|
|
Description
|
|
Form
|
|
Date
|
|
10.10
|
|
Amendment to Exclusive Patent License Agreement, dated as of
April 11, 2000, by and between IriSys Research &
Development, LLC and the Center for Neurologic Study
|
|
Quarterly Report on Form 10-Q for the quarter ended March 31,
2005, as Exhibit 10.2
|
|
May 13, 2005
|
10.11
|
|
Manufacturing Services Agreement, dated as of January 4,
2006, by and between Patheon Inc. and Avanir Pharmaceuticals*
|
|
Quarterly Report on Form 10-Q for the quarter ended March 31,
2006, as Exhibit 10.1
|
|
May 10, 2006
|
10.12
|
|
Quality Agreement, dated as of January 4, 2006, by and
between Avanir Pharmaceuticals and Patheon Inc.*
|
|
Quarterly Report on Form 10-Q for the quarter ended March 31,
2006, as Exhibit 10.2
|
|
May 10, 2006
|
10.13
|
|
Docosanol License Agreement, dated as of January 5, 2006,
by and between Kobayashi Pharmaceutical Co., Ltd. And Avanir
Pharmaceuticals*
|
|
Quarterly Report on Form 10-Q for the quarter ended March 31,
2006, as Exhibit 10.3
|
|
May 10, 2006
|
10.14
|
|
Docosanol Data Transfer and Patent License Agreement, dated as
of July 6, 2006, by and between Avanir Pharmaceuticals and
Healthcare Brands International Limited*
|
|
Annual Report on Form 10-K for the fiscal year ended September
30, 2006, as Exhibit 10.21
|
|
December 18, 2006
|
10.15
|
|
Development and License Agreement, dated as of August 7,
2006, by and between Eurand, Inc. and Avanir Pharmaceuticals*
|
|
Annual Report on Form 10-K for the fiscal year ended September
30, 2006, as Exhibit 10.22
|
|
December 18, 2006
|
10.16
|
|
Amended and Restated 1998 Stock Option Plan
|
|
Annual Report on Form 10-K for the fiscal year ended September
30, 2001, as Exhibit 10.2
|
|
December 21, 2001
|
10.17
|
|
Amended and Restated 1994 Stock Option Plan
|
|
Annual Report on Form 10-K for the fiscal year ended September
30, 2001, as Exhibit 10.4
|
|
December 21, 2001
|
10.18
|
|
Amended and Restated 2000 Stock Option Plan
|
|
Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, as Exhibit 10.1
|
|
May 14, 2003
|
10.19
|
|
Form of Restricted Stock Grant Notice for use with Amended and
Restated 2000 Stock Option Plan
|
|
Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, as Exhibit 10.2
|
|
May 14, 2003
|
10.20
|
|
2003 Equity Incentive Plan
|
|
Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, as Exhibit 10.3
|
|
May 14, 2003
|
10.21
|
|
Form of Non-Qualified Stock Option Award Notice for use with
2003 Equity Incentive Plan
|
|
Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, as Exhibit 10.4
|
|
May 14, 2003
|
10.22
|
|
Form of Restricted Stock Grant for use with 2003 Equity
Incentive Plan
|
|
Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, as Exhibit 10.5
|
|
May 14, 2003
|
10.23
|
|
Form of Restricted Stock Grant Notice (cash consideration) for
use with 2003 Equity Incentive Plan
|
|
Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, as Exhibit 10.6
|
|
May 14, 2003
|
35
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference Herein
|
Number
|
|
Description
|
|
Form
|
|
Date
|
|
10.24
|
|
Form of Indemnification Agreement with certain Directors and
Executive Officers of the Registrant
|
|
Quarterly Report on Form 10-Q for the quarter ended June 30,
2009, as Exhibit 10.1
|
|
July 30, 2009
|
10.25
|
|
2005 Equity Incentive Plan
|
|
Annual Report on Form 10-K for the fiscal year ended September
30, 2005, as Exhibit 10.21
|
|
December 14, 2005
|
10.26
|
|
Form of Stock Option Agreement for use with 2005 Equity
Incentive Plan
|
|
Current Report on Form 8-K, as Exhibit 10.1
|
|
March 23, 2005
|
10.27
|
|
Form of Restricted Stock Unit Grant Agreement for use with 2005
Equity Incentive Plan and 2003 Equity Incentive Plan
|
|
Annual Report on Form 10-K for the fiscal year ended September
30, 2007, as Exhibit 10.36
|
|
December 21, 2007
|
10.28
|
|
Form of Restricted Stock Purchase Agreement for use with 2005
Equity Incentive Plan
|
|
Annual Report on Form 10-K for the fiscal year ended September
30, 2006, as Exhibit 10.35
|
|
December 18, 2006
|
10.29
|
|
Form of Change of Control Agreement
|
|
Current Report on Form 8-K, as Exhibit 10.2
|
|
December 10, 2007
|
10.30
|
|
Employment Agreement with Keith Katkin, dated as of
June 13, 2005
|
|
Annual Report on Form 10-K for the fiscal year ended September
30, 2005, as Exhibit 10.25
|
|
December 14, 2005
|
10.31
|
|
Employment Agreement with Randall Kaye, dated as of
December 23, 2005
|
|
Quarterly Report on Form 10-Q for the quarter ended December 31,
2005, as Exhibit 10.1
|
|
February 9, 2006
|
10.32
|
|
Amended and Restated Change of Control Agreement, dated as of
February 27, 2007, by and between Avanir Pharmaceuticals
and Randall Kaye
|
|
Annual Report on Form 10-K for the fiscal year ended September
30, 2007, as Exhibit 10.43
|
|
December 21, 2007
|
10.33
|
|
Employment Agreement with Keith Katkin, dated as of
March 13, 2007
|
|
Annual Report on Form 10-K for the fiscal year ended September
30, 2007, as Exhibit 10.44
|
|
December 21, 2007
|
10.34
|
|
Bonus Agreement, dated as of September 10, 2007, by and
between Avanir Pharmaceuticals and Keith Katkin
|
|
Current Report on Form 8-K, as Exhibit 10.1
|
|
December 10, 2007
|
10.35
|
|
Asset Purchase Agreement, dated as of July 2, 2007, by and
among Avanir Pharmaceuticals, Alamo Pharmaceuticals, LLC and
Azur Pharma Inc.*
|
|
Annual Report on Form 10-K for the fiscal year ended September
30, 2007, as Exhibit 10.49
|
|
December 21, 2007
|
10.36
|
|
Sublease Agreement, dated as of July 2, 2007, by and
between Avanir Pharmaceuticals and Halozyme, Inc. (11388
Sorrento Valley Rd., San Diego, CA)
|
|
Annual Report on Form 10-K for the fiscal year ended September
30, 2007, as Exhibit 10.51
|
|
December 21, 2007
|
10.37
|
|
Sublease Agreement, dated as of July 2, 2007, by and
between Avanir Pharmaceuticals and Halozyme, Inc. (11404
Sorrento Valley Rd., San Diego, CA)
|
|
Annual Report on Form 10-K for the fiscal year ended September
30, 2007, as Exhibit 10.52
|
|
December 21, 2007
|
36
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated by Reference Herein
|
Number
|
|
Description
|
|
Form
|
|
Date
|
|
10.38
|
|
Third Amendment to Lease, dated as of July 19, 2007, by and
between Avanir Pharmaceuticals and RREEF America REIT II Corp.
FFF
|
|
Annual Report on Form 10-K for the fiscal year ended September
30, 2007, as Exhibit 10.53
|
|
December 21, 2007
|
10.39
|
|
Asset Purchase and License Agreement, dated as of March 6,
2008, by and among Avanir Pharmaceuticals, Xenerex Biosciences
and Emergent Biosolutions, Inc.*
|
|
Quarterly Report on Form 10-Q for the quarter ended March 31,
2008, as Exhibit 10.1
|
|
May 14, 2008
|
10.40
|
|
Payoff Letter, dated as of June 2, 2008, by and between
Neal R. Cutler and Avanir Pharmaceuticals
|
|
Quarterly Report on Form 10-Q for the quarter ended June 30,
2008, as Exhibit 10.1
|
|
August 8, 2008
|
10.41
|
|
Sublease Agreement, dated as of April 21, 2009, by and
between Avanir Pharmaceuticals, Inc. and Halozyme, Inc.
|
|
Quarterly Report on Form 10-Q for the quarter ended March 31,
2009, as Exhibit 10.1
|
|
May 8, 2009
|
10.42
|
|
Controlled Equity
Offeringsm
Sales Agreement, dated as of July 30, 2009, by and between
Avanir Pharmaceuticals, Inc. and Cantor Fitzgerald &
Co.
|
|
Quarterly Report on Form 10-Q for the quarter ended June 30,
2009, as Exhibit 10.2
|
|
July 30, 2009
|
21.1
|
|
List of Subsidiaries
|
|
Filed herewith
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
Filed herewith
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
|
|
|
|
* |
|
Confidential treatment has been granted with respect to portions
of this exhibit pursuant to an application requesting
confidential treatment under
Rule 24b-2
of the Securities Exchange Act of 1934. A complete copy of this
exhibit, including the redacted terms, has been separately filed
with the Securities and Exchange Commission. |
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Avanir Pharmaceuticals,
INC.
Keith A. Katkin
President and Chief Executive Officer
Date: November 25, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
date indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Keith
A. Katkin
Keith
A. Katkin
|
|
President and Chief Executive Officer (Principal Executive
Officer)
|
|
November 25, 2009
|
|
|
|
|
|
/s/ Christine
G. Ocampo
Christine
G. Ocampo
|
|
Vice President, Finance
(Principal Financial Officer)
|
|
November 25, 2009
|
|
|
|
|
|
/s/ Craig
A. Wheeler
Craig
A. Wheeler
|
|
Director, Chairman of the Board
|
|
November 25, 2009
|
|
|
|
|
|
/s/ Stephen
G. Austin, CPA
Stephen
G. Austin, CPA
|
|
Director
|
|
November 25, 2009
|
|
|
|
|
|
/s/ Charles
A. Mathews
Charles
A. Mathews
|
|
Director
|
|
November 25, 2009
|
|
|
|
|
|
/s/ David
J. Mazzo, Ph.D.
David
J. Mazzo, Ph.D.
|
|
Director
|
|
November 25, 2009
|
|
|
|
|
|
/s/ Dennis
G. Podlesak
Dennis
G. Podlesak
|
|
Director
|
|
November 25, 2009
|
|
|
|
|
|
/s/ Nicholas
Simon
Nicholas
Simon
|
|
Director
|
|
November 25, 2009
|
|
|
|
|
|
/s/ Scott
M. Whitcup, M.D.
Scott
M. Whitcup, M.D.
|
|
Director
|
|
November 25, 2009
|
38
Avanir
Pharmaceuticals,
Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
F-2
|
|
Financial Statements:
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
Financial Statement Schedules:
|
|
|
|
|
Financial statement schedules have been omitted for the reason
that the required information is presented in the consolidated
financial statements or notes thereto, the amounts involved are
not significant or the schedules are not applicable.
|
|
|
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Avanir
Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of
Avanir
Pharmaceuticals, Inc. and subsidiaries (the Company)
as of September 30, 2009 and 2008, and the related
consolidated statements of operations, stockholders equity
and comprehensive loss, and cash flows for the years then ended.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company has
determined that it is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Avanir
Pharmaceuticals, Inc. and subsidiaries as of September 30,
2009 and 2008, and the results of their operations and their
cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
/s/ KMJ
Corbin &
Company LLP
Costa Mesa, California
November 25, 2009
F-2
Avanir
Pharmaceuticals, Inc.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
31,486,012
|
|
|
$
|
41,383,930
|
|
Inventories
|
|
|
114,098
|
|
|
|
17,000
|
|
Prepaid expenses
|
|
|
397,100
|
|
|
|
1,030,630
|
|
Other current assets
|
|
|
331,717
|
|
|
|
237,334
|
|
Current portion of restricted investments in marketable
securities
|
|
|
200,775
|
|
|
|
388,122
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
32,529,702
|
|
|
|
43,057,016
|
|
Restricted investments in marketable securities, net of current
portion
|
|
|
267,700
|
|
|
|
468,475
|
|
Property and equipment, net
|
|
|
310,677
|
|
|
|
806,909
|
|
Non-current inventories
|
|
|
710,531
|
|
|
|
1,316,277
|
|
Other assets
|
|
|
249,462
|
|
|
|
257,484
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
34,068,072
|
|
|
$
|
45,906,161
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,214,117
|
|
|
$
|
451,846
|
|
Accrued expenses and other liabilities
|
|
|
1,001,599
|
|
|
|
1,881,401
|
|
Accrued compensation and payroll taxes
|
|
|
1,345,859
|
|
|
|
1,192,457
|
|
Current portion of deferred revenues
|
|
|
2,282,560
|
|
|
|
2,333,932
|
|
Current portion of notes payable
|
|
|
|
|
|
|
25,744
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,844,135
|
|
|
|
5,885,380
|
|
Accrued expenses and other liabilities, net of current portion
|
|
|
652,395
|
|
|
|
868,517
|
|
Deferred revenues, net of current portion
|
|
|
7,629,807
|
|
|
|
10,152,100
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,126,337
|
|
|
|
16,905,997
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock $0.0001 par value,
10,000,000 shares authorized, no shares issued or
outstanding as of September 30, 2009 and 2008
|
|
|
|
|
|
|
|
|
Common stock $0.0001 par value,
200,000,000 shares authorized; 83,084,182 and
78,213,986 shares issued and outstanding as of
September 30, 2009 and 2008, respectively
|
|
|
8,308
|
|
|
|
7,821
|
|
Additional paid-in capital
|
|
|
297,923,915
|
|
|
|
284,986,815
|
|
Accumulated deficit
|
|
|
(277,990,488
|
)
|
|
|
(255,994,472
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
19,941,735
|
|
|
|
29,000,164
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
34,068,072
|
|
|
$
|
45,906,161
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
Avanir
Pharmaceuticals, Inc.
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
REVENUES FROM PRODUCT SALES
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
|
|
|
$
|
129,820
|
|
Cost of revenues
|
|
|
73,135
|
|
|
|
21,714
|
|
|
|
|
|
|
|
|
|
|
Product gross (loss) margin
|
|
|
(73,135
|
)
|
|
|
108,106
|
|
|
|
|
|
|
|
|
|
|
REVENUES AND COST OF RESEARCH SERVICES AND OTHER
|
|
|
|
|
|
|
|
|
Revenues from royalties and royalty rights
|
|
|
3,642,675
|
|
|
|
3,616,102
|
|
Revenues from license agreements
|
|
|
533,834
|
|
|
|
2,205,724
|
|
Revenues from government research grant services
|
|
|
|
|
|
|
1,006,922
|
|
|
|
|
|
|
|
|
|
|
Revenues from research services and other
|
|
|
4,176,509
|
|
|
|
6,828,748
|
|
Cost of research and development services
|
|
|
10,224
|
|
|
|
249,281
|
|
Cost of government research grant
|
|
|
|
|
|
|
940,130
|
|
|
|
|
|
|
|
|
|
|
Research services and other gross margin
|
|
|
4,166,285
|
|
|
|
5,639,337
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
|
4,093,150
|
|
|
|
5,747,443
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
15,867,049
|
|
|
|
14,110,743
|
|
General and administrative
|
|
|
10,150,766
|
|
|
|
10,599,158
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
26,017,815
|
|
|
|
24,709,901
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(21,924,665
|
)
|
|
|
(18,962,458
|
)
|
OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
204,190
|
|
|
|
1,283,302
|
|
Interest expense
|
|
|
(517
|
)
|
|
|
(540,618
|
)
|
Gain on early extinguishment of debt
|
|
|
|
|
|
|
967,547
|
|
Gain on sale of Xenerex antibodies
|
|
|
|
|
|
|
120,274
|
|
Other, net
|
|
|
(271,824
|
)
|
|
|
1,222,481
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before provision for income
taxes
|
|
|
(21,992,816
|
)
|
|
|
(15,909,472
|
)
|
Provision for income taxes
|
|
|
3,200
|
|
|
|
3,200
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(21,996,016
|
)
|
|
|
(15,912,672
|
)
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(231,848
|
)
|
Loss from sale of discontinued operations
|
|
|
|
|
|
|
(1,351,219
|
)
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(1,583,067
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,996,016
|
)
|
|
$
|
(17,495,739
|
)
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED NET LOSS PER SHARE:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.28
|
)
|
|
$
|
(0.27
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.28
|
)
|
|
$
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of common shares
outstanding
|
|
|
78,844,251
|
|
|
|
58,901,030
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
Avanir
Pharmaceuticals, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
Loss
|
|
|
BALANCE, SEPTEMBER 30, 2007
|
|
|
43,117,358
|
|
|
$
|
4,312
|
|
|
$
|
245,527,400
|
|
|
$
|
(238,498,733
|
)
|
|
$
|
(2,745
|
)
|
|
$
|
7,030,234
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,495,739
|
)
|
|
|
|
|
|
|
(17,495,739
|
)
|
|
$
|
(17,495,739
|
)
|
Issuance of common stock in connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of stock, net of offering costs
|
|
|
35,007,246
|
|
|
|
3,500
|
|
|
|
37,835,342
|
|
|
|
|
|
|
|
|
|
|
|
37,838,842
|
|
|
|
|
|
Vesting of restricted stock units and awards
|
|
|
113,361
|
|
|
|
11
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
271
|
|
|
|
|
|
Common stock surrendered
|
|
|
(21,979
|
)
|
|
|
(2
|
)
|
|
|
(29,848
|
)
|
|
|
|
|
|
|
|
|
|
|
(29,850
|
)
|
|
|
|
|
Forfeiture of restricted awards
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,653,661
|
|
|
|
|
|
|
|
|
|
|
|
1,653,661
|
|
|
|
|
|
Reclassification adjustment for unrealized gains on investments
in marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,745
|
|
|
|
2,745
|
|
|
|
2,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, SEPTEMBER 30, 2008
|
|
|
78,213,986
|
|
|
|
7,821
|
|
|
|
284,986,815
|
|
|
|
(255,994,472
|
)
|
|
|
|
|
|
|
29,000,164
|
|
|
$
|
(17,492,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,996,016
|
)
|
|
|
|
|
|
|
(21,996,016
|
)
|
|
$
|
(21,996,016
|
)
|
Issuance of common stock in connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of stock, net of offering costs
|
|
|
4,613,350
|
|
|
|
461
|
|
|
|
10,246,419
|
|
|
|
|
|
|
|
|
|
|
|
10,246,880
|
|
|
|
|
|
Vesting of restricted stock units
|
|
|
346,294
|
|
|
|
35
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock surrendered
|
|
|
(89,448
|
)
|
|
|
(9
|
)
|
|
|
(186,247
|
)
|
|
|
|
|
|
|
|
|
|
|
(186,256
|
)
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2,876,963
|
|
|
|
|
|
|
|
|
|
|
|
2,876,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, SEPTEMBER 30, 2009
|
|
|
83,084,182
|
|
|
$
|
8,308
|
|
|
$
|
297,923,915
|
|
|
$
|
(277,990,488
|
)
|
|
$
|
|
|
|
$
|
19,941,735
|
|
|
$
|
(21,996,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
Avanir
Pharmaceuticals, Inc.
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,996,016
|
)
|
|
$
|
(17,495,739
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
|
1,583,067
|
|
Adjustments to reconcile loss from continuing operations to net
cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
260,780
|
|
|
|
445,980
|
|
Share-based compensation expense
|
|
|
2,876,963
|
|
|
|
1,639,756
|
|
Amortization of debt discount
|
|
|
|
|
|
|
232,776
|
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
(967,547
|
)
|
Gain on sale of Xenerex antibodies
|
|
|
|
|
|
|
(120,274
|
)
|
Loss on impairment of assets
|
|
|
|
|
|
|
41,048
|
|
Loss on disposal of assets
|
|
|
266,212
|
|
|
|
26,852
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
|
|
|
|
72,000
|
|
Inventories
|
|
|
508,648
|
|
|
|
21,714
|
|
Prepaid expenses and other assets
|
|
|
547,169
|
|
|
|
1,220,915
|
|
Accounts payable
|
|
|
762,271
|
|
|
|
144,146
|
|
Accrued expenses and other liabilities
|
|
|
(1,095,924
|
)
|
|
|
(471,342
|
)
|
Accrued compensation and payroll taxes
|
|
|
153,402
|
|
|
|
780
|
|
Deferred revenues
|
|
|
(2,573,665
|
)
|
|
|
(2,834,398
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities of continuing operations
|
|
|
(20,290,160
|
)
|
|
|
(16,460,266
|
)
|
Net cash used in operating activities of discontinued operations
|
|
|
|
|
|
|
(217,943
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(20,290,160
|
)
|
|
|
(16,678,209
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Investments in securities
|
|
|
|
|
|
|
(527
|
)
|
Proceeds from sales and maturities of investments in securities
|
|
|
388,122
|
|
|
|
2,300,111
|
|
Purchase of property and equipment
|
|
|
(33,010
|
)
|
|
|
(134,374
|
)
|
Proceeds from sale of Xenerex antibodies
|
|
|
|
|
|
|
210,000
|
|
Proceeds from disposal of assets
|
|
|
2,250
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
357,362
|
|
|
|
2,380,210
|
|
Net cash used in investing activities of discontinued operations
|
|
|
|
|
|
|
(1,351,219
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
357,362
|
|
|
|
1,028,991
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from issuances of common stock and warrants, net of
commissions and offering costs
|
|
|
10,246,880
|
|
|
|
37,838,842
|
|
Tax withholding payments reimbursed by surrender of restricted
stock
|
|
|
(186,256
|
)
|
|
|
(29,579
|
)
|
Payments on notes and capital lease obligations
|
|
|
(25,744
|
)
|
|
|
(11,264,077
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
10,034,880
|
|
|
|
26,545,186
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(9,897,918
|
)
|
|
|
10,895,968
|
|
Cash and cash equivalents at beginning of year
|
|
|
41,383,930
|
|
|
|
30,487,962
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
31,486,012
|
|
|
$
|
41,383,930
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
517
|
|
|
$
|
447,508
|
|
Income taxes paid
|
|
$
|
6,427
|
|
|
$
|
51,108
|
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Common stock surrendered
|
|
$
|
186,256
|
|
|
$
|
29,850
|
|
See notes to consolidated financial statements.
F-6
Avanir
Pharmaceuticals, Inc.
|
|
1.
|
Description
of Business
|
Avanir
Pharmaceuticals, Inc. and subsidiaries (AVANIR or
the Company) is a pharmaceutical company focused on
acquiring, developing and commercializing novel therapeutic
products for the treatment of central nervous system disorders.
The Companys lead product candidate,
Zenviatm
(dextromethorphan
hydrobromide/quinidine
sulfate), has successfully completed three Phase III
clinical trials for the treatment of pseudobulbar affect
(PBA) and has successfully completed a
Phase III trial for the treatment of patients with diabetic
peripheral neuropathic pain (DPN pain). In addition
to the Companys focus on products for the central nervous
system, the Company also has a number of partnered programs in
other therapeutic areas which may generate future income. The
Companys first commercialized product, docosanol 10%
cream, (sold in the United States and Canada as
Abreva®
by their marketing partner GlaxoSmithKline Consumer Healthcare)
is the only
over-the-counter
treatment for cold sores that has been approved by the
U.S. Food and Drug Administration (FDA). In
2008, the Company licensed all monoclonal antibodies and remains
eligible to receive milestone payments and royalties related to
the sale of these assets.
Avanir was
incorporated in California in August 1988 and was reincorporated
in Delaware in March 2009.
The Companys operations are subject to certain risks and
uncertainties frequently encountered by companies in the early
stages of operations, particularly in the evolving market for
small biotech and specialty pharmaceuticals companies. Such
risks and uncertainties include, but are not limited to, timing
and uncertainty of achieving milestones in clinical trials and
in obtaining approvals by the FDA and regulatory agencies in
other countries.
The Companys ability to generate revenues in the
future will depend on license arrangements, the timing and
success of reaching development milestones, and obtaining
regulatory approvals and ultimately market acceptance of Zenvia
for the treatment of PBA, assuming the FDA approves the
Companys new drug application. The Companys
operating expenses depend substantially on the level of
expenditures for clinical development activities for Zenvia for
the treatment of PBA and the rate of progress being made on such
programs.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of presentation
The consolidated financial statements include the accounts of
Avanir
Pharmaceuticals, Inc. and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
Certain amounts from prior years have been reclassified to
conform to the current year presentation, as discussed below.
The Companys fiscal year ends on September 30 of each
year. The years ended September 30, 2009 and 2008 may
be referred to as fiscal 2009 and fiscal 2008, respectively.
The Company has evaluated subsequent events through
November 25, 2009, the filing date of this
Form 10-K,
and determined that no subsequent events have occurred that
would require recognition in the consolidated financial
statements or disclosure in the notes thereto other than as
discussed in the accompanying notes.
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 consolidated financial
statements of
Avanir include
adjustments to reflect the classification of the Companys
FazaClo business as discontinued operations. See Note 3 for
information on discontinued operations.
On March 27, 2009, the Company effected a change of
domicile from California to Delaware. In the change of domicile,
Avanir
Pharmaceuticals, a California corporation
(Avanir
California), merged with and into
Avanir
Pharmaceuticals, Inc., a Delaware corporation
(Avanir
Delaware) and a wholly-owned subsidiary of
Avanir California.
As a result of the merger,
Avanir Delaware
succeeded to the assets and liabilities of
Avanir California.
In the merger, each share of
Avanir California
Class A common stock, no par value, was converted into one
share of Avanir
Delaware common stock, $0.0001 par value, and all options,
warrants and purchase rights issued by
Avanir California
and outstanding at the time of the merger were assumed by
Avanir Delaware.
Due to the change in the par value of the Companys common
stock, the Company attributed $7,824 to stockholders
equity for common stock as
F-7
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of March 31, 2009, which amount is equal to the aggregate
par value of the shares of common stock issued and outstanding
on that date, and reclassified the balance of $285,814,402 as
additional paid-in capital as of that date. No change was made
to stockholders equity for preferred stock as no shares
were outstanding as of March 31, 2009. Prior period amounts
have been reclassified to conform to the current period
presentation. The reclassifications had no effect on total
stockholders equity.
Management
estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates. Significant estimates made by management include,
among others, valuation of inventories and investments,
recoverability of long-lived assets, recognition of deferred
revenue, share-based compensation expense, determination of
expenses in outsourced contracts and realization of deferred tax
assets.
Cash
and cash equivalents
Cash and cash equivalents consist of cash and highly liquid
investments with maturities of three months or less at the date
of acquisition.
Restricted
investments in marketable securities
Restricted investments consist of certificates of deposit and
represent amounts pledged to the Companys bank as
collateral for letters of credit issued in connection with
certain of the Companys lease agreements. These
investments are classified as
held-to-maturity
and are stated at the lower of cost or market. The restricted
amounts that apply to the terms of the leases, which expire in
January 2013, were $468,475 and $856,597 for the years ended
September 30, 2009 and 2008, respectively.
Concentrations
As of September 30, 2009, $31.1 million of the
Companys cash and cash equivalents were maintained in six
separate money market mutual funds, and approximately $379,000
of the Companys cash and cash equivalents were maintained
at two major financial institutions in the United States. At
times, deposits held with financial institutions may exceed the
amount of insurance provided on such deposits, and at
September 30, 2009, such uninsured deposits totaled
$31.1 million. Generally, these deposits may be redeemed
upon demand and, therefore, bear minimal risk. Effective
October 3, 2008, the Emergency Economic Stabilization Act
of 2008 raised the Federal Deposit Insurance Corporation deposit
coverage limits to $250,000 per owner from $100,000 per owner.
This program is currently available through December 31,
2009.
Financial instruments that potentially subject us to
concentrations of credit risk consist principally of cash and
cash equivalents. The Companys cash and cash equivalents
are placed in various money market mutual funds and at financial
institutions of high credit standing.
The Company performs ongoing credit evaluations of
customers financial conditions and would limit the amount
of credit extended if deemed necessary but usually has required
no collateral.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined on a
first-in,
first-out (FIFO) basis. The Company evaluates the
carrying value of inventories on a regular basis, based on the
price expected to be obtained for products in their respective
markets compared with historical cost. Write-downs of
inventories are considered to be permanent reductions in the
cost basis of inventories.
F-8
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company also regularly evaluates its inventories for excess
quantities and obsolescence (expiration), taking into account
such factors as historical and anticipated future sales or use
in production compared to quantities on hand and the remaining
shelf life of goods on hand. The Company establishes reserves
for excess and obsolete inventory as required based on its
analyses.
Property
and equipment
Property and equipment, net, is stated at cost less accumulated
depreciation and amortization. Depreciation and amortization is
computed using the straight-line method over the estimated
useful life of the asset. Computer equipment and related
software are depreciated over three to five years. Office
equipment, furniture and fixtures are depreciated over five
years. Leasehold improvements are amortized over the remaining
lease term. Leased assets meeting certain capital lease criteria
are capitalized and the present value of the related lease
payments is recorded as a liability. Assets under capital lease
arrangements are depreciated using the straight-line method over
their estimated useful lives or their related lease term,
whichever is shorter.
Capitalization
and Valuation of Long-Lived Assets
Long-lived assets are evaluated for impairment whenever events
or changes in circumstances indicate that their carrying value
may not be recoverable. If the review indicates that 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.
|
As a result of our impairment review conducted in fiscal 2008,
the Company determined that approximately $41,000 of intangible
assets were not recoverable. Accordingly, the Company recorded
an impairment loss of approximately $41,000. This impairment
loss was included in amortization expense in fiscal 2008. Based
on its recent analysis, the Companys management believes
that no impairment of the carrying value of its long-lived
assets existed at September 30, 2009.
Deferred
rent
The Company accounts for rent expense related to operating
leases (excluding leases related to exit activities) by
accumulating total minimum rent payments on the leases over
their respective periods and recognizing the rent expense on a
straight-line basis. The difference between the actual amount
paid and the amount recorded as rent expense in each fiscal year
is recorded as an adjustment to deferred rent. Deferred rent as
of September 30, 2009 and 2008 was approximately $20,000
and $49,000, respectively, and is included in accrued expenses
and other liabilities.
Fair
value of financial instruments
At September 30, 2009 and 2008, the Companys
financial instruments included cash and cash equivalents,
restricted investments in marketable securities, accounts
payable, accrued expenses and other liabilities, notes payable
and accrued compensation and payroll taxes. The carrying amount
of cash and cash equivalents, accounts payable, accrued expenses
and other liabilities, notes payable and accrued compensation
and payroll taxes approximates fair value due to the short-term
maturities of these instruments. The Companys short- and
long-term restricted investments in marketable securities are
carried at fair value based on quoted market prices. The fair
value of the Companys notes payable at September 30,
2008 were estimated based on quoted market prices or
F-9
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
pricing models using current market rates. At September 30,
2008, the fair value of the Companys notes payable and
capital lease obligations approximate their carrying value.
Revenue
recognition
The Company has historically generated revenues from product
sales, collaborative research and development arrangements, and
other commercial arrangements such as, royalties, the sale of
royalty rights and sales of technology rights. Payments received
under such arrangements may include non-refundable fees at the
inception of the arrangements, milestone payments for specific
achievements designated in the agreements, royalties on sales of
products resulting from collaborative arrangements, and payments
for the sale of rights to future royalties.
The Company recognizes revenue when all of the following
criteria are met: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services have been
rendered; (3) the Companys price to the buyer is
fixed and determinable; and (4) collectability is
reasonably assured. Certain product sales are subject to rights
of return. For products sold where the buyer has the right to
return the product, the Company recognizes revenue at the time
of sale only if (1) the Companys price to the buyer
is substantially fixed or determinable at the date of sale,
(2) the buyer has paid the Company, or the buyer is
obligated to pay the seller and the obligation is not contingent
on resale of the product, (3) the buyers obligation
to the Company would not be changed in the event of theft or
physical destruction or damage of the product, (4) the
buyer acquiring the product for resale has economic substance
apart from that provided by the seller, (5) the Company
does not have significant obligations for future performance to
directly bring about resale of the product by the buyer, and
(6) the amount of future returns can be reasonably
estimated. The Company recognizes such product revenues when
either it has met all the above criteria, including the ability
to reasonably estimate future returns, when it can reasonably
estimate that the return privilege has substantially expired, or
when the return privilege has substantially expired, whichever
occurs first.
Product Sales Active Pharmaceutical Ingredient
Docosanol (API Docosanol). Revenue
from sales of the Companys API Docosanol is recorded when
title and risk of loss have passed to the buyer and provided the
criteria for revenue recognition are met. The Company sells the
API Docosanol to various licensees upon receipt of a written
order for the materials. Shipments generally occur fewer than
five times a year. The Companys contracts for sales of the
API Docosanol include buyer acceptance provisions that give the
Companys buyers the right of replacement if the delivered
product does not meet specified criteria. That right requires
that they give the Company notice within 30 days after
receipt of the product. The Company has the option to refund or
replace any such defective materials; however, it has
historically demonstrated that the materials shipped from the
same pre-inspected lot have consistently met the specified
criteria and no buyer has rejected any of the Companys
shipments from the same pre-inspected lot to date. Therefore,
the Company recognizes revenue at the time of delivery without
providing any returns reserve.
Multiple
Element Arrangements.
The Company has arrangements whereby it delivers to the customer
multiple elements including technology
and/or
services. Such arrangements have generally included some
combination of the following: antibody generation services;
licensed rights to technology, patented products, compounds,
data and other intellectual property; and research and
development services. The Company analyzes its multiple element
arrangements to determine whether the elements can be separated.
The Company performs its analysis at the inception of the
arrangement and as each product or service is delivered. If a
product or service is not separable, the combined deliverables
will be accounted for as a single unit of accounting.
A delivered element can be separated from other elements when it
meets all of the following criteria: (1) the delivered item
has value to the customer on a standalone basis; (2) there
is objective and reliable evidence of the fair value of the
undelivered item; and (3) if the arrangement includes a
general right of return relative to the delivered item,
delivery, or performance of the undelivered item is considered
probable and substantially in our control. If an element can be
separated the Company allocates amounts based upon the relative
fair values of each element. The
F-10
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company determines the fair value of a separate deliverable
using the price it charges other customers when it sells that
product or service separately; however, if the Company does not
sell the product or service separately, it uses third-party
evidence of fair value. The Company considers licensed rights or
technology to have standalone value to its customers if it or
others have sold such rights or technology separately or its
customers can sell such rights or technology separately without
the need for the Companys 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. These arrangements are
often multiple element arrangements.
Non-refundable, up-front fees that are not contingent on any
future performance by the Company, and require no consequential
continuing involvement on its part, are recognized as revenue
when the license term commences and the licensed data,
technology
and/or
compound is delivered. Such deliverables may include physical
quantities of compounds, design of the compounds and
structure-activity relationships, the conceptual framework and
mechanism of action, and rights to the patents or patents
pending for such compounds. The Company defers recognition of
non-refundable upfront fees if it has continuing performance
obligations without which the technology, right, product or
service conveyed in conjunction with the non-refundable fee has
no utility to the licensee that is separate and independent of
the Companys performance under the other elements of the
arrangement. In addition, if the Company has required continuing
involvement through research and development services that are
related to its proprietary know-how and expertise of the
delivered technology, or can only be performed by the Company,
then such up-front fees are deferred and recognized over the
period of continuing involvement.
Payments related to substantive, performance-based milestones in
a research and development arrangement are recognized as
revenues upon the achievement of the milestones as specified in
the underlying agreements when they represent the culmination of
the earnings process.
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 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. The Company recognizes
royalty revenues from licensed products when earned in
accordance with the terms of the license agreements. Net sales
amounts generally required to be used for calculating royalties
include deductions for returned product, pricing allowances,
cash discounts, freight and warehousing. These arrangements are
often multiple element arrangements.
Certain royalty arrangements require that royalties are earned
only if a sales threshold is exceeded. Under these types of
arrangements, the threshold is typically based on annual sales.
For royalty revenue generated from the license agreement with
GlaxoSmithKline, the Company recognizes royalty revenue in the
period in which the threshold is exceeded. For royalty revenue
generated from the license agreement with Azur Pharma, the
Company recognizes revenue when it has confirmed that the
threshold has been exceeded.
When the Company sells its rights to future royalties under
license agreements and also maintains continuing involvement in
earning such royalties, it defers recognition of any upfront
payments and recognizes them as revenues over the life of the
license agreement. The Company recognizes revenues for the sale
of an undivided interest of its
Abreva®
license agreement to Drug Royalty USA under the
units-of-revenue
method. Under this method, the amount of deferred revenues
to be recognized in each period is calculated by multiplying the
ratio of the royalty payments due to Drug Royalty USA by
GlaxoSmithKline for the period to the total remaining royalties
the
F-11
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company expects GlaxoSmithKline will pay Drug Royalty USA over
the remaining term of the agreement by the unamortized deferred
revenues.
Government Research Grant Revenues. The
Company recognizes 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.
Recognition
of expenses in outsourced contracts
Pursuant to managements assessment of the services that
have been performed on clinical trials and other contracts, the
Company recognizes expense as the services are provided. Such
management assessments include, but are not limited to:
(1) an evaluation by the project manager of the work that
has been completed during the period, (2) measurement of
progress prepared internally
and/or
provided by the third-party service provider, (3) analyses
of data that justify the progress, and
(4) managements judgment. Several of the
Companys contracts extend across multiple reporting
periods, including the Companys largest contract,
representing a $7.1 million Phase III clinical trial
contract that was entered into in the first quarter of fiscal
2008. A 3% variance in the Companys estimate of the work
completed in the largest contract could increase or decrease
quarterly operating expenses by approximately $213,000.
Research
and development expenses
Research and development expenses consist of expenses incurred
in performing research and development activities including
salaries and benefits, facilities and other overhead expenses,
clinical trials, contract services and outsource contracts.
Research and development expenses are charged to operations as
they are incurred. Up-front payments to collaborators made in
exchange for the avoidance of potential future milestone and
royalty payments on licensed technology are also charged to
research and development expense when the drug is still in the
development stage, has not been approved by the FDA for
commercialization and currently has no alternative uses.
The Company assesses its obligations to make milestone payments
that may become due under licensed or acquired technology to
determine whether the payments should be expensed or
capitalized. The Company charges milestone payments to research
and development expense when:
|
|
|
|
|
The technology is in the early stage of development and has no
alternative uses;
|
|
|
|
There is substantial uncertainty regarding the future success of
the technology or product;
|
|
|
|
There will be difficulty in completing the remaining
development; and
|
|
|
|
There is substantial cost to complete the work.
|
Acquired contractual rights. Payments to
acquire contractual rights to a licensed technology or drug
candidate are expensed as incurred when there is uncertainty in
receiving future economic benefits from the acquired contractual
rights. The Company considers the future economic benefits from
the acquired contractual rights to a drug candidate to be
uncertain until such drug candidate is approved by the FDA or
when other significant risk factors are abated.
Share-Based
Compensation
The Company grants options, restricted stock units and
restricted stock awards to purchase the Companys common
stock to employees, directors and consultants under stock option
plans. The benefits provided under these plans are share-based
payments that the Company accounts for using the fair value
method.
F-12
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of each option award is estimated on the date of
grant using a Black-Scholes-Merton option pricing model
(Black-Scholes model) that uses assumptions
regarding a number of complex and subjective variables. These
variables include, but are not limited to, expected stock price
volatility, actual and projected employee stock option exercise
behaviors, risk-free interest rate and expected dividends.
Expected volatilities are based on historical volatility of
common stock and other factors. The expected terms of options
granted are based on analyses of historical employee termination
rates and option exercises. The risk-free interest rates are
based on the U.S. Treasury yield in effect at the time of
the grant. Since the Company does not expect to pay dividends on
common stock in the foreseeable future, it estimated the
dividend yield to be 0%.
Share-based compensation expense recognized during a period is
based on the value of the portion of share-based payment awards
that is ultimately expected to vest amortized under the
straight-line attribution method. As share-based compensation
expense recognized in the consolidated statements of operations
for fiscal 2009 and 2008 is based on awards ultimately expected
to vest, it has been reduced for estimated forfeitures. The fair
value method requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The Company estimates
forfeitures based on historical experience. Changes to the
estimated forfeiture rate are accounted for as a cumulative
effect of change in the period the change occurred. In the
fourth quarter of fiscal 2009, the Company reviewed the
estimated forfeiture rate considering recent actual data which
resulted in a reduction to the estimated forfeiture rate from
30.0% to 12.6%. Additionally, the Company reduced the estimated
forfeiture rate on certain restricted stock unit awards from
30.0% to zero percent, as the Company expects all these awards
to vest. These changes in the estimated forfeiture rates
resulted in an increase in share-based compensation expense of
approximately $935,000 and an increase to basic and diluted loss
per share of $0.01 for fiscal 2009.
Total compensation expense related to all of the Companys
share-based awards for fiscal 2009 and 2008 was comprised of the
following:
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|
Fiscal 2009
|
|
|
Fiscal 2008
|
|
|
From Continuing Operations:
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
$
|
2,213,242
|
|
|
$
|
1,149,018
|
|
Research and development expense
|
|
|
663,721
|
|
|
|
490,738
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense related to continuing operations
|
|
|
2,876,963
|
|
|
|
1,639,756
|
|
From discontinued operations:
|
|
|
|
|
|
|
13,905
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
$
|
2,876,963
|
|
|
$
|
1,653,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009
|
|
|
Fiscal 2008
|
|
|
Share-based compensation expense from:
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
919,478
|
|
|
$
|
666,129
|
|
Restricted stock units
|
|
|
1,957,485
|
|
|
|
848,535
|
|
Restricted stock awards
|
|
|
|
|
|
|
138,997
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,876,963
|
|
|
$
|
1,653,661
|
|
|
|
|
|
|
|
|
|
|
Since the Company has a net operating loss carry-forward as of
September 30, 2009 and 2008, no excess tax benefits for the
tax deductions related to share-based awards were recognized in
the consolidated statements of operations. Additionally, no
incremental tax benefits were recognized from stock options
exercised in fiscal 2009 and 2008 that would have resulted in a
reclassification from cash flows from operating activities to
cash flows from financing activities.
F-13
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restructuring
expense
We record costs and liabilities associated with exit and
disposal activities at fair value in the period the liability is
incurred. In periods subsequent to initial measurement, changes
to a liability are measured using the credit-adjusted risk-free
rate applied in the initial period. In fiscal 2009, we recorded
costs and liabilities for exit and disposal activities related
to a relocation plan that was implemented in 2006. Refer to
Note 8, Accrued Expenses and Other Liabilities
for further information.
Advertising
expenses
Advertising costs are expensed as incurred, and these costs are
included in both research and development expenses and general
and administrative expenses. Advertising costs were
approximately $336,000 and $304,000 for fiscal 2009 and 2008,
respectively.
Income
taxes
The Company accounts for income taxes and the related accounts
under the liability method. Deferred tax assets and liabilities
are determined based on the differences between the financial
statement carrying amounts and the income tax bases of assets
and liabilities. A valuation allowance is applied against any
net deferred tax asset if, based on available evidence, it is
more likely than not that some or all of the deferred tax assets
will not be realized.
Under Accounting Standards Codification 740-10-50 (ASC
740-10-50), Accounting for Uncertain Tax Positions,
formerly Financial Accounting Standards Board Interpretation No.
48 (FIN 48), the Company recognizes any uncertain
income tax positions on income tax returns at the largest amount
that is more-likely-than-not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will
not be recognized if it has less than a 50% likelihood of being
sustained.
The Company adopted the authoritative guidance, ASC
740-10-50,
on accounting for uncertain tax positions as of October 1,
2007. The total amount of unrecognized tax benefits as of the
date of adoption was $3.0 million. The total unrecognized
tax benefit resulting in a decrease in deferred tax assets and
corresponding decrease in the valuation allowance at
September 30, 2009 is $3.3 million. There are no
unrecognized tax benefits included in the consolidated balance
sheet that would, if recognized, affect the effective tax rate.
The Companys 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
Companys consolidated balance sheets at September 30,
2009 and 2008.
The Company is subject to taxation in the U.S. and various
state jurisdictions. The Companys tax years for 1992 and
forward are subject to examination by the U.S. and
California tax authorities due to the carryforward of unutilized
net operating losses and research and development credits.
The Company does not foresee material changes to its gross
uncertain income tax position liability within the next twelve
months.
Comprehensive
income (loss)
Comprehensive income (loss) is defined as the change in equity
of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources, including
foreign currency translation adjustments and unrealized gains
and losses on marketable securities. The Company presents
accumulated other comprehensive income (loss) in the
consolidated statements of stockholders equity and
comprehensive loss.
F-14
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. Diluted net loss per common share is computed
by dividing net loss by the weighted-average number of common
and dilutive common equivalent shares outstanding during the
period. In the loss periods, the shares of common stock issuable
upon exercise of stock options and warrants are excluded from
the computation of diluted net loss per share, as their effect
is anti-dilutive. There were no restricted shares with right of
repurchase excluded from the computation of net loss per share
in fiscal 2009 and 2008.
For fiscal 2009 and 2008, the following options and warrants to
purchase shares of common stock, restricted stock awards and
restricted stock units were excluded from the computation of
diluted net loss per share, as the inclusion of such shares
would be anti-dilutive:
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|
|
|
|
|
|
|
|
Fiscal 2009
|
|
|
Fiscal 2008
|
|
|
Stock options
|
|
|
2,185,938
|
|
|
|
624,027
|
|
Performance stock options
|
|
|
2,031,218
|
|
|
|
2,048,200
|
|
Stock warrants
|
|
|
12,240,437
|
|
|
|
12,509,742
|
|
Restricted stock units(1)
|
|
|
2,505,434
|
|
|
|
2,432,416
|
|
|
|
|
(1) |
|
Includes 692,448 and 173,374 shares of restricted stock in
fiscal 2009 and 2008, respectively, awarded to directors that
have vested but are still restricted until the directors resign. |
Recent
authoritative guidance
Multiple-Deliverable Revenue Arrangements. In
September 2009, the FASB issued authoritative guidance regarding
multiple-deliverable revenue arrangements. This guidance
addresses how to separate deliverables and how to measure and
allocate consideration to one or more units of accounting.
Specifically, the guidance requires that consideration be
allocated among multiple deliverables based on relative selling
prices. The guidance establishes a selling price hierarchy of
(1) vendor-specific objective evidence,
(2) third-party evidence and (3) estimated selling
price. This guidance is effective for annual periods beginning
after December 15, 2009 but may be early adopted as of the
beginning of an annual period. The Company is currently
evaluating the effect that this guidance will have on its
consolidated financial position and results of operations.
Subsequent Events. In May 2009, the FASB
issued authoritative guidance regarding subsequent events, which
establishes the standards for accounting for and disclosure of
events that occur after the balance sheet date, but before the
financial statements are issued or are available to be issued.
This guidance sets forth the circumstances under which an entity
should recognize events or transactions occurring after the
balance sheet date in its financial statements. This guidance
also identifies the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date. This guidance was effective for interim and annual periods
ending after June 15, 2009. The Companys adoption of
this guidance in the third quarter ended June 30, 2009 did
not have a material impact on its results of operations,
consolidated financial position and cash flows.
Determining Fair Value when the Volume and Level of Activity
for the Asset or Liability have Significantly Decreased and
Identifying Transactions That Are Not Orderly. In
April 2009, the FASB issued authoritative guidance regarding the
determination of fair value when the volume and level of
activity for the asset or liability have significantly decreased
and the identification of transactions that are not orderly.
This guidance was effective for the Company for the quarterly
period beginning April 1, 2009. This guidance affirms that
the objective of fair value when the market for an asset is not
active is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date under current market
conditions. The FASB provided guidance for estimating fair value
when the volume and level of market activity for an asset or
liability have significantly decreased and determining whether a
transaction was orderly. This guidance
F-15
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
applies to all fair value measurements when appropriate. The
Companys adoption of this guidance did not have a material
impact on its results of operations, consolidated financial
position and cash flows.
Recognition and Presentation of
Other-Than-Temporary
Impairments. In April 2009, the FASB issued
authoritative guidance regarding the recognition and
presentation of
other-than-temporary
impairments, which was effective for the Company for the
quarterly period beginning April 1, 2009. The new guidance
amends existing guidance for determining whether an
other-than-temporary
impairment of debt securities has occurred. Among other changes,
the FASB replaced the existing requirement that an entitys
management assert it has both the intent and ability to hold an
impaired security until recovery with a requirement that
management assert (a) it does not have the intent to sell
the security, and (b) it is more likely than not it will
not have to sell the security before recovery of its cost basis.
The Companys adoption of this guidance did not have a
material impact on its results of operations, consolidated
financial position and cash flows.
Interim Disclosures about Fair Value of Financial
Instruments. In April 2009, the FASB issued
authoritative guidance on interim disclosures about fair value
of financial instruments, which increases the frequency of fair
value disclosures to a quarterly basis instead of an annual
basis. The guidance relates to fair value disclosures for any
financial instruments that are not currently reflected on the
balance sheet at fair value and was effective for interim and
annual periods ending after June 15, 2009. The
Companys adoption of this guidance in the third quarter
ended June 30, 2009 did not have a material impact on its
results of operations, consolidated financial position and cash
flows.
Determining Whether an Instrument (or an Embedded Feature) Is
Indexed to an Entitys Own Stock. In June
2008, the FASB issued authoritative guidance on determining
whether an instrument (or an embedded feature) is indexed to an
entitys own stock. This guidance provides that an entity
should use a two step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the
instruments contingent exercise and settlement provisions.
It also clarifies the impact of foreign currency denominated
strike prices and market-based employee stock option valuation
instruments on the evaluation. This guidance is effective for
fiscal years beginning after December 15, 2008. Therefore,
the Company will adopt this guidance in the fiscal year
beginning October 1, 2009. The Company does not expect the
adoption of this guidance to have a material impact on its
results of operations, consolidated financial position and cash
flows.
Noncontrolling Interests in Consolidated Financial
Statements. In December 2007, the FASB issued
authoritative guidance on noncontrolling interests in
consolidated financial statements, which is intended to improve
the relevance, comparability and transparency of the financial
information that a reporting entity provides in its consolidated
financial statements by establishing certain required accounting
and reporting standards. This guidance is effective for fiscal
years beginning on or after December 15, 2008. Therefore,
the Company will adopt this guidance in the fiscal year
beginning October 1, 2009. The Company does not expect the
adoption of this guidance to have a material impact on its
results of operations, consolidated financial position and cash
flows.
The Fair Value Option for Financial Assets and Financial
Liabilities. In February 2007, the FASB issued
authoritative guidance that provided 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 items fair value must be
reported as unrealized gains and losses in earnings at each
subsequent reporting period. The Company adopted this guidance
on October 1, 2008. The adoption of this guidance did not
have a material impact on its results of operations,
consolidated financial position and cash flows.
Fair Value Measurements. In September 2006,
the FASB issued authoritative guidance on fair value
measurements, which defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair
value measurements. This guidance was effective for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. In February 2008, the FASB delayed
the effective date of this guidance for non-financial assets and
non-financial liabilities, except for items that are recognized
or disclosed at fair value in the
F-16
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
financial statements on a recurring basis (at least annually),
until fiscal years beginning after November 15, 2008, and
interim periods within those years. The Company adopted certain
provisions of this guidance effective October 1, 2008 (see
Note 4, Fair Value of Financial Instruments). The Company
is currently evaluating the effect that the adoption of the
deferred provisions will have on its consolidated financial
position and results of operations.
In August 2007, the Company sold FazaClo, which was acquired in
conjunction with the acquisition of Alamo Pharmaceuticals,
Inc. (Alamo) in May 2006, and its related assets and
operations to Azur. In connection with the sale, the Company
received approximately $43.9 million in upfront
consideration. In addition, the Company could receive up to
$2 million in royalties, based on 3% of annualized net
product revenues in excess of $17 million. During fiscal
2009 and 2008, the Company recorded royalty revenues of
approximately $395,000 and $71,000, respectively, for FazaClo
royalties. The Companys 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.
The financial results relating to FazaClo have been classified
as discontinued operations in the accompanying consolidated
statements of operations for all periods presented.
A summarized statement of operations for the discontinued
operations for fiscal 2008 are as follows:
|
|
|
|
|
|
|
Fiscal 2008
|
|
|
OPERATING AND OTHER EXPENSES
|
|
|
|
|
General and administrative expenses
|
|
$
|
231,848
|
|
Loss on sale of FazaClo
|
|
|
1,351,219
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
1,583,067
|
|
|
|
|
|
|
No loss or income from discontinued operations was recorded in
fiscal 2009.
The Asset Purchase Agreement (the Agreement) with
Azur provided 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 stipulated 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 the Company
had at the time, it estimated that the Net Working Capital
Adjustment was less than the $250,000 threshold. However, in
January 2008, the Company received claims from Azur that the Net
Working Capital Adjustment should reduce the sale price of
FazaClo by approximately $2.0 million. The Company disputed
the amount of Net Working Capital Adjustment claimed by Azur.
However, based upon new information and its own analysis, for
the quarter ended December 31, 2007, the Company accrued a
liability of $868,000 and recognized a charge in its statement
of operations as a result of the potential Net Working Capital
Adjustment. On August 1, 2008, the independent arbitrator
engaged by the Company and Azur determined the Net Working
Capital Adjustment to be $1,351,000. As a result, the Company
recorded a loss on sale of FazaClo of approximately $1,351,000,
which was paid by the Company in the fourth quarter of fiscal
2008, in its statement of operations for the fiscal year ended
September 30, 2008. The Net Working Capital Adjustment was
considered a change in estimate and represents new information
that was not available as of September 30, 2007.
In addition to the loss of $1,351,000 due to the Net Working
Capital Adjustment, the Company recognized other costs related
to the operations of the FazaClo business of approximately
$232,000 during the fiscal year ended September 30, 2008.
The Company initially estimated these costs were assumed by Azur.
F-17
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Fair
Value of Financial Instruments
|
As of October 1, 2008, the Company measures the fair value
of certain of its financial assets on a recurring basis. A fair
value hierarchy is used to rank the quality and reliability of
the information used to determine fair values. Financial assets
and liabilities carried at fair value will be classified and
disclosed in one of the following three categories:
|
|
|
|
|
Level 1-Quoted
prices in active markets for identical assets and liabilities.
|
|
|
|
Level 2-Inputs
other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets and
liabilities, quoted prices in the markets that are not active;
or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the
assets or liabilities.
|
|
|
|
Level 3-Unobservable
inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or
liabilities.
|
As of September 30, 2009, the Companys cash
equivalents of approximately $31.1 million are all valued
using quoted prices generated by market transactions involving
identical assets, or Level 1 as defined by the fair value
hierarchy.
|
|
5.
|
Restricted
Investments in Marketable Securities
|
Restricted investments in marketable securities at
September 30, 2009 and 2008 consist of certificates of
deposits, which are classified as
held-to-maturity.
At September 30, 2009 and 2008, the fair value of these
investments approximated their cost basis. At September 30,
2009, restricted investments in marketable securities totaling
$200,775 and $267,700 are recorded as current and non-current
assets, respectively, in the consolidated balance sheet. Of
these investments, $200,775 will mature in 2010 and $267,700
will mature throughout 2011 and 2013. Restricted investments of
$388,122 matured in fiscal 2009. At September 30, 2008,
restricted investments in marketable securities totaling
$388,122 and $468,475 were recorded as current and non-current
assets, respectively, in the consolidated balance sheet.
Inventories are comprised of the active pharmaceutical
ingredient (API) docosanol and the active
pharmaceutical ingredients of Zenvia, dextromethorphan
(DM) and quinidine (Q).
The composition of inventories as of September 30, 2009 and
2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Raw materials
|
|
$
|
824,629
|
|
|
$
|
1,333,277
|
|
Less: current portion
|
|
|
(114,098
|
)
|
|
|
(17,000
|
)
|
|
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
710,531
|
|
|
$
|
1,316,277
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2009 the Company recorded a writedown of inventory of
approximately $456,000 of which is primarily comprised of
$383,000 which was established for DM and Q supplies that are
scheduled to expire in fiscal 2011 and an additional inventory
reserve of approximately $69,000 was recorded for Docosanol
inventory.
F-18
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the activity in inventory reserves
for the last two fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Balance at
|
|
|
|
September 30,
|
|
|
Additional
|
|
|
September 30,
|
|
|
|
2008
|
|
|
Reserves
|
|
|
2009
|
|
|
Reserve for excess and obsolete inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for docosanol API
|
|
$
|
50,000
|
|
|
$
|
68,760
|
|
|
$
|
118,760
|
|
Reserve for DM and Q API
|
|
|
|
|
|
|
383,000
|
|
|
|
383,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50,000
|
|
|
$
|
451,760
|
|
|
$
|
501,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Balance at
|
|
|
|
September 30,
|
|
|
Additional
|
|
|
September 30,
|
|
|
|
2007
|
|
|
Reserves
|
|
|
2008
|
|
|
Reserve for excess and obsolete inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for docosanol API
|
|
$
|
50,000
|
|
|
$
|
|
|
|
$
|
50,000
|
|
Reserve for DM and Q API
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50,000
|
|
|
$
|
|
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Property
and Equipment
|
Property and equipment as of September 30, 2009 and 2008
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
As of September 30, 2008
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Value
|
|
|
Depreciation
|
|
|
Net
|
|
|
Value
|
|
|
Depreciation
|
|
|
Net
|
|
|
Computer equipment and related software
|
|
$
|
1,330,223
|
|
|
$
|
(1,211,096
|
)
|
|
$
|
119,127
|
|
|
$
|
1,319,891
|
|
|
$
|
(1,080,132
|
)
|
|
$
|
239,759
|
|
Leasehold improvements
|
|
|
37,790
|
|
|
|
(18,916
|
)
|
|
|
18,874
|
|
|
|
37,790
|
|
|
|
(11,362
|
)
|
|
|
26,428
|
|
Office equipment furniture and fixtures
|
|
|
756,672
|
|
|
|
(583,996
|
)
|
|
|
172,676
|
|
|
|
763,260
|
|
|
|
(484,257
|
)
|
|
|
279,003
|
|
Manufacturing equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261,719
|
|
|
|
|
|
|
|
261,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
$
|
2,124,685
|
|
|
$
|
(1,814,008
|
)
|
|
$
|
310,677
|
|
|
$
|
2,382,660
|
|
|
$
|
(1,575,751
|
)
|
|
$
|
806,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense associated with property
and equipment was approximately $261,000 and $415,000 for fiscal
2009 and 2008, respectively. In fiscal 2009, manufacturing
equipment of approximately $262,000 was disposed as it was
determined the equipment was not likely to be used in the
packaging process of Zenvia. The loss on disposal is included in
other, net on the accompanying consolidated statements of
operations.
In fiscal 2008, the Company retired approximately $850,000 of
research and development equipment with a net book value of
approximately $120,000 resulting in a decrease to accumulated
depreciation of approximately $730,000. The related loss on
disposal is included in other, net on the accompanying
consolidated statements of operations.
F-19
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Accrued
Expenses and Other Liabilities
|
Accrued expenses and other liabilities at September 30,
2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Accrued research and development expenses
|
|
$
|
372,494
|
|
|
$
|
1,404,556
|
|
Accrued general and administrative expenses
|
|
|
270,401
|
|
|
|
160,759
|
|
Deferred rent
|
|
|
19,516
|
|
|
|
48,638
|
|
Lease restructuring liability(1)
|
|
|
991,583
|
|
|
|
1,135,965
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses and other liabilities
|
|
|
1,653,994
|
|
|
|
2,749,918
|
|
Less: current portion
|
|
|
(1,001,599
|
)
|
|
|
(1,881,401
|
)
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities, non-current portion
|
|
$
|
652,395
|
|
|
$
|
868,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In fiscal 2006, the Company relocated all operations other than
research and development from San Diego, California to
Aliso Viejo, California. In fiscal 2007, the Company subleased a
total of approximately 49,000 square feet of laboratory and
office space in San Diego and relocated remaining personnel
and clinical trial support functions to the Companys
offices in Aliso Viejo, California. Restructuring expenses
included recognition of the estimated loss due to the exit of
the Companys leases of approximately $2.1 million. No
further costs were incurred related to these restructuring
events in fiscal 2008. In April 2009, the Company entered into a
sublease for office space in San Diego, California.
Sublease rental payments commenced in September 2009 pursuant to
this sublease. In September 2009, the Company recognized a loss
of approximately $172,000 related to a lease restructuring
liability resulting from a sublease entered into in April 2009
for office buildings subleased in San Diego, California.
The lease restructuring loss is included in rent expense in
fiscal 2009. |
The following table presents the restructuring activities in
fiscal 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Balance at
|
|
|
|
September 30,
|
|
|
Payments/
|
|
|
September 30,
|
|
|
|
2008
|
|
|
Reductions
|
|
|
2009
|
|
|
Accrued Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease restructuring liability
|
|
$
|
1,135,965
|
|
|
$
|
(144,382
|
)
|
|
$
|
991,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,135,965
|
|
|
$
|
(144,382
|
)
|
|
|
991,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
(316,086
|
)
|
|
|
|
|
|
|
(358,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
819,879
|
|
|
|
|
|
|
$
|
632,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
Deferred
Revenues/Sale of Licenses
|
The following table sets forth as of September 30, 2009 and
2008 the net deferred revenue balances for the Companys
sale of future
Abreva®
royalty rights to Drug Royalty USA and other agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drug Royalty
|
|
|
|
|
|
|
|
|
|
USA Agreement
|
|
|
Other Agreements
|
|
|
Total
|
|
|
Net deferred revenues as of October 1, 2008
|
|
$
|
12,202,198
|
|
|
$
|
283,834
|
|
|
$
|
12,486,032
|
|
Changes during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized as revenues during period
|
|
|
(2,289,831
|
)
|
|
|
(283,834
|
)
|
|
|
(2,573,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred revenues as of September 30, 2009
|
|
$
|
9,912,367
|
|
|
$
|
|
|
|
$
|
9,912,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified and reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of deferred revenues
|
|
$
|
2,282,560
|
|
|
$
|
|
|
|
$
|
2,282,560
|
|
Deferred revenues, net of current portion
|
|
|
7,629,807
|
|
|
|
|
|
|
|
7,629,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenues
|
|
$
|
9,912,367
|
|
|
$
|
|
|
|
$
|
9,912,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drug Royalty
|
|
|
|
|
|
|
|
|
|
USA Agreement
|
|
|
Other Agreements
|
|
|
Total
|
|
|
Net 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
|
|
|
(2,536,311
|
)
|
|
|
(548,087
|
)
|
|
|
(3,084,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred revenues as of September 30, 2008
|
|
$
|
12,202,198
|
|
|
$
|
283,834
|
|
|
$
|
12,486,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified and reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of deferred revenues
|
|
$
|
2,106,740
|
|
|
$
|
227,192
|
|
|
$
|
2,333,932
|
|
Deferred revenues, net of current portion
|
|
|
10,095,458
|
|
|
|
56,642
|
|
|
|
10,152,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenues
|
|
$
|
12,202,198
|
|
|
$
|
283,834
|
|
|
$
|
12,486,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drug Royalty Agreement In December 2002, the
Company sold to Drug Royalty USA an undivided interest in the
Companys rights to receive future Abreva royalties under
the license agreement with GlaxoSmithKline for
$24.1 million (the Drug Royalty Agreement and
the GlaxoSmithKline License Agreement,
respectively). Under the Drug Royalty Agreement, Drug Royalty
USA has the right to receive royalties from GlaxoSmithKline on
sales of Abreva until December 2013. The Company retained the
right to receive 50% of all royalties (a net of 4%) under the
GSK license agreement for annual net sales of Abreva in the
U.S. and Canada in excess of $62 million. In fiscal
2009 and 2008, the Company recognized royalties in the amount of
approximately $951,000 and $934,000, respectively, which is
included in the consolidated statements of operations as
revenues from royalties and royalty rights.
Revenues are recognized when earned, collection is reasonably
assured and no additional performance of services is required.
The Company classified the proceeds received from Drug Royalty
USA as deferred revenue, to be recognized as revenue over the
life of the license agreement because of the Companys
continuing involvement over the term of the Drug Royalty
Agreement. Such continuing involvement includes overseeing the
performance of GlaxoSmithKline and its compliance with the
covenants in the GlaxoSmithKline License Agreement, monitoring
patent infringement, adverse claims or litigation involving
Abreva, and undertaking to find a new license partner in the
event that GlaxoSmithKline terminates the agreement. The Drug
Royalty Agreement contains both covenants
F-21
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and events of default that require such performance on the
Companys part. Therefore, nonperformance on the
Companys part could result in default of the arrangement,
and could give rise to additional rights in favor of Drug
Royalty USA under a separate security agreement with Drug
Royalty USA, which could result in loss of the Companys
rights to share in future Abreva royalties if wholesale sales by
GlaxoSmithKline exceed $62 million a year. Because of the
Companys continuing involvement, the Company recorded the
net proceeds of the transaction as deferred revenue, to be
recognized as revenue over the life of the license agreement.
Based on a review of the Companys continuing involvement,
the Company concluded that the sale proceeds did not meet any of
the rebuttable presumptions that would require classification of
the proceeds as debt.
Kobayashi Docosanol License Agreement In
January 2006, the Company signed an exclusive license agreement
with Kobayashi Pharmaceutical Co., Ltd. (Kobayashi),
a Japanese corporation, to allow Kobayashi to market in Japan
medical products that are curative of episodic outbreaks of
herpes simplex or herpes labialis and that contain a therapeutic
concentration of the Companys docosanol 10% cream.
In April 2009, the license agreement with Kobayashi was
terminated and no termination fees were incurred. In the third
quarter of fiscal 2009, the Company recognized approximately
$170,000 in revenue which was previously deferred relating to
the approximately $860,000 data transfer fee received in March
2006 upon initiation of the agreement.
During fiscal 2009 and 2008, the Company recognized total
revenues of approximately $284,000 and $228,000, respectively,
related to the Kobayashi agreement.
HBI Docosanol License Agreement In July 2006,
the Company entered into an exclusive license agreement with
Healthcare Brands International (HBI), pursuant to
which the Company granted to HBI the exclusive rights to develop
and commercialize docosanol 10% in the following countries:
Austria, Belgium, Czech Republic, Estonia, France, Germany,
Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, The
Netherlands, Poland, Portugal, Russia, Slovakia, Slovenia,
Spain, Ukraine and United Kingdom.
Pursuant to the HBI License Agreement, in fiscal 2008, the
Company received £750,000 (or approximately
U.S. $1.5 million based on the exchange rate as of
September 30, 2008) for each of the first two
regulatory approvals for marketing in countries of the Licensed
Territory. If there is any subsequent divestiture or sublicense
of docosanol by HBI (including through a sale of HBI), or any
initial public offering of HBIs securities, the Company
will receive an additional payment related to the future value
of docosanol under the Agreement. No revenue was received from
this agreement in fiscal 2009.
HBI will bear all expenses related to the regulatory approval
and commercialization of docosanol within the Licensed
Territory. HBI also has certain financing obligations, pursuant
to which it will be obligated to raise a minimum amount of
working capital within certain time periods following execution
of the HBI License Agreement.
Emergent Biosolutions License Agreement In
March 2008, the Company entered into an Asset Purchase and
License Agreement with Emergent Biosolutions (the Emergent
Agreement) for the sale of the Companys anthrax
antibodies and license to use its proprietary Xenerex Technology
platform. Under the terms of the definitive agreement, the
Company received upfront payments totaling $500,000, of which
$250,000 was deferred and recognized in the fourth quarter of
fiscal 2008 upon delivery of all materials to Emergent. The
Company has the potential to receive up to $1.25 million in
milestone payments, as well as royalties on annual net sales if
the product is commercialized. Milestone payments of $250,000
and $500,000 are included in the consolidated statements of
operations as revenues from license agreements in fiscal 2009
and 2008, respectively.
F-22
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Commitments
and Contingencies
|
Operating lease commitments. The Company
leases 11,319 square feet of office space in Aliso Viejo,
California. The lease has scheduled rent increases each year and
expires in 2011. As of September 30, 2009, the financial
commitment for the remainder of the term of the lease is
approximately $700,000.
The Company leases approximately 30,370 square feet of
office and lab space in San Diego, California. The lease
has scheduled rent increases each year and expires in 2013. All
30,370 square feet of office and lab space is subleased
through January 14, 2013. The sublease has scheduled rent
increases each year. As of September 30, 2009, the
financial commitment for the remainder of the term of the lease
is approximately $3.9 million (excluding the benefit of
approximately $3.1 million of payments to be received from
the subleases). The Company delivered an irrevocable standby
letter of credit to the lessor in the amount of approximately
$468,000, to secure the Companys performance under the
lease (see Note 5).
Rent expense, excluding common area charges and other costs, was
approximately $1.5 million in fiscal 2009 and approximately
$2.3 million in fiscal 2008. Sublease rent income totaled
approximately $907,000 in fiscal 2009 and $888,000 in fiscal
2008. Future minimum rental payments under non-cancelable
operating lease commitments as of September 30, 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Payments to be
|
|
|
|
|
|
|
Minimum
|
|
|
Received from
|
|
|
|
|
Year Ending September 30,
|
|
Payments
|
|
|
Subleases
|
|
|
Net Payments
|
|
|
2010
|
|
$
|
1,530,249
|
|
|
$
|
888,699
|
|
|
$
|
641,550
|
|
2011
|
|
|
1,483,195
|
|
|
|
961,425
|
|
|
|
521,770
|
|
2012
|
|
|
1,222,548
|
|
|
|
997,422
|
|
|
|
225,126
|
|
2013
|
|
|
351,659
|
|
|
|
281,801
|
|
|
|
69,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,587,651
|
|
|
$
|
3,129,347
|
|
|
$
|
1,458,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal contingencies. In the ordinary course of
business, the Company may face various claims brought by third
parties and the Company may, from time to time, make claims or
take legal actions to assert the Companys rights,
including intellectual property rights as well as claims
relating to employment and the safety or efficacy of products.
Any of these claims could subject us to costly litigation and,
while the Company generally believes that the Company has
adequate insurance to cover many different types of liabilities,
the Companys insurance carriers may deny coverage or
policy limits may be inadequate to fully satisfy any damage
awards or settlements. If this were to happen, the payment of
any such awards could have a material adverse effect on
consolidated operations, cash flows and financial position.
Additionally, any such claims, whether or not successful, could
damage the Companys reputation and business. Management
believes the outcome of currently pending claims and lawsuits
will not likely have a material effect on consolidated
operations or financial position.
In fiscal 2008, the Company received approximately
$1.25 million in proceeds resulting from a settlement
agreement with a former employee. The proceeds represented court
awarded reimbursement of attorneys fees incurred in
connection with the Companys defense. The proceeds were
recorded as other income in the third fiscal quarter of 2008.
In addition, it is possible that the Company could incur
termination fees and penalties if it elected to terminate
contracts with certain vendors, including clinical research
organizations.
Guarantees and Indemnities. The Company
indemnifies directors and officers to the maximum extent
permitted under the laws of the State of Delaware, and various
lessors in connection with facility leases for certain claims
arising from such facilities or leases. Additionally, the
Company periodically enters into contracts that contain
indemnification obligations, including contracts for the
purchase and sale of assets, clinical trials, pre-clinical
development work and securities offerings. These indemnification
obligations provide the contracting parties with the contractual
right to have Avanir pay for the costs associated with the
defense and settlement of
F-23
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
claims, typically in circumstances where Avanir has failed to
meet its contractual performance obligations in some fashion.
The maximum amount of potential future payments under such
indemnifications is not determinable. The Company has not
incurred significant costs related to these guarantees and
indemnifications, and no liability has been recorded in the
consolidated financial statements for guarantees and
indemnifications as of September 30, 2009 and 2008.
Center for Neurologic Study (CNS)
The Company holds the exclusive worldwide marketing rights
to Zenvia for certain indications pursuant to an exclusive
license agreement with CNS. The Company will be obligated to pay
CNS up to $400,000 in the aggregate in milestones to continue to
develop for both PBA and DPN pain, assuming they are both
approved for marketing by the FDA. The Company is not currently
developing, nor does it have an obligation to develop, any other
indications under the CNS license agreement. In fiscal 2005, the
Company paid $75,000 to CNS under the CNS license agreement, and
will need to pay a $75,000 milestone if the FDA approves
Zenvia for the treatment of PBA. In addition, the Company is
obligated to pay CNS a royalty on commercial sales of Zenvia
with respect to each indication, if and when the drug is
approved by the FDA for commercialization. Under certain
circumstances, the Company may have the obligation to pay CNS a
portion of net revenues received if it sublicenses Zenvia to a
third party. Under the agreement with CNS, the Company is
required to make payments on achievements of up to a maximum of
ten milestones, based upon five specific medical indications.
Maximum payments for these milestone payments could total
approximately $2.1 million if the Company pursued the
development of Zenvia for all of the licensed indications. Of
the clinical indications that the Company currently plans to
pursue, expected milestone payments could total $800,000. In
general, individual milestones range from $150,000 to $250,000
for each accepted new drug application (NDA) and a
similar amount for each approved NDA. In addition the Company is
obligated to pay CNS a royalty ranging from approximately 5% to
8% of net revenues.
As of September 30, 2008, notes payable consisted of the
following:
|
|
|
|
|
|
|
September 30, 2008
|
|
|
10.43% equipment loan due February 2009
|
|
$
|
16,275
|
|
10.17% equipment loan due January 2009
|
|
|
9,469
|
|
|
|
|
|
|
Total
|
|
|
25,744
|
|
Less: current portion
|
|
|
(25,744
|
)
|
|
|
|
|
|
Total long-term notes payable
|
|
$
|
|
|
|
|
|
|
|
Senior Notes. In connection with the Alamo
Acquisition, the Company issued promissory notes (the
Notes) totaling $29.1 million. In June 2008,
the Company accelerated the repayment of the outstanding
principal under the Notes. At the time of repayment, the Notes
had an outstanding balance of $12.0 million, which was
retired early in consideration for a single payment of
$10.9 million in full satisfaction of the Notes. The
Company recognized a gain on extinguishment of debt of $968,000
(net of unamortized origination discount of $140,000). The
accelerated repayment of the Notes represented an estimated
savings of approximately $1.2 million in principal and
interest payments through the original maturity date, net of
estimated lost earnings on cash balances that would have been
held through the maturity date. Interest expense recorded in
fiscal 2008 related primarily to the Notes.
Equipment Loans. In September 2004, the
Company entered into a finance agreement with GE Healthcare
Financial Services (GE Capital) that provides for
loans to purchase equipment, secured by the equipment purchased.
The net book value of capital equipment financed and subject to
lien at September 30, 2008 under the GE Capital finance
agreement was approximately $26,000.
F-24
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Preferred
Stock
In March 2009, in connection with our change in domicile, our
Board of Directors approved a stockholder rights plan (the
Plan) that provides for the issuance of
Series A junior participating preferred stock to each of
our stockholders of record under certain circumstances. None of
the Series A junior participating preferred stock was
outstanding on September 30, 2009 and 2008. The Plan
provided for a dividend distribution of one preferred share
purchase right (the Right) on each outstanding share
of our common stock, payable on shares outstanding as of
March 20, 2009 (the Record Date). All shares of
common stock issued by the Company after the Record Date have
been issued with such Rights attached. Subject to limited
exceptions, the Rights would become exercisable if a person or
group acquires 20% or more of our common stock or announces a
tender offer for 20% or more of our common stock (a
Trigger Event).
If and when the Rights become exercisable, each Right will
entitle shareholders, excluding the person or group causing the
Trigger Event (an Acquiring Person), to buy a
fraction of a share of our Series A junior participating
preferred stock at a fixed price. In certain circumstances
following a Trigger Event, each Right will entitle its owner,
who is not an Acquiring Person, to purchase at the Rights
then current exercise price, a number of shares of common stock
having a market value equal to twice the Rights exercise
price. Rights held by any Acquiring Person would become void and
not be exercisable to purchase shares at the discounted purchase
price.
Our Board of Directors may redeem the Rights at $0.0001 per
Right at any time before a person has acquired 20% or more of
the outstanding common stock. The Rights expire on
March 20, 2019, subject to a periodic review of the Plan by
a committee of independent directors.
Common
stock
Fiscal 2009. On July 30, 2009, the
Company entered into a Controlled Equity Offering Sales
Agreement (the Sales Agreement) with Cantor
Fitzgerald & Co. (Cantor), providing for
the sale of up to 12,500,000 shares of common stock from
time to time into the open market at prevailing prices. Pursuant
to the Sales Agreement, sales of common stock will be made in
such quantities and on such minimum price terms as the Company
may set from time to time. As of September 30, 2009,
4,613,350 shares of common stock were issued under the
Sales Agreement at an average price of $2.34 per share raising
gross proceeds of $10.8 million ($10.2 million after
offering expenses, including commissions).
During fiscal 2009, the Company issued 346,294 shares of
common stock in connection with the vesting of restricted stock
units. In connection with the vesting, two officers and three
employees exercised their option to pay for minimum required
withholding taxes associated with the vesting of restricted
stock by surrendering 77,046 and 12,402 shares of common
stock, respectively, at an average market price of $2.08 and
$2.13 per share, respectively.
Fiscal 2008. In April 2008, the Company closed
a registered securities offering raising $40 million in
gross proceeds ($38 million after offering expenses) 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. Additionally, the Company issued warrants
to acquire up to approximately 12.2 million common shares
at $1.43 per share. The warrants have a
5-year
exercise term, but can be called for redemption for a nominal
price.
During fiscal 2008, the Company issued 113,361 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
16,996 shares of common stock at an average market price of
$1.42 per share.
Also during fiscal 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 with an average market price
F-25
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of $1.13 per share were surrendered to pay for the minimum
required withholding taxes associated with the vesting of
restricted stock awards. In addition, the Company issued
20,500 shares of common stock for restricted stock awards
which vested in fiscal 2008.
During January 2008, the Company sold and issued a total of
34,568 shares of its Class A common stock for
aggregate gross offering proceeds of $44,200 ($42,700 after
offering expenses, including underwriting discounts and
commissions). In April 2008, the Company notified Brinson
Patrick Securities Corporation that it had terminated the
outstanding financing facility with the Corporation.
A summary of common stock transactions for fiscal 2009 and 2008
is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued and Warrants and
|
|
|
|
Common Stock
|
|
|
Gross Amount
|
|
|
Average Price
|
|
Stock Options Exercised
|
|
Date
|
|
Shares
|
|
|
Received(1)
|
|
|
per Share(2)
|
|
|
Fiscal year ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered offering of common stock
|
|
Aug-09
|
|
|
4,613,350
|
|
|
$
|
10,787,907
|
|
|
$
|
2.34
|
|
Restricted stock units
|
|
Various
|
|
|
346,294
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
4,959,644
|
|
|
$
|
10,787,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered offering of common stock
|
|
Apr-08
|
|
|
34,972,678
|
|
|
$
|
40,000,000
|
|
|
$
|
1.14
|
|
Private placement of common stock
|
|
Jan-08
|
|
|
34,568
|
|
|
|
44,200
|
|
|
$
|
1.28
|
|
Restricted stock awards and restricted stock units
|
|
Various
|
|
|
113,361
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
35,120,607
|
|
|
$
|
40,044,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount received represents the amount before the cost of
financing and after underwriters discount, if any. |
|
(2) |
|
Average price per share has been rounded to two decimal places. |
Warrants
In April 2008, in connection with the Companys registered
securities offering, warrants were issued to acquire up to
approximately 12,240,437 million shares of common stock at
$1.43 per share. The warrants have a
5-year
exercise term, but can be called for redemption for a nominal
price. As of September 30, 2009, all these warrants are
exercisable and remained outstanding.
In July 2003, warrants were issued to acquire up to
approximately 269,305 shares of common stock at $8.92 per
share. The warrants had a
5-year
exercise term. No warrants were exercised prior to their
expiration.
The following table summarizes all warrant activity for fiscal
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
Weighted
|
|
|
|
|
|
|
Common Stock
|
|
|
Average
|
|
|
|
|
|
|
Purchasable Upon
|
|
|
Exercise Price
|
|
|
Range of
|
|
|
|
Exercise of Warrants
|
|
|
per Share
|
|
|
Exercise Prices
|
|
|
Outstanding October 1, 2008
|
|
|
12,509,742
|
|
|
$
|
1.59
|
|
|
$
|
1.43-$8.92
|
|
Expired
|
|
|
(269,305
|
)
|
|
$
|
8.92
|
|
|
$
|
8.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2009
|
|
|
12,240,437
|
|
|
$
|
1.43
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Equity Incentive Plans
The Company currently has 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
F-26
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
below. The 1998 Plan and the 1994 Plan are expired and the
Company no longer grants share-based awards from these plans.
All of the Plans were approved by the stockholders, except for
the 2003 Equity Incentive Plan, which was approved solely by the
Board of Directors. Share-based awards are subject to terms and
conditions established by the Compensation Committee of the
Companys Board of Directors. The Companys policy is
to issue new common shares upon the exercise of stock options,
conversion of share units or purchase of restricted stock.
During fiscal 2009 and 2008, the Company 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 employees and consultants. Under the Plans, as of
September 30, 2009, the Company had an aggregate of
11,821,730 shares of common stock reserved for issuance. Of
those shares, 6,722,591 were subject to outstanding options and
other awards and 5,099,140 shares were available for future
grants of share-based awards. The Company also issued
share-based awards outside of the Plans. As of
September 30, 2009, there were no options to purchase
shares of common stock that were issued outside of the Plans
(inducement option grants). None of the share-based awards is
classified as a liability as of September 30, 2009.
2005 Equity Incentive Plan. On March 17,
2005, the Companys stockholders approved the adoption of
the 2005 Plan that initially provided for the issuance of up to
500,000 shares of common stock, plus an annual increase
beginning in fiscal 2006 equal to the lesser of (a) 1% of
the shares of common stock outstanding on the last day of the
immediately preceding fiscal year, (b) 325,000 shares
of common stock, or (c) such lesser number of shares of
common stock as the board of directors shall determine. Pursuant
to the provisions of annual increases, the number of authorized
shares of common stock for issuance under the 2005 Plan
increased by 273,417 shares effective November 16,
2005, 317,084 shares effective November 30, 2006,
325,000 shares effective December 4, 2007, and an
additional 325,000 shares effective November 6, 2008
to a total of 1,740,501 shares. In February 2006, the
Companys stockholders eliminated the limitation on the
number of shares of common stock that may be issued as
restricted stock under the 2005 Plan. The 2005 Plan allows us to
grant options, restricted stock awards and stock appreciation
rights to directors, officers, employees and consultants. As of
September 30, 2009, 440,632 shares of common stock
remained available for issuance under the 2005 Plan.
2003 Equity Incentive Plan. On March 13,
2003, the board of directors approved the adoption of the 2003
Plan that provides for the issuance of up to 625,000 shares
of common stock, plus an annual increase beginning January 2004
equal to the lesser of (a) 5% of the number of shares of
common stock outstanding on the immediately preceding
December 31, or (b) a number of shares of common stock
set by the board of directors. Pursuant to the provisions of
annual increases, the number of authorized shares of common
stock for issuance under the 2003 Plan increased by
1,528,474 shares effective November 30, 2005,
1,857,928 shares effective August 3, 2007,
2,158,220 shares effective February 21, 2008, and an
additional 3,911,352 shares effective February 19,
2009 to a total of 10,080,974 shares. Of the additional
3,911,352 shares effective February 19, 2009, the
board of directors provided that no more than
2,346,811 shares would be available to grant in calendar
2009. The 2003 Plan allows us to grant options, restricted stock
awards and stock appreciation rights to directors, officers,
employees and consultants. As of September 30, 2009,
4,110,271 shares of common stock remained available for
issuance under the 2003 Plan.
2000 Stock Option Plan. On March 23,
2000, the Companys stockholders approved the adoption of
the 2000 Plan, pursuant to which an aggregate of
575,000 shares of common stock have been reserved for
issuance. On March 14, 2002, the Companys
stockholders approved an amendment to the 2000 Plan to increase
the number of shares of common stock issuable under the Plan by
250,000 shares, for an aggregate of 825,000 shares. On
March 13, 2003, the Company amended the 2000 Plan to allow
for the issuance of restricted stock awards. As of
September 30, 2009, 548,237 shares of common stock
were available for grant under the 2000 Plan.
F-27
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock Options. Stock options are granted with
an exercise price equal to the current market price of the
Companys common stock at the grant date and have
10-year
contractual terms. Options awards typically vest in accordance
with one of the following schedules:
a. 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;
b. 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;
c. 6.25% vest upon obtainment of a performance target and
the remaining option shares vest and become exercisable
quarterly in equal installments thereafter over
3.75 years; or
d. Options fully vest and become 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 fiscal 2009 and
2008 are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Common Stock
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Purchasable Upon
|
|
|
Exercise Price per
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Exercise of Options
|
|
|
Share
|
|
|
(in Years)
|
|
|
Value
|
|
|
Outstanding October 1, 2008
|
|
|
624,027
|
|
|
$
|
6.61
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,613,110
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(49,039
|
)
|
|
$
|
4.74
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(2,160
|
)
|
|
$
|
5.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2009
|
|
|
2,185,938
|
|
|
$
|
2.17
|
|
|
|
8.5
|
|
|
$
|
2,606,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest in the future,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
1,890,512
|
|
|
$
|
2.40
|
|
|
|
8.5
|
|
|
$
|
2,179,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2009
|
|
|
302,501
|
|
|
$
|
10.73
|
|
|
|
5.8
|
|
|
$
|
11,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair values of options granted
during fiscal 2009 and 2008 were $0.40 and $0.58 per share,
respectively. There were no stock options exercised in fiscal
2009 or 2008. As of September 30, 2009, the total
unrecognized compensation cost related to options was
approximately $831,000, which is expected to be recognized over
a weighted-average period of 2.9 years, based on the
vesting schedules.
The fair value of each option award is estimated on the date of
grant using the Black-Scholes model that uses the assumptions
noted in the following table. Expected volatilities are based on
historical volatility of the Companys common stock and
other factors. The expected term of options granted is based on
analyses of
F-28
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
historical employee termination rates and option exercises. The
risk-free interest rates are based on the U.S. Treasury
yield for a period consistent with the expected term of the
option in effect at the time of the grant.
Assumptions used in the Black-Scholes model for options granted
during fiscal 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
Expected volatility
|
|
100.8% 101.3%
|
|
|
95.8
|
%
|
Weighted-average volatility
|
|
100.8%
|
|
|
95.8
|
%
|
Average expected term in years
|
|
5.0
|
|
|
5.0
|
|
Risk-free interest rate (zero coupon U.S. Treasury Note)
|
|
1.6% 2.3%
|
|
|
2.9
|
%
|
Expected dividend yield
|
|
0%
|
|
|
0
|
%
|
The following table summarizes information concerning
outstanding and exercisable stock options as of
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Life in Years
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$ 0.47-$ 0.53
|
|
|
1,428,010
|
|
|
|
9.2
|
|
|
$
|
0.53
|
|
|
|
|
|
|
$
|
|
|
$ 0.54-$ 2.41
|
|
|
448,741
|
|
|
|
8.3
|
|
|
$
|
1.29
|
|
|
|
13,000
|
|
|
$
|
1.18
|
|
$ 4.60-$ 9.92
|
|
|
87,250
|
|
|
|
6.1
|
|
|
$
|
6.66
|
|
|
|
72,251
|
|
|
$
|
6.69
|
|
$10.24-$13.60
|
|
|
180,687
|
|
|
|
5.5
|
|
|
$
|
11.93
|
|
|
|
180,687
|
|
|
$
|
11.93
|
|
$15.84-$19.38
|
|
|
41,250
|
|
|
|
5.9
|
|
|
$
|
16.16
|
|
|
|
36,563
|
|
|
$
|
16.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,185,938
|
|
|
|
8.5
|
|
|
$
|
2.17
|
|
|
|
302,501
|
|
|
$
|
10.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Stock Options. During fiscal 2008,
the Company granted stock options to purchase
2,048,000 shares of common stock from the 2003 Stock Option
Plan at $0.88 per share, the current market price of the
Companys common stock on the date of grant. The
performance stock options are not included in the above
outstanding and exercisable stock options table. The contractual
terms are ten years. The stock options have a performance goal
related to the clinical development of Zenvia that determines
when vesting begins and the actual number of shares to be
awarded ranging from 0% to 115% of target. All performance goals
were accomplished in fiscal 2009 and the actual number of shares
awarded ranged from 100% to 107.5% of target. Vesting is over
3.75 years beginning on the date the performance goal is
achieved (Achievement Date), with 6.25% vesting on
the Achievement Date and 6.25% quarterly from the Achievement
Date for the following fifteen quarters. During fiscal 2009, the
performance goals related to 2,031,218 performance options were
met and vesting began.
The fair value of each performance option was estimated on the
date of grant using the Black-Scholes model that uses the
assumptions noted in the following table. Expected volatilities
are based on historical volatility of the Companys common
stock. The expected term of performance options granted is based
on analyses of historical employee termination rates and option
exercises. The risk-free interest rates are based on the
U.S. Treasury yield for
F-29
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 performance options granted in fiscal
2008 were as follows:
|
|
|
|
|
2008
|
|
Expected volatility
|
|
95.4% 98.9%
|
Weighted-average volatility
|
|
97.8%
|
Average expected term in years
|
|
5.4 6.0
|
Risk-free interest rate (zero coupon U.S. Treasury Note)
|
|
3.4% 3.5%
|
Expected dividend yield
|
|
0%
|
The following table summarizes information concerning
outstanding and exercisable performance stock options as of
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
Weighted Average
|
|
|
|
|
Common Stock
|
|
Weighted Average
|
|
Remaining
|
|
Aggregate
|
|
|
Purchasable Upon
|
|
Exercise Price per
|
|
Contractual Term
|
|
Intrinsic
|
|
|
Exercise of Options
|
|
Share
|
|
(In Years)
|
|
Value
|
|
Outstanding October 1, 2008
|
|
|
2,048,200
|
|
|
$
|
0.88
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(16,982
|
)
|
|
$
|
0.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2009
|
|
|
2,031,218
|
|
|
$
|
0.88
|
|
|
|
8.8
|
|
|
$
|
2,437,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest in the future, September 30,
2009
|
|
|
1,699,398
|
|
|
$
|
0.88
|
|
|
|
8.8
|
|
|
$
|
2,039,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2009
|
|
|
236,300
|
|
|
$
|
0.88
|
|
|
|
8.8
|
|
|
$
|
283,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair value of performance stock
options granted during fiscal 2008 was $0.70. The total
unrecognized compensation cost related to performance stock
options was approximately $1.0 million, which is expected
to be recognized over a weighted-average period of
3.5 years at September 30, 2009, based on the vesting
schedules.
Restricted stock units. RSUs generally vest
based on three years of continuous service and may not be sold
or transferred until the awardees termination of service.
The following table summarizes the RSU activities for fiscal
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Number of Shares
|
|
|
Fair Value
|
|
|
Unvested, October 1, 2008
|
|
|
2,259,042
|
|
|
$
|
1.85
|
|
Granted
|
|
|
420,000
|
|
|
$
|
0.44
|
|
Vested
|
|
|
(865,356
|
)
|
|
$
|
1.22
|
|
Forfeited
|
|
|
(700
|
)
|
|
$
|
2.06
|
|
|
|
|
|
|
|
|
|
|
Unvested, September 30, 2009
|
|
|
1,812,986
|
|
|
$
|
1.83
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair value of RSUs granted
during fiscal 2009 and 2008 was $0.44 and $1.48 per unit,
respectively. The fair value of RSUs vested during fiscal 2009
and 2008 was approximately $1.1 million and $763,000,
respectively. As of September 30, 2009, the total unrecognized
compensation cost related to unvested stock units was
approximately $1.1 million, which is expected to be
recognized over a weighted-average period of 1.0 year,
based on the vesting schedules and assuming no forfeitures.
At September 30, 2009, there were 692,448 shares of
restricted stock with a weighted-average grant date fair value
of $1.85 per share awarded to directors that have vested but are
still restricted until the directors resign. In fiscal 2009,
519,062 shares of restricted stock vested but remain restricted.
F-30
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2009, the Companys compensation committee approved
a modification to the vesting schedule of RSUs originally
granted on March 21, 2007 (Modified Awards).
The Modified Awards originally were to vest 50% upon the earlier
of the completion of a Company milestone or March 21, 2010,
and the remaining 50% on March 21, 2010. The awards
vesting was modified to vest equally over four specified dates
through August 31, 2010. The Modified Awards are for an
aggregate of 1,200,708 RSUs held by eight grantees, including
officers and employees. The modification did not change the
probability of vesting and did not result in any incremental
share-based compensation. At the date of modification, no RSUs
were vested and the remaining unamortized share-based
compensation expense will be amortized over the remaining
vesting periods of the Modified Awards.
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 awardees 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. The fair value of restricted
stock awards vested in fiscal 2008 was approximately $253,000.
There were no unvested restricted stock awards at
September 30, 2008 and no activity during fiscal 2009.
|
|
13.
|
Research,
License, Supply and other Agreements
|
Center for Neurologic Study (CNS)
The Company holds the exclusive worldwide marketing rights
to Zenvia for certain indications pursuant to an exclusive
license agreement with CNS. The Company will be obligated to pay
CNS up to $400,000 in the aggregate in milestones to continue to
develop Zenvia for both PBA and DPN pain, assuming they are both
approved for marketing by the FDA. The Company is not currently
developing, nor does the Company have an obligation to develop,
any other indications under the CNS license agreement. In fiscal
2005, the Company paid $75,000 to CNS under the CNS license
agreement, and will need to pay a $75,000 milestone if the
FDA approves Zenvia for the treatment of PBA. In addition, the
Company is obligated to pay CNS a royalty on commercial sales of
Zenvia with respect to each indication, if and when the drug is
approved by the FDA for commercialization. Under certain
circumstances, the Company may have the obligation to pay CNS a
portion of net revenues received if the Company sublicenses
Zenvia to a third party. Under the Companys agreement with
CNS, the Company is required to make payments on achievements of
up to a maximum of ten milestones, based upon five specific
medical indications. Maximum payments for these milestone
payments could total approximately $2.1 million if the
Company pursued the development of Zenvia for all of the
licensed indications. Of the clinical indications that the
Company currently plans to pursue, expected milestone payments
could total $800,000. In general, individual milestones range
from $150,000 to $250,000 for each accepted NDA and a similar
amount for each approved NDA. In addition, the Company is
obligated to pay CNS a royalty ranging from approximately 5% to
8% of net revenues. From inception through September 20,
2009, no milestone payments have been made under this agreement.
HBI Docosanol License Agreement In July 2006,
the Company entered into an exclusive license agreement with
Healthcare Brands International, pursuant to which the Company
granted to HBI the exclusive rights to develop and commercialize
docosanol 10% in the following countries: Austria, Belgium,
Czech Republic, Estonia, France, Germany, Hungary, Ireland,
Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland,
Portugal, Russia, Slovakia, Slovenia, Spain, Ukraine and the
United Kingdom. The HBI License Agreement automatically expires
on a
country-by-country
basis upon the later to occur of (a) the
15th anniversary of the first commercial sale in each
respective country in the Licensed Territory or (b) the
date the last claim of any patent licensed under the HBI License
Agreement expires or is invalidated that covers sales of
licensed products in each such country in the Licensed
Territory. In fiscal 2008, the Company received payments of
approximately $1.5 million due to HBIs attainment of
European regulatory approvals and clearances to sell docosanol
in two countries.
Kobayashi Docosanol License Agreement In
January 2006, the Company signed an exclusive license agreement
with Kobayashi Pharmaceutical Co., Ltd. (Kobayashi),
a Japanese corporation, to allow Kobayashi to
F-31
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
market in Japan medical products that are curative of episodic
outbreaks of herpes simplex or herpes labialis and that contain
a therapeutic concentration of the Companys docosanol 10%
cream.
In April 2009, the license agreement with Kobayashi was
terminated and no termination fees were incurred. In the third
quarter of fiscal 2009, the Company recognized approximately
$170,000 in revenue which was previously deferred relating to
the $860,000 data transfer fee received in March 2006 upon
initiation of the agreement.
During fiscal 2009 and 2008, the Company recognized total
revenues of approximately $284,000 and $228,000, respectively,
related to the Kobayashi agreement.
GlaxoSmithKline Subsidiary, SB Pharmco Puerto Rico, Inc.
(GlaxoSmithKline). On March 31,
2000, the Company signed an exclusive license agreement with
GlaxoSmithKline for rights to manufacture and sell Abreva
(docosanol 10% cream) as an
over-the-counter
product in the United States and Canada as a treatment for
recurrent oral-facial herpes. Under the terms of the license
agreement, GlaxoSmithKline Consumer Healthcare is responsible
for all sales and marketing activities and the manufacturing and
distribution of Abreva in the U.S. and Canada. The terms of
the license agreement provide for us to earn royalties on
product sales. In October 2000 and August 2005, GlaxoSmithKline
launched Abreva in the United States and Canada, respectively.
All milestones under the agreement were earned and paid prior to
fiscal 2003. During fiscal 2003, the Company sold an undivided
interest in the GlaxoSmithKline license agreement to Drug
Royalty with a term until the later of December 13, 2013 or
until the expiration of the patent for Abreva. (See Note 9,
Deferred Revenues/Sale of Licenses.)
P.N. Gerolymatos SA.
(Gerolymatos). In May 2004, the
Company signed an exclusive agreement with Gerolymatos giving
them the rights to manufacture and sell docosanol 10% cream as a
treatment for cold sores in Greece, Cyprus, Turkey and Romania.
Under the terms of the agreement, Gerolymatos will be
responsible for all sales and marketing activities, as well as
manufacturing and distribution of the product. The terms of the
agreement provide for us to receive a license fee, royalties on
product sales and milestones related to product approvals in
Greece, Cyprus, Turkey and Romania. This agreement will continue
until the latest of the 12th anniversary of the first
commercial sale in each of those respective countries, or the
date that the patent expires, or the last date of the expiration
of any period of data exclusivity in those countries.
Gerolymatos is also responsible for regulatory submissions to
obtain marketing approval of the product in the licensed
territories. In 2009, the Company recognized royalty revenue
from product sales of approximately $6,000. No revenues were
recognized from this agreement in fiscal 2008.
ACO HUD. In September 2004, the Company signed
an exclusive agreement with ACO HUD giving them the rights to
manufacture and sell docosanol 10% cream as a treatment for cold
sores in Sweden, Norway, Denmark and Finland. Stockholm-based
ACO HUD is the Scandinavian market leader in sales of cosmetic
and medicinal skincare products. ACO HUD launched the product in
fiscal 2005. Under the terms of the agreement, ACO HUD will be
responsible for all sales and marketing activities, as well as
manufacturing and distribution of the product. The terms of the
agreement provide for us to receive a license fee, royalties on
product sales and milestones related to product approvals in
Norway, Denmark and Finland. This agreement will continue until
either: 15 years from the anniversary of the first
commercial sale in each of those respective countries, or, until
the date that the patent expires, or, the last date of the
expiration of any period of data exclusivity in those countries,
whichever occurs last. ACO HUD is also responsible for
regulatory submissions to obtain marketing approval of the
product in the licensed territories. Royalties in the amount of
approximately $9,000 were recorded in fiscal 2008. No revenue
was recognized pursuant to this agreement in fiscal 2009.
In November 2009, the license agreement between ACO HUD and the
Company was terminated. The Company retains the right to license
docosanol in Sweden, Norway, Denmark and Finland, and to other
interested parties.
Emergent Biosolutions. In March 2008, the
Company entered into an Asset Purchase and License Agreement
with Emergent Biosolutions for the sale of the Companys
anthrax antibodies and license to use the Companys
proprietary Xenerex Technology platform which was used to
generate fully human antibodies to
F-32
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
target antigens. A gain of approximately $120,000 was recorded
on the accompanying consolidated statements of operations as a
result of this sale. Under the terms of the Agreement, the
Company completed the remaining work under an
NIH/NIAID
grant (NIH grant) and transferred all materials to
Emergent. Under the terms of the agreement, the Company is
eligible to receive milestone payments and royalties on any
product sales generated from this program. The Company earned
$250,000 and $500,000 in milestone payments in fiscal years 2009
and 2008, respectively.
Non-anthrax related antibodies. In September
2008, the Company entered into an Asset Purchase Agreement with
a San Diego based biotechnology company for the sale of
non-anthrax related antibodies as well as the remaining
equipment and supplies associated with the Xenerex Technology
platform. In connection with this sale, in fiscal 2008 the
Company received an upfront payment of $210,000 and is eligible
to receive future royalties on potential product sales, if any.
No licensing revenue was recorded in fiscal 2009 associated with
this agreement.
Government research grants. Through June 2008,
the Company was engaged in various research programs funded by
government research grants. The government research grants were
used for conducting research on various docosanol-based
formulations for a potential genital herpes product and
development of antibodies to anthrax toxins. There was no
remaining balance under the research grants as of
September 30, 2008. In fiscal 2008 the Company recorded
government research grant revenue of approximately
$1.0 million.
Components of the income tax provision are as follows for the
fiscal years ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
State and foreign
|
|
$
|
3,200
|
|
|
$
|
3,200
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(5,948,313
|
)
|
|
|
(5,147,297
|
)
|
State and foreign
|
|
|
(1,026,174
|
)
|
|
|
(1,115,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,974,487
|
)
|
|
|
(6,262,867
|
)
|
|
|
|
|
|
|
|
|
|
Increase in deferred income tax asset valuation allowance
|
|
|
6,974,487
|
|
|
|
6,262,867
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
3,200
|
|
|
$
|
3,200
|
|
|
|
|
|
|
|
|
|
|
F-33
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income taxes reflect the income tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys net deferred income tax balance were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net operating loss carryforwards
|
|
$
|
90,497,829
|
|
|
$
|
83,265,183
|
|
Deferred revenue
|
|
|
3,920,337
|
|
|
|
4,943,699
|
|
Research credit carryforwards
|
|
|
11,295,872
|
|
|
|
10,964,507
|
|
Capitalized research and development costs
|
|
|
986,955
|
|
|
|
1,263,921
|
|
Capitalized license fees and patents
|
|
|
3,075,544
|
|
|
|
3,411,306
|
|
Share-based compensation and options
|
|
|
3,449,222
|
|
|
|
2,584,645
|
|
Foreign tax credits
|
|
|
595,912
|
|
|
|
595,912
|
|
Other
|
|
|
750,675
|
|
|
|
622,961
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
|
114,572,346
|
|
|
|
107,652,134
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Other
|
|
|
(459
|
)
|
|
|
(54,734
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(459
|
)
|
|
|
(54,734
|
)
|
|
|
|
|
|
|
|
|
|
Less valuation allowance for net deferred income tax assets
|
|
|
(114,571,887
|
)
|
|
|
(107,597,400
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets / (liabilities)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Company has provided a full valuation allowance against the
net deferred income tax assets recorded as of September 30,
2009 and 2008 as the Company concluded that they are unlikely to
be realized. As of September 30, 2009 the Company had
federal and state net operating loss carryforwards of
$240,000,000 and $163,000,000, respectively. As of
September 30, 2009 the Company had federal and California
research and development credits of $7,400,000 and $6,000,000,
respectively. The net operating loss and research credit
carryforwards will expire on various dates through 2028, unless
previously utilized. In the event of certain ownership changes,
the Tax Reform Act of 1986 imposes certain restrictions on the
amount of net operating loss and credit carryforwards that the
Company may use in any year.
A reconciliation of the federal statutory income tax rate and
the effective income tax rate is as follows for the fiscal years
ended September 30:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Federal statutory rate
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
Increase in deferred income tax asset valuation allowance
|
|
|
32
|
|
|
|
36
|
|
State income taxes, net of federal effect
|
|
|
(6
|
)
|
|
|
(6
|
)
|
Research and development credits
|
|
|
(1
|
)
|
|
|
(4
|
)
|
Expired net operating loss and other credits
|
|
|
8
|
|
|
|
7
|
|
Other
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
Employee
Savings Plan
|
The Company has established an employee savings plan pursuant to
Section 401(k) of the Internal Revenue Code. The plan
allows participating employees to deposit into tax deferred
investment accounts up to 50% of their
F-34
Avanir
Pharmaceuticals, Inc.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
salary, subject to annual limits. The Company is not required to
make matching contributions under the plan. However, the Company
voluntarily contributed approximately $39,000 in fiscal 2009 and
$47,000 in fiscal 2008 to the plan.
The Company operates the business on the basis of a single
reportable segment, which is the business of discovery,
development and commercialization of novel therapeutics for
chronic diseases. The Companys chief operating
decision-maker is the Chief Executive Officer, who evaluates the
company as a single operating segment.
The Company categorizes revenues by geographic area based on
selling location. All operations are currently located in the
United States; therefore, total revenues for fiscal 2009 and
2008 are attributed to the United States. All long-lived assets
at September 30, 2009 and 2008 are located in the United
States.
Approximately 78% and 50% of the Companys total revenues
in fiscal 2009 and 2008, respectively, are derived from a
license agreement with GlaxoSmithKline and the sale of rights to
royalties under that agreement. Royalties from Azur totaled
approximately 9% of total revenue in fiscal 2009 compared to 1%
in fiscal 2008. Approximately 21% of the Companys total
revenues in fiscal 2008 and are derived from a license agreement
with HBI and the sale of rights to royalties under that
agreement. Revenues derived from the Companys government
grant accounted for 14% of total revenues in fiscal 2008.
From October 1, 2009 through November 25, 2009,
approximately 85,600 shares of common stock were sold under
the financing facility with Cantor Fitzgerald and 56 shares
were issued pursuant to the vesting of restricted stock units.
* * * * *
F-35