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

Sales ofTable NUEDEXTA for treatment of patients with PBA will depend in part on the availability of coverage and reimbursement from third-party payers such as government insurance programs, including Medicare and Medicaid, private health insurers, health maintenance organizations and other health care related organizations. Accordingly, coverage and reimbursement may be uncertain. Adoption of NUEDEXTA by the medical community may be limited if third-party payers will not offer coverage. Cost control initiatives may decrease coverage and payment levels for NUEDEXTA and, in turn, the price that we will be able to charge. We are unable to predict all changes to the coverage or reimbursement methodologies that will be applied by private or government payers to NUEDEXTA. Any denial of private or government payer coverage of NUEDEXTA could harm our business and reduce our revenue. Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended September 30, ~~2013~~2014

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

For the transition period from to

Commission File No. 1-15803

Avanir Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

Delaware		33-0314804
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
20 Enterprise Suite 200, Aliso Viejo, California		92656
30 Enterprise Suite 400, Aliso Viejo, California		92656
(Address of principal executive offices)		(Zip Code)

(949) 389-6700

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of March 31, ~~2013~~2014 was approximately $~~270~~586.85 million, based upon the closing price on the NASDAQ Global Market reported for such date. Shares of common stock held by each officer and director and by each person who is known to own 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates of the Company. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of December 21, ~~2013~~2014, the registrant had ~~152~~193,~~106~~758,~~667~~703 shares of common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required to be disclosed in Part III of this report is incorporated by reference from the registrant’s definitive Proxy Statement for the 2014 Annual Meeting of Stockholders, which will be held on February 12, 2014 and which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this report.

Table of Contents

		Page
PART I
Item 1.	Business		3
Item 1A.	Risk Factors		1113
Item 1B.	Unresolved Staff Comments		3136
Item 2.	Properties		3136
Item 3.	Legal Proceedings		3136
Item 4.	Mine Safety Disclosures		3238
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		3338
Item 6.	Selected Financial Data		3439
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		3540
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		4856
Item 8.	Financial Statements and Supplementary Data		4956
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		4956
Item 9A.	Controls and Procedures		4957
Item 9B.	Other Information		5057
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		5058
Item 11.	Executive Compensation		5264
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		5287
Item 13.	Certain Relationships and Related Transactions, and Director Independence		5289
Item 14.	Principal Accountant Fees and Services		5291
PART IV
Item 15.	Exhibits and Financial Statement Schedules		5292
SIGNATURES			5897

PART I

Item 1.

Business

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

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

EXECUTIVE OVERVIEW

Avanir is a biopharmaceutical company focused on acquiring, developing and commercializing novel therapeutic products for the treatment of central nervous system disorders. Our lead product NUEDEXTA® (referred to as AVP-923 during clinical development) is a first-in-class dual N-methyl-D-aspartate (“NMDA”) receptor antagonist and sigma-1 agonist. NUEDEXTA, 20/10 mg (dextromethorphan hydrobromide 20 mg/quinidine sulfate 10 mg), ~~was~~is approved in the United States ~~in October 2010~~ for the treatment of pseudobulbar affect (“PBA”). It is also approved for the symptomatic treatment of PBA in the European Union in two dose strengths, NUEDEXTA 20/10 mg and NUEDEXTA 30/10 mg. We commercially launched NUEDEXTA in the United States in February 2011 and we are currently assessing plans regarding the potential commercialization of NUEDEXTA in the European Union.

We are studying the clinical utility of AVP-923 in other mood/behavior disorders, and movement disorders, ~~and~~including ~~pain. We have two ongoing Phase II clinical trials exploring~~ the potential treatment of agitation in patients with Alzheimer’s disease and the potential treatment of levodopa-induced dyskinesia in Parkinson’s disease (~~the~~ “LID ~~study~~”). ~~The~~Our Phase 2 LID study is supported by a grant from the Michael J. Fox Foundation. InOur ~~December 2013, we completed a~~ Phase 2 IIstudy ~~clinical trial~~ of ~~AVP-923~~agitation ~~for the potential treatment of central neuropathic pain~~ in ~~patients~~Alzheimer’s ~~with~~disease ~~multiple sclerosis (“MS”). The data from~~was ~~this~~recently ~~Phase~~completed IIand, ~~clinical~~on ~~trial~~September 15, ~~did~~2014, ~~not~~we ~~meet~~announced ~~the~~positive ~~primary~~results ~~efficacy~~for ~~endpoint. In~~this ~~the~~ study, (see “AVP-923 ~~treated~~for ~~patients~~the ~~experienced~~Treatment ~~levels~~ of ~~pain~~Agitation ~~reduction~~in ~~commensurate~~Patients with ~~those~~Alzheimer’s ~~observed in similar studies and the improvement in pain scores from baseline reached statistical significance; however~~Disease,” ~~there was no difference between the treatment arms and placebo~~below). We ~~believe that a higher than expected placebo response negatively impacted the study results. AVP-923 was generally safe and well tolerated in the study.~~

We are also developing AVP-786, aan ~~next~~investigational ~~generation~~ drug product containing deuterium-modified dextromethorphan and quinidine for the potential treatment of neurologic and psychiatric disorders. We completed a pharmacokinetic ~~study~~studies with AVP-786, and ~~based~~identified ona ~~this~~formulation ~~data,~~of weAVP-786 ~~believe~~to ~~that~~move weforward ~~have~~into ~~identified~~clinical astudies. This AVP-786 formulation ofcontains significantly less quinidine than used in AVP-923. In June 2013, the U.S. Food and Drug Administration (“FDA”) agreed to an expedited development pathway for AVP-786, requiring

~~AVP~~only a limited non-~~786~~clinical ~~with~~package aas ~~comparable~~part ~~pharmacokinetic~~of ~~profile,~~the ~~and~~Investigational ~~likely~~New aDrug ~~comparable~~(“IND”) application. In August 2014, ~~safety~~we ~~and~~initiated ~~tolerability~~a ~~profile~~Phase to2 ~~AVP-923.~~study ~~This~~for AVP-786 ~~formulation~~as ~~contains~~an ~~significantly~~adjunctive ~~less~~therapy ~~quinidine~~to antidepressants ~~than~~for ~~used~~the ~~in AVP-923~~treatment of Major Depressive Disorder (“MDD”.)

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

We entered into a multi-year agreement with Merck Sharp & Dohme Corp. (“Merck”) to co-promote Merck’s type 2 diabetes therapies JANUVIA® (sitagliptin) and the sitagliptin family of products in the long-term care institutional setting in the United States beginning October 1, 2013. The term of the agreement will continue for three years following the launch date of the co-promotion activities, unless terminated earlier pursuant to the terms of the agreement. Under the terms of the agreement, ~~the~~we ~~Company~~ will be compensated via a (i) fixed monthly fee and (ii) performance fee based on the amount of the products sold by ~~the~~us ~~Company~~ above a predetermined baseline. A significant majority of the fee is performance -based. Over the three years of the agreement, Avanir could receive up to ~~a maximum of~~ $6046.07 million in compensation, including revenue earned in the first contract year.

InWe ~~addition~~have developed and licensed certain intellectual property rights relating to NUEDEXTA and our ~~focus~~existing ondrug candidates (AVP-923, AVP-786 and AVP-825) and we continue to actively seek to acquire rights to other complementary products ~~for~~and technologies, particularly following our successful defense of the ~~central~~patents ~~nervous~~underlying ~~system~~NUEDEXTA. As a result, we ~~also~~intend ~~have~~to ~~partnered~~seek ~~programs~~to in-license or acquire through other ~~therapeutic~~means, ~~areas~~such ~~that~~as ~~may~~mergers, ~~generate~~stock ~~future~~purchases ~~revenue~~or ~~for~~asset ~~us.~~purchases, ~~Our~~complementary ~~first~~products ~~commercialized~~and ~~product~~technologies, ~~docosanol~~as ~~10%~~well ~~cream~~as ~~(sold~~sales inand ~~the~~marketing ~~United~~infrastructure ~~States~~ and ~~Canada~~other ~~as Abreva®~~assets byor ~~our~~resources. ~~marketing~~There ~~partner~~can ~~GlaxoSmithKline~~be ~~Consumer~~no ~~Healthcare)~~assurance, ishowever, ~~the~~that ~~only~~we will ~~over-the-counter~~be ~~treatment for~~successful ~~cold~~in ~~sores~~acquiring ~~that~~any ~~has~~additional ~~been~~assets, ~~approved~~or bythat we will receive the ~~FDA~~anticipated benefits of any such acquisitions.

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

MERGER AGREEMENT

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

Acquisition Sub’s obligation to purchase the Company Shares validly tendered pursuant to the Offer is subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, including (i) the expiration or termination of any waiting period (and extensions thereof) applicable to the transactions contemplated by the Merger Agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), (ii) that the number of Company Shares validly tendered and not withdrawn in accordance with the terms of the Offer, together with the Company Shares then owned by Otsuka, Acquisition Sub and their respective controlled affiliates, represents at least a majority of all then outstanding Company Shares (not including Company Shares tendered pursuant to guaranteed delivery procedures), (iii) the absence of any law or order by any governmental

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

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

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

MARKETED PRODUCTS AND DRUG CANDIDATES

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

LOGO

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

~~NUEDEXTA~~5 ~~for the Treatment of Pseudobulbar Affect~~

NUEDEXTA is the first and only FDA-approved treatment for PBA. PBA occurs secondary to a variety of otherwise unrelated neurological conditions, and is characterized by involuntary, sudden, and frequent episodes of

~~laughing~~NUEDEXTA ~~and/or~~for ~~crying.~~the ~~PBA~~Treatment ~~episodes typically occur out~~ of ~~proportion~~Pseudobulbar orAffect ~~incongruent to the patient’s underlying emotional state.~~

NUEDEXTA is anthe ~~innovative~~first ~~combination~~and ofonly ~~two~~FDA ~~well-characterized~~and ~~components:~~European ~~dextromethorphan~~Medicines ~~hydrobromide~~Agency (~~20 mg~~“EMA”),-approved ~~the~~treatment ~~ingredient~~for ~~that~~PBA. ~~is pharmacologically~~PBA ~~active~~occurs insecondary ~~the~~to ~~central~~a variety ~~nervous~~of ~~system~~otherwise unrelated neurological conditions, and ~~quinidine~~is ~~sulfate~~characterized ~~(10~~by ~~mg)~~involuntary, asudden, ~~metabolic~~and ~~inhibitor~~frequent ~~enabling~~episodes ~~dextromethorphan~~of tolaughing ~~reach~~and/or ~~therapeutic~~crying. ~~plasma~~PBA ~~concentrations.~~episodes ~~NUEDEXTA~~typically ~~acts~~occur onout ~~sigma-1~~of ~~and~~proportion ~~NMDA~~or ~~receptors~~incongruent into the ~~brain,~~patient’s ~~although the~~underlying ~~mechanism~~emotional ~~by which NUEDEXTA exerts therapeutic effects in patients with PBA is unknown~~state.

~~Studies to support the effectiveness of~~ NUEDEXTA ~~were~~is ~~performed~~an ininnovative ~~patients~~combination ~~with~~of ~~PBA~~two ~~and~~well-characterized ~~underlying~~components: ~~amyotrophic~~dextromethorphan ~~lateral sclerosis (“ALS”) and MS. The primary outcome measure~~hydrobromide, the ~~number~~ingredient ofthat ~~laughing~~is ~~and~~pharmacologically ~~crying~~active ~~episodes, was significantly lower~~ in the ~~NUEDEXTA~~central ~~cohort~~nervous ~~compared with placebo. The secondary outcome measure~~system, ~~the~~and ~~Center~~quinidine ~~for Neurologic Studies Lability Scale (“CNS-LS”)~~sulfate, ~~demonstrated~~ a ~~significantly~~metabolic ~~greater~~inhibitor ~~mean~~enabling ~~decrease~~dextromethorphan into ~~CNS-LS~~reach ~~score~~therapeutic ~~from~~plasma ~~baseline~~concentrations. ~~for the~~ NUEDEXTA ~~cohort~~acts ~~compared~~on ~~with~~sigma-1 ~~placebo. NUEDEXTA~~and ~~has~~NMDA ~~not~~receptors ~~been studied~~ in ~~other~~the brain, ~~types~~although ofthe ~~emotional~~mechanism ~~lability~~by ~~that~~which ~~can~~NUEDEXTA ~~commonly~~exerts ~~occur,~~therapeutic ~~for~~effects ~~example,~~ in ~~Alzheimer’s~~patients ~~disease~~with ~~and~~PBA ~~other~~is ~~dementias~~unknown.

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

NUEDEXTA safety information

For a description of the NUEDEXTA safety information, a copy has been filed as Exhibit 99.1 on this Annual Report on Form 10-K for the period ended September 30, ~~2013~~2014. For additional information regarding PBA or NUEDEXTA see www.pbafacts.com or www.nuedexta.com.

PBA indication and market

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

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

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

We believe that NUEDEXTA represents a more attractive treatment option for patients suffering from PBA. In our Phase ~~III~~3 STAR trial that was completed in 2009, patients treated with NUEDEXTA reported an average 82% reduction in PBA episodes at the end of the 12-week study compared to baseline, with an average 44% reduction in episodes after the first week of treatment. Over the course of the 12-week study, patients receiving NUEDEXTA ~~experienced significantly lower PBA episode rates versus placebo (P<0.0001). Over the final two weeks of the STAR trial, 51% of patients treated with NUEDEXTA achieved episode-free remission.~~

NUEDEXTA commercial strategy

We currently market NUEDEXTA in the U.S. to approximately 10,000 physicians and other healthcare providers who specialize in psychiatry, neurology, internal medicine or geriatric medicine and practice in outpatient

or long-term care settings in the U.S. Our U.S. commercial strategy for NUEDEXTA includes the following key objectives:

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

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

• Expand adoption of NUEDEXTA — We are focused on driving awareness of NUEDEXTA and educating health care providers on the risks and benefits of the drug. These interactions take place in a wide range of forums including physician offices, long term care facilities, speaker programs and medical meetings and conferences. Our medical affairs team is active in publishing results from NUEDEXTA studies that are disseminated through appropriate scientific channels.

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

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

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

AVP-923 for the Potential Treatment of Neuropathic Pain

AVP-923 for the treatment central neuropathic pain in multiple sclerosis

Multiple Sclerosis is one of the most frequent chronic neurologic diseases causing significant disability in young adults. Among the many neurological complications of MS, chronic pain has a significant impact on the daily life of patients with this disease.

Several distinct pain conditions associated with MS have been characterized in various literature, including optic neuritis, headache, musculoskeletal pain (which includes painful tonic spasms, back pain and muscle spasms) and central neuropathic pain (which includes extremity pain, trigeminal neuralgia and Lhermitte’s sign). While the specific pain mechanisms associated with each condition have not been fully identified, it is believed that neuropathic pain results from nerve damage caused by MS. Approximately 30% of MS patients experience central neuropathic pain during the course of the disease.

In November 2011, we initiated a Phase II study, known as Pain Research In Multiple sclErosis (“PRIME”), for the treatment of central neuropathic pain in MS. The objectives of PRIME were to evaluate the safety, tolerability, and efficacy of three dose levels of AVP-923 capsules for the treatment of central neuropathic pain in a population of patients with MS. The trial was a multicenter, randomized, double-blind, placebo-controlled, 4-arm parallel group study. Eligible patients were randomized to receive one of the three dose levels of AVP-923 (45/10 mg, 30/10 mg, or 20/10 mg) or placebo daily for 12 weeks. The primary efficacy measure was the Pain Rating Scale obtained from patient diaries. The primary efficacy endpoint looked at the plasma levels of DM at different doses versus the pain relief observed. Secondary endpoints included measure of fatigue, impact of MS on

~~daily~~experienced ~~life,~~significantly ~~sleep~~lower ~~quality,~~PBA ~~cognition~~episode ~~and~~rates ~~depression.~~versus ~~Safety~~placebo ~~was assessed by monitoring adverse events, clinical laboratory tests, electrocardiograms, physical examinations, and vital signs~~(P<0. ~~In February 2013, based on the successful interim Phase I results from the AVP-786 study, we modified the target study enrollment from approximately 400 to 200 patients both in the U~~0001).S. ~~and~~Over ~~internationally. The enrollment target was modified in order to accelerate completion of~~ the ~~study~~final sotwo ~~that~~weeks ~~data would be available to help plan further development~~ of ~~our next generation compound AVP-786. In December 2013, we completed~~ the ~~PRIME~~STAR ~~study. The data from the PRIME study did not meet the primary efficacy endpoint. In the study~~trial, ~~AVP-923~~51% ~~treated~~of patients ~~experienced~~treated ~~levels of pain reduction commensurate~~ with ~~those~~NUEDEXTA ~~observed~~achieved ~~in similar studies and the improvement in pain scores from baseline reached statistical significance; however, there~~episode-free ~~was no difference between the treatment arms and placebo~~remission. ~~Avanir~~ ~~believes that a higher than expected placebo response negatively impacted the study results. AVP-923 was generally safe and well tolerated in the study.~~

~~AVP-923~~In ~~for~~October 2014, at the ~~treatment~~American Neurological Association annual meeting, Avanir presented data from the PRISM II open label study assessing the effectiveness, tolerability and safety of ~~diabetic~~NUEDEXTA ~~neuropathic~~treating ~~pain~~PBA in 134 patients with underlying Alzheimer’s disease/dementia. The PRISM II study demonstrated a 68% reduction in PBA episodes vs. baseline (P<0.001) and 78% of the investigators rated their patient’s condition with respect to PBA as much and very much improved after 12 weeks of treatment. In this study NUEDEXTA was well tolerated with a safety profile similar to previous controlled studies.

~~Diabetic~~NUEDEXTA ~~peripheral~~commercial ~~neuropathic~~strategy 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 DPN 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 global neuropathic pain market was approximately $2.4 billion in 2010 and is expected to grow to $3.6 billion by 2020 among the seven largest markets, consisting of the United States, Japan, France, Germany, Italy, Spain and the United Kingdom.

~~Avanir~~We ~~has~~currently ~~completed~~market aNUEDEXTA ~~Phase III clinical trial for AVP-923~~ in the ~~treatment of patients with DPN pain~~U.S. Into ~~April~~approximately ~~2007~~20,000 ~~we announced~~physicians ~~positive~~and ~~top-line~~other ~~data~~healthcare ~~from~~providers ~~our~~who ~~first~~specialize ~~Phase III~~in ~~clinical~~psychiatry, ~~trial~~neurology, ofinternal ~~AVP-923~~medicine ~~for~~or ~~the~~geriatric ~~treatment~~medicine ofand ~~patients~~practice ~~with DPN pain. The most commonly reported adverse events from this Phase III study were dizziness, nausea, diarrhea, fatigue~~in ~~and~~outpatient ~~somnolence,~~or ~~which~~long-term ~~were~~care ~~mild~~settings ~~to moderate~~ in ~~nature~~the U.S. WeOur ~~are~~U.S. ~~continuing~~commercial tostrategy ~~evaluate our options~~ for ~~this~~NUEDEXTA ~~program,~~includes ~~including~~ the ~~use~~following ofkey ~~AVP-786~~objectives: ~~in the advancement of this program.~~

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

~~AVP~~• Increase awareness and appropriate diagnosis of PBA — Since PBA is under-~~923~~diagnosed ~~for~~and often not treated, we use a range of tools to educate physicians and nurses about the ~~treatment~~prevalence of ~~agitation~~PBA, the burden of the disease, the differential diagnosis versus depression, and encourage the utilization of screening tools to appropriately diagnose PBA in patients with ~~Alzheimer’s~~ ~~disease~~underlying neurological disorders.

~~Alzheimer’s~~• ~~disease~~Expand isadoption ~~generally~~of ~~characterized~~NUEDEXTA by— ~~cognitive~~We ~~decline,~~are ~~impaired performance~~focused ofon ~~daily~~driving ~~activities,~~awareness ~~and~~of ~~behavioral~~NUEDEXTA ~~disturbances. Behavioral~~ and ~~psychiatric~~educating ~~symptoms~~health ~~develop~~care inproviders ason ~~many~~the asrisks ~~60% of community-dwelling dementia patients~~ and inbenefits ~~more~~of ~~than~~the ~~80%~~drug. ofThese ~~patients~~interactions ~~with~~take ~~dementia~~place ~~living~~ in ~~nursing~~a ~~homes;~~wide asrange ~~the disease progresses the risk~~ of ~~such~~settings ~~complications~~including ~~approaches~~physician ~~100%. Dementia-related behavioral symptoms~~offices, ~~including~~long ~~agitation,~~term ~~can~~care ~~be extremely distressing to the individual~~facilities, ~~the~~speaker ~~family,~~programs and ~~caregivers.~~medical ~~These~~meetings ~~behavioral disturbances have been associated with more rapid cognitive decline, institutionalization,~~ and ~~increased caregiver burden~~conferences.

~~The~~• ~~objectives~~Minimize ofbarriers ~~this proof-of-concept study are~~ to ~~evaluate~~patient ~~the~~access ~~safety,~~— ~~tolerability,~~We ~~and~~work ~~efficacy~~actively ofwith ~~AVP-923~~major ~~for~~insurance ~~the~~plans ~~treatment~~and ofpharmacy ~~agitation~~benefit inmanagers ~~Alzheimer’s~~to ~~patients.~~ensure ~~The~~that ~~trial~~NUEDEXTA isreceives athe ~~multicenter,~~appropriate ~~randomized,~~coverage ~~double-blind,~~and ~~placebo-controlled~~patients ~~study~~with ~~that~~PBA ishave ~~expected~~access to ~~enroll~~ ~~up to 200 Alzheimer’s patients in~~ the ~~United States~~drug. ~~Eligible~~Additionally, ~~patients~~we ~~will~~have bea ~~randomized~~range toof ~~receive~~patient ~~either~~programs ~~AVP-923~~to orhelp ~~placebo~~defray ~~for~~some 10of ~~weeks. The primary efficacy measure is~~ the ~~agitation/aggression~~out-of-pocket ~~domain~~costs of the ~~Neuropsychiatric Inventory~~medication orincluding ~~NPI.~~co-pay ~~Secondary~~cards, ~~outcome~~support ~~measures~~for ~~include~~a ~~assessments~~third ofparty ~~disease~~patient ~~severity,~~assistance ~~behavioral~~foundation ~~abnormalities,~~program ~~cognition,~~for ~~activities~~Medicare ofPart ~~daily~~D ~~living~~patients, ~~quality~~and ofpatient ~~life~~assistance ~~and~~programs ~~caregiver~~for ~~strain.~~under-insured ~~Standard~~patients ~~safety~~and ~~assessments~~patients ~~will~~lacking ~~also~~health ~~be conducted~~insurance.

~~AVP-923~~• ~~for~~Motivate ~~the~~patients ~~treatment~~and caregivers to request and adhere to NUEDEXTA therapy — Our market research has shown that many neurological patients are not aware that PBA is a distinct medical condition and do not discuss their symptoms with their physicians. Research also shows that when they engage with a physician, they are likely to be appropriately diagnosed and receive a medication like NUEDEXTA. Based on this data, we have engaged in a series of ~~levodopa-induced-dyskinesia~~programs directly communicating with patients and their caregivers to provide educational material on PBA and NUEDEXTA where appropriate. These programs include direct database marketing, Internet advertising and direct response television advertising.

~~Levodopa-induced-dyskinesia~~We ~~(“LID”)~~received ~~occurs~~approval in ~~most~~June ~~patients~~2013 ~~with~~to ~~Parkinson’s disease (“PD”) after several years~~market ofNUEDEXTA ~~treatment, generally~~ in ~~association with other motor response complications, such as wearing-off or “on-off” fluctuations. Dyskinesia may be as disabling as~~ the ~~parkinsonism~~European ~~itself,~~Union and ~~current~~are ~~treatment~~currently ~~options~~evaluating ~~are~~our ~~limited~~commercial ~~and~~strategy ~~are~~for ~~not always~~the ~~effective~~European Union.

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

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

~~This proof-of-concept, double blind, randomized, crossover study will compare AVP-923 (45mg~~ ~~DM/10mg~~progresses Q)the ~~with~~risk ~~placebo for treatment~~ of ~~LID.~~such ~~The~~complications ~~study~~approaches ~~will enroll approximately 16 PD patients across three study centers in the U~~100%.S. ~~and Canada. Study participants will receive, in a random order, a 2~~Dementia-~~week~~related ~~treatment~~behavioral ~~with AVP-923 and a 2-week placebo treatment~~symptoms, ~~separated~~including ~~by a 2-week break. At the end of each 2-week treatment period~~agitation, ~~patients~~can ~~will~~be ~~receive~~extremely adistressing ~~2-hour levodopa infusion~~ to ~~test~~ the ~~drug~~individual, ~~effect on dyskinesia. Patients will be carefully monitored throughout~~ the ~~6-week study for side effects~~family, ~~Parkinson’s symptoms~~ and ~~general health status~~caregivers. These ~~The~~behavioral ~~results~~disturbances ofhave ~~this~~been ~~study~~associated ~~will~~with ~~help~~more ~~inform~~rapid ~~future~~cognitive ~~development~~decline, ofinstitutionalization, ~~AVP-923~~and ~~for~~increased ~~LID.~~caregiver ~~This study is being funded through a grant awarded by the Michael J~~burden. ~~Fox Foundation.~~

On September 15, 2014, Avanir announced positive results from a Phase 2 clinical study of AVP-~~786~~923 in the treatment of agitation in Alzheimer’s patients. The objectives of this proof-of-concept study were to evaluate the safety, tolerability, and efficacy of AVP-923 for the treatment of ~~neurologic~~agitation in Alzheimer’s patients. The trial was a multicenter, randomized, double-blind, placebo-controlled study that enrolled approximately 220 Alzheimer’s patients in the United States utilizing a Sequential Parallel Comparison Design (“SPCD”) intended to reduce placebo response rates. Eligible patients were initially randomized 3:4 to receive either AVP-923 (dose escalated from DM 20mg/Q 10mg to DM 30mg/Q 10mg) or placebo. At the end of week five, patients who initially received placebo were stratified according to their response to treatment and ~~psychiatric~~subsequently ~~disorders~~re-randomized 1:1 to receive either AVP-923 or placebo for the remainder of the study (an additional five weeks of treatment). The primary efficacy measure was the agitation/aggression domain of the Neuropsychiatric Inventory (“NPI”). The primary endpoint follows a standard analysis of SPCD by combining the change from baseline to week five (stage 1: full analysis population) and change from week five to week ten (stage 2) on the NPI agitation/aggression domain (patients who were considered “non-responders” to placebo during the initial five weeks). Secondary outcome measures include global assessments of disease severity, other neuropsychiatric symptoms, cognition, activities of daily living, quality of life and caregiver strain.

Treatment with AVP-~~786~~923 iswas aassociated ~~novel~~with ~~investigational~~significantly ~~drug~~reduced ~~product~~agitation ~~consisting~~as ofmeasured aby ~~combination~~the ofprimary ~~deuterium-modified~~endpoint, ~~dextromethorphan~~the ~~(a new chemical entity~~agitation/aggression ordomain ~~NCE)~~score ~~and~~of the ~~metabolic~~NPI ~~inhibitor~~compared ~~quinidine~~to placebo (p=0.00008). The ~~compound~~reduction ~~was~~in ~~developed~~agitation ~~through~~was ~~incorporation~~observed ofin ~~deuterium~~both ~~into~~stage ~~molecular~~1 ~~positions~~(p=0.0002) ofand ~~dextromethorphan,~~stage ~~resulting~~2 in(p=0.021) ~~strengthened~~of ~~molecular~~the ~~bonds~~SPCD. ~~which~~In ~~reduce~~addition, ~~susceptibility~~improvements towere ~~enzyme~~also ~~cleavage. Based~~seen onin ~~interim~~secondary ~~data,~~endpoints weincluding ~~believe~~the ~~that~~NPI wetotal score ~~have~~(p=0.014), ~~identified~~clinical aglobal ~~formulation~~impression of ~~AVP~~change-~~786~~agitation ~~with a comparable pharmacokinetic profile~~(p=0.0003), ~~and~~patient ~~likely~~global aimpression ~~comparable~~of ~~safety~~change (p=0.001) and ~~tolerability~~measures ~~profile~~of tocaregiver ~~AVP-923~~burden (p£0.05). ~~This~~The ~~AVP-786~~complete ~~formulation~~set ~~contains~~of ~~significantly~~primary ~~less~~and ~~quinidine~~secondary ~~than~~endpoints ~~used~~ in ~~AVP-923. In June 2013,~~ the ~~FDA~~study ~~agreed~~is toset anforth ~~expedited~~below. ~~development~~In ~~pathway~~the ~~for~~study, AVP-~~786,~~923 ~~requiring~~showed ~~only~~ a ~~limited~~statistically ~~non-clinical~~significant ~~package~~improvement asover ~~part~~placebo ofin the ~~Investigational~~primary ~~New~~endpoint ~~Drug~~and ~~application.~~in ~~Upon~~a ~~completion~~majority of ~~these non-clinical studies,~~ the ~~Company~~secondary ~~intends to proceed directly into human clinical trials~~endpoints. ~~The Company currently intends to study AVP-786 in neuropathic pain, agitation in patients with Alzheimer’s disease and treatment resistant depression.~~

~~AVP-825~~Primary ~~for~~Endpoint ~~the treatment of acute migraine~~

~~AVP-825~~The istreatment aneffect ~~investigational~~of ~~drug~~AVP-~~device~~923 ~~combination~~was ~~product~~measured ~~consisting~~using the agitation/aggression domain of ~~low~~the NPI. The NPI is a well-~~dose~~accepted ~~sumatriptan~~tool ~~powder~~and was developed to ~~treat~~provide ~~acute~~a ~~migraine~~means of assessing neuropsychiatric symptoms and psychopathology of patients with Alzheimer’s disease and other neurodegenerative disorders. The ~~powder~~NPI ishas ~~delivered~~proven ~~intranasally~~to ~~utilizing~~be asensitive ~~novel~~to ~~Breath~~change ~~Powered~~and has been employed to capture ~~delivery~~treatment ~~technology.~~related Ifbehavioral ~~approved,~~changes ~~AVP-825~~in ~~would~~patients bereceiving ~~the~~cholinesterase ~~first~~inhibitors, antipsychotic agents, melatonin and ~~only~~a ~~fast-acting~~variety ~~dry~~of other anti-~~powder~~dementia ~~intranasal~~and ~~form~~psychotropic compounds. The NPI is comprised of ~~sumatriptan~~12 domains. WeThe ~~have~~score ~~begun~~for ~~preparing~~each domain is the ~~NDA~~product ~~and~~of ~~expect~~frequency to(on ~~file~~a four-point scale) x severity (on a three-point scale). The maximum score on any single sub-domain is therefore 12. A 30 percent reduction in the ~~application~~agitation/aggression ~~with~~domain of the ~~FDA~~NPI is considered to be a clinically meaningful improvement in ~~the~~symptoms. The ~~first~~NPI ~~quarter~~caregiver distress score provides internal validity to the score of ~~calendar~~each ~~2014~~NPI domain and the overall NPI.

~~Migraine~~At ~~represents~~the anstudy ~~area~~baseline, ofthe ~~significant~~NPI ~~unmet~~agitation/aggression ~~medical~~domain ~~need~~was 7. ~~According~~0 toand ~~the~~7.1 ~~Centers~~ for ~~Disease~~patients ~~Control~~in ~~and Prevention,~~the ~~over~~AVP-923 ~~37 million~~and ~~Americans~~placebo ~~suffer~~groups, ~~from migraine headaches~~respectively. ~~The~~At ~~triptan~~the ~~class~~end of ~~medications~~stage is1, ~~generally~~scores ~~considered~~for the ~~standard~~AVP-923 oftreated ~~care~~patients ~~with~~had reduced ~~over~~by ~~13 million~~3.3 ~~prescriptions~~(SD=2.98), ~~written~~vs. ~~annually~~1.7 ~~Sumatriptan~~(SD=3.10) isfor ~~the~~placebo ~~class~~(p<0.001), ~~leader~~amounting ~~with~~to a ~~market~~ ~~share~~47 ofpercent ~~over~~reduction ~~50%,~~and ~~making~~a itStandard ~~the~~Effect ~~most~~Size ~~commonly~~(SES)=0.505. ~~prescribed~~In ~~migraine~~stage ~~drug~~2, inwhere ~~the~~only ~~U.S. An~~placebo ~~online~~non-responders ~~survey~~were ofincluded ~~over~~in 2the primary analysis,~~500~~ ~~frequent~~a ~~migraine~~reduction ~~sufferers~~of ~~revealed~~2.0 (SD=3.19) ~~that~~was ~~66%~~observed ~~were~~in ~~dissatisfied~~patients treated with ~~their~~AVP-923 ~~treatments~~vs. As0.8 afor ~~result~~patients on placebo (p=0.021), ~~many~~corresponding ~~migraine sufferers~~to ~~are~~a ~~seeking~~26 ~~fast~~percent reduction for AVP-~~acting,~~923 ~~well~~vs. ~~tolerated~~a ~~treatment~~6.7 ~~options~~reduction for placebo and a SES=0.340.

Docosanol 10% cream — cold sore treatment

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

In November 2002, we sold to Drug Royalty USA an undivided interest in our right to receive future Abreva royalties under the GSK License Agreement for $24.1 million (the “Drug Royalty Agreement”). Under the Drug Royalty Agreement, Drug Royalty USA has the right to receive royalties from GSK on sales of Abreva until the expiration of the patent for Abreva on April 30, 2014. 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 $62.0 million. From the effective date of the GSK License Agreement up to the 2002 sale of our royalty rights to

~~Drug~~Secondary ~~Royalty~~Endpoints ~~USA,~~and ~~Inc.,~~Safety weMeasures ~~received a total of approximately $5.9 million in royalty payments from GSK attributed to the 8% royalty on net sales by GSK.~~

~~Under~~Clinical ~~the~~benefits ~~terms~~were ofobserved ~~our~~across ~~docosanol~~a ~~license~~number ~~agreements, our partners are generally responsible for all regulatory approvals, sales and marketing activities, and manufacturing and distribution~~ of ~~the~~secondary ~~product~~endpoints inproviding ~~the~~additional ~~licensed~~insight ~~territories.~~into ~~The terms of~~ the ~~license~~overall ~~agreements typically provide for us to receive a data transfer fee, potential milestone payments and royalties on product~~treatment ~~sales~~effect. Improvements Wewere ~~purchase~~observed ~~the active pharmaceutical ingredient (“API”), docosanol, from a large supplier~~ in ~~Western Europe and have, on occasion, sold material to our licensees. We currently store our API in~~ the ~~United~~following ~~States.~~measures ~~Any~~(SPCD ~~material disruption~~analysis): ~~in manufacturing could cause a delay in shipments and possible loss of sales.~~

•

Total NPI: p=0.014

•

Two NPI domain clusters encompassing commonly observed symptoms of agitation:

•

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

•

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

•

Clinical Global Impression of Change-agitation: p=0.0003

•

Clinical Global Impression of Change-overall: p=0.005

•

Patient Global Impression of Change: p=0.001

•

Measures of caregiver distress/strain:

•

Caregiver Distress — NPI agitation/aggression: p=0.01

•

Caregiver Distress NPI total: p=0.014

•

Caregiver Strain Index (CSI): p=0.05

•

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

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

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

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

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

AVP-923 for the Treatment of Levodopa-Induced Dyskinesia

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

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

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

AVP-786 for the Treatment of Neurologic and Psychiatric Disorders

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

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

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

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

AVP-825 for the Acute Treatment of Migraine

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

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

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

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

Competition

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

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

•

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

•

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

•

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

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

Manufacturing

We currently have no manufacturing or production facilities and, accordingly, rely on third parties for ~~clinical~~commercial and clinical production of our products and product candidates. We obtain the ~~API~~APIs for NUEDEXTA from a sole supplier who is one of several available commercial suppliers. (See Item 1A, “Risk Factors”). ~~Further, we licensed to various pharmaceutical companies the exclusive rights to manufacture and distribute docosanol 10% cream.~~

Intellectual Property Rights

Patents

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

Trademarks and Other Intellectual Property Rights

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

~~Our~~11 ~~intellectual property also includes copyrights, confidential and trade secret information.~~

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

Government Regulations

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

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

•

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

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

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

• Phase I1 investigations are generally conducted in healthy subjects. In certain instances, subjects with a life-threatening disease, such as cancer, may participate in Phase I1 studies that determine the maximum tolerated dose and initial safety of the product;

• Phase II2 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

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

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

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

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

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

1012

Product Liability Insurance

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

Executive Officers and Key Employees of the Registrant

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

Employees

As of December 21, ~~2013~~2014, we employed ~~267~~484 persons, including 3454 engaged in research, development, regulatory and medical affairs activities, ~~202~~394 in selling and marketing, and 3136 in general and administrative functions.

Financial Information about Segments

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

General Information

Our principal executive offices are located at 2030 Enterprise, Suite ~~200~~400, Aliso Viejo, California 92656. Our telephone number is (949) 389-6700 and our e-mail address is info@avanir.com. Our Internet website address is www.avanir.com. No portion of our website is incorporated by reference into this Annual Report on Form 10-K.

You are advised to read this Annual Report on Form 10-K in conjunction with other reports and documents that we file from time to time with the Securities and Exchange Commission (“SEC”). In particular, please read our definitive proxy statement, which will be filed with the SEC in connection with our ~~2014~~2015 Annual Meeting of Stockholders, our Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K that we may file from time to time. You may obtain copies of these reports after the date of this annual report directly from us or from the SEC at the SEC’s Public Reference Room at 100 F Street, N.E. Washington, D.C. 20549. In addition, the SEC maintains information for electronic filers (including Avanir) at its website at www.sec.gov. The public may obtain information regarding the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We make our periodic and current reports available on our internet website, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

Item 1A.

Risk Factors

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

11Risks Related to our Pending Acquisition by Otsuka

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Risks Relating to Our Business

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

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

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

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

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

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

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

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

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

~~We have~~15 ~~a history of net losses and an accumulated deficit, and we may be unable to generate sufficient revenue to achieve or maintain profitability in the future.~~

We have experienced significant net losses and negative cash flows from operations and we expect our negative cash flow from operations to continue until we are able to generate significant revenues from sales of NUEDEXTA. As of September 30, 2013, we had an accumulated deficit of approximately $500.5 million. We have incurred these losses principally from costs incurred in funding the research, development and clinical testing of our drug candidates, from our general and administrative expenses and from our commercialization activities for NUEDEXTA. We may continue incurring net losses for the foreseeable future and we expect our operating losses to continue for the foreseeable future as we continue to grow NUEDEXTA sales, invest in the development of AVP-923 and AVP-786, seek to commercialize NUEDEXTA in the European Union (“EU”), and seek FDA approval and subsequently commercialize AVP-825.

Our ability to generate revenue and achieve profitability in the near term is dependent on our ability, alone or with partners, to successfully manufacture and market NUEDEXTA for the treatment of patients with PBA in the United States. We expect to continue to spend substantial amounts on the ongoing marketing of NUEDEXTA domestically for the treatment of PBA, invest in Europe to commercialize NUEDEXTA, and seek regulatory

~~approvals~~We ~~for~~have ~~use~~a history of ~~NUEDEXTA~~net inlosses ~~other geographic markets~~ and ~~indications.~~an Asaccumulated ~~a result~~deficit, and we may be unable to generate sufficient revenue ~~from product sales~~ to ~~become~~achieve ~~profitable~~ or ~~generate positive~~maintain ~~cash~~profitability ~~flows~~in the future.

~~Certain~~We ofhave experienced significant net losses and negative cash flows from operations and we expect our ~~key~~negative ~~issued~~cash ~~patents~~flow ~~covering~~from ~~NUEDEXTA~~operations to continue until we are ~~currently~~able ~~being~~to ~~challenged~~generate substantially higher revenues from sales of NUEDEXTA for the long-term. As of September 30, 2014, we had an accumulated deficit of approximately $551.0 million. We have incurred these losses principally from costs incurred in funding the research, development and clinical testing of our ~~pending~~drug candidates, from our general and administrative expenses and ~~patent~~from ~~applications~~our ~~may~~commercialization beactivities ~~denied~~for NUEDEXTA. AnWe ~~adverse~~may ~~outcome~~continue incurring net losses for the foreseeable future as we continue to grow NUEDEXTA sales, invest in ~~either~~the ~~case~~development ~~would~~of ~~adversely~~AVP-923 ~~affect~~and ~~our~~AVP-786, ~~ability~~seek to ~~generate~~commercialize ~~significant~~NUEDEXTA ~~product~~in ~~revenue~~the European orUnion ~~become~~(“EU”), ~~profitable~~and seek FDA approval and subsequently commercialize AVP-825.

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

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

We have invested in an extensive patent portfolio and we rely substantially on the protection of our intellectual property through our ownership or control of issued patents and patent applications. The degree of patent protection that will ultimately be afforded to us in the U.S. and in other important markets remains uncertain and is dependent upon the scope of protection decided upon by the patent offices, courts and lawmakers in these countries. If we cannot prevent others from exploiting claims in our patent portfolio, we will not derive the benefit from it that we currently expect. Further, we may incur substantial expense from litigation to protect our patent portfolio.

On September 16, 2011, the Leahy-Smith America Invents Act (the “America Invents Act”), was signed into law. The ~~validity~~final substantive provisions of the America Invents Act, ~~enforceability~~including ~~and~~the ~~scope~~first-to-file system, became effective on March 16, 2013. The America Invents Act includes a number of ~~our~~significant ~~core~~changes ~~patents~~to ~~covering~~U.S. ~~NUEDEXTA~~patent ~~are~~law. ~~currently~~These changes include provisions that affect the way patent applications are being ~~challenged~~filed asand aprosecuted ~~result~~and ofmay also affect patent litigation. For example, the America Invents Act enacted proceedings ~~abbreviated~~involving ~~new~~post-issuance ~~drug~~patent ~~application~~review ~~(“ANDA”)~~procedures, ~~filings~~such ~~from~~as ~~generic~~inter ~~drug~~partes ~~companies~~review, covered business method reviews, and post grant reviews. AnThese ~~adverse~~proceedings ~~outcome~~are inconducted before the ~~current~~Patent orTrial ~~any~~and ~~future~~Appeal Board. Each proceeding has different eligibility criteria and different patentability challenges tothat can be raised. Because the ~~validity,~~standard ~~enforceability~~of orreview ~~scope~~for certain of ~~our~~these proceedings may differ from the standard in patent ~~portfolio~~litigation, ~~could~~the ~~significantly~~success ~~reduce~~of ~~revenues~~the Company in defending its patents in ~~from~~a ~~NUEDEXTA~~court ~~and~~proceeding ~~any~~does ~~future~~not ~~products~~necessarily preclude a subsequent challenge of the same patents under the America Invents Act. ~~More~~As ~~broadly~~a result, ~~investors~~the ~~should~~America beInvents ~~aware~~Act ~~that~~and its implementation could increase the ~~pharmaceutical~~uncertainties ~~industry~~and iscosts ~~highly~~surrounding ~~competitive.~~the prosecution ~~Our~~of ~~ability~~our topatent ~~compete~~applications inand ~~this~~the ~~space~~enforcement ~~involves~~or ~~various~~defense ~~risks~~of ~~relating~~our toissued patents, all of which could have a material adverse effect on our ~~intellectual~~business, ~~property~~financial condition, ~~including:~~ results of operations and growth prospects.

•The ~~our~~validity, ~~patents~~enforceability ~~covering~~and ~~NUEDEXTA~~scope of our core patents may also be ~~found~~challenged toas bea ~~invalid~~result ~~and~~of ~~unenforceable~~abbreviated new drug application (“ANDA”) filings from generic drug companies or ~~insufficiently~~through ~~broad~~post-grant toproceedings ~~block~~before the ~~introduction~~U.S. Patent and Trademark Office outside of athe ~~generic~~auspices ~~form~~of the America Invents Act. An adverse outcome in any future challenge to the validity, enforceability or scope of ~~NUEDEXTA;~~our patent portfolio could significantly reduce revenues from any future products. More broadly, investors should be aware that the pharmaceutical industry is highly competitive.

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

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

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

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

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

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

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

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we may not develop additional proprietary products that are patentable;

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

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

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

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

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

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

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

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

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

We17 have received notices of ANDA filings for NUEDEXTA submitted by five generic drug companies. These ANDA filings assert that a generic form of NUEDEXTA would not infringe our FDA Orange Book listed patents and/or those patents are invalid. As a result of these filings, we have commenced litigation to defend our patent rights, and have subsequently settled three of these cases. The litigation has been costly and time consuming and, depending on the outcome of the litigation, we may face competition from lower cost generic or follow-on products in the near term.

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

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

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

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

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

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

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

~~generic~~505(b)(2) ~~product~~pathway. AThe ~~patent~~FDA ~~owner~~and ~~who~~other ~~receives~~regulatory aauthorities ~~Paragraph~~will IVhave ~~certification~~substantial ~~may~~discretion ~~choose~~in toevaluating ~~sue~~the results of the ~~generic~~Phase ~~applicant~~3 ~~for~~clinical ~~patent~~trial ~~infringement~~and our NDA filing. In ~~recent~~November ~~years~~2014, ~~generic~~we received ~~manufacturers~~a ~~have~~Complete ~~used Paragraph~~Response IVLetter ~~certifications~~from ~~extensively~~the toFDA, ~~challenge~~which requested that we assess the ~~applicability~~root cause(s) of ~~patents~~device ~~listed~~use errors observed in the ~~FDA’s~~previously ~~Approved~~conducted ~~Drug~~human ~~Products~~factors ~~List~~testing. ~~with~~We ~~Therapeutic~~are ~~Equivalence~~currently ~~Evaluations,~~working ~~commonly~~to ~~referred~~address these issues and intend to conduct asa ~~the~~new ~~Orange~~human ~~Book~~factors study, onwith ainput ~~wide~~from ~~array~~the ofFDA, ~~innovative therapeutic~~with ~~products.~~a Wegoal ~~expect~~to ~~this~~respond ~~trend~~ to ~~continue~~the ~~and~~Complete toResponse ~~affect~~Letter ~~drug~~in ~~products~~the ~~with~~first ~~even~~half ~~relatively~~of ~~modest~~calendar ~~revenues~~2015.

~~We have~~Although ~~received~~the ~~Paragraph~~FDA IVdid ~~certification~~not ~~notices~~request ~~from~~in ~~five~~the ~~separate~~Complete ~~companies~~Response ~~contending~~Letter that ~~our~~any ~~patents~~additional ~~listed~~clinical intrials ~~the~~be ~~Orange~~conducted ~~Book~~prior ~~(U.S.~~to ~~Patents 7~~approval,~~659,282,~~ ~~8,227,484~~it ~~and~~is REpossible ~~38,115,~~that ~~which~~the ~~expire~~FDA inmay ~~August~~issue ~~2026, July~~an ~~2023~~additional ~~and~~Complete ~~January 2016,~~Response ~~respectively)~~Letter ~~are invalid, unenforceable and/~~or ~~will~~otherwise ~~not~~require beus ~~infringed~~to byconduct ~~the~~additional ~~manufacture~~non-clinical, ~~use,~~clinical or ~~sale~~chemical ofmanufacturing acontrol-related ~~generic~~studies ~~form~~before ofwe ~~NUEDEXTA.~~gain Inapproval ~~response~~for AVP-825. Prior to ~~these~~approving ~~notices~~a new drug, wethe ~~have~~FDA ~~filed~~generally ~~suit~~requires ~~against~~that ~~all~~the efficacy of the drug ~~generic~~be ~~drug~~demonstrated ~~companies~~in totwo ~~defend~~adequate ~~our~~and ~~patent rights~~well-controlled clinical trials. WeIn ~~have~~some ~~entered~~situations, ~~into~~the ~~settlement~~FDA ~~agreements~~approves ~~with~~drugs ~~three~~on the basis of ~~the~~a ~~companies~~single towell-controlled ~~resolve~~clinical ~~pending~~trial ~~patent~~and ~~litigation~~/ inor ~~response~~on tothe ~~their~~basis ~~ANDAs~~of ~~seeking~~referencing ~~approval~~data togenerated ~~market~~previously ~~generic~~with ~~versions~~the reference ofdrug ~~NUEDEXTA~~under ~~capsules.~~the ~~The~~505(b)(2) ~~settlement~~application ~~agreements~~process. ~~grant~~If the ~~three~~ ~~companies~~FDA determines that the ~~right~~clinical totrials ~~begin~~already ~~selling~~conducted do not demonstrate a ~~generic~~clinically ~~version~~meaningful ofbenefit ~~NUEDEXTA~~and onan ~~July 30,~~acceptable ~~2026~~safety profile, or ~~earlier~~do ~~under~~not ~~certain~~reflect ~~circumstances.~~an ~~The~~acceptable risk-benefit ~~parties~~profile ~~also~~or ~~filed~~if ~~stipulations~~the FDA requires us to conduct additional clinical trials in order to gain approval, we may incur significant additional development costs and ~~orders~~commercialization of ~~dismissal~~AVP-825 ~~with~~would ~~the~~be ~~United~~prevented ~~States~~or ~~District~~delayed ~~Court~~and ~~for~~our ~~the~~business ~~District~~would ofbe ~~Delaware~~adversely ~~which~~affected. ~~conclude~~AVP-825 ~~the~~is ~~litigation~~classified ~~with~~as ~~respect~~a new drug-device combination which requires additional conditions to ~~the~~be ~~three~~satisfied ~~companies.~~for ~~The~~FDA ~~settlements~~approval dobeyond ~~not~~what ~~end~~is ~~our~~required ~~ongoing~~for ~~litigation~~other ~~against~~drug products. Delays in obtaining regulatory approval for AVP-825, or the issuance of additional Complete Response Letters, would, among other ~~two~~consequences, ~~ANDA~~delay ~~filers~~the commercialization of AVP-825 and adversely affect our ability to generate revenue.

AsIn aaddition, ~~result~~this ofBreath ~~the~~Powered ~~30-month~~intranasal ~~stay~~device ~~associated~~has ~~with~~not ~~the~~been ~~filing~~previously ofreviewed ~~the~~or ~~ANDA~~approved ~~actions,~~by the FDA ~~cannot~~and ~~grant~~therefore, ~~final~~it ~~approval~~is topossible that ~~any~~other ~~ANDA~~issues ~~before~~may ~~December 30,~~arise ~~2013,~~during ~~unless~~the ~~there~~review isprocess anwhich ~~earlier~~could ~~court~~delay ~~decision holding~~or ~~that~~preclude the ~~Orange~~approval ~~Book-listed~~and ~~’282~~require additional capital investment. In addition, ~~’484~~we ~~and~~have ~~’115~~limited ~~patents~~experience ~~are~~obtaining ~~not~~FDA ~~infringed~~approval ~~and/or~~for ~~are~~drug-device ~~invalid~~combinations.

~~Although we~~We ~~intend~~established toa ~~vigorously~~joint ~~enforce~~steering ~~our~~committee, a joint intellectual property ~~rights~~committee ~~relating~~and tojoint ~~NUEDEXTA,~~development ~~there~~committee ~~can~~which ~~be no assurance that we~~ will ~~prevail~~give OptiNose, in our ~~defense~~partner ofwe ~~our~~license ~~patent~~AVP-825 ~~rights. Our existing patents could be invalidated~~from, ~~found~~input ~~unenforceable~~on ormatters ~~found~~related ~~not~~ to ~~cover~~ adevelopment ~~generic form~~ of ~~NUEDEXTA.~~AVP-825 Ifand anintellectual ~~ANDA~~property ~~filer~~related ~~were~~ to ~~receive~~the ~~FDA~~product. ~~approval~~As ~~to sell~~ a ~~generic~~result, ~~version~~our ofsuccess ~~NUEDEXTA~~depends ~~and/or~~partially ~~prevail~~on inthe ~~any~~success ~~patent~~of ~~litigation,~~OptiNose ~~NUEDEXTA~~in ~~would~~performing ~~become~~its responsibilities ~~subject to increased competition~~ and ~~our~~enforcing ~~revenue~~their ~~would~~intellectual beproperty ~~adversely affected~~rights.

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

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

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

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

•

recruit and retain adequate numbers of effective sales personnel;

•

effectively train our sales personnel on AVP-825;

•

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

•

manage geographically dispersed sales and marketing operations;

•

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

•

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

•

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

The commercialization of AVP-825 requires us to manage relationships with an increasing number of collaborative partners, suppliers and third-party contractors. If we are unable to successfully establish and maintain the required infrastructure, either internally or through third parties, and successfully manage an increasing number of relationships, we will have difficulty growing our business. In addition, we may enter into co-promotion or out-licensing arrangements with other pharmaceutical or biotechnology partners where necessary to reach customers when deemed strategically and economically advisable. To the extent that we enter into co-promotion or other licensing arrangements, our product revenues are likely to be lower than if we directly marketed and sold AVP-825, and some or all of the revenues we receive will depend upon the efforts of third parties, which may not be successful. If we are unable to develop and maintain adequate sales, marketing and distribution capabilities, independently or with others, we may not be able to generate significant product revenue or become profitable.

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

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

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

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

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

•

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

•

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

•

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

•

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

•

we will be successful developing this investigational drug; or

•

we will obtain regulatory approval domestically or internationally.

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

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

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

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

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

Discovery of previously unknown safety or drug interaction problems with an approved product may result in a variety of adverse regulatory actions. ~~This~~Under ~~risk~~the ~~may~~Food beand ~~increased~~Drug asAdministration ~~physicians,~~Amendments atAct ~~their~~of ~~own discretion~~2007, ~~may~~the ~~prescribe~~FDA ~~NUEDEXTA~~has ~~for~~broad ~~off-label~~authority ~~uses,~~to ~~which~~force ~~may~~drug ~~result~~manufacturers into ~~unknown~~take ~~safety~~any ornumber ~~drug~~of ~~interactions.~~actions ~~Under~~if ~~the~~previously ~~Food~~unknown ~~and Drug~~safety ~~Administration~~or ~~Amendments~~drug interaction ~~Act~~problems ofarise, ~~2007~~including, ~~the~~but ~~FDA~~not ~~has~~limited ~~broad authority~~ to: ~~force~~(i) requiring ~~drug~~ manufacturers to conduct post-approval

1421

~~take any number of actions if previously unknown safety or drug interaction problems arise, including, but not limited to: (i) requiring manufacturers to conduct post-approval~~ clinical studies to assess known risks or signals of serious risks, or to identify unexpected serious risks; (ii) mandating labeling changes to a product based on new safety information; or (iii) requiring manufacturers to implement a Risk Evaluation Mitigation Strategy, or REMS, where necessary to assure safe use of the drug. In addition, previously unknown safety or drug interaction problems could result in product recalls, restrictions on the product’s permissible uses, or withdrawal of the product from the market.

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

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

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

We have experienced significant operating losses due to costs associated with funding the research, development, clinical testing and commercialization of NUEDEXTA and our drug candidates. We expect to continue to incur substantial operating losses for the foreseeable future as we continue to expand our commercialization efforts for NUEDEXTA in the U.S. and in European markets, continue to develop AVP-923 and AVP-786, and seek FDA approval and subsequently commercialize AVP-825. Although we had approximately $57274.5 million in cash and cash equivalents, restricted cash and cash equivalents, and restricted investments as of September 30, ~~2013~~2014, we currently do not have sufficient revenue from NUEDEXTA or other sources of recurring revenue or cash flow from operations to sustain our operations and it is possible that we may not be able to achieve profitability with our current capital resources.

In light of our substantial long-term capital needs, we may need to partner our rights to NUEDEXTA (either in the U.S. or outside the U.S.) or raise additional capital in the future to finance our long-term operations, until we are able to generate sufficient revenue from product sales to fund our operations. Based on our current loss rate and existing capital resources as of the date of this report, we estimate that we have sufficient funds to sustain our operations at their current and anticipated levels ~~over~~for at least the next 12 months, which includes the costs associated with ~~the~~ the ongoing commercialization of NUEDEXTA for the treatment of PBA in the U.S. and European markets, and seeking FDA approval and subsequently commercialize AVP-825. Although we expect to be able to raise additional capital if needed, there can be no no assurance that we will be able to do so or that the available terms of any financing would be acceptable to us. If we are unable to raise additional capital to fund future operations, we may experience significant delays or cutbacks in the commercialization of NUEDEXTA and may be forced to further curtail our operations.

If we raise additional capital, we may do so through various financing alternatives, including licensing or sales of our technologies, drugs and/or drug candidates, selling shares of common or preferred stock, through the acquisition of other companies, or through the issuance of debt securities. Each of these financing alternatives carries certain risks.

1522

acquisition of other companies, or through the issuance of debt securities. Each of these financing alternatives carries certain risks.

Raising capital through the issuance of common stock may depress the market price of our stock. Any such financing will dilute our existing stockholders and, if our stock price is relatively depressed at the time of any such offering, the levels of dilution would be greater.

In addition, debt financing may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as encumbering our assets, making capital expenditures or entering into certain licensing transactions.

~~Our~~We ~~Loan~~are ~~Agreement with Oxford and SVB contains certain covenants that could~~party ~~adversely affect our operations and, if an event of default were~~ to ~~occur, we could be forced to repay the outstanding indebtedness sooner than planned and possibly at~~ a ~~time~~co-promotion ~~when~~agreement wefor doour ~~not~~institutional ~~have~~sales ~~sufficient~~force ~~capital~~that ~~to meet this obligation. The occurrence of any of these events~~ could ~~cause~~have anegative ~~significant adverse impact on our~~ business, ~~prospects and stock price~~implications.

~~Pursuant~~We ~~to our Loan Agreement with Oxford and SVB, we have pledged all of our assets, other than our patents and other intellectual~~entered ~~property~~into ~~rights,~~a ~~and~~multi-year ~~have~~agreement ~~agreed~~involving ~~that we may not sell or assign rights to~~ our ~~patents~~institutional ~~and~~sales ~~other intellectual property without the prior consent of Oxford and SVB~~team. ~~The~~This ~~Loan Agreement also requires us to maintain a minimum sales level relative to projected NUEDEXTA revenues, measured on a trailing three~~co-~~month~~promote ~~basis,~~agreement orinvolves ~~maintain~~certain ~~cash~~financial and ~~cash~~operating equivalents in accounts subject to control agreements in favor of the collateral agent equal to at least 1.5 times the outstanding amount of obligations under the Loan Agreement. The failure to satisfy both of these tests would result in an event of defaultrisks, ~~which could accelerate our repayment obligations. Additionally, the Loan Agreement contains affirmative and negative covenants that, among other things, restrict our ability to~~including:

• incur additional indebtedness or guarantees;

• incur liens;

• make investments, loans and acquisitions;

• consolidate or merge;

• sell assets, including capital stock of subsidiaries;

• alter the business of the Company;

• engage in transactions with affiliates; and

• enter into agreements limiting dividends and distributions of certain subsidiaries.

The Loan Agreement also includes events of default, including, among other things, payment defaults; breaches of representations, warranties or covenants; certain bankruptcy events; the occurrence of certain material adverse changes; and a commercial, generic version of NUEDEXTA (for the treatment of PBA) becoming available. Upon the occurrence of an event of default and following any cure periods (if applicable), a default interest rate of an additional 5.0% per annum may be applied to the outstanding loan balances, and the lenders may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement.

These terms of the Loan Agreement could prevent us from taking certain actions without the consent of our lenders and, if an event of default should occur, we could be required to immediately repay the outstanding indebtedness. If we are unable to repay this debt, the lenders would be able to foreclose on the secured collateral, including our cash accounts, and take other remedies permitted under the security agreement. Even if we are able to repay the indebtedness on an event of default, the repayment of these sums may significantly reduce our working capital and impair our ability to operate as planned. The occurrence of any of these events could cause a significant adverse impact on our business, prospects and stock price.

We recently entered into a co-promotion agreement for our institutional sales force that could have negative business implications.

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

•

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

• increased compliance risk which could harm our reputation; ~~and~~

•

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

•

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

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

~~There~~We ~~can~~are beparty noto ~~assurance~~a license agreement with obligations that ~~the~~could ~~FDA~~require ~~will~~significant ~~approve~~capital ~~AVP-825~~infusions ~~for~~and ~~the~~could ~~treatment~~involve ofmany ~~acute~~financial and ~~migraine~~operating risks.

AIn ~~Phase~~July II2013, ~~and~~we ~~Phase~~entered ~~III~~into ~~clinical~~an ~~trial~~exclusive oflicense ~~AVP-825~~agreement for ~~acute~~the ~~treatment~~development and commercialization of ~~migraine~~a ~~have~~Breath ~~been~~Powered ~~completed~~intranasal ~~and~~delivery ~~will~~system ~~form~~containing ~~the~~low-dose ~~basis~~sumatriptan powder for ~~a 505(b)(2)~~the ~~NDA~~acute ~~filing~~treatment ~~with~~of ~~the~~migraine, ~~FDA~~now ~~together~~named ~~with~~AVP-825. ~~previously~~The ~~completed~~licensed ~~studies~~territories ~~with~~are the ~~reference~~United ~~drug~~States, ~~sumatriptan~~Canada and Mexico. ~~The~~Our ~~FDA~~obligations pursuant ~~and~~to ~~other~~this ~~regulatory~~license ~~authorities~~agreement ~~will~~could ~~have~~require ~~substantial~~significant ~~discretion~~capital ininfusions ~~evaluating~~and ~~the~~could ~~results~~involve ofmany ~~the~~financial ~~Phase~~and ~~III~~operating ~~clinical~~risks, ~~trial and~~including, ~~our~~but ~~NDA~~not ~~filing.~~limited to, the following:

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

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

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

We are primarily responsible for the manufacturing and distribution of AVP-825. We will utilize third parties to manufacture, package and distribute AVP-825. We may encounter challenges in the purchase of manufacturing equipment or in entering into manufacturing and supply agreements. We have no experience in manufacturing AVP-825 in commercial quantities. Any delays or difficulties in obtaining API or in the manufacturing, packaging or distribution of AVP-825 could negatively affect our sales revenues as well as delay FDA approval.

If AVP-825 is approved by the FDA, our ability to generate significant revenue is entirely dependent upon our ability to commercialize AVP-825. Our future results could be impacted by important factors which include, but are not limited to, commercial market estimates, reliance on market research, competition in the migraine segment, effect of healthcare reform, ability to secure reasonable pricing and patent protection. If we are unable to generate revenues from AVP-825, including through raising awareness among patients and physicians of the benefits of

using the device for the treatment of acute migraine, driving higher rates of physician adoption and obtaining reimbursement and third party payer coverage, our ability to generate significant revenue or achieve profitability will be adversely affected.

• recruit and retain adequate numbers of effective sales personnel;

• effectively train our sales personnel on AVP-825;

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

• manage geographically dispersed sales and marketing operations; and

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

We recently entered into a license agreement with obligations that could require significant capital infusions and could involve many financial and operating risks.

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

•

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

•

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

•

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

•

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

•

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

•

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

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

~~Our~~23 ~~co-promotion agreement with Merck may be terminated with or without cause, which could negatively impact our business.~~

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

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

•

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

•

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

•

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

•

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

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

We ~~are~~have ~~developing~~entered ~~AVP-786,~~into a ~~next~~number ~~generation~~of ~~drug~~agreements ~~product~~providing ~~containing~~for ~~deuterium-modified~~the ~~dextromethorphan.~~acquisition Itor isdivestiture ~~possible~~of ~~that~~drug ~~studies~~products and clinical assets and we ofexpect ~~AVP-786~~to enter into additional such agreements in the future. We may not ~~produce~~realize ~~favorable~~the ~~results~~anticipated value of these transactions and ~~future~~we ~~studies~~may ~~utilizing~~become ~~AVP-786~~involved ~~carry~~in ~~certain~~disputes ~~risks~~with the counterparties, both of which could harm our business operations and prospects.

We have ~~licensed exclusive,~~entered ~~worldwide~~into ~~rights~~agreements relating to ~~develop and commercialize deuterium-modified dextromethorphan compounds for~~ the ~~potential~~acquisition ~~treatment~~or divestiture of ~~neurologic~~certain ~~and psychiatric disorders~~assets, ~~as well as certain rights to other deuterium-modified dextromethorphan~~including ~~compounds.~~FazaClo, ~~The~~our ~~goal~~anthrax ofantibody ~~the AVP-786~~ program, isand toother ~~deliver~~antibodies ~~therapeutically~~in ~~effective~~our ~~levels~~infectious ofdisease ~~deuterium-modified dextromethorphan~~program, ~~but~~as ~~with~~well aas ~~reduction~~docosanol in the ~~need~~U.S. ~~for~~and another ~~enzyme~~markets ~~inhibitor such as quinidine~~worldwide. ~~Although~~We wehave ~~believe~~also ~~that~~licensed acertain ~~drug~~intellectual ~~product containing~~property ~~deuterium-modified~~rights ~~dextromethorphan~~from ~~will allow us to significantly reduce the level of quinidine~~CNS, ~~we are not certain that~~ AVP-786 ~~will~~from ~~have~~Concert Pharmaceuticals aand ~~similar efficacy profile to~~ AVP-~~923~~825 ~~and,~~from ifOptiNose ~~approved~~AS. byAll ~~the~~of ~~FDA,~~these ~~that~~transactions ~~the~~and ~~reduction~~agreements ininvolve ~~quinidine will~~numerous ~~result~~risks, inincluding: ~~improved safety language in the package insert.~~

We completed a pharmacokinetic study with AVP-786 and, based on this data, we believe that we have identified a formulation of AVP-786 with a comparable pharmacokinetic profile, and likely a comparable safety and tolerability profile to AVP-923. In June 2013, the FDA agreed to an expedited development pathway for AVP-786,

requiring only a limited non-clinical package as part of the Investigational New Drug application. Although the FDA has agreed to allow us to reference the extensive data generated during the AVP-923 development programs in support of the AVP-786 development programs and regulatory filings, there can be no assurance that we will be successful developing this investigational drug or that we will obtain regulatory approval domestically or internationally. In addition, our initial discussions regarding the development of AVP-786 have been with the FDA’s Division of Neurology. There can be no assurance that other divisions at the FDA will agree with the expedited development plan discussed with the Division of Neurology.

Additionally, we established a joint steering committee and a joint patent committee which will give Concert input on development and patent prosecution for a period of time. As a result, our success depends partially on the success of Concert in performing its responsibilities.

We have licensed 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 or sale of our non-core assets, including FazaClo, our anthrax antibody program, and other antibodies in our infectious disease program, as well as docosanol in the U.S. and other markets worldwide. From time to time, we have been and will continue to be engaged in discussions with potential licensing or development partners for NUEDEXTA for the treatment of PBA and/or AVP-923/AVP-786 for other indications and we may choose to pursue a partnership or license involving NUEDEXTA and/or AVP-923/AVP-786 if the terms are attractive. Additionally, we may seek to acquire rights to other drugs or technologies. However, all of these transactions involve numerous risks, including:

•

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

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

•

threatened or actual loss of potentially material contractual rights;

•

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

•

insufficient proceeds to offset expenses associated with the transactions; and

•

the potential loss of key employees following such a transaction.

~~Transactions~~Further, ~~such~~from astime ~~these~~to ~~carry~~time, ~~significant~~we ~~risks~~have ~~where~~been aand ~~large~~will ~~portion~~continue ofto ~~the~~be ~~total~~engaged ~~consideration~~in isdiscussions ~~contingent~~with ~~upon~~potential ~~post-closing events,~~licensing ~~such as regulatory, commercialization~~ or ~~sales~~development ~~milestones.~~partners for WeNUEDEXTA ~~may~~for ~~not~~the ~~have~~treatment ~~control~~of ~~over~~PBA ~~whether~~and/or ~~these~~AVP-923/AVP-786 ~~milestones~~for ~~are~~other ~~met~~indications and, ifwe ~~they~~may ~~are~~choose ~~not~~to ~~met,~~pursue ~~then~~ a ~~potentially~~partnership ~~large~~or ~~portion~~license ofinvolving ~~the~~NUEDEXTA ~~value~~and/or ofAVP-923/AVP-786 if the ~~transaction~~terms ~~may~~are ~~not be realized~~attractive. ~~Disputes may~~We also ~~develop~~regularly ~~over~~review ~~these~~potential acquisition ~~and~~opportunities ~~other~~for ~~terms,~~complementary ~~such~~products ~~as representations~~ and ~~warranties,~~technologies ~~indemnities, earn-outs,~~ and ~~other~~may ~~provisions~~seek into ~~the~~acquire ~~transaction~~rights ~~agreements.~~to Ifother ~~disputes~~drugs ~~are~~or ~~resolved unfavorably~~technologies, ~~our~~as ~~financial~~well ~~condition~~as ~~and~~other ~~results~~complementary ~~of operations may be adversely affected and we may not realize the anticipated benefits from the transactions~~assets.

~~Disputes~~24 relating to these transactions can lead to expensive and time-consuming litigation and may subject us to unanticipated liabilities or risks, disrupt our operations, divert management’s attention from day-to-day operations, and increase our operating expenses. See Item 3. “Legal Proceedings” for further discussion relating to a lawsuit filed by Neal R. Cutler, M.D., founder of Alamo Pharmaceuticals, LLC.

The FDA’s safety concerns regarding our prior formulation of NUEDEXTA, known as AVP-923, 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 AVP-923 or AVP-786 for other indications, including central neuropathic pain in patients with MS, is expected to use an alternative lower-dose quinidine formulation, which may negatively affect efficacy.

We have completed a single Phase III trial for AVP-923 in the treatment of DPN pain. In communications regarding the continued development of AVP-923 for this indication, the FDA has stated that certain safety concerns and questions raised in the PBA approvable letter issued in 2006 necessitate the testing of a low-dose quinidine formulation for the DPN pain indication. Additionally, based on feedback we have received from the FDA on the proposed continued development of AVP-923 for DPN pain, we believe it is likely that two additional large well-controlled Phase III trials would be needed to support a supplemental NDA filing for this indication. Due to our limited

~~capital~~Transactions ~~resources,~~such weas dothese ~~not~~carry ~~expect~~significant ~~that~~risks wewhere ~~will~~a belarge ~~able~~portion toof ~~conduct~~ the ~~trials~~total ~~needed~~value to ~~for~~Avanir ~~this~~and ~~indication~~our ~~without~~stockholders ~~additional~~is ~~capital,~~contingent aupon ~~development partner for AVP~~post-~~923~~closing ~~for~~events, ~~DPN~~such ~~pain~~as regulatory, ~~or a~~ commercialization ~~partner~~or ~~for~~sales ~~NUEDEXTA~~milestones. ~~Moreover,~~In ~~although~~certain circumstances, we ~~achieved~~may ~~positive~~not ~~results~~have incontrol ~~our~~over ~~initial~~whether ~~Phase~~these ~~III~~milestones ~~trial,~~are anmet ~~alternative~~and, ~~low-dose~~if ~~quinidine~~they ~~formulation~~are ~~may~~ not ~~yield~~met, ~~the~~then a ~~same~~potentially ~~levels~~large portion of ~~efficacy~~the asvalue ~~seen~~of in the ~~earlier~~transaction ~~trials~~may ornot ~~as predicted~~be ~~based on our subsequent pharmacokinetic study~~realized. ~~Any~~Disputes ~~decrease in efficacy~~ may bealso sodevelop ~~great~~over ~~that~~these ~~the~~and ~~drug~~other ~~does~~terms, ~~not~~such ~~demonstrate~~as arepresentations ~~statistically~~and ~~significant~~warranties, ~~improvement over placebo or an active comparator. Additionally~~indemnities, ~~any alternative low~~earn-~~dose quinidine~~outs, ~~formulation that we develop may not sufficiently satisfy~~ the ~~FDA’s~~scope ~~safety~~of ~~concerns.~~intellectual Ifproperty ~~this~~rights ~~were~~and related ~~to happen~~obligations, weand ~~may~~other ~~not~~provisions bein ~~able to pursue~~ the ~~development~~underlying ofagreements. ~~AVP-923~~If ordisputes ~~AVP-786~~are ~~for~~resolved ~~DPN pain or other indications~~unfavorably, ~~including~~our ~~central neuropathic~~financial ~~pain~~condition ~~in patients with MS~~ and ~~symptoms~~results of ~~agitation~~operations inmay ~~patients~~be ~~with~~adversely ~~Alzheimer’s~~affected ~~disease,~~and orwe may ~~need~~not torealize ~~undertake~~the ~~significant~~anticipated ~~additional~~benefits ~~clinical~~from ~~trials, which would be costly and cause potentially substantial delays~~the transactions.

Disputes relating to these transactions can lead to expensive and time-consuming litigation and may subject us to unanticipated liabilities or risks, disrupt our operations, divert management’s attention from day-to-day operations, and increase our operating expenses. Further, stockholders may not support the terms of any such transactions and our stock price may decline upon announcing any planned acquisition or divestiture.

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

Even if we successfully secure our intellectual property rights, third parties, including other biotechnology or pharmaceutical companies, may allege that our technology infringes on their rights. In addition, a third party may claim that we or our manufacturing or commercialization partners are using inventions covered by the third party’s patent rights, or that we or such partners are infringing, misappropriating or otherwise violating other intellectual property rights, and may go to court to stop us from engaging in our normal operations and activities, including making or selling our products. Intellectual property litigation is costly, and even if we were to prevail in such a dispute, the cost of litigation could adversely affect our business, financial condition, and results of operations. Litigation is also time consuming and could divert management’s attention and resources away from our operations and other activities. If we were to lose any litigation, in addition to any damages we would have to pay, we could be required to stop the infringing activity or obtain a license. Any required license might not be available to us on acceptable terms, or at all. Some licenses might be non-exclusive, and our ~~competitors~~ competitors could have access to the same technology licensed to us. If we were to fail to obtain a required license or were unable to design around a competitor’s patent, we would be unable to sell or continue to develop some of our products, which would have a material adverse effect on our business, financial condition and results of operations.

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

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

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

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

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

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~~In Europe, based on the European Commission’s Article 14(11) of Regulation (EC)~~ ~~No. 726/2004~~competition, ~~NUEDEXTA~~our ~~qualifies for ten years of regulatory data protection. Similar to the U.S., market exclusivity provisions provide for a maximum five~~long-~~year~~term ~~extension~~revenues ~~for~~from ~~certain~~NUEDEXTA ~~patents~~sales ~~through~~may ~~the~~be ~~granting~~significantly ofless ~~Supplementary~~than Protection Certificates. Although all countries in the European Union are required to provide Supplementary Protection Certificates that come into force after expiry of the patent upon which they are basedexpected, nowe ~~unified~~may ~~cross-recognition~~have ~~exists.~~greater ~~Applications~~difficulty ~~for Supplementary~~finding ~~Protection Certificates must be filed with each country’s patent office and approved on~~ a ~~country-by-country~~development ~~basis.~~partner ~~Although~~or welicensee ~~believe~~for ~~that~~ NUEDEXTA ~~will qualify for this extension~~ and wethe costs ~~plan~~ to ~~apply~~defend ~~for Supplementary Protection Certificates, we cannot assure you that NUEDEXTA will be granted any Supplementary Protection Certificates nor, if a Supplementary Protection Certificate is granted, that~~ the ~~term~~patents ofwould ~~the extension will~~ be ~~five years~~significant.

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

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

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

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

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

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

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

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

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

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

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

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

Risks Relating to Our Industry

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

The pharmaceutical and biotechnology industries are highly competitive and subject to significant and rapid technological change. We compete with hundreds of companies that develop and market products and technologies in areas similar to those in which we are performing our research. For example, we expect that NUEDEXTA may face competition from off-label use of other agents in the treatment of PBA, even though none of these agents has proven to be safe and effective for the treatment of PBA. Additionally, NUEDEXTA may face direct competition from a generic form of NUEDEXTA, if approved, as described above.

proven to be safe and effective for the treatment of PBA. Additionally, NUEDEXTA may face direct competition from a generic form of NUEDEXTA, if approved, as described above.

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

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

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

Marketed products, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for these products, are subject to continual requirements and review by the FDA, the EMA and other regulatory bodies. In addition, regulatory authorities subject a marketed product, its manufacturer and the manufacturing facilities to ongoing review and periodic inspections. We are subject to ongoing FDA requirements, including required submissions of safety and other post-market information and reports, registration requirements, current Good Manufacturing Practices (“cGMP”) regulations, requirements regarding the distribution of samples to physicians and recordkeeping requirements.

The cGMP regulations also include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. We rely on the compliance by our contract manufacturers with cGMP regulations and other regulatory requirements relating to the manufacture of products. We are also subject to state laws and registration requirements covering the distribution of our products. If we fail to comply with any of these requirements, we may be subject to action by regulatory agencies, which could negatively affect our business.

Regulatory agencies may also change existing requirements or adopt new requirements or policies. We may be slow to adapt or may not be able to adapt to these changes or new requirements.

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

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

In addition, the possibility exists that:

•

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

•

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

•

subjects may drop out of our clinical trials;

•

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

•

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;

•

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

•

there could be a delay in initiating our clinical trials.

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

Additionally, the FDA has substantial discretion in the approval process and may reject our data, disagree with our interpretations of regulations, draw different conclusions from our clinical trial data or ask for additional information at any time during their review.

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

•

delays in our ability to submit an NDA;

•

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

•

requests for additional studies or data;

•

delays in obtaining an approval;

•

the rejection of an application; or

•

the approval of the drug, but with restrictive labeling that could adversely affect the commercial market.

If we do not receive regulatory approval to sell our product candidates or cannot successfully commercialize our product candidates, we may not be able to generate sufficient revenues or achieve or maintain profitability.

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

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

our product candidates or could limit or eliminate our future spending on development projects. Some of the specific PPACA provisions, among other things:

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

•

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

•

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

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

•

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

•

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

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

If29 future reimbursement for NUEDEXTA or any other approved product candidates, if any, is substantially less than we project, or rebate obligations associated with them are substantially increased, our business could be materially and adversely impacted.

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InIf ~~addition,~~future ~~both~~coverage ~~the federal~~ and ~~state~~reimbursement ~~governments~~for inNUEDEXTA, ~~the~~products ~~United~~that ~~States~~we ~~and~~co-promote ~~foreign~~or ~~governments~~any ~~continue~~other approved toproduct ~~propose~~candidates, ~~and~~if ~~pass~~any, ~~new~~is ~~legislation~~substantially ~~affecting~~less ~~coverage~~than ~~and~~we ~~reimbursement policies~~project, ~~which~~or ~~are designed~~rebate toobligations ~~contain~~associated orwith ~~reduce~~them ~~the~~are ~~cost~~substantially ofincreased, ~~health~~our ~~care,~~business ascould ~~well~~be asmaterially ~~hold~~and ~~public~~adversely ~~hearings~~impacted. onSales ~~these~~of ~~matters,~~NUEDEXTA ~~which~~for ~~has~~treatment ~~resulted~~of inpatients with ~~certain~~PBA ~~private~~will ~~companies~~depend ~~dropping~~in part on the ~~prices~~availability of ~~their~~coverage ~~drugs.~~and ~~Further~~reimbursement ~~federal~~from ~~and~~third-party ~~state~~payers ~~proposals~~such ~~and~~as ~~healthcare~~government ~~reforms are~~insurance ~~likely~~programs, ~~which~~including ~~could~~Medicare ~~limit~~and ~~the~~Medicaid, ~~prices~~private ~~that~~health ~~can~~insurers, behealth ~~charged~~maintenance ~~for~~organizations ~~the~~and ~~product~~other ~~candidates~~health care ~~that~~related weorganizations. ~~develop~~Accordingly, coverage and reimbursement may ~~further~~be ~~limit~~uncertain. ~~our~~Adoption ~~commercial~~of ~~opportunity.~~NUEDEXTA ~~There~~by the medical community may be ~~future~~limited ~~changes~~if ~~that~~third-party ~~result~~payers inwill ~~reductions~~not inoffer ~~current~~coverage. Cost control initiatives may decrease coverage and ~~reimbursement~~ payment levels for ~~our~~NUEDEXTA ~~products~~and, ifin ~~commercialized~~turn, ~~and~~the price that we ~~cannot~~will ~~predict~~be ~~the~~able ~~scope~~to ofcharge. ~~any~~We ~~future~~are unable to predict all changes orto the ~~impact~~coverage or reimbursement methodologies that ~~those~~will ~~changes~~be ~~would~~applied ~~have~~by onprivate or government payers to NUEDEXTA. Any denial of private or government payer coverage of NUEDEXTA could harm our ~~operations~~business and reduce our revenue.

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

In addition, both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation affecting coverage and reimbursement policies, which are designed to contain or reduce the cost of health care, as well as hold public hearings on these matters. Further federal and state proposals and healthcare reforms are likely, which could limit the prices that can be charged for our products and the product candidates that we develop and may further limit our commercial opportunity. There may be future changes that result in reductions in current coverage and reimbursement levels for our products and product candidates, if approved and commercialized, and we cannot predict the scope of any future changes or the impact that those changes would have on our operations.

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

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

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

We are seeking to have our products or product candidates marketed outside the United States. In order to market our products in the EU and many other foreign jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and jurisdictions and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval processes may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all, and may not qualify or be accepted for accelerated review in foreign countries. For example, our development partner in Japan encountered

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~~significant~~required ~~difficulty~~to inobtain ~~seeking~~FDA approval. The foreign regulatory approval processes may include all of ~~docosanol~~the inrisks ~~that~~associated ~~country~~with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all, and ~~was~~may ~~forced~~not toqualify ~~abandon~~or ~~efforts~~be toaccepted ~~seek~~for ~~approval~~accelerated review in ~~that~~foreign ~~country~~countries. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictions or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations.

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

The conduct of our business, including the testing, marketing and sale of pharmaceutical products, involves the risk of liability claims by consumers, stockholders, and other third parties including products in which we co-promote. ~~Although~~Product ~~we maintain various types of insurance, including product~~ liability ~~and director and officer liability,~~ claims ~~can~~might be ~~high~~brought ~~and our insurance may not sufficiently cover our actual liabilities. If liability claims were made~~ against us, itby ~~is possible that our insurance carriers may deny~~consumers, orhealth ~~attempt~~care ~~to deny~~providers, ~~coverage~~other inpharmaceutical ~~certain instances.~~companies Ifor aothers ~~lawsuit~~selling ~~against us is successful, then the lack~~ or ~~insufficiency~~otherwise coming ofinto ~~insurance~~contact ~~coverage~~with ~~could materially and adversely affect~~ our ~~business and financial condition~~products. ~~Furthermore,~~If ~~various~~we ~~distributors~~cannot ofsuccessfully ~~pharmaceutical~~defend ~~products~~ourselves ~~require minimum~~against product liability insurance coverage before their purchase or acceptance of products for distribution. Failure to satisfy these insurance requirements could impede our ability to achieve broad distribution of our products and the imposition of higher insurance requirements could impose additional costs on us. Additionallyclaims, we ~~are~~could ~~potentially~~incur atsubstantial ~~risk if our insurance carriers become insolvent~~liabilities. ~~Although~~In ~~we have historically obtained coverage through highly rated and capitalized firms~~addition, ~~there~~ ~~can~~regardless beof nomerit ~~assurance that we will be able to maintain coverage under existing policies at the current rates~~ or ~~purchase~~eventual ~~insurance~~outcome, ~~under~~product ~~new~~liability ~~policies~~claims atmay ~~reasonable~~result ~~rates.~~ in:

•

impairment of our business reputation;

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withdrawal of clinical study participants;

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costs of related litigation;

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distraction of management’s attention from our primary business;

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substantial monetary awards to patients or other claimants;

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the inability to commercialize our product candidate; and

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

Although we maintain various types of insurance, including product liability and director and officer liability, claims can be high and our insurance may not sufficiently cover our actual liabilities. If liability claims were made against us, it is possible that our insurance carriers may deny, or attempt to deny, coverage in certain instances. If a lawsuit against us is successful, then the lack or insufficiency of insurance coverage could materially and adversely affect our business and financial condition. Furthermore, various distributors of pharmaceutical products require minimum product liability insurance coverage before their purchase or acceptance of products for distribution. Failure to satisfy these insurance requirements could impede our ability to achieve broad distribution of our products and the imposition of higher insurance requirements could impose additional costs on us. Additionally, we are potentially at risk if our insurance carriers become insolvent. Although we have historically obtained coverage through highly rated and capitalized firms, there can be no assurance that we will be able to maintain coverage under existing policies at the current rates or purchase insurance under new policies at reasonable rates.

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

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

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

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

• the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; and

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

In addition, the compliance environment is changing as some states mandate implementation of commercial compliance programs to ensure compliance with these laws. The PPACA also imposes new reporting and disclosure requirements on drug manufacturers for any “transfer of value” made or distributed to prescribers and other healthcare providers and such information will be made publicly available in a searchable format. Drug manufacturers are required to begin collecting required information on August 1, 2013 and to submit reports disclosing any investment interests held by physicians and their immediate family members from August through December of 2013 by March 31, 2014. Failure to submit required information may result in civil monetary penalties

of• upfederal tofalse anclaims ~~aggregate~~laws ofwhich ~~$150~~prohibit,~~000~~ ~~per~~among ~~year~~other ~~(and~~things, upindividuals toor anentities ~~aggregate~~from ofknowingly $1presenting, ~~million~~or ~~per~~causing ~~year~~to ~~for~~be ~~“knowing failures”)~~presented, claims for ~~all~~payment ~~payments~~from Medicare, ~~transfers~~Medicaid, ~~of value~~ or ~~ownership~~other orthird-party ~~investment interests~~payers ~~not~~that ~~reported~~are infalse anor ~~annual~~fraudulent ~~submission. PPACA also requires pharmaceutical manufacturers~~ and, ~~distributors~~under ~~to provide~~ the ~~U.S.~~PPACA, ~~Department of Health and Human Services with an annual report on~~ the ~~drug~~government ~~samples~~may ~~they~~assert ~~provide~~that ~~to physicians. There has also been~~ a ~~recent~~claim ~~trend~~including ofitems ~~increased~~or ~~federal~~services ~~and~~resulting ~~state~~from ~~regulation~~a ofviolation ~~payments made to physicians for marketing, including the tracking and reporting~~ of ~~gifts, compensation, and other remuneration to physicians. The shifting commercial compliance environment and~~ the ~~need~~federal toAnti-Kickback ~~build~~Statute ~~and~~constitutes ~~maintain~~a ~~robust~~false ~~and expandable systems to comply with multiple jurisdictions with different compliance and/~~or ~~reporting~~fraudulent ~~requirements~~claim ~~increases~~for ~~the~~purposes ~~possibility that a healthcare company may run afoul~~ of ~~one or more of~~ the ~~requirements.~~false claims statutes;

If• ~~our~~the ~~operations~~federal ~~are~~Health ~~found~~Insurance toPortability beand inAccountability ~~violation~~Act of ~~any~~1996, ~~of the laws described above~~ or ~~any other~~HIPAA, ~~domestic~~which orcreated ~~foreign~~federal criminal laws ~~or governmental regulations~~ that ~~apply~~prohibit toexecuting ~~us,~~a wescheme ~~may be subject~~ to ~~penalties,~~defraud ~~including~~any ~~civil~~healthcare ~~and~~benefit ~~criminal~~program ~~penalties, damages, fines, exclusion from governmental health care programs, and the curtailment~~ or ~~restructuring~~ ofmaking ~~our~~false ~~operations,~~statements ~~any~~relating ~~of which could adversely affect our ability~~ to ~~operate~~healthcare ~~our business and our financial results~~matters. ~~The~~Similar ~~risk~~to ~~of our being found in violation of these laws is increased by~~ the ~~fact~~Anti-Kickback ~~that many of them have not been fully interpreted by the regulatory authorities or the courts~~Statute, ~~and their provisions are open to~~ a ~~variety~~person ofor ~~interpretations.~~entity ~~Even~~does ~~if we are~~ not ~~found~~need to behave inactual ~~violation~~knowledge of ~~any of~~ the ~~laws~~statute ~~described above~~ or ~~any~~specific ~~other~~intent ~~domestic or foreign laws or governmental regulations that apply~~ to ~~us,~~violate ~~any~~it ~~action against us for violation of these laws could cause us~~ to ~~incur~~have ~~significant~~committed ~~legal~~a ~~expenses and divert our management’s attention from the operation of our business.~~ violation;

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

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

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

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

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

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

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

Responding to government investigations, defending any claims raised, and any resulting fines, restitution, damages and penalties, settlement payments or administrative actions, as well as any related actions brought by stockholders or other third parties, could have a material impact on our reputation, business and financial condition and divert the attention of our management from operating our business. Our distribution and contracting partners may also be the subject of regulatory investigations involving, or remedies or sanctions for, off-label promotion of products we have licensed to them, or for which they provide vendor support services, which may have an adverse impact on sales of such licensed products, or indemnification obligations, which may, in turn, have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common shares to decline. The risks of a regulatory investigation are increased by the practice of some stock market participants to publicly issue reports alleging compliance violations. A report of this nature was recently issued regarding the Company’s practices.

~~Companies~~32 may not promote drugs for “off-label” uses — that is, uses that are not described in the product’s labeling and that differ from those approved by the FDA or other applicable regulatory agencies. Physicians may prescribe drug products for off-label uses, and such off-label uses are common across medical specialties. Although the FDA and other regulatory agencies do not regulate a physician’s choice of treatments for a given medical condition, the FDA and other regulatory agencies do restrict communications by pharmaceutical companies and their sales representatives regarding dissemination of information concerning off-label use. The FDA and other regulatory agencies actively enforce regulations prohibiting promotion of product for off-label uses and the promotion of products for which marketing authorization has not been obtained. A company that is found to have promoted product for off-label uses may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions. Notwithstanding the regulatory restrictions on off-label promotion, the FDA and other regulatory authorities allow companies to engage in truthful, non-misleading, and non-promotional scientific exchange with health care professionals concerning their products.

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

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

Risks Related to Reliance on Third Parties

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

We have utilized, and intend to continue utilizing, third parties to manufacture, package and distribute NUEDEXTA and ~~the active pharmaceutical ingredient (“API”) for docosanol 10% cream and~~ to provide clinical supplies of our drug candidates. We will also utilize third parties to manufacture, package and distribute AVP-825 and AVP-786. We have no experience in manufacturing and do not have any manufacturing facilities. Currently, we have sole suppliers for the ~~API~~APIs for ~~docosanol and~~ NUEDEXTA, and a sole manufacturer for the finished form of NUEDEXTA. In addition, these materials are custom-made and available from only a limited number of sources. In particular, there may be a limited supply source for APIs in NUEDEXTA. Although we maintain a significant supply of APIs on hand, any sustained disruption in this supply could adversely affect our operations and revenues. Any material disruption in manufacturing could cause a delay in shipments and possible loss of sales. We do not have any long-term agreements in place with our current ~~docosanol~~ ~~supplier or~~ NUEDEXTA API suppliers. If we are required to change manufacturers, we may experience delays associated with finding an alternate manufacturer that is properly qualified to produce supplies of our products and product candidates in accordance with FDA requirements and our specifications. Any delays or difficulties in obtaining APIs or in manufacturing, packaging or distributing NUEDEXTA could negatively affect our sales revenues, as well as delay our clinical trials of AVP-923 ~~for~~or ~~DPN pain, MS~~AVP-~~related~~786 ~~pain~~for orfuture ~~other potential~~ indications. The third parties we rely on for manufacturing and packaging are also subject to regulatory review, and any regulatory compliance problems with these third parties could significantly delay or disrupt our commercialization activities. Additionally, macro-economic conditions may adversely affect these third parties, causing them to suffer liquidity or operational problems. If a key third party vendor becomes insolvent or is forced to lay off workers assisting with our projects, our results and development timing could suffer.

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

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

our contractors and we believe that they are fully capable of performing their contractual obligations, we cannot directly control the adequacy and timeliness of the resources and expertise that they apply to these activities. Additionally, macro-economic conditions may affect our development partners and vendors, which could adversely affect their ability to timely perform their tasks. If our contractors do not perform their obligations in an adequate and timely manner, the pace of clinical development, regulatory approval and commercialization of our drug candidates could be significantly delayed and our prospects could be adversely affected.

We generally do not control the development of compounds licensed to third parties and, as a result, we may not realize a significant portion of the potential value of any such license arrangements.

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

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

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

Risks Relating to Our Stock

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

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

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

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

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

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

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

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

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

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market and economic conditions.

If a substantial number of shares are sold into the market at any given time, particularly following any significant announcements or large swings in our stock price (whether sales are under our existing “shelf” registration statements, from an existing stockholder, or the result of warrant or stock options exercised), there may not be sufficient demand in the market to purchase the shares without a decline in the market price for our common stock. Moreover, continuous sales into the market of a number of shares in excess of the typical trading volume for our common stock, or even the availability of such a large number of shares, could depress the trading market for our common stock over an extended period of time.

Additionally, our stock price has been volatile as a result of announcements of regulatory actions and decisions relating to NUEDEXTA, and periodic variations in our operating results. We expect that our operating results will continue to vary from quarter to quarter, particularly as we continue to market NUEDEXTA and report sales results. 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 could give rise to stockholder lawsuits, which are costly and time consuming to defend against and which may adversely affect our ability to raise capital while the suits are pending, even if the suits are ultimately resolved in our favor. We have, from time to time, been a party to such suits and although none have been material to date, there can be no assurance that any such suit will not have an adverse effect on us.

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

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

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

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

We have paid no cash dividends on our common stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future, and payment of cash dividends, if any, will also depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. ~~In addition, under the terms of our Loan Agreement, we are precluded from paying cash dividends without the prior written consent of the lenders.~~ Accordingly, the success of your investment in our common stock will likely depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value or even maintain the price at which you purchased your shares, and you may not realize a return on your investment in our common stock.

Our corporate governance documents and Delaware law may delay or prevent an acquisition of us that stockholders may consider favorable, which could decrease the value of our common stock.

Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include restrictions on the ability of our stockholders to remove directors and supermajority voting requirements for stockholders to amend our organizational documents and a classified board of directors. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Delaware law, for instance, also imposes some restrictions on mergers and other business combinations between any holder of 15% or more of our outstanding common stock and us. Although we believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics and thereby provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some stockholders.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

WeOur ~~recently~~headquarters, ~~entered~~commercial ~~into~~and aadministrative ~~lease~~offices ~~for~~are ~~approximately~~located ~~61,000 square feet~~ in Aliso Viejo, California, ~~which~~where ~~will~~we ~~become~~occupy ~~our~~approximately ~~headquarters~~69, ~~commercial~~000 square ~~and~~feet. ~~administrative~~There ~~offices.~~is ~~This~~one lease for 61,000 square feet which expires in December 2020 and a separate lease for 8,000 square feet which expires in October 2018.

~~Currently~~We ~~our~~lease ~~headquarters,~~an ~~commercial and~~additional ~~administrative offices are also located in Aliso Viejo, California, where we occupy~~ approximately 30,000 ~~square~~ ~~feet. Additionally, we have approximately 8,000~~ square feet of ~~unoccupied~~office space ~~for~~in ~~future expansion. This~~ Aliso Viejo, ~~office~~California ~~lease expires~~which ~~in April 2018. Once~~ we ~~have~~sublease ~~relocated~~until tothe ~~our~~end ~~new~~of ~~offices,~~the ~~our~~lease ~~intention~~in isOctober to2018. ~~sublet~~We ~~the~~do ~~30,000~~not ~~square~~intend ~~feet~~to ofrenew ~~our~~this ~~current offices~~lease.

Item 3.

Legal Proceedings

Stockholder Class-Action Litigation Regarding Our Pending Acquisition by Otsuka

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

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

NUEDEXTA ANDA Litigation

In fiscal 2011 and 2012, we received Paragraph IV certification notices from five separate companies contending that certain of our patents listed in the FDA’s publication, “Approved Drug Products with Therapeutic Equivalence Evaluation” (“FDA Orange Book”) (U.S. Patents 7,659,282 (“’282 Patent”), 8,227,484 (“’484 Patent”) and RE 38,115 (“’115 Patent”), which expire in August 2026, July 2023 and January 2016, respectively) are invalid, unenforceable and/or will not be infringed by the manufacture, use, sale or offer for sale of a generic form of NUEDEXTA as described in those companies’ ~~ANDAs~~abbreviated new drug application (“ANDA”). The FDA Orange Book provides potential competitors, including generic drug companies, with a list of issued patents covering approved drugs. In August 2011 and March 2012, we filed lawsuits in ~~the~~ ~~U.S. District Court for~~ the District of Delaware against Par Pharmaceutical, Inc. and Par Pharmaceutical Companies, Inc. (collectively “Par”), Actavis South Atlantic LLC and Actavis, Inc. (collectively “Actavis”), Wockhardt USA, LLC and Wockhardt, Ltd. (collectively, “Wockhardt”), Impax Laboratories, Inc. (“Impax”) and Watson Pharmaceuticals, Inc., Watson Laboratories, Inc. and Watson Pharma, Inc. (collectively “Watson”) (Par, Actavis, Wockhardt, Impax and Watson, collectively the “Defendants”). In March 2012, we also filed a protective suit in the U.S. District ~~Court for the District of New Jersey against Watson. The New Jersey suit was voluntarily dismissed by us in~~ ~~May 2012. In September and October 2012, we filed lawsuits in the U.S. District~~ Court for the District of Delaware against the Defendants. All lawsuits (collectively, the “ANDA Actions”) were filed on the basis that the Defendants’ submissions of their respective ANDAs to obtain approval to manufacture, use, sell, or offer for sale generic versions of NUEDEXTA prior to the expiration of the ’282 Patent, the ’484 Patent and the ’115 Patent listed in the FDA Orange Book constitute infringement of one or more claims of those patents. On October 31, 2012, Watson announced the divestiture of its ANDA for a generic form of NUEDEXTA to Sandoz, Inc. As a result of Sandoz’ acquisition and maintenance of said ANDA, on May 30, 2013, we filed suit in the U.S. District Court for the District of Delaware against Sandoz. This suit was filed on the basis that Sandoz’ ANDA to obtain approval to manufacture, use, sell, or offer for sale generic versions of NUEDEXTA prior to the expiration of the ’282 Patent, the ’484 Patent and the ’115 Patent listed in the FDA Orange Book constitutes infringement of one or more claims of those patents.

On36 December 3, 2012, we received a Memorandum Opinion and Order (the “Order”) issued by Judge Leonard P. Stark of the United States District Court for the District of Delaware (the “Court”) related to the Markman hearing held October 5, 2012 in our ongoing patent infringement case against the Defendants. The Order establishes the meaning of patent claim terms in dispute between the parties. After comprehensive briefing and oral argument, Judge Stark’s Order adopted our proposed or stipulated patent term constructions.

A bench trial was held in September 2013 and concluded on October 15, 2013. We are currently awaiting Judge Stark’s decision.

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

Delaware against Par Pharmaceutical, Inc. and Par Pharmaceutical Companies, Inc. (collectively “Par”), Actavis South Atlantic LLC and Actavis, Inc. (collectively “Actavis”), Wockhardt USA, LLC and Wockhardt, Ltd. (collectively, “Wockhardt”), Impax Laboratories, Inc. (“Impax”) and Watson Pharmaceuticals, Inc., Watson Laboratories, Inc. and Watson Pharma, Inc. (collectively “Watson”) (Par, Actavis, Wockhardt, Impax and Watson, collectively the “Defendants”). In September and October 2012, we filed lawsuits in the U.S. District Court for the District of Delaware ~~which~~against ~~conclude~~the Defendants. All lawsuits (collectively, the “ANDA ~~litigation~~Actions”) ~~with~~were ~~respect~~filed on the basis that the Defendants’ submissions of their respective ANDAs to ~~Sandoz~~obtain approval to manufacture, ~~Actavis~~use, sell, or offer for sale generic versions of NUEDEXTA prior to the expiration of the ‘282 Patent, the ‘484 Patent and ~~Wockhardt~~the ‘115 Patent listed in the FDA Orange Book constitute infringement of one or more claims of those patents. ~~The~~On ~~settlements~~October 31, do2012, ~~not~~Watson ~~end~~announced ~~our~~the ~~ongoing~~divestiture ~~litigation~~of its ANDA for a generic form of NUEDEXTA to Sandoz, Inc. (“Sandoz”). As a result of Sandoz’ acquisition and maintenance of said ANDA, on May 30, 2013, we filed suit in the U.S. District Court for the District of Delaware against Sandoz. This suit was filed on the ~~other~~basis that ~~two~~Sandoz’ ANDA ~~filers.~~to obtain approval to manufacture, use, sell, or offer for sale generic versions of NUEDEXTA prior to the expiration of the ’282 Patent, the ’484 Patent and the ’115 Patent listed in the FDA Orange Book constitutes infringement of one or more claims of those patents.

AsA abench ~~result~~trial ofwas ~~the~~held ~~30-month~~in ~~stay~~September ~~associated~~2013 ~~with~~and ~~the~~concluded ~~filing of the ANDA Actions, the FDA cannot grant final approval to any~~on ~~ANDA before December~~October 3015, 2013~~, unless there is an earlier court decision holding that the Orange Book-listed ’282, ’484 and ’115 patents are not infringed and/or are invalid~~. ~~We intend to vigorously enforce our intellectual property rights relating to NUEDEXTA, but we cannot predict the outcome of these matters.~~

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

InOn ~~October 2011~~April 30, ~~Neal R. Cutler~~2014, ~~M.D.,~~ the ~~founder of Alamo Pharmaceuticals, LLC (“Alamo”), filed a lawsuit in California~~United ~~Superior~~States District Court ~~against~~for ~~Azur~~the ~~Pharma~~District ~~International~~of ~~III~~Delaware ~~Limited~~issued ~~and~~an ~~Azur~~Order ~~Pharma~~finding ~~Limited~~our ~~(collectively,~~latest ~~“Azur”) and Avanir (the “Cutler Action”). We purchased Alamo in 2006~~ to ~~acquire~~expire ~~rights~~patents to ~~FazaClo,~~be anvalid ~~approved~~and ~~anti-psychotic drug~~infringed. InOn ~~connection~~May 14, ~~with this acquisition of Alamo~~2014, ~~we agreed to provide~~ the ~~Alamo~~Court ~~equity~~issued ~~holders,~~a ~~including~~judgment ~~Dr. Cutler,~~in ~~with~~favor ~~milestone payments tied to the aggregate net revenues~~ of ~~FazaClo.~~Avanir Inand ~~2007,~~a wepermanent ~~sold~~injunction ~~FazaClo~~enjoining ~~and~~Par ~~its related assets~~ and ~~operations~~Impax tofrom ~~Azur.~~manufacturing, ~~In connection with this sale~~using, ~~Azur~~offering ~~agreed~~ to ~~assume the milestone payment obligations due to Dr. Cutler under the Alamo purchase agreement~~sell, ~~although~~or weselling ~~may~~a ~~remain~~generic ~~liable~~version ~~for~~of ~~these~~NUEDEXTA ~~payments~~during ~~if Azur defaults on these obligations. In~~ the ~~Cutler~~terms ~~Action, Dr. Cutler alleges a breach~~ of ~~contract~~the ~~and~~‘282 aPatent ~~breach of implied covenant of good faith~~ and ~~fair~~‘484 ~~dealing~~Patent. ~~Dr. Cutler~~The ~~alleges~~judgment ~~that~~also ~~Azur~~ordered ~~has failed to make certain sales information available to Dr. Cutler and has withheld payments to which Dr. Cutler is entitled. Dr. Cutler alleges~~ that ~~Avanir~~the ~~has~~FDA ~~acquiesced~~shall innot ~~this~~approve ~~conduct,~~Par’s and ~~Dr. Cutler~~Impax’s ~~seeks~~generic product toearlier ~~hold~~than ~~both~~the ~~Azur~~latest ~~and~~date ~~Avanir~~of ~~liable~~expiration ~~for~~of ~~these~~the ~~actions.~~‘282 ~~Azur~~Patent ~~Ltd.~~ and ~~Jazz Pharmaceuticals,~~‘484 ~~Inc. entered into a business combination creating Jazz Pharmaceuticals~~Patent, ~~plc (“Jazz”). As successor in interest to Azur Ltd.~~August 13, ~~Jazz agreed to indemnify Avanir in full for the claims asserted in the Cutler Action~~2026.

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

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

General and Other

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

Item 4.

Mine Safety Disclosures

Not applicable.

PART II

Item 5.

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

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

	Common Stock Price
	Fiscal 2013				Fiscal 2012
	Fiscal 2014				Fiscal 2013
	High		Low		High		Low
First Quarter	$	35.5707	$	2.0762	$	3.2557	$	12.7707
Second Quarter	$	35.3208	$	23.6505	$	3.5632	$	2.0065
Third Quarter	$	45.7889	$	23.6002	$	4.0578	$	2.6560
Fourth Quarter	$	613.0009	$	35.9808	$	46.0500	$	23.7698

On December 21, ~~2013~~2014, the closing sales price of our common stock was $415.4600 per share.

As of December 21, ~~2013~~2014, we had approximately 2324,~~701~~918 stockholders, including ~~376~~337 holders of record and an estimated 2324,~~325~~581 beneficial owners. We have not paid any dividends on our common stock since our inception and do not expect to pay dividends on our common stock in the foreseeable future.

The following graph compares the cumulative 5-year return provided to a hypothetical stockholder in Avanir Pharmaceuticals, Inc.’s common stock relative to the cumulative total returns of the NASDAQ Composite index and the NASDAQ Biotechnology index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on October 1, ~~2008~~2009 and its relative performance is tracked through September 30, ~~2013~~2014.

LOGO

3338

Information About Our Equity Compensation Plans

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

Item 6.

Selected Financial Data

The selected consolidated financial data set forth below at September 30, ~~2013~~2014 and ~~2012~~2013, and for the fiscal years ended September 30, ~~2013~~2014, ~~2012~~2013, and ~~2011~~2012, are derived from our audited consolidated financial statements included elsewhere in this report. This information should be read in conjunction with those consolidated financial statements, the notes thereto, and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data set forth below at September 30, ~~2011~~2012, ~~2010~~2011 and ~~2009~~2010, and for the years ended September 30, ~~2010~~2011 and ~~2009~~2010, are derived from our audited consolidated financial statements that are contained in reports previously filed with the SEC, not included herein. The quarterly consolidated financial data are derived from unaudited consolidated financial statements included in our Quarterly Reports on Form 10-Q.

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

Summary Financial Information

	Fiscal Years Ended September 30,
Statement of operations data:	2013			2012			2011			2010			2009
Total revenues	$	75,365,884		$	41,275,073		$	10,495,895		$	2,895,474		$	4,176,509
Operating expenses(1)	$	146,792,584		$	99,677,254		$	71,125,310		$	29,992,198		$	26,101,174
Loss from operations	$	(71,426,700	)	$	(58,402,181	)	$	(60,629,415	)	$	(27,096,724	)	$	(21,924,665	)
Net loss	$	(75,475,863	)	$	(59,743,827	)	$	(60,631,563	)	$	(26,694,148	)	$	(21,996,016	)
Basic and diluted net loss per share:	$	(0.53	)	$	(0.45	)	$	(0.51	)	$	(0.30	)	$	(0.28	)
Basic and diluted weighted average number of shares of common stock outstanding		142,269,399			133,358,571			119,405,230			87,614,420			78,844,251

(in thousands except per share amounts and share data)

(1) Includes an up-front payment of $20.0 million for the in-licensing of AVP-825.


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

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

	September 30,
Balance sheet data:	2013		2012		2011		2010		2009
Cash and cash equivalents	$	55,259,073	$	69,778,406	$	79,542,564	$	38,771,469	$	31,486,012
Restricted cash and cash equivalents and restricted investments	$	2,269,924	$	2,356,599	$	2,252,939	$	601,550	$	468,475
Total cash, cash equivalents, restricted cash and cash equivalents, and restricted investments	$	57,528,997	$	72,135,005	$	81,795,503	$	39,373,019	$	31,954,487
Working capital	$	37,051,425	$	60,596,300	$	70,200,594	$	32,967,188	$	26,685,567
Total assets	$	76,079,007	$	86,011,796	$	89,648,994	$	42,141,198	$	34,068,072
Deferred revenues	$	1,288,514	$	4,049,318	$	7,791,416	$	8,476,831	$	9,912,367
Notes payable, net of debt discount	$	29,365,108	$	28,860,526	$	—	$	—	$	—
Total liabilities	$	57,607,453	$	49,174,689	$	18,309,330	$	14,134,642	$	14,126,337
Stockholders’ equity	$	18,471,554	$	36,837,107	$	71,339,664	$	28,006,556	$	19,941,735

Quarterly statement of operations data for fiscal 2013 (Unaudited):	Fiscal Quarters Ended
Quarterly statement of operations datafor fiscal 2014 (Unaudited):	Fiscal Quarters Ended
	December 31,2013			March 31, 2014			June 30, 2014			September 30,2014
Total revenues	$	26,746		$	26,947		$	28,631		$	32,705
Operating expenses	$	36,743		$	38,722		$	40,523		$	45,385
Loss from operations	$	(9,997	)	$	(11,775	)	$	(11,892	)	$	(12,680	)
Net loss	$	(10,947	)	$	(12,678	)	$	(12,699	)	$	(14,112	)
Basic and diluted net loss per share	$	(0.07	)	$	(0.08	)	$	(0.08	)	$	(0.08	)
Basic and diluted weighted average number of common shares outstanding		152,100,388			154,633,853			166,016,719			172,232,486
Quarterly statement of operations datafor fiscal 2013 (Unaudited):	Fiscal Quarters Ended
	December 31,2012			March 31, 2013			June 30, 2013			September 30,2013
Total revenues	$	16,520~~,272~~		$	17,434~~,188~~		$	19,~~758,662~~759		$	21,~~652,762~~653
Operating expenses(1)	$	27,556,440		$	32,916,906		$	30,168,785		$	56,150,453
Operating expenses	$	27,556		$	32,917		$	30,169		$	56,151
Loss from operations	$	(11,036~~,168~~	)	$	(15,~~482,718~~483	)	$	(10,410~~,123~~	)	$	(34,~~497,691~~498	)
Net loss	$	(12,076~~,082~~	)	$	(16,~~526,701~~527	)	$	(11,424~~,630~~	)	$	(35,~~448,450~~449	)
Basic and diluted net loss per share	$	(0.09	)	$	(0.12	)	$	(0.08	)	$	(0.24	)
Basic and diluted weighted average number of common shares outstanding		136,772,557			139,173,746			145,244,796			147,851,544

(1) Includes an up-front payment of $20.0 million for the in-licensing of AVP-825.

Quarterly statement of operations data for fiscal 2012 (Unaudited):	Fiscal Quarters Ended
	December 31,2011			March 31, 2012			June 30, 2012			September 30,2012
Total revenues	$	7,164,883		$	10,040,388		$	10,537,996		$	13,531,806
Operating expenses	$	23,129,337		$	27,090,504		$	25,250,002		$	24,207,411
Loss from operations	$	(15,964,454	)	$	(17,050,116	)	$	(14,712,006	)	$	(10,675,605	)
Net loss	$	(15,946,157	)	$	(17,042,159	)	$	(15,030,214	)	$	(11,725,297	)
Basic and diluted net loss per share	$	(0.12	)	$	(0.13	)	$	(0.11	)	$	(0.09	)
Basic and diluted weighted average number of common shares outstanding		127,934,257			133,463,300			135,825,005			136,239,668

Item 7.

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

Except for the historical information contained herein, the matters set forth in this Annual Report on Form 10-K, including statements regarding the Company’s plans, potential opportunities, financial or other expectations, projections, goals objectives, milestones, strategies, market growth, timelines, legal matters, product pipeline, clinical studies, product development and the potential benefits of its commercialized products and products under development are forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from the anticipated or estimated future results, including the risks and uncertainties associated with Avanir’s future operating performance and financial position, developments in Avanir’s ongoing NUEDEXTA patent litigation, the market demand for and acceptance of Avanir’s products domestically and internationally, research, development and commercialization of new products domestically and internationally, obtaining and maintaining regulatory approvals domestically and internationally, including, but not limited to potential regulatory delays or rejections in the filing or acceptance of the Marketing Authorization Application, uncertainty regarding use of the data package which served as the basis for the U.S. FDA approval, risks associated with meeting the objectives of clinical studies, including, but not limited to, delays or failures in enrollment, and the occurrence of adverse safety events, and other risks set forth below under Item 1A, “Risk Factors” and other documents subsequently filed with or furnished to the Securities and Exchange Commission. These forward-looking statements are based on current information that may change and you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update any forward-looking statement to reflect events or circumstances after the date hereof. Except as otherwise indicated herein, all dates referred to in this report represent periods or dates fixed with reference to the calendar year, rather than our fiscal year ending September 30.

Executive Overview

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

35The table below shows quarterly net product sales and dispensed prescription data for NUEDEXTA over the past four quarterly periods.


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

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

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

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

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

~~AVP-923~~majority ~~during~~of ~~clinical~~the ~~development)~~fee is aperformance ~~first-in-class~~based. ~~dual~~Over ~~NMDA~~the ~~receptor~~three ~~antagonist~~years ~~and~~of ~~sigma-1~~the ~~agonist. NUEDEXTA~~agreement, ~~20/10~~Avanir ~~mg,~~could isreceive ~~approved~~up into ~~the~~a ~~United~~maximum ~~States for the treatment~~ of ~~pseudobulbar affect (“PBA”)~~$46.7 Itmillion ~~is also approved for PBA~~ in ~~the European Union in two dose strengths, NUEDEXTA 20/10 mg and NUEDEXTA 30/10 mg~~compensation.

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

	Three Months Ended
	December 31,2011			March 31,2012(1)			June 30,2012			September 30,2012			December 31,2012			March 31,2013			June 30,2013			September 30,2013
Gross product sales	$	6,285,631		$	11,185,298		$	12,205,811		$	15,431,249		$	18,373,831		$	20,849,581		$	24,315,422		$	27,666,348
Total dispensed units (capsules)		746,343			1,012,777			1,332,982			1,584,263			1,727,356			1,839,842			2,334,898			2,606,289
Percentage growth over previous quarter		45	%		36	%		32	%		19	%		9	%		7	%		27	%		12	%

(1) Includes a one-time adjustment to gross product sales of approximately $1.9 million as a result of a change in accounting estimate.

We are studying the clinical utility of AVP-923 in other mood/behavior disorders, movement disorders and pain. We have two ongoing Phase II clinical trials exploring the potential treatment of agitation in patients with Alzheimer’s disease and potential treatment of levodopa-induced dyskinesia in Parkinson’s disease (the “LID study”). The LID study is supported by a grant from the Michael J. Fox Foundation. In December 2013, we completed a Phase II clinical trial of AVP-923 for the potential treatment of central neuropathic pain in patients with multiple sclerosis (“MS”). The data from this Phase II clinical trial did not meet the primary efficacy endpoint. In the study, AVP-923 treated patients experienced levels of pain reduction commensurate with those observed in similar studies and the improvement in pain scores from baseline reached statistical significance; however, there was no difference between the treatment arms and placebo. We believe that a higher than expected placebo response negatively impacted the study results. AVP-923 was generally safe and well tolerated in the study.

AVP-923 has also completed a Phase III trial for the treatment of patients with diabetic peripheral neuropathic pain (“DPN pain”) with positive results. Additional Phase III trials would need to be completed for approval of this indication.

We are also developing AVP-786, a next generation drug product containing deuterium-modified dextromethorphan and quinidine for the treatment of neurologic and psychiatric disorders. We completed a pharmacokinetic study with AVP-786, and based on this data, we believe that we have identified a formulation of AVP-786 with a comparable pharmacokinetic profile, and likely a comparable safety and tolerability profile to AVP-923. This AVP-786 formulation contains significantly less quinidine than used in AVP-923.

We are also developing a novel Breath Powered intranasal delivery system containing low-dose sumatriptan powder to treat acute migraine, AVP-825. If approved, this product would be the first and only fast-acting dry-powder nasal delivery form of sumatriptan. AVP-825 is licensed from OptiNose. Under the terms of the agreement, we assumed responsibility for regulatory, manufacturing, supply-chain and commercialization activities for the investigational product, now named AVP-825. Both parties will work together on the remaining activities in support of the New Drug Application (“NDA”) submission. We have begun preparing the NDA and expect to file the application with the FDA in the first quarter of calendar 2014.

We entered into a multi-year agreement with Merck to co-promote Merck’s type 2 diabetes therapies JANUVIA® (sitagliptin) and the sitagliptin family of products in the long-term care institutional setting in the United States beginning October 1, 2013. The term of the agreement will continue for three years following the launch date of the co-promotion activities. Under the terms of the agreement, the Company will be compensated via a (i) fixed monthly fee and (ii) performance fee based on the amount of the products sold by the Company above a predetermined baseline. A significant majority of the fee is performance based. Over the three years of the agreement, Avanir could receive up to a maximum of $60.0 million in compensation.

In addition to our focus on products for the central nervous system, we also have partnered programs in other therapeutic areas which may generate future revenue for us. Our first commercialized product, docosanol 10% cream, (sold in the United States and Canada as Abreva® by our marketing partner GlaxoSmithKline Consumer Healthcare) is the only over-the-counter treatment for cold sores that has been approved by the FDA.

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

In addition to the summary above, additional accomplishments in fiscal ~~2013~~2014 and subsequent to the end of fiscal ~~2013~~2014 through the date of this filing are:

• InWe ~~June~~announced ~~2013,~~positive ~~the~~data ~~European Commission approved NUEDEXTA in the European Union~~ for ~~the~~AVP-825 ~~treatment of PBA, irrespective of underlying neurological disease or injury.~~studies:

• In ~~August~~October ~~2013~~2014, we published the ~~findings~~results from TARGET, a pivotal phase 3 study evaluating the ~~PRISM~~efficacy ~~patient~~and ~~registry~~safety of AVP-825, ~~the~~demonstrating ~~largest~~relief ~~registry~~of ~~ever~~moderate ~~conducted~~or tosevere ~~further~~migraine ~~understand~~headache ~~prevalence~~as ~~and~~quickly ~~impact~~as of15 ~~PBA~~minutes (19.4% AVP-825 vs. 14.4% placebo device) in subjects receiving AVP-825. A significantly greater proportion of AVP-825 patients reported headache relief at 30 minutes (41.7% vs. 26.9%, P=0.03) and at every time point up to two hours post-dose compared with those using the ~~United~~placebo ~~States~~device (67.6% vs. 45.2%, P=0.002).

• In ~~the~~June ~~fourth~~2014, ~~quarter~~we ofannounced ~~fiscal~~positive ~~2013,~~results weof ~~initiated~~our aPhase ~~sales~~3b ~~force~~COMPASS ~~expansion~~trial, ~~adding~~a ~~approximately~~head-to-head 25study ~~representatives~~comparing AVP-825 to ~~focus~~oral onsumatriptan for the ~~institutional~~acute ~~care~~treatment ~~setting~~of ~~and~~migraine. ~~currently~~The ~~have~~COMPASS ~~approximately~~study 80met ~~representatives~~the ~~focused~~primary inendpoint for the ~~institutional~~sum ~~care~~of ~~setting~~pain ~~and~~intensity ~~approximately~~difference 72at ~~representatives~~30 ~~focused~~minutes inpost dose (SPID30), showing that migraine sufferers achieved greater pain relief within 30 minutes of treatment with 22 mg of the ~~retail~~investigational ~~setting~~product AVP-825 compared with 100 mg sumatriptan tablet (p<0.0001).

• In ~~the~~September ~~fourth quarter of fiscal 2013~~2014, we ~~entered~~sold ~~into~~20,930,000 ~~settlement~~shares ~~agreements with three~~ of ~~five~~our ~~filers~~common tostock ~~resolve~~through ~~pending~~a ~~patent~~public ~~litigation~~offering. inGross ~~response~~proceeds towere ~~their~~$230.2 ~~abbreviated~~million, ~~new~~before ~~drug~~deducting ~~applications~~underwriting ~~seeking~~discounts, ~~approval~~commissions toand ~~market~~offering ~~generic versions of NUEDEXTA capsules~~expenses.

• In ~~fiscal~~September ~~2013~~2014, we ~~sold~~announced ~~12,965,465~~positive ~~shares~~results offrom ~~our~~its ~~common~~Phase ~~stock~~2 ~~under~~clinical antrial ~~at-~~evaluating the safety and efficacy of AVP-~~market~~923 ~~sales~~for ~~agreement.~~the ~~Gross~~treatment ~~proceeds~~of ~~were~~agitation ~~$50~~in patients with Alzheimer’s disease.0 ~~million,~~Treatment ~~before~~with ~~deducting~~AVP-923 ~~underwriting~~was ~~discounts~~associated with significantly reduced agitation as measured by the primary endpoint, ~~commissions~~the agitation/aggression domain score of the neuropsychiatric inventory (NPI) compared to placebo (p=0.00008). The reduction in agitation was observed in both stage 1 (p=0.0002) and ~~offering~~stage ~~expenses~~2 (p=0.021) of the Sequential Parallel Comparison study design.

•

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

•

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

•

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

•

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

•

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

Our principal focus is on the commercialization of NUEDEXTA for the PBA indication. We believe that cash and cash equivalents, restricted cash and cash equivalents, and restricted investments of approximately $57274.5 million at September 30, ~~2013~~2014, together with funds generated from sales of NUEDEXTA will be sufficient to fund our operations for at least the next 12 months. For additional information about the risks and uncertainties that may affect our business and prospects, please see Item 1A, “Risk Factors.”

Merger Agreement

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

Critical Accounting Policies and Estimates

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

Revenue Recognition

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

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

~~Product~~43 Sales — NUEDEXTA. NUEDEXTA is sold primarily to third-party wholesalers that, in turn, sell the product to retail pharmacies, hospitals, and other dispensing organizations. We have entered into agreements with wholesale customers, certain medical institutions and third-party payers throughout the United States. These agreements frequently contain commercial terms, which may include favorable product pricing and discounts and rebates payable upon dispensing the product to patients. Additionally, these agreements customarily provide the customer with rights to return the product, subject to the terms of each contract. Consistent with pharmaceutical industry practice, wholesale customers can return purchased product during an 18-month period that begins six months prior to the product’s expiration date and ends 12 months after the expiration date.

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

Prior to the second quarter of fiscal 2012, we were unable to reasonably estimate future returns due to the lack of sufficient historical return data for NUEDEXTA. Accordingly, we invoiced the wholesaler, recorded deferred revenue at gross invoice sales price less estimated cash discounts and distribution fees, and classified the inventory shipped as finished goods. We previously deferred recognition of revenue and the related cost of product sales on shipments of NUEDEXTA until the right of return no longer existed, i.e. when we received evidence that the products had been dispensed to patients. We estimated patient prescriptions dispensed using an analysis of third-party information.

Product Sales — Active Pharmaceutical Ingredient docosanol (“docosanol”). Revenue from our sales of docosanol is recorded when title and risk of loss have passed to the buyer provided the criteria for revenue recognition has been met. We sell docosanol to various licensees upon receipt of a written order for the materials. Shipments generally occur fewer than three times per year. Our contracts for sales of docosanol include buyer acceptance provisions that give 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~~criteria, ~~from~~including the ~~same~~ability ~~pre-inspected~~to ~~lot~~reasonably ~~have~~estimate ~~consistently~~future ~~met~~returns, ~~the~~or ~~specified~~when ~~criteria~~we ~~and~~can noreasonably ~~buyer~~estimate ~~has~~that ~~rejected any of our shipments from~~ the ~~same~~return ~~pre-inspected~~privilege ~~lot~~has tosubstantially ~~date. Therefore~~expired, ~~we recognize~~whichever ~~revenue~~occurs ~~at the time of delivery without providing any returns reserve~~first. ~~We recognize revenue upon shipment of NUEDEXTA to its wholesalers and other customers.~~

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

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

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

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

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

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

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


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

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

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


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

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

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


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

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

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

Multiple Element Arrangements. We have, in the past, entered into arrangements whereby we deliver to the customer multiple elements including technology and/or services. Such arrangements have included some combination of the following: antibody generation services; licensed rights to technology, patented products, compounds, data and other intellectual property; and research and development services. At the inception of each such arrangement, we analyze the multiple elements contained within the arrangement to determine whether the elements can be separated. If a product or service is not separable, the combined deliverables will be accounted for as a single unit of accounting.

A delivered element can be separated from other elements when it meets both of the following criteria: (1) the delivered item has value to the customer on a standalone basis; and (2) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. If an element can be separated, we allocate amounts based upon the selling price of each element. We determine the selling price of a separate deliverable using the price we charge other customers when we sell that product or service separately; however, if we do not sell the product or service separately, we use third-party evidence of selling price of a similar product or service to a similarly situated customer. We consider licensed rights or technology to have standalone value to our customers if we or others have sold such rights or technology separately or our customers can sell such rights or technology separately without the need for our continuing involvement. We have not entered into any multiple element arrangements that have required us to estimate selling prices during fiscal 2013, 2012 or 2011.

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

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

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

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

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

Certain royalty arrangements provide that royalties are earned only if a sales threshold is exceeded. Under these types of arrangements, the threshold is typically based on annual sales. For royalty revenue generated from the license agreement with GSK, we ~~recognize~~recognized royalty revenue in the period in which the threshold iswas exceeded. For royalty revenue generated from the license agreement with Azur Pharma (“Azur”), we recognized revenue when it had determined that the threshold had been exceeded.

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

39Co-Promotion Arrangements. We recognize both a fixed monthly fee and a performance fee as revenues from co-promote activities in the fee in the consolidated statements of operations. The fixed monthly fee is recognized ratably over the period earned. The performance fee is recognized when the products sold exceeds a predetermined baseline for the period. The receivable from the co-promotion fee is recorded in other current assets in the consolidated balance sheets.

life of the license agreement. We recognize revenues for the sale of an undivided interest of our Abreva® license agreement to Drug Royalty USA under the “units-of-revenue method.” Under this method, the amount of deferred revenues to be recognized in each period is calculated by multiplying the ratio of the royalty payments due to Drug Royalty USA by GSK for the period to the total remaining royalties we expect GSK will pay Drug Royalty USA over the remaining term of the agreement.

Cost of Product Sales

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

Recognition of Expenses in Outsourced Contracts

Pursuant to our assessment of the services that have been performed on clinical trials and other contracts, we recognize expense as the services are provided. Our assessments include, but are not limited to: (1) an evaluation by the project manager of the work that has been completed during the period, (2) measurement of progress prepared internally and/or provided by the third-party service provider, (3) analyses of data that justify the progress, and (4) management’s judgment.

Research and Development Expenses

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

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

•

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

•

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

•

There will be difficulty in completing the remaining development; and

•

There is substantial cost to complete the work.

Acquired contractual ~~rights~~right. Payments to acquire contractual rights to a licensed technology or drug candidate are expensed as incurred when there is uncertainty in receiving future economic benefits from the acquired contractual rights. We consider the future economic benefits from the acquired contractual rights to ~~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

We grant options, restricted stock units and restricted stock awards to purchase our common stock to our employees, directors and consultants under our stock option plans. The benefits provided under these plans are share-based payments that we account for using the fair value method.

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

40If factors change and we employ different assumptions in calculating the fair value in future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation. Because changes in the subjective input assumptions can materially affect our estimates of fair value

~~If factors change and we employ different assumptions in calculating the fair value in~~ ~~future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period. There is a high degree~~ of ~~subjectivity involved when using option pricing models to estimate share-based compensation. Because changes in the subjective input assumptions can materially affect~~ our ~~estimates of fair value of our~~ share-based compensation, in our opinion, existing valuation models, including the Black-Scholes model and lattice binomial models, may not provide reliable measures of the fair value of our share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, early termination or forfeiture of those share-based payments in the future. Certain share-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair value originally estimated on the grant dates and reported in our financial statements.

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

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

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

Share-based compensation expense recognized during a period is based on the value of the portion of share-based payment awards that is ultimately expected to vest and is amortized using the straight-line attribution method. As share-based compensation expense recognized in the consolidated statements of operations for fiscal ~~2013~~2014, ~~2012~~2013, and ~~2011~~ 2012 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The fair value method requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimate forfeitures based on our historical experience. Changes to the estimated forfeiture rate are accounted for as a cumulative effect of change in the period the change occurred.

Effects of Inflation

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

Results of Operations

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

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

41All long-lived assets for fiscal 2014 and 2013 were located in the United States.

~~All~~Comparison ~~long-lived~~of ~~assets~~Fiscal ~~for~~2014 ~~fiscal~~and 2013 ~~and 2012 were located in the United States.~~

~~Comparison~~Revenues of(in ~~Fiscal~~thousands) ~~2013 and 2012~~

Revenues


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

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

	Year ended September 30,
	2013		2012		$ Change		% Change
REVENUES
Gross product sales	$	91,205,182	$	45,107,989	$	46,097,193		102	%
Less: discounts and allowances		20,513,155		8,033,422		12,479,733		155	%
Net product sales		70,692,027		37,074,567		33,617,460		91	%
Revenues from royalties		4,453,707		4,200,506		253,201		6	%
Revenues from research grant services		220,150		—		220,150		—
Total revenues	$	75,365,884	$	41,275,073	$	34,090,811		83	%

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

~~Total~~Potential ~~revenues~~revenue-generating ~~were~~contracts ~~$75.4~~that ~~million~~remained ~~for~~active ~~the~~as ~~fiscal~~of ~~year ended~~ September 30, ~~2013~~2014 ~~compared~~include ~~to $41.3 million~~co-promote ~~for~~revenues ~~the~~from ~~fiscal~~our agreement ~~year~~with ~~ended~~Merck. ~~September 30~~Partnering, ~~2012.~~licensing ~~The~~and ~~increase~~research incollaborations ~~total~~have ~~revenues~~been, ofand ~~approximately~~may ~~$34.1~~continue ~~million~~to ~~was~~be, ~~primarily~~an ~~attributed~~important topart anof ~~increase~~our ofbusiness ~~86%~~development instrategy. ~~volume~~We ~~for~~may ~~NUEDEXTA~~continue ~~net~~to ~~product~~seek ~~sales~~partnerships ~~when~~with ~~compared~~pharmaceutical tocompanies ~~the~~that ~~same period~~can ofhelp ~~the~~fund our ~~prior~~operations ~~year,~~in asexchange ~~well~~for assharing ~~price~~in ~~increases~~the ~~implemented~~success ~~over~~of ~~the~~any ~~last~~licensed ~~twelve~~compounds ~~months~~or technologies.

~~Discounts~~Operating ~~and~~Expenses ~~allowances increased approximately $12.5 million for the fiscal year ended September 30, 2013 when compared to the same period~~ (in ~~fiscal 2012. Discounts and allowances were 22.5% of gross product sales in fiscal 2013 compared to 17.8% of gross product~~ ~~sales~~thousands) in fiscal 2012. The increase in the discount and allowances percentage of gross product sales is primarily due to new contracts entered into with managed care entities during fiscal 2013 and increases in government mandated rebates.

Revenue from royalties related to GSK was approximately $4.5 million and $4.2 million in fiscal 2013 and 2012, respectively. We expect to recognize revenue from royalties from GSK through April 2014. Revenue from royalties from Azur was approximately $492,000 for fiscal 2012. The maximum royalty payments from the Azur license agreement was reached in fiscal 2012 and we did not recognize any additional revenue from royalties under this agreement in fiscal 2013.


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

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

Potential revenue-generating contracts that remained active as of September 30, 2013 include licensing revenue from our agreement with GSK and co-promote revenues from our co-promotion agreement with Merck and modest potential 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 11, “Research, License, Supply and other Agreements,” and Note 14, “Segment Information,” in the Notes to Consolidated Financial Statements.

Operating Expenses

	Year Ended September 30,
	2013		2012		$ Change		% Change
OPERATING EXPENSES
Cost of product sales	$	4,002,303	$	2,120,221	$	1,882,082		89	%
Cost of research grant services		147,431		—		147,431		—
Research and development		49,506,199		23,066,037		26,440,162		115	%
Selling and marketing		63,201,776		52,463,409		10,738,367		20	%
General and administrative		29,934,875		22,027,587		7,907,288		36	%
Total operating expenses	$	146,792,584	$	99,677,254	$	47,115,330		47	%

Cost of Product Sales

In fiscal ~~2013~~2014, cost of product sales was $43.03 million compared to $24.10 million in fiscal ~~2012~~2013. The ~~increase~~decrease in cost of product sales is ~~attributable~~primarily driven by the elimination of royalty expense related to NUEDEXTA effective May 1, 2014, partially offset by an increase in cost of ~~86%~~product sales attributable to an increase in the volume of NUEDEXTA net product sales as compared to the same period of the prior year.

Research and Development Expenses

Research and development expenses ~~increased~~ decreased by approximately $265.45 million for the fiscal year ended September 30, ~~2013~~2014 compared to the fiscal year ended September 30, ~~2012~~2013. The ~~increase~~decrease is primarily due to the $20.0 million up-front payment for the in-licensing of AVP-825, ~~increased~~paid ~~clinical~~in ~~study~~fiscal ~~costs~~2013, ofsubstantially ~~approximately~~offset ~~$5.9~~by ~~million and increased personnel costs of approximately $0.5 million to support the increased number of studies.~~ an

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

Research and Development Expenses by Product

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


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

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

(1)

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

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

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

(4)	Excludes unallocated indirect corporate overhead costs.

Selling and Marketing Expenses

Selling and marketing expenses increased by approximately $1014.75 million for the fiscal year ended September 30, ~~2013~~2014 compared to the fiscal year ended September 30, ~~2012~~2013. The increase is primarily attributed to increased personnel costs of approximately $8.40 million resulting from sales force expansions, which increased our sales force by approximately 30% in the fourth quarter of fiscal 2013 and approximately 85% during the fourth quarter of fiscal 2014, increased marketing costs of approximately $4.6 million and increases in other costs of approximately $21.39 million.

General and Administrative Expenses

General and administrative expenses increased by approximately $76.93 million for the fiscal year ended September 30, ~~2013~~2014, compared to the fiscal year ended September 30, ~~2012~~2013. The increase is primarily attributed to increased ~~legal~~personnel costs of approximately $52.6 million, ~~associated~~increased ~~with~~rent and related facility costs of approximately $2.0 million related to the ~~enforcement~~relocation of our corporate ~~intellectual~~offices ~~property~~to ~~rights~~a larger space, additional expense related tothe ~~NUEDEXTA,~~U.S. ~~increased~~Branded ~~personnel~~Prescription ~~costs~~Drug Fee of ~~approximately~~ $10.15 million and ~~increased~~increases in other costs of approximately $13.2 million, partially offset by a $2.0 million decrease in legal costs.

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

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

Share-Based Compensation

Total compensation expense for our share-based payments in the fiscal years ended September 30, ~~2013~~2014 and ~~2012~~2013 was approximately $56.87 million and $45.98 million, respectively. Research and development expense in the fiscal years ended September 30, ~~2013~~2014 and ~~2012~~2013 includes share-based compensation expense of approximately $1.13 million and $1.01 million, respectively. Selling and marketing expense in the fiscal years ended September 30, ~~2013~~2014 and ~~2012~~2013 includes share-based compensation expense of approximately $12.61 million and $01.96 million, respectively. General and administrative expense in the fiscal years ended September 30, ~~2013~~2014 and ~~2012~~2013 includes share-based compensation expense of approximately $3.12 million and $3.01 million, respectively. As of September 30, ~~2013~~2014, approximately $1115.3 million of total unrecognized compensation costs related to unvested awards is expected to be recognized over a weighted average period of 2.6 years. See Note 10, “Stockholders’ Equity –— Employee Equity Incentive Plans,” in the Notes to Consolidated Financial Statements for further discussion.

Interest Expense

For the fiscal year ended September 30, ~~2013~~2014, interest expense was approximately $43.13 million compared to interest expense of $1.4.1 million for the prior fiscal year. The increase in interest expense is due to a financing arrangement entered into in June 2012, resulting in fiscal 2013 having a full year of interest expense compared to only four months of interest expense for the same period in the prior year.

Loss on Early Extinguishment of Debt

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

Net Loss

Net loss was approximately $7550.54 million, or $0.5331 per share, for the fiscal year ended September 30, ~~2013~~2014, compared to a net loss of approximately $5975.75 million, or $0.4553 per share for the fiscal year ended September 30, ~~2012~~2013. The ~~increase~~decrease in net loss is primarily attributed to anincreased ~~increase~~NUEDEXTA innet ~~operating~~product ~~expenses~~sales ~~and interest expense, partially~~ offset by increased ~~NUEDEXTA~~operating ~~net product sales~~expenses.

43Comparison of Fiscal 2013 and 2012

Revenues (in thousands)


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

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

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

~~Comparison~~Operating ofExpenses ~~Fiscal~~(in ~~2012~~thousands) ~~and 2011~~

Revenues


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

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

	Year ended September 30,
	2012		2011		$ Change			% Change
REVENUES
Gross product sales	$	45,107,989	$	7,014,778	$	38,093,211			543	%
Less: discounts and allowances		8,033,422		925,472		7,107,950			768	%
Net product sales		37,074,567		6,089,306		30,985,261			509	%
Revenues from royalties		4,200,506		4,406,589		(206,083	)		-5	%
Total revenues	$	41,275,073	$	10,495,895	$	30,779,178			293	%

Total revenues were $41.3 million for the fiscal year ended September 30, 2012 compared to $10.5 million for the fiscal year ended September 30, 2011. The increase in total revenues of approximately $30.8 million was primarily attributed to an increase in volume for NUEDEXTA net product sales which we began promoting commercially in February 2011.

Discounts and allowances increased approximately $7.1 million for the fiscal year ended September 30, 2012 when compared to the same period in fiscal 2011. Discounts and allowances were 17.8% in fiscal 2012 compared to 13.2% in fiscal 2011. The increase in the discount and allowances percentages is primarily due to new contracts entered into with managed care entities during fiscal 2012.

Revenue from royalties related to GSK was approximately $3.7 million and $3.9 million in fiscal 2012 and 2011, respectively. We expect to recognize revenue from royalties from GSK through April 2014. Revenue from royalties from Azur was approximately $0.5 million for each of the fiscal years 2012 and 2011.

Operating Expenses

	Year ended September 30,
	2012		2011		$ Change		% Change
OPERATING EXPENSES
Cost of product sales	$	2,120,221	$	445,980	$	1,674,241		375	%
Research and development		23,066,037		15,253,739		7,812,298		51	%
Selling and marketing		52,463,409		38,140,558		14,322,851		38	%
General and administrative		22,027,587		17,285,033		4,742,554		27	%
Total operating expenses	$	99,677,254	$	71,125,310	$	28,551,944		40	%

Cost of Product Sales

In fiscal ~~2012~~2013, cost of product sales was $24.10 million compared to $02.41 million in fiscal ~~2011~~2012. The increase in cost of product sales is attributable to the increase in product sales of NUEDEXTA which we began promoting commercially in February 2011.

Research and Development Expenses

Research and development expenses increased by approximately $726.84 million for the fiscal year ended September 30, ~~2012~~2013 compared to the fiscal year ended September 30, ~~2011~~2012. The increase is primarily due to ~~costs~~the ~~of approximately~~ $320.50 million ~~associated with PRIME, a Phase II clinical trial of AVP~~up-~~923~~front payment for the ~~treatment~~in-licensing of ~~central neuropathic pain in patients with MS~~AVP-825, ~~for~~increased ~~which~~clinical westudy ~~enrolled our first patient in November 2011,~~ costs of approximately $2.5.9 million ~~for~~and ~~the~~increased ~~d-DM~~personnel ~~development~~costs ~~program which began in the second quarter~~ of ~~fiscal 2012, and~~ approximately $0.75 million ~~of increased regulatory costs, primarily~~ to support ~~pursuing~~the ~~approval~~increased ~~for~~number ~~NUEDEXTA~~of ~~in Europe~~studies.

Selling and Marketing Expenses

Selling and marketing expenses increased by approximately $1410.37 million for the fiscal year ended September 30, ~~2012~~2013, compared to the fiscal year ended September 30, ~~2011~~2012. The increase is primarily attributed to increased personnel costs of approximately $118.14 million resulting from sales force expansion ~~and~~which ~~other~~increased ~~key~~our ~~corporate~~sales ~~and~~force ~~commercial~~by ~~headcount~~30% ~~resulting~~and ~~in an increase of over 40 employees;~~ increased marketing and ~~market~~other ~~research~~ costs of approximately $2.~~9 million; and increased other costs of approximately $0.~~3 million.

General and Administrative Expenses

General and administrative expenses increased by approximately $4.7.9 million for the fiscal year ended September 30, ~~2012~~2013, compared to the fiscal year ended September 30, ~~2011~~2012. The increase is primarily attributed to increased ~~personnel~~legal costs of approximately $15.8 6 million ~~resulting~~associated ~~from~~with the ~~hiring~~enforcement of ~~key~~our ~~corporate~~intellectual ~~headcount~~property torights ~~support~~related ~~the~~to ~~commercialization of~~ NUEDEXTA;, increased ~~legal~~personnel ~~expense~~costs of approximately $21.31 million ~~primarily due to the enforcement of our intellectual property rights;~~ and increased other ~~corporate~~ costs of approximately $01.6 2 million.

Share-Based Compensation

Total compensation expense for our share-based payments in the fiscal years ended September 30, ~~2012~~2013 and ~~2011~~2012 was approximately $45.98 million and $34.89 million, respectively. Research and development expense in the fiscal years ended September 30, ~~2012~~2013 and ~~2011~~2012 includes share-based compensation expense of approximately $1.01 million and $01.60 million, respectively. Selling and marketing expense in the fiscal years ended September 30, ~~2012~~2013 and ~~2011~~2012 includes share-based compensation expense of approximately $01.96 million and $0.69 million, respectively. General and administrative expense in the fiscal years ended September 30, ~~2012~~2013 and ~~2011~~2012 includes share-based compensation expense of approximately $3.01 million and $23.50 million, respectively.

Interest Expense

For the fiscal year ended September 30, ~~2012~~2013, interest expense was approximately $1.4.1 million ~~and~~compared ~~there~~to ~~was no~~ interest expense ~~for~~of ~~the~~$1.4 million for fiscal year ended September 30, ~~2011~~2012. ~~Interest~~The ~~expense~~increase in ~~fiscal~~interest ~~2012~~expense is ~~related~~due to ~~the Oxford and SVB financing arrangement we entered into in June 2012.~~

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

Net Loss

Net loss was approximately $5975.75 million, or $0.4553 per share, for the fiscal year ended September 30, ~~2012~~2013, compared to a net loss of approximately $6059.67 million, or $0.5145 per share for the fiscal year ended September 30, ~~2011~~2012. The ~~decrease~~increase in net loss is primarily attributed to ~~increased~~an ~~NUEDEXTA~~increase ~~product~~in ~~sales~~operating expenses and interest expense, partially offset by anincreased ~~increase~~NUEDEXTA innet ~~operating~~product ~~expenses~~sales.

Liquidity and Capital Resources

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

45Cash, cash equivalents, restricted cash and cash equivalents and restricted investments, as well as net cash provided by or used in operating, investing and financing activities, are summarized in the table below (reported in thousands).


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

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

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

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

~~Cash,~~ other ~~cash~~liabilities ~~equivalents,~~of ~~restricted~~$3.6 ~~cash~~million ~~and~~primarily ~~cash equivalents and restricted investments,~~ as ~~well~~ asa ~~net~~result ~~cash~~of ~~provided~~increased byaccrued orroyalties, ~~used in operating~~rebates, ~~investing~~chargebacks and ~~financing~~distribution ~~activities,~~fees ~~are~~due ~~summarized~~to inrevenue ~~the table below~~growth.

	September 30,2013			DecreaseDuringPeriod			September 30,2012			DecreaseDuringPeriod			September 30,2011
Cash, cash equivalents, restricted cash and cash equivalents, and restricted investments	$	57,528,997		$	(14,606,008	)	$	72,135,005		$	(9,660,498	)	$	81,795,503
Cash and cash equivalents	$	55,259,073		$	(14,519,333	)	$	69,778,406		$	(9,764,158	)	$	79,542,564
Net working capital	$	37,051,425		$	(23,544,875	)	$	60,596,300		$	(9,604,294	)	$	70,200,594
	Year EndedSeptember 30,2013			ChangeBetweenPeriods			Year EndedSeptember 30,2012			ChangeBetweenPeriods			Year EndedSeptember 30,2011
Net cash used in operating activities	$	(65,422,227	)	$	(7,765,607	)	$	(57,656,620	)	$	(1,135,331	)	$	(56,521,289	)
Net cash used in investing activities		(361,623	)		555,040			(916,663	)		2,558,081			(3,474,744	)
Net cash provided by financing activities		51,264,517			2,455,392			48,809,125			(51,958,003	)		100,767,128
Net change in cash and cash equivalents	$	(14,519,333	)	$	(4,755,175	)	$	(9,764,158	)	$	(50,535,253	)	$	40,771,095

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

~~Operating activities.~~ Net cash used in operating activities ~~was approximately~~for ~~$65.4 million in~~ fiscal ~~2013 compared to approximately $57.7 million in fiscal~~ 2012. ~~The~~included ~~increase~~a isnet ~~primarily~~loss ~~due to increased operating expenses~~ of $4759.17 million, ~~including~~and a $203.07 million ~~up-front~~use ~~payment for the in-licensing~~ of ~~AVP-825,~~cash ~~and~~for an increase in ~~interest~~net ~~expense~~working ofcapital ~~approximately $2.7 million~~items, partially offset by ~~increased net product sales of approximately $33.6 million and an increase in~~ non-cash ~~charges~~items ~~and changes in operating assets and liabilities~~ of ~~approximately~~ $85.08 million. ~~Net~~consisting ~~cash~~of ~~used~~share-based incompensation ~~operating~~expense, ~~activities~~depreciation ~~was~~and ~~approximately~~amortization, ~~$56.5 million in fiscal 2011. The increase in fiscal 2012 when compared to fiscal 2011 is primarily due to expenses related to NUEDEXTA sales~~ and ~~marketing expenses~~amortization ~~and~~of ~~our~~debt ~~clinical~~discount and ~~regulatory~~debt ~~activities,~~issuance ~~partially offset by increased revenues~~costs.

Investing activities. Net cash used in investing activities was approximately $03.4 million in fiscal ~~2013~~2014, compared to approximately $0.94 million in fiscal ~~2012~~2013. The ~~decrease~~increase is primarily related to aincreased ~~decrease in~~ purchases of ~~property~~ ~~and~~manufacturing equipment. ~~Net~~for ~~cash~~the ~~used~~AVP-825 inprogram, ~~investing~~along ~~activities~~with inincreased ~~fiscal~~costs ~~2011~~for ~~was~~computer ~~approximately~~hardware ~~$3.5~~and ~~million.~~infrastructure ~~The decrease in fiscal 2012 when compared to fiscal 2011 is primarily~~ related to ~~a decrease in purchases of property and equipment which~~the ~~were~~relocation ~~high in fiscal 2011 in support~~ of our ~~commercial~~corporate ~~launch~~office ~~of NUEDEXTA~~ and ~~reduced~~employee ~~purchases of investments in securities~~growth.

~~Financing activities.~~ Net cash ~~provided~~used byin ~~financing~~investing activities ~~was approximately $51.3 million~~ in fiscal ~~2013~~ ~~compared to approximately $48.8 million in fiscal~~ 2012. Inwas ~~fiscal 2013, we raised~~ approximately $~~50.~~0 ~~million in gross proceeds (approximately $48~~.89 million ~~net of offering costs and commissions) from the sale of common stock and approximately $2~~.5 ~~million~~The ~~from~~decrease ~~the~~in ~~exercise~~fiscal of2013 ~~warrants~~when ~~and~~compared ~~stock~~to ~~options. In~~ fiscal 2012, weis ~~received~~primarily ~~proceeds~~related ~~from~~to ~~debt,~~a ~~net~~decrease ~~of issuance costs of approximately $29.6 million. In addition, we raised approximately $10.3 million~~ in ~~gross~~purchases ~~proceeds (approximately $10.1 million net~~ of ~~offering~~property ~~costs~~ and ~~commissions) from the sale of common stock and approximately $9~~equipment.1 million from the exercise of warrants and stock options. In fiscal 2011, we raised approximately $96.7 million in gross proceeds (approximately $91.4 million net of offering costs and commissions) from the sale of common stock and approximately $9.3 million from the exercise of warrants and stock options.

InFinancing ~~August~~activities. Net ~~2012,~~cash weprovided ~~filed~~by ~~with~~financing ~~the~~activities ~~SEC~~was aapproximately ~~shelf~~$268.7 ~~registration~~million ~~statement~~in onfiscal ~~Form~~2014 ~~S-3~~compared to ~~sell~~approximately an$51.3 million ~~aggregate~~in offiscal up2013. In tofiscal 2014, we raised approximately $~~100~~295.04 million in ~~common stock,~~net ~~preferred~~proceeds ~~stock,~~from ~~debt~~the ~~securities~~sale of common stock and ~~warrants~~approximately $3.3 ~~Included~~million infrom ~~this~~the ~~shelf~~exercise ~~registration~~of onstock options.

46In fiscal 2013, we received net proceeds of approximately $48.8 million from the sale of common stock and approximately $2.5 million from the exercise of warrants and stock options.

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

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

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

Form S-3 is a prospectus relating to a financing facility with Cowen and Company, LLC (“Cowen”), providing for the sale of up to $25.0 million worth of shares of our common stock from time to time in the open market at prevailing prices in accordance with the terms of a sales agreement entered into with Cowen on August 8, 2012. As of September 30, ~~2013~~2014, ~~7,935,395~~we ~~shares~~have ofcontractual ~~common~~obligations ~~stock had been sold under this facility~~ for ~~total~~operating ~~gross proceeds of approximately $25.0 million. In December 2013~~lease obligations, weas ~~amended~~summarized ~~our~~in ~~sales agreement with Cowen, providing for~~ the ~~sale~~table ofthat upfollows ~~to an additional $30.0 million worth of shares of our common stock from time to time~~ (in ~~the open market at prevailing prices~~thousands). ~~As of September 30, 2013, approximately $75.0 million remains available under this shelf registration statement.~~

In July 2013, we filed with the SEC a shelf registration statement on Form S-3 to sell an aggregate of up to $150.0 million in common stock, preferred stock, debt securities and warrants. Included in this shelf registration on Form S-3 is a prospectus relating to a financing facility with Cowen, providing for the sale of up to $25.0 million worth of shares of our common stock from time to time in the open market at prevailing prices in accordance with the terms of a sales agreement entered into on August 8, 2012 and amended in July 2013. As of September 30, 2013, 5,030,070 shares of common stock had been sold under this facility for total gross proceeds of approximately $25.0 million. As of September 30, 2013, approximately $125.0 million remains available under this shelf registration statement.


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

As(1) ofExpected ~~September 30,~~sublease ~~2013,~~payments ~~we have contractual obligations~~ for ~~trade~~our ~~expenses and~~ operating lease ~~obligations,~~are asnetted ~~summarized~~against in the ~~table~~ ~~that~~total ~~follows~~obligations. ~~We have no off-balance sheet arrangements.~~

	Payments Due by Period
	Total		Less Than1 Year		1-3 Years		3-5 Years		More than5 Years
Debt obligation	$	36,363,829	$	10,749,024	$	25,614,805	$	—	$	—
Operating lease obligations(1)		19,294,515		2,615,863		5,982,087		5,876,404		4,820,161
Purchase obligations(2)		11,915,169		11,915,169		—		—		—
Total	$	67,573,513	$	25,280,056	$	31,596,892	$	5,876,404	$	4,820,161

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

~~(1)~~We ~~Includes~~paid to CNS a ~~lease~~$75,000 ~~entered~~milestone ~~into~~upon FDA approval of NUEDEXTA for the treatment of PBA in ~~November~~fiscal 2011. In addition, we have been obligated to pay CNS a royalty ranging from approximately 5% to 8% of net U.S. GAAP revenue generated by sales of NUEDEXTA. During fiscal 2014, 2013 ~~for~~and 2012, royalties of approximately 61$2.7 million,~~000~~ ~~square~~$3.5 million ~~feet~~and $1.8 million, respectively, were recorded to cost of ~~office~~product ~~space~~sales in the consolidated statements of operations. ~~See~~Effective ~~Note~~with 15the ANDA ruling on April 30, ~~“Subsequent~~2014, ~~Events~~we no longer have a royalty obligation on revenue generated by sales of NUEDEXTA.” Under certain circumstances, we may have the obligation to pay CNS a portion of net revenues received if we sublicense the licensed patent rights to a third party.

~~(2)~~Under ~~Purchase~~the ~~obligations~~agreement ~~consist~~with CNS, we are required to make payments on achievements of ~~the~~up to a maximum of ten milestones, based upon five specific clinical indications. Maximum payments for these milestone payments could total approximately $1.1 million if we pursued the development of ~~trade~~the ~~accounts~~licensed ~~payable~~patent ~~and~~rights ~~trade~~for ~~related~~all ~~accrued~~five ~~expenses~~of atthe ~~September~~licensed ~~30,~~indications. ~~2013~~In general, ~~which~~individual ~~approximates~~milestones ~~our~~range ~~contractual~~from ~~commitments~~$75,000 to $125,000 for ~~goods~~each accepted new drug application (“NDA”) and ~~services~~a ~~supported~~similar byamount ~~purchase~~for ~~obligations~~each approved NDA in addition to the ~~normal~~royalty ~~course~~discussed ofabove ~~our~~on ~~business~~net U.S. GAAP revenues. We do not have the obligation to develop additional indications under the CNS license agreement.

NUEDEXTA License Milestone Payments. We hold the exclusive worldwide marketing rights to NUEDEXTA for certain indications pursuant to an exclusive license agreement with the Center for Neurologic Study (“CNS”).

We paid to CNS a $75,000 milestone upon FDA approval of NUEDEXTA for the treatment of PBA in fiscal 2011. In addition, we are obligated to pay CNS a royalty ranging from approximately 5% to 8% of net U.S. GAAP revenue generated by sales of NUEDEXTA. During fiscal 2013, 2012 and 2011 respectively, we recorded royalties of approximately $3.5 million, $1.8 million and $309,000 related to NUEDEXTA product shipments as cost of product sales in the consolidated statements of operations. Under certain circumstances, we may have the obligation to pay CNS a portion of net revenues received if we sublicense NUEDEXTA to a third party.

Under the agreement with CNS, we are required to make payments on achievements of up to a maximum of ten milestones, based upon five specific clinical indications. Maximum payments for these milestone payments could total approximately $1.1 million if we pursued the development of NUEDEXTA for all five of the licensed indications. In general, individual milestones range from $75,000 to $125,000 for each accepted new drug application (“NDA”) and a similar amount for each approved NDA in addition to the royalty discussed above on net U.S. GAAP revenues. We are not obligated to develop additional indications under the CNS license agreement.

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

Under the agreement with Concert, we are obligated to make milestone and royalty payments to Concert based on successful advancement of deuterium-modified dextromethorphan products for one or more indications in the United States, Europe, and Japan. Individual milestone payments range from $2.0 — $6.0 million, $1.5 — $15.0 million, and $25.0 — $60.0 million for clinical, regulatory and commercial targets respectively, and in aggregate could total over $200.0 million. Royalty payments are tiered, beginning in the single-digits and increasing to the low double-digits for worldwide net sales of deuterium-modified dextromethorphan products exceeding $1 billion annually. As of September 30, ~~2013~~2014, we have paid $24.0 million for milestones that have been achieved pursuant to this agreement.

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

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

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Management Outlook

We believe that cash, cash equivalents, restricted cash and cash equivalents, and restricted investments of approximately $57274.5 million at September 30, ~~2013~~2014, together with funds expected to be generated from sales of NUEDEXTA, will be sufficient to sustain our planned level of operations for at least the next 12 months, which includes the costs associated with the ongoing commercialization of NUEDEXTA for the treatment of PBA in the U.S. and European markets, and seeking FDA approval and subsequently commercialize AVP-825. However, we cannot provide assurances that our plans will not change, or that changed circumstances will not result in the depletion of capital resources more rapidly than anticipated.

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

Recent Authoritative Guidance

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

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

As described below, we are exposed to market risks related to changes in interest rates. Because substantially all of our revenue, expenses, and capital purchasing activities are transacted in U.S. dollars, our exposure to foreign currency exchange rates is immaterial. However, in the future we could face increasing exposure to foreign currency exchange rates if we obtain EMA approval to market NUEDEXTA and distribute internationally, ~~expand~~or ~~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, ~~2013~~2014 as held-to-maturity. These held-to-maturity securities are subject to interest rate risk. Based on our current low yield, any decrease in interest rates is not likely to have a material effect on interest income.

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

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

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

Item 8.

Financial Statements and Supplementary Data

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

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

In connection with that evaluation, our CEO and Vice President, Finance concluded that our disclosure controls and procedures were effective and designed to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms as of September 30, ~~2013~~2014. For the purpose of this review, disclosure controls and procedures means controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit is accumulated and communicated to management, including our principal executive officer, principal financial officer and principal accounting officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Management’s Report on Internal Control Over Financial Reporting

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

49Our assessment of the effectiveness of our internal control over financial reporting as of September 30, 2014 has been audited by KMJ Corbin & Company LLP, an independent registered public accounting firm, as stated in their report, which is set forth at page F-3.

the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and related COSO guidance. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of September 30, 2013.

Our assessment of the effectiveness of our internal control over financial reporting as of September 30, 2013 has been audited by KMJ Corbin & Company LLP, an independent registered public accounting firm, as stated in their report, which is set forth at page F-3.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during our fourth fiscal quarter ended September 30, ~~2013~~2014, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

Item 9B.

Other Information

None.

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

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,” “Board of Directors and Committees” and “Executive Officers” contained in our definitive proxy statement (the “Proxy Statement”), which will be filed with the Securities and Exchange Commission in connection with our 2014 Annual Meeting of Stockholders.

~~Additionally,~~The ~~information~~names ~~relating to reporting~~ of ~~insider transactions~~our indirectors, ~~Company~~their ~~securities~~ages isand ~~incorporated~~their positions bywith ~~reference from~~ the ~~information~~Company ~~under~~as ~~the~~of ~~caption “Section~~December ~~16(a)~~1, ~~Beneficial~~2014 ~~Ownership~~are ~~Reporting~~set ~~Compliance”~~forth ~~in the Proxy Statement~~below.

Executive Officers and Key Employees of the Registrant


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

~~The~~Keith ~~names~~Katkin. Mr. Katkin ofwas ~~our~~appointed ~~executive~~President ~~officers~~and Chief Executive Officer of Avanir and ~~other~~was ~~key~~elected ~~employees~~as a member of the Board of Directors in March of 2007. From July 2005 until March 2007, Mr. Katkin served as Senior Vice President of Sales and ~~their~~Marketing. ~~ages~~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 ~~December~~the company to Johnson 1& Johnson in 2005. Additionally, ~~2013~~Mr. Katkin’s ~~are~~employment experience ~~set~~includes ~~forth~~leadership ~~below~~roles at InterMune, Amgen and Abbott Laboratories. ~~Officers~~Mr. Katkin ~~are~~also ~~elected~~served ~~annually~~as bystrategic advisor to Cerexa, a pharmaceutical company that was sold to Forest Laboratories in 2007. Mr. Katkin currently serves on the ~~Board~~board of ~~Directors~~directors of Brain Injury Associates of America, a non-profit organization dedicated to people with brain injury and ~~hold~~their ~~office~~families ~~until~~and Carbylan Therapeutics a private company focused on the development and marketing of device/drug ~~their~~combination ~~respective~~products ~~successors~~based ~~are~~on ~~qualified~~novel, chemically engineered polymer systems incorporating hyaluronic acid. Mr. Katkin received a B.S. degree in Business and ~~appointed~~Accounting orfrom ~~until~~Indiana ~~their~~University ~~resignation~~and an M.B.A. degree in Finance from the Anderson School of Management at UCLA, ~~removal~~graduating orwith ~~disqualification~~honors. Mr. Katkin became a licensed Certified Public Accountant in 1995.

Name	Age		Position
Keith A. Katkin		42	President and Chief Executive Officer
Gregory J. Flesher		43	Senior Vice President, Corporate Development and Chief Business Officer
Randall E. Kaye, M.D.		51	Senior Vice President, Medical Affairs and Chief Medical Officer
Rohan Palekar		48	Senior Vice President and Chief Commercial Officer
Joao Siffert, M.D.		49	Senior Vice President, Research and Development, Chief Scientific Officer
Christine G. Ocampo, CPA		41	Vice President, Finance and Secretary

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

~~Keith~~Hans ~~Katkin~~E. Bishop has served on the Board of Directors since May 2012. Mr. ~~Katkin~~Bishop ~~was~~is ~~appointed~~the ~~President~~chief ~~and~~executive ~~Chief~~officer ~~Executive Officer~~ of ~~Avanir~~Juno Therapeutics, an oncology company, and ~~was~~also ~~elected~~currently serves as aan ~~member~~Executive ofin ~~the~~Residence ~~Board~~with ofWarburg ~~Directors~~Pincus, ina ~~March~~private ofequity ~~2007~~investment firm. ~~From~~Prior ~~July~~to ~~2005~~joining ~~until~~Juno ~~March 2007~~Therapuetics, Mr. ~~Katkin~~Bishop ~~served~~was asthe ~~Senior~~chief ~~Vice~~operating ~~President~~officer of ~~Sales~~Photothera ~~and~~Inc., ~~Marketing~~a late-stage medical device company, from February 2012 until October 2013. Prior to joining ~~Avanir~~Photothera Inc., Mr. ~~Katkin~~Bishop ~~previously~~ served as Executive Vice President, ~~Commercial~~and ~~Development~~Chief ~~for~~Operating Officer ~~Peninsula~~at ~~Pharmaceuticals,~~Dendreon ~~playing~~Corporation afrom ~~key~~January ~~role~~2010 into September 2011. His previous roles have included President of the ~~management~~specialty ~~and~~medicine business at Bayer Healthcare Pharmaceuticals Inc. from December 2006 to January 2010, where

5058

~~ultimate~~he ~~sale~~was responsible for a diverse portfolio of neurology, oncology and hematology products, growing the ~~company~~division tointo ~~Johnson &~~a ~~Johnson~~€3 inbillion ~~2005~~global franchise. ~~Additionally,~~ Mr. ~~Katkin’s~~Bishop ~~employment~~also ~~experience~~held ~~includes~~various positions ~~leadership roles~~ at ~~InterMune~~Chiron Corporation, ~~Amgen~~Glaxo Wellcome, and ~~Abbott Laboratories~~SmithKline Beecham. In addition, he served as Executive Vice President of operations with a global telecom service company. Mr. ~~Katkin~~Bishop ~~also~~ served as ~~strategic~~chairman ~~advisor~~of tothe ~~Cerexa~~board of Genesis Biopharma, Inc., a ~~pharmaceutical~~biotechnology company, ~~that~~from ~~was~~January ~~sold~~2012 tountil ~~Forest~~November ~~Laboratories in 2007~~2012. Mr. ~~Katkin~~Bishop received a B.S. degree in ~~Business~~chemistry ~~and Accounting~~ from ~~Indiana~~Brunel University ~~and~~in ~~an M~~London.~~B.A. degree~~ inBased ~~Finance~~on ~~from~~Mr. Bishop’s experience within the ~~Anderson~~pharmaceutical ~~School~~industry ofand ~~Management~~his executive experience at ~~UCLA~~other companies in the biotechnology industry, ~~graduating~~the ~~with~~Board ~~honors.~~believes Mr. ~~Katkin~~Bishop ~~became~~has athe ~~licensed~~appropriate ~~Certified~~set ~~Public~~of ~~Accountant~~skills into ~~1995~~serve as a member of our Board.

~~Gregory~~Mark JH. ~~Flesher~~Corrigan, M. MrD. ~~Flesher~~ has ~~was~~served ~~appointed~~as ~~Senior~~a ~~Vice~~member ~~President,~~of ~~Corporate~~the ~~Development~~Board since March 2014 and ~~Chief~~currently ~~Business~~serves ~~Officer~~as inChairperson ~~February~~of ~~2011~~our Science Committee and as a member of our Corporate Governance Committee. ~~From~~Dr. ~~August~~Corrigan ~~2007~~is Chairman of the Board of Epirus Biopharmaceuticals, Inc. a public biopharmaceutical company, and from 2010 to ~~February 2011~~2014, he previously served as ~~Vice~~a Director, President and Chief Executive Officer of ~~Business~~Zalicus ~~Development~~Inc. ~~From~~prior to ~~June~~their ~~2006~~merger towith ~~August~~Epirus ~~2007,~~Biopharmaceuticals hein July 2014. He also served as ~~Senior~~a Director of ~~Commercial~~Zalicus ~~Strategy~~ and, inits ~~November~~progenitor companies since December 2006. Prior to Zalicus, ~~assumed~~Dr. Corrigan joined the ~~additional~~specialty ~~responsibility~~pharmaceutical ~~for~~company ~~Business~~Sepracor ~~Development~~Inc. ~~and~~in ~~Portfolio~~2003 ~~Planning.~~(now ~~Prior~~known toas ~~joining~~Sunovion ~~Avanir~~Pharmaceuticals, MrInc. ~~Flesher~~) ~~held~~and ~~positions~~served as ~~Director~~their Executive Vice President of ~~Sales~~Research —and ~~Hepatology~~Development ~~(from~~until ~~2004~~December 2009. Prior to ~~2006)~~joining ~~and~~Sepracor, ~~Director~~Dr. ofCorrigan ~~Marketing~~spent —10 ~~Pulmonary~~years atwith ~~InterMune~~Pharmacia & Upjohn, a pharmaceutical company acquired by Pfizer, Inc. ~~(from~~where ~~2002~~he toserved ~~2004).~~most ~~Prior~~recently toas ~~his~~group ~~tenure~~vice atpresident ~~InterMune, Mr. Flesher~~of ~~held~~Global ~~both~~Clinical ~~oncology~~Research and ~~nephrology~~Experimental ~~marketing~~Medicine. ~~positions~~Before ~~with~~Dr. ~~Amgen~~Corrigan ~~Inc.~~entered the pharmaceutical industry, ahe ~~global~~spent ~~biotechnology~~five ~~company~~years in academic research at the University of North Carolina, ~~from~~School ~~1999~~of toMedicine, ~~2002~~focusing on psychoneuroendocrinology. MrDr. ~~Flesher~~ Corrigan also ~~has~~serves ~~global~~on ~~marketing~~the ~~and~~board ~~clinical~~of ~~development~~directors ~~experience~~of ~~from~~Cubist ~~Eli~~Pharmaceuticals, ~~Lilly~~Inc. ~~and~~Dr. ~~Company, where~~Corrigan heholds ~~worked~~a ~~from~~B.A. ~~1995~~and toan ~~1998~~M. MrD. ~~Flesher~~ ~~graduated~~ from ~~Purdue~~the University ~~with~~of aVirginia ~~Bachelor~~and ofreceived specialty ~~Science~~training in ~~Biology~~psychiatry at Maine Medical Center and Cornell University.

~~Randall~~David EJ. ~~Kaye~~ Mazzo, MPh.D. ~~Dr. Kaye~~has ~~was~~served ~~appointed~~as ~~Senior~~a ~~Vice~~member ~~President,~~of ~~Medical~~the ~~Affairs~~Board since July 2005 and ~~Chief Medical~~he ~~Officer~~currently inserves ~~March 2007~~as Chairperson of our Compensation Committee and as a member of our Science Committee. From ~~November~~August ~~2006~~2008 ~~until~~through ~~March~~October ~~2007~~2014, he served as ~~Vice~~ President, ~~Clinical~~Chief Executive Officer and ~~Medical~~member ~~Affairs~~of the board of Regado Biosciences, ~~and~~Inc., ~~from~~a ~~January~~publicly ~~2006~~traded, toU.S.-based ~~November~~biopharmaceutical ~~2006~~company asdeveloping ~~Vice~~novel ~~President~~aptamer-reversal ofagent ~~Medical~~pairs ~~Affairs~~initially in the area of injectable antithrombotics. ~~Immediately~~From ~~prior~~April to2007 ~~joining~~through ~~Avanir~~March 2008, Dr. ~~Kaye~~Mazzo ~~was~~served ~~the~~as ~~Vice~~ President and Chief Executive Officer and member of ~~Medical~~the ~~Affairs~~board ~~for~~of ~~Scios~~Æterna Zentaris, Inc., a ~~division~~global ofbiopharmaceutical ~~Johnson &~~company ~~Johnson,~~with ~~from~~products ~~2004~~and toa ~~2006~~therapeutic focus in the areas of oncology and endocrinology. From ~~2002~~April to2003 ~~2004~~through March 2007, Dr. ~~Kaye~~Mazzo ~~recruited~~served as President and ~~managed~~Chief Executive Officer and member of the ~~Medical~~board ~~Affairs~~of ~~department~~Chugai ~~for~~Pharma ~~InterMune~~USA, ~~Inc~~a pharmaceutical company. ~~Previously,~~Dr. Mazzo has spent more than 28 years in the pharmaceutical industry and has held positions of increasing responsibility with Merck, Baxter, Rhône-Poulenc Rorer, Hoechst Marion Roussel and Schering-Plough. Dr. ~~Kaye~~Mazzo ~~served~~holds ~~for~~a ~~nearly~~B.A. degree in Honors (Interdisciplinary Humanities) and a ~~decade~~B.S. degree in Chemistry from Villanova University, as well as an M.S. degree in Chemistry and a ~~variety~~Ph.D. degree in Analytical Chemistry from the University of ~~Medical~~Massachusetts ~~Affairs~~(Amherst). ~~and~~He ~~Marketing~~further ~~positions~~complemented ~~for~~his American ~~Pfizer~~education ~~Inc~~as a Research Fellow at the Ecole Polytechnique Fédérale de Lausanne, Switzerland. Dr. ~~Kaye~~Mazzo ~~earned~~serves ~~his~~as ~~Doctor~~non-executive Chairman of ~~Medicine~~the board of directors of pSivida, ~~Masters~~Inc., ina ~~Public~~global ~~Health~~public biopharmaceutical company. Based on Dr. Mazzo’s experience within the pharmaceutical industry and ~~Bachelor~~his ofexecutive ~~Science~~experience, ~~degrees~~specifically athis ~~George~~experience ~~Washington~~as ~~University~~Chief Executive Officer at other companies in the biotechnology industry, as well as his service on ~~Washington~~other boards of directors in the biotechnology industries, D the Board believes Dr.C. Mazzo ~~and~~has ~~was~~the aappropriate ~~Research~~set ~~Fellow~~of inskills ~~Allergy~~to ~~and~~serve ~~Immunology~~as ata ~~Harvard~~member ~~Medical~~of ~~School~~our Board.

~~Rohan~~Corinne ~~Palekar~~H. ~~Mr.~~ ~~Palekar~~ Nevinny joined ~~Avanir~~the Board in March ~~2012~~2013 ~~as Senior Vice President~~ and ~~Chief~~ ~~Commercial~~currently ~~Officer.~~serves ~~Mr.~~as ~~Palekar~~Chairperson ~~has over 20 years~~ of ~~experience~~our inAudit ~~the~~Committee ~~biopharmaceutical industry~~ and ~~has worked on significant brands including Remicade® and Stelara®~~ as ~~well~~a asmember ~~the investigational~~of ~~therapy~~our ~~MDV3100~~Compensation Committee. MrMs. ~~Palekar’s~~Nevinny is ~~most~~currently ~~recent~~General ~~commercial~~Partner ~~leadership~~of ~~role~~LMNVC ~~was~~LLC, asa ~~Chief~~privately ~~Commercial~~held ~~Officer~~venture ~~for Medivation~~firm, a ~~biopharmaceutical~~position ~~company,~~she ~~where~~has heheld ~~was~~since ~~responsible~~October ~~for~~2010. ~~all~~From ~~commercial~~September ~~activities,~~2009 ~~chemistry, manufacturing~~to ~~and~~August ~~controls~~2010, ~~medical~~Ms. Nevinny ~~affairs~~served ~~and~~as ~~public~~General ~~relations~~Manager, ~~functions.~~Cardiac ~~Prior~~Surgery toand ~~Medivation~~Vascular, ~~Mr.~~at ~~Palekar~~Edwards Lifesciences ~~spent~~Corporation, ~~over~~a 16leading ~~years~~cardiovascular attechnology ~~Johnson~~company. &Prior ~~Johnson from July 1991~~ to ~~January~~assuming ~~2008~~that ~~in various senior commercial and strategic management roles~~position, ~~most~~ ~~recently~~she aswas ~~Vice~~ President of ~~Sales~~Global &Operations ~~Marketing~~from atDecember ~~Centocor,~~2005 auntil ~~subsidiary~~September ~~of Johnson & Johnson, where he successfully launched two new indications for Remicade~~2009. ~~Prior to that, Mr~~Ms. Nevinny ~~Palekar~~served ~~was~~as ~~the~~Corporate ~~worldwide~~ Vice President, ~~of Immunology~~Chief Financial Officer and ~~held~~Treasurer ~~marketing~~of ~~leadership~~Edwards ~~roles~~Lifesciences atCorporation ~~McNeil~~from ~~Consumer~~March ~~and~~2003 ~~Specialty~~until ~~Pharmaceuticals.~~December Mr2005. ~~Palekar~~From ~~earned~~1998 ~~his~~until M2003, Ms.~~B.A.~~ Nevinny ~~degree~~was ~~from~~Vice ~~the~~President ~~Amos~~and ~~Tuck~~Chief ~~School~~Financial Officer of ~~Business Administration Dartmouth College~~Tularik, ~~his B~~Inc.~~Com.~~, ina ~~Accounting~~biotechnology ~~from~~company. ~~the~~From ~~University~~1996 ~~of Bombay~~until ~~and~~1998, ~~his L~~Ms.~~L.B.~~ Nevinny inwas ~~Law~~Executive ~~from~~Director for the ~~University~~health ofcare ~~Bombay.~~group at

~~Joao~~59 Siffert, M.D. Dr. Siffert joined Avanir in August 2011 as Senior Vice President, Research and Development and became Chief Scientific Officer in December 2012. Dr. Siffert previously served as Vice President and Chief Medical Officer at Ceregene, Inc., a biotechnology company focused on the development of neurotrophic gene therapies for Alzheimer’s and Parkinson’s diseases, from September 2007 to August 2011. Prior to his work at Ceregene, Dr. Siffert served as the Chief Medical Officer at Avera Pharmaceuticals, a CNS specialty pharmaceutical company, from May 2005 to September 2007. Prior to joining Avera, Dr. Siffert held positions with Pfizer (from February 2002 to May 2005) first as a medical director for Relpax and subsequently as the worldwide medical team leader of Lyrica and Neurontin focusing in areas of pain and epilepsy. Prior to Pfizer, Dr. Siffert held academic positions at Beth Israel Medical Center, where he served as director of the Adult Neuro-Oncology program, and Albert Einstein College of Medicine, where he was assistant professor of neurology. Dr. Siffert completed residencies in pediatrics at New York University School of Medicine and in neurology at Harvard Medical School. Dr. Siffert was certified by the American Board of Neurology and Psychiatry in 1996. He holds an M.D. degree from the University of Sao Paulo School of Medicine as well as an M.B.A. degree from Columbia University Business School.

~~Christine~~ Warburg G.Dillon ~~Ocampo,~~Read ~~CPA. Ms. Ocampo was appointed Vice President~~LLC, ~~Finance~~an ininvestment ~~February 2008~~bank. Ms. ~~Ocampo~~Nevinny ~~previously~~also ~~served~~serves ason ~~Avanir’s~~the ~~Controller~~board ~~since~~of ~~March~~directors ~~2007.~~of ~~Prior~~Neurocrine ~~to joining Avanir~~Biosciences, MsInc. ~~Ocampo~~ and previously served ason ~~Senior~~the ~~Vice~~board ~~President,~~of ~~Chief~~directors ~~Financial~~of ~~Officer~~Onyx Pharmaceuticals, ~~Chief~~Inc. ~~Accounting~~from ~~Officer, Treasurer~~October ~~and~~2005 ~~Secretary~~until ofOctober ~~Cardiogenesis Corporation~~2013, aboth ~~medical~~of ~~device~~which ~~company~~are biopharmaceutical companies, ~~from~~as ~~November~~well ~~2003~~as ~~until~~three ~~April~~private ~~2006~~companies. ~~From~~Ms. Nevinny ~~2001~~received toa ~~November 2003, Ms~~B. ~~Ocampo~~S. ~~served~~degree in ~~the~~industrial ~~role~~engineering offrom ~~Vice~~Stanford ~~President~~University and ~~Corporate~~her ~~Controller at Cardiogenesis~~M. ~~Prior to~~B.A. ~~joining~~from ~~Cardiogenesis~~Harvard inBusiness ~~April~~School. ~~1997,~~Based on Ms. ~~Ocampo~~Nevinny’s ~~held~~experience awithin ~~management~~the ~~position~~pharmaceutical inindustry ~~Finance~~and ather ~~Mills-Peninsula~~executive ~~Health~~experience ~~Systems~~at inother ~~Burlingame,~~companies ~~California,~~in ~~and~~the ~~spent~~biotechnology ~~three~~industry, ~~years~~the asBoard anbelieves ~~auditor for Ernst & Young LLP.~~ Ms. ~~Ocampo~~Nevinny ~~graduated with~~has athe ~~Bachelor~~appropriate set of ~~Science~~skills into ~~Accounting~~serve ~~from~~as ~~Seattle University and became~~ a ~~licensed~~member ~~Certified~~of ~~Public~~our ~~Accountant in 1996~~Board.

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

WeExecutive ~~have~~Officers ~~adopted a code of Business Conduct~~ and ~~Ethics~~Key ~~for~~Employees directors, officers (including our principal executive officer, principal financial officer, and principal accounting officer and controller), and employees. This code is available on our website at www.avanir.com. Any waivers from or amendments to the code of ethics will be posted to our website. You may also request a printed copy of our code of ethics, without charge, by writing to us at 20 Enterprise, Suite 200, Aliso Viejo, California 92656, Attn: Investor Relations.

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


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

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

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

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

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

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

Corporate Governance

Code of Business Conduct and Ethics

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

Board of Directors and Committees

Board and Committee Meetings

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

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

Board Leadership Structure and Risk Oversight

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

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

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

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

Board Committees

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

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

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

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

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

Section 16(a) Beneficial Ownership Reporting Compliance

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

Item 11.

Executive Compensation

~~The information required by this item is incorporated by reference to the information under the captions “Executive~~ Compensation” ~~and~~Discussion ~~“Compensation Committee Interlocks~~ and ~~Insider Participation”~~Analysis ~~and “Director Compensation” contained in the Proxy Statement.~~

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

Compensation Philosophy and Objectives

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

•

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

•

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

•

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

•

align executives’ incentives with the creation of stockholder value.

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

Risk Management and Mitigation

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

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

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

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

Roles in Determining Compensation

Compensation Committee

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

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

Compensation Consultant

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

Chief Executive Officer

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

Competitive Market Benchmarking

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


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

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

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

Implementation of Objectives

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

•

Base Salary

•

Annual Bonus Incentive

•

Equity Compensation

•

Employee Benefit Program

Base Salary

Overview

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

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

•

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

•

level of experience and expertise of the executive;

•

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

•

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

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

Changes in Base Salaries for Fiscal 2015

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

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


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

(1)	Effective as of October 1, 2014.

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

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


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

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

Annual Bonus Incentive

Overview

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

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

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

Fiscal 2014 Annual Bonus Incentive Levels for Each Named Executive Officer


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

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


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

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

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

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

Fiscal 2014 Annual Bonus Incentive

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


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

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

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

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

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

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

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

•

Clinical Development Progress (weighting 10.0%)

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

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

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

•

AVP-825 NDA (weighting 7.5%)

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

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

•

Lifecycle Management (weighting 7.5%)

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

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

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

•

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

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

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

•

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

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

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

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

•

Corporate Development Initiatives (weighting 5.0%)

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

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

•

ANDA Resolution (weighting 10.0%)

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

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


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

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

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

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

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

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

Achievement of Goals and Relationship to Compensation Awarded

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

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

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


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

Equity Compensation

Overview

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

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

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

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

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

Equity Awards

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

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

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

Stockownership Guidelines

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

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

Insider Trading Policy Prohibitions and Hedging Policy

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

Employee Benefit Program

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

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

Change of Control Arrangements

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

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

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

Compensation of our Current Named Executive Officers

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

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

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

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

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

Tax and Accounting Considerations

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

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

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

Allocation of Compensation

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

Timing of Compensation Actions

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

Compensation Committee Report

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

Submitted by the Compensation Committee of the Board of Directors

David J. Mazzo, Ph.D., Chairman

Dennis G. Podlesak

Corinne Nevinny

Summary Compensation Table

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


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

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

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

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

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

(2)

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

(3)

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

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

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

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

Grants of Plan-Based Awards

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


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

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

(2)

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

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

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

(5)

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

Outstanding Equity Awards at Fiscal Year-End

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


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

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

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

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

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

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

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

Option Exercises and Stock Vested

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


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

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

Pension Benefits

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

Nonqualified Deferred Compensation

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

Employment, Change of Control and Severance Arrangements

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

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

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

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

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

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

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

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

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

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

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

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


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

Potential Payments upon Termination or Change of Control

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


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

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

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

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

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

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

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

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

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

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


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

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

(2)

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

(3)

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

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

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

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

401(k) Plan

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

Director Compensation

Non-Employee Director Compensation

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


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

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

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

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

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

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


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

(1)

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

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

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

Director Ownership Guidelines

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

Compensation Committee Interlocks and Insider Participation

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

Item 12.

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

~~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.~~

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


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

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