1.	Description of Business and Basis of Presentation

Description of Business

Avanir Pharmaceuticals, Inc. and subsidiaries (“Avanir”, the “Company” or “we”) is a biopharmaceutical company focused on acquiring, developing and commercializing novel therapeutic products for the treatment of central nervous system disorders. The Company’s lead product NUEDEXTA^® (referred to as AVP-923 during clinical development) is a first-in-class dual N-methyl-D-aspartate (“NMDA”) receptor antagonist and sigma-1 agonist. NUEDEXTA, 20/10 mg, was approved in the United States in October 2010 for the treatment of pseudobulbar affect (“PBA”). It is also approved for the treatment of PBA in the European Union in two dose strengths, NUEDEXTA 20/10 mg and NUEDEXTA 30/10 mg.

The Company is studying the clinical utility of AVP-923 in other mood/behavior disorders, movement disorders and pain. The Company has 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, the Company 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. The Company believes that a higher than expected placebo response negatively impacted the study results. AVP-923 was generally safe and well tolerated in the study.

The Company is also developing AVP-786, a next generation drug product containing deuterium-modified dextromethorphan and quinidine for the treatment of neurologic and psychiatric disorders. The Company completed a pharmacokinetic study with AVP-786, and based on this data, the Company believes that it has 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.

The Company is 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 AS (“OptiNose”). Under the terms of the agreement, the Company assumed responsibility for regulatory, manufacturing, supply-chain and commercialization activities for the investigational product. Both parties will work together on the remaining activities in support of the New Drug Application (“NDA”) submission. The Company has begun preparing the NDA and expects to file the application with the FDA in the first quarter of calendar 2014.

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. 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. See Note 11, “Research, License, Supply and other Agreements.”

In addition to the Company’s focus on products for the central nervous system, the Company also has partnered programs in other therapeutic areas which may generate future revenue. The Company’s 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.

The Company’s operations are subject to certain risks and uncertainties frequently encountered by companies in the early stages of operations, particularly in the evolving market for small biotech and specialty pharmaceutical companies. Such risks and uncertainties include, but are not limited to, the occurrence of adverse safety events with NUEDEXTA; that NUEDEXTA may not gain broader acceptance by the medical field or that the indicated use may not be clearly understood; the Company’s dependence on third parties for manufacturing and distribution of NUEDEXTA; that the Company may not adequately build or maintain the necessary sales, marketing, supply chain management and reimbursement capabilities on its own or enter into arrangements with third parties to perform these functions in a timely manner or on acceptable terms; the ability to successfully protect and enforce its intellectual property rights relating to NUEDEXTA; timing and uncertainty of achieving milestones in clinical trials; obtaining approvals by the FDA, European Medicines Agency (“EMA”) and regulatory agencies in other countries; and potential regulatory delays or rejections in the filing or acceptance of an NDA. The Company’s ability to generate revenues in the future may depend on market acceptance of NUEDEXTA for the treatment of PBA, pricing and reimbursement in European countries, the ability to obtain a partner to market NUEDEXTA in the EU, commercial market estimates and related revenue projections for AVP-825 and the timing and success of reaching clinical development milestones and obtaining regulatory approvals for other formulations and indications for AVP-923 and AVP-786. The Company’s cash expenditures depend substantially on the level of expenditures for the ongoing marketing of NUEDEXTA, clinical development activities for AVP-923 and AVP-786, milestone payments related to AVP-786 and AVP-825 and regulatory activities for AVP-825.

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

Basis of presentation

The consolidated financial statements include the accounts of Avanir Pharmaceuticals, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. The Company’s fiscal year ends on September 30 of each year. The years ended September 30, 2013, 2012, and 2011 are herein referred to as fiscal 2013, fiscal 2012 and fiscal 2011, respectively.

The Company has evaluated subsequent events through the filing date of this Form 10-K, and determined that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto other than as discussed in the accompanying notes. See Note 15, “Subsequent Events” and Note 9, “Commitments and Contingencies – Legal Contingencies.”

Reclassifications

Sales, general and administrative expenses for fiscal 2012 and 2011 are now reported under two separate captions, sales and marketing and general and administrative expenses, in the accompanying consolidated statement of operations in order to conform to the current period presentation.