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AVANIR Pharmaceuticals (NASDAQ:AVNR)

F4Q07 (Qtr End 10/30/07) Earnings Call

December 11, 2007 11.00 AM ET

Executives

Brenda Mullen – Investor Relations

Keith Katkin - President and Chief Executive Officer

Randall Kaye, M.D. - Chief Medical Officer

Martin Sturgeon - Interim Chief Financial Officer

Analysts

Jason Butler - Rodman and Renshaw

Operator

Good morning. My name is Bobby-Jo and I will be your conference operator today. At this time I would like to welcome everyone to the AVANIR Pharmaceuticals fourth quarter conference call. (Operator Instructions) Ms Mullen you may begin your conference.

Brenda Mullen

Thank you, and good morning, everyone. Joining me today on this conference call is Keith Katkin, President and Chief Executive Officer; Dr. Randall Kaye, Chief Medical Officer; and Martin Sturgeon, Interim Chief Financial Officer. I'll begin the call by addressing our forward-looking statements. Following this, I'll turn the call over to Keith Katkin. As a reminder, the statements made in this call represent our judgment as of today, December 11th, 2007. Our remarks and responses to questions during this conference call may constitute forward-looking statements including plans, expectations, and financial projections, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause actual results to differ materially from these statements. These forward-looking statements include, among others, statements about our expectations for the continued development of Zenvia and the likelihood of success in obtaining FDA approval, as well as statements regarding anticipated expenditure levels and future cash balances.

We encourage you to take the time to review our recent filings with the Securities and Exchange Commission which present these matters in more detail as well as related risk factors. AVANIR does not undertake any obligation to update any forward-looking statements made during this call.

Now, I will turn the call over to Keith Katkin.

Keith Katkin

Thank you Brenda. Good morning everyone and thank you for joining us on the fourth quarter earnings call. I will begin today’s discussion with the brief business overview and then I will turn the call over to Marty Sturgeon who will discuss our financial results, followed by Dr Randall Kaye who will provide a clinical update on the Zenvia development programs.

2007 has been a year of focus and realignment at AVANIR as we continue our transformation into a specialty pharmaceutical company focused on developing treatments for central nervous system disorders. The fiscal fourth quarter marked a turning point as we accelerated that transformation. We have now completed our restructuring, brought our cash burn in line, strengthened our balance sheet and most importantly advanced the clinical development of our promising drug candidate Zenvia for the treatment of pseudobulbar affect (NYSE:PBA) and the treatment of diabetic peripheral neuropathic (DPN) pain.

We are exceptionally pleased that we have enrolled the first patient into the confirmatory Phase III study known as the STAR trial, evaluating Zenvia as a treatment for patients with PBA. On time initiation of the STAR trial keeps us on track to complete patient enrollment within the next 15 - 18 months and report top line data in the second half of 2009. Initiation of the STAR trial represents a major milestone in the development of Zenvia.

In October, we received a special protocol assessment (NYSE:SPA) from the Food and Drug Administration covering the design of the STAR trial. Receipt of the SPA provides us a clear regulatory path to approval. In preparation for the STAR trial we reformulated Zenvia to include a lower dose of the quinidine component. We expect that the new lower dose formulation of Zenvia tested in the STAR trial will address the safety concerns raised in the FDA approval letter while continuing to demonstrate significant efficacy.

Regarding our DPN pain program, in November we announced our plans to conduct a formal pharmacokinetic (PK) study. The objective of the formal PK study is to evaluate alternative lower quinidine dose formulations of Zenvia designed to improve the safety profile while providing similar efficacy to the doses tested in our first successful Phase III study for DPN pain.

While we have not received specific direction from the anesthesia division of the FDA to reduce the quinidine dose, we feel it likely that they will have similar cardiovascular risk concerns as the neurology division evaluating the PBA program. Therefore, we feel it is a prudent next step to develop alternative formulations in preparation for our next Phase III trial in patients with DPN pain. Dr Kaye will discuss the study in greater detail during his remarks.

Turning now to progress on the intellectual property front we were very excited to announce that the recently received official notification from the European Patent Office (EPO) that they have issued a notice of allowance for our pending patent application that will extend the coverage of Zenvia in Europe until 2023. This new patent will provide significantly longer period of commercial exclusivity for Zenvia in Europe covering our development programs in both PBA and DPN pain. The patent will cover the use of pharmaceutical compositions and will extend the available dose ranges under prior patent protection.

Importantly, we have a similar patent application pending with the US Patent and Trademark Office. Based on the allowance of the European patent application, we are optimistic about receiving a favorable response in the US as well. We expect the EPO to issue the new Zenvia patent in early 2008 after completion of the final administrative requirements.

As I mentioned earlier, the fiscal fourth quarter saw the completion of our strategic initiatives to align our resources behind Zenvia, the asset offering the greatest opportunity for shareholder value creation. During the quarter we completed the restructuring of the organization by dramatically reducing our overall headcount while enhancing our clinical development team, discontinuing our drug discovery operations and subleasing the San Diego laboratory facility.

We also completed the sale of FazaClo and the associated commercial support infrastructure to Azur Pharmaceuticals for upfront payments of $42 million plus an additional $1.9 million in working capital adjustments and potential total payments of up to $54 million which has the dual benefit of improving our cash position while simultaneously lowering our headcount and cash burn. As a result of these changes, including costs for both of our Phase III trials for PBA, and the formal PK study for DPN pain, our estimated net annual cash burn rate for fiscal 2008 will be between $25 and $27 million. Therefore we expect that our cash on hand will be adequate to fund continuing operations through fiscal 2008.

With those comments, I would now like to turn the call over to Marty Sturgeon for a review of the fiscal 2007 fourth quarter and full year financial results.

Martin Sturgeon

Thank you Keith. My comments today will cover the financial results for the fiscal fourth quarter and fiscal year ended September 30th 2007. In addition to the results summarized in the press release issued earlier today, you will be able to find more information in our annual report on form 10-K that we expect to file with the Securities and Exchange Commission within the next week.

As a preliminary note, we have accounted for the sale of our FazaClo business as discontinued operations and accordingly, I have retrospectively adjusted prior period financial results to reflect this accounting treatment. Therefore, all numbers discussed on this call will exclude revenues and expenses relating to the FazaClo business unless specifically identified. Additionally, the full year financial results reflect the net impact of our restated quarterly filing.

I will begin with the results of our most recently completed fiscal fourth quarter. Total quarterly revenues were $2.9 million for the fourth quarter in fiscal 2007 and consisted primarily of Abreva royalties and government grant revenue. Revenues for the fourth quarter of fiscal 2006 totaled $2.2 million and consisted primarily of research services and Abreva royalties.

Total operating expenses for the fourth quarter of fiscal 2007 were $2.7 million compared to $16.2 million in the same period a year ago. The components are as follows: R&D expenses for the fourth quarter of fiscal 2007 were $188,000, a significant decrease from R&D expenses of $5.8 million for the fourth quarter 2006. This included a reduction of expenses due to lower than estimated final costs on previous clinical studies. Selling, general and administrative expenses also experienced a significant decrease from $10.4 million a year ago to $2.6 million in the fourth quarter of fiscal 2007.

The net profit for the fourth quarter of fiscal 2007 was $12.1 million or $0.28 per share compared to a net loss of $22.2 million or $0.70 per share for the same period a year ago. Net profit in Q4 of 2007 also includes $12 million in income from the discontinued operations of our FazaClo business. The weighted average number of shares outstanding during the fourth quarter of this year was 43.1 million shares compared to 31.5 million shares during the same period last year.

Now turning to the full fiscal year results for 2007 and 2006; total annual revenues for 2007 were $9.2 million composed primarily of $3.3 million in research services, $4.3 million from the sale of Abreva royalty rights and $1.6 million in license agreements. This compares with 2006 revenues of $15.2 million composed primarily of $8.1 million in research services, $1.9 million from the sale of Abreva royalty rights and $5.2 million in license agreements.

Total operating expenses for fiscal year 2007 were $34.5 million compared to $59.4 million for fiscal 2006. The breakdown is as follows: R&D expenses for fiscal year 2007 were $13.1 million compared to $27 million for the prior year. This decrease is attributed to decreased costs for Zenvia product research and development. Selling, general and administrative expenses for fiscal 2007 were $21.4 million compared to $32.4 million the year earlier. This decrease of $11 million is attributed to fiscal year 2006 pre-launch expenditures for Zenvia that were not repeated in fiscal 2007 due to receipt of the FDA approvable letter and due to significant reductions in overhead expenses throughout fiscal 2007.

The net loss for fiscal 2007 was $20.9 million or $0.53 per share. This includes income from discontinued operations of $7.4 million or $0.19 per share related to the discontinued operations of our FazaClo business. This compares with a net loss of $62.6 million or $2.04 per share for the prior year. The waited average number of shares of common stock outstanding for the 2007 fiscal year was 39.6 million shares compared with 30.6 million for the prior year.

As for the comparative balance sheets, we finished the year with total cash of $33.6 million. This includes cash and cash equivalents of $30.5 million, investments of $1.9 million, and restricted funds of $1.2 million. This an $8.9 million increase in our total cash balance from prior year end.

Our total liabilities as of September 30th 2007 were $32.1 million, down from $77.1 million at prior year end, resulting in a $45 million reduction. Our balance sheet composition has changed dramatically from last year.

Right now we are a very liquid company with a current ratio of 6.5 compared to 0.8 at prior year end. As you can see, our financial position has improved year over year and we are now well poised to deliver on our stated corporate objectives.

We have eliminated all non-essential operating activity, converted the majority of our long-term assets to current assets, and dramatically reduced our headcount to what we believe will be the optimum level required to accomplish our goals. I would now like to turn the call over to Dr Randall Kaye to provide an update on our clinical programs.

Dr Randall Kaye

Thanks Marty, and good morning everyone. As Keith described 2007 has been a year of focus, and realignment. After receiving the approval letter in late 2006 the clinical team focused on the advancement of our promising drug candidate Zenvia.

We assembled a team of individuals who were considered to be the top leaders in their respective fields and we then told investors that we hope to meet with the FDA and determine a clear path forward for obtaining marketing approval for Zenvia.

After nearly a year of focused effort we announced in October that we have reached a definitive agreement with the US Food and Drug Administration under the special protocol assessment process on the design of the single, confirmatory day street clinical trial of Zenvia, for the treatment of patients with pseudobulbar affect.

Just two months after receiving the SPA we are now pleased to announce that we have successfully initiated the STAR trial and have enrolled our first patient. The STAR trial will enroll 270 patients with underlying multiple sclerosis or ALS, who exhibit signs and symptoms of PBA at approximately 50 sites in the US and Latin America.

The primary efficacy analysis will be based on the changes in crying and laughing episode rates. These are recorded in patient diaries. The secondary endpoints for this clinical trial will also include the Center for Neurologic Study-Lability Scale or the CNS-LS score, a neuropsychiatric inventory questionnaire, a SF-36 health survey which assesses health outcomes, the Beck Depression Inventory and a pain rating scale and this will be done in patients with MS only.

Safety and tolerability of Zenvia will be determined by reporting adverse events, physical exams, vital signs, EKGs, respiratory function tests, and a clinical assessment of the clinical laboratory variables.

The initiation of the STAR trial represents a very important milestone for the greater than one million Americans that are thought to suffer from the debilitating episodes of PBA. With no currently approved treatment options available the STAR trial is an essential step towards making Zenvia available to patients with PBA.

Now moving on to our DPN pain program, in April of 2007 we are pleased to announce the successful top line results from our pivotal Phase III trial in patients with DPN pain. Both doses of Zenvia achieved the primary endpoint of the trial which was based on the daily diary entries for the pain rating scale.

In light of the positive Phase III results in the first DPA pain study, it is important to consider the current regulatory environment as we develop and submit a second study protocol to the FDA. In this submission we believe that we will need to address a number of issues including the dose of quinidine, the length of therapy, primary and secondary endpoints as well as inclusion exclusion criteria.

In order to have a meaningful dialogue with the FDA in these subjects we made the decision to initiate a formal PK study to assess alternative lower dose quinidine formulations of Zenvia for DPN pain. These are intended to deliver similar efficacy but improved safety and tolerability verses the formulations that were previously tested for this indication.

We’re pleased to announce today that the first cohorts, or the first group of subjects have already been dosed in this study and we expect to have top line PK and safety data available by mid 2008.

In summary we continue to make outstanding progress with our Zenvia development programs and we remain committed to making Zenvia available to patients as quickly and as safely as possible.

Thanks for your attention and I’d like to turn the call back to Keith now.

Keith Katkin

Thanks Randal, and before we move to questions I would just like to make a few closing comments. 2007 was a year of transition. We successfully realigned our resources around Zenvia and put the organization on a course for success. We committed to define a regulatory path forward for Zenvia in PBA and we received a special protocol assessment.

We committed to enroll patients before the end of the calendar year and we enrolled our first patient only two months after receiving the SPA from the FDA. We committed to moving forward with Zenvia and DPN pain. We’ve already initiated a large formal PK study to evaluate the alternative formulations for Zenvia and DPN pain.

We look forward to 2008 as we make progress with enrollment of the STAR trial and PBA, announce PK study results in support of the DPN pain programs and continue to make progress on the intellectual property and business development fronts.

With that I would like turn the call back over to the operator to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jason Butler

Jason Butler

Thanks for taking the question. I was just wondering if you could give me an idea of the burn rate going through 2008.

Keith Katkin

Sure. Hi Jason, it’s Keith. Good morning. For 2008 we’re projecting an operating cash burn between $25 and $27 million. So that would be inclusive of the cost of doing our PBA study as well as the cost of the formal PK study associated with the DPN pain program.

Operator

And your next question comes from the line of [Jim McKinnon]

Unidentified Analyst

I’m frustrated without how slow things are going. I know much of the slowness is a result of the decisions made by your predecessor but the normal time frame for the PBA study seems to be very, very [concerning]. Given the interest that these groups have in this treatment, shouldn’t that happen much more quickly?

Keith Katkin

Thanks for the question Jim. I think it’s important to look at our previous clinical studies in terms of the amount of time they took to enroll. So the previous study in ALS which enrolled approximately 140 patients and the previous study in MS which enrolled approximately 150 patients, both of those studies took between 15 and 18 months to enroll so in putting out our current estimated timeline we believe that this study is obviously much larger than either of those studies but we are still going to deliver the study results under the same timeline of 15 to 18 months.

Additionally there are other trials in ALS which are currently going on which are obviously competing for the same patients that we’re competing for, but we’ve got an excellent clinical team in place now with a lot of clinical trial experience so we’re confident that we could deliver on that 15 to 18 month timeline.

Randall, I’m not sure if you want to add any additional comments?

Dr Randall Kaye

No, just to add there are a number of activities that we’re doing, have been involved in to make sure that we do the best that we can to meet those numbers and where possible try to beat those expectations, trial awareness programs, a very concerted, focused effort on the individual sites. We just recently conducted our investigator meeting and the investigators are very, very excited and they’re committed for this program.

Unidentified Analyst

This is a follow up. Now that you have the favorable Phase III results, it would seem to me that there would be people clamoring to get this. I mean certainly an EMS where the pain issue would be a benefit to them. You would think there would be people lining up outside the door as soon as they hear about it.

Keith Katkin

But we haven’t seen people lined up outside our door of our offices but I can tell you that getting a study started just two months after our receiving an SPA gives the sense of the excitement that’s out there.

Unidentified Analyst

So you’re hoping to do better and working to do better but you feel comfortable with the guidance that you’ve given.

Keith Katkin

Exactly.

Unidentified Analyst

Okay, thank you.

Operator

(Operator Instructions) At this time there are no further questions.

Great, thank you for joining us on the fourth quarter earnings call and we look forward to providing continued updates over the next year.

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