2012: Laying the Foundations – Building for the Future

Dear fellow stockholders,

2012 has been a significant year for Avanir – We are building a sustainable biopharmaceutical business designed to provide innovative new therapies to patients with high unmet need. The first step on this path has been the launch of NUEDEXTA® for the treatment of pseudobulbar affect (PBA). After only 2 years on the market, NUEDEXTA has helped treat tens of thousands of PBA patients and is well on its way to becoming a commercially meaningful product. NUEDEXTA also provides an important platform for us to build the next mid-cap specialty biopharmaceutical company.

Building... value

My goal with this annual review is to highlight the actions we are taking now that I believe will create both near-term and long-term shareholder value through our commitments to...

  • Advancing innovative treatments through scientific excellence
  • Striving for the highest quality, safety and compliance
  • Helping patients with high unmet medical needs
  • Bringing passion to everything we do
  • Maximizing financial performance

Throughout 2012, we made great progress in both our commercial and research and development activities. Looking at our accomplishments over the past year and comparing our current business to where we were in the fall of 2011 is quite remarkable...

On the Commercial Front...

12 months ago, NUEDEXTA had an annualized gross sales run-rate of less than $25 million...

Today, we have an annualized gross sales run-rate of over $70 million with strong continued growth.

12 months ago, we had a sales force of 76 representatives focused primarily on office-based neurology practices...

Today, we have a diversified sales force of 130 representatives promoting NUEDEXTA to neurologists, psychiatrists and geriatricians in both outpatient and institutional settings.

On the clinical front...

12 months ago, we had one recently initiated clinical study...

Today, we have two phase II programs underway assessing AVP-923 (dextromethorphan and quinidine) for the treatment of agitation in Alzheimer's disease and central neuropathic pain in multiple sclerosis. A third program funded by the Michael J. Fox foundation will be initiated shortly to assess AVP-923 for the treatment of levodopa induced dyskinesia in Parkinson's disease. In addition, we now have a new development program of a next generation asset - AVP-786, or deuterium modified dextromethorphan. A phase I study examining the pharmacokinetic profile of AVP-786 in humans is underway. Finally, we are supporting two investigator-initiated studies testing NUEDEXTA in (1) adult autism and (2) speech and swallowing in patients with ALS (Lou Gehrig's disease).

On the regulatory front...

12 months ago we had only just submitted our marketing authorization application to the European Medicines Agency...

Today, we are a few short months away from an opinion on our application.

These foundations firmly set us up for future success.

Building... the most experienced institutional sales force

During fiscal 2012 we created the infrastructure to promote NUEDEXTA to health care providers practicing in skilled nursing facilities. As of the writing of this letter, we now have approximately 80 full time equivalent sales representatives focused on the institutional setting. We are very encouraged by the adoption of NUEDEXTA in the institutional setting so early in the launch phase. Prescriptions from this segment now account for over half of our business and we believe that significant opportunity remains with between 100,000 and 300,000 residents in skilled nursing facilities suffering from PBA. We are excited about our recent expansion in the institutional setting and firmly believe that we are uniquely positioned with one of the largest and most capable institutional sales forces in the US. We expect to realize the full impact of this expanded sales force during calendar 2013.

Building... a leading CNS platform

Throughout fiscal 2012, we saw steady pipeline progress, including data presentations, regulatory submissions and clinical trial initiations.

We have a number of potential indications that we believe our CNS platform can address. The results from the trials in the following areas are expected to be near- and mid-term catalysts for our business.

  • Agitation in Alzheimer's disease
  • Central neuropathic pain in multiple sclerosis
  • Levodopa induced dyskinesia in Parkinson's disease
  • Autism
  • Speech & Swallowing in ALS

Of particular note...

First, we were very pleased to initiate a study of agitation in patients with Alzheimer's disease. This was a significant accomplishment by the team and we are extremely excited to conduct a study in this area of tremendous unmet medical need. There are an estimated 5 million Americans with Alzheimer's disease, a number that is expected to be as high as 16 million by 2050. 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 progresses the risk of such complications approaches 100%. Dementia-related behavioral symptoms, including agitation, can be extremely distressing to the individual, the family, and caregivers. Behavioral disturbances are associated with more rapid cognitive decline, institutionalization, and increased caregiver burden. With no approved treatments specifically for agitation in patients with Alzheimer's disease, this remains an area of great unmet medical need.

Second, in October 2012 the Michael J. Fox Foundation awarded the company a grant to evaluate the safety and efficacy of AVP-923 for the treatment of levodopa induced dyskinesia in Parkinson's disease. Levodopa is a standard of care drug for Parkinson's disease that with chronic use may cause uncontrollable movements in most patients. We anticipate that we will enroll the first patient during the first quarter of calendar 2013 with top-line data being available in the first half of calendar 2014.

Finally, we are very excited about the potential of the AVP-786 or deuterium-modified dextromethorphan program. We believe this technology platform will enable delivery of therapeutically effective levels of dextromethorphan, with a reduced need or even elimination of a co-administered enzyme inhibitor such as quinidine. As part of our portfolio strategy, we intend to explore the utility of AVP-786 in several neurological and psychiatric disorders. In November 2012 we announced that we had initiated a first in-human Phase I trial of AVP-786 and expect top-line study results will be available in the first quarter of calendar 2013

I am encouraged by the depth and breadth of our current pipeline and believe it positions us well for the future.

Building... the next leading mid-cap biopharmaceutical company

I am excited about what 2013 holds in store for Avanir. I believe we have the right team, resources and strategy to continue to build upon the accomplishments of the last twelve months.

Our corporate objectives for 2013 are as follows:

  • Continue to build the PBA market and increase NUEDEXTA sales
  • Further develop AVP-923 and AVP-786 for new clinical opportunities
  • Advance the European regulatory process for NUEDEXTA in PBA
  • Actively manage our cash position and expenses

I'd like to thank all of our staff for their dedication and hard work over the past year in making all of the above possible. We have made significant progress across all aspects of our business during this fiscal year, and it's through their efforts and dedication that we're able to deliver important new therapies for patients and ultimately deliver value to our shareholders.

In closing, I firmly believe that Avanir is well on its way to becoming the next leading mid-cap specialty biopharmaceutical company. We have a rare combination of an FDA-approved product that provides significant benefits for patients with PBA, that can generate meaningful cash flows, a significant number of additional development opportunities, and a commercial and R&D infrastructure that allows us to capitalize on all of these opportunities.

I remain confident that we are taking the right actions to create value for you, our shareholders. Thank you for your continued trust in us. We respect it, and with resolve and perseverance, we will continue to earn it, every day.

Sincerely,

Keith A. Katkin

President and Chief Executive Officer

December 2012

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