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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

¨	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. 0-16614

PONIARD PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)

Washington

91-1261311

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

750 Battery Street, Suite 330, San Francisco, CA 94111

(Address of principal executive offices)

Registrant’s telephone number, including area code: (650) 583-3774

(Former Name, Former Address and Former Fiscal Year, if Changed Since the Last Report)

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 x 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

As of October 25, 2011, 59,969,271 shares of the registrant’s common stock, $0.02 par value per share, were outstanding.

TABLE OF CONTENTS

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2011


		PAGE
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010 (Note 1)	3

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)	5

	Notes to Condensed Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 6.	Exhibits	35

Signatures		36

Exhibit Index		37

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

PONIARD PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	September 30, 2011			December 31, 2010
	(Unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	1,984		$	1,284
Cash—restricted		22			158
Investment securities		0			3,046
Prepaid expenses and other current assets		246			729

Total current assets		2,252			5,217
Facilities and equipment, net of depreciation of $701 and $745 at September 30, 2011 and December 31, 2010, respectively		18			49
Licensed products, net of amortization of $6,534 and $5,623 at September 30, 2011 and December 31, 2010, respectively		5,466			6,377

Total assets	$	7,736		$	11,643

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	1,483		$	392
Accrued liabilities		1,496			1,224

Total current liabilities		2,979			1,616

Long-term liabilities:
Capital lease obligations, noncurrent portion		1,640			1,574

Total long-term liabilities		1,640			1,574

Commitments and contingencies

Shareholders’ equity:
Preferred stock, $0.02 par value, 2,998,425 shares authorized: Convertible preferred stock, Series 1, 78,768 shares issued and outstanding as of September 30, 2011 and December 31, 2010 (entitled in liquidation to $2,033 and $1,985, respectively)		2			2
Common stock, $0.02 par value, 200,000,000 shares authorized: 59,944,271 and 48,547,896 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively		1,199			971
Additional paid-in capital		451,878			446,415
Other comprehensive income		0			8
Accumulated deficit		(449,962	)		(438,943	)

Total shareholders’ equity		3,117			8,453

Total liabilities and shareholders’ equity	$	7,736		$	11,643

See notes to the condensed consolidated financial statements.

PONIARD PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Operating expenses:
Research and development	$	287		$	891		$	1,062		$	7,870
General and administrative		3,461			5,060			9,756			13,747
Restructuring		0			0			0			1,626

Total operating expenses		3,748			5,951			10,818			23,243

Loss from operations		(3,748	)		(5,951	)		(10,818	)		(23,243	)

Other (expense) income:
Interest expense		(23	)		(516	)		(70	)		(1,744	)
Interest income and other, net		0			18			13			103

Total other (expense) income, net		(23	)		(498	)		(57	)		(1,641	)

Net loss		(3,771	)		(6,449	)		(10,875	)		(24,884	)
Preferred stock dividends		(48	)		(48	)		(144	)		(118	)
Preferred stock dividends, in-kind		0			0			0			(570	)

Net loss applicable to common shareholders	$	(3,819	)	$	(6,497	)	$	(11,019	)	$	(25,572	)

Net loss per share applicable to common shareholders – basic and diluted	$	(0.06	)	$	(0.13	)	$	(0.20	)	$	(0.55	)

Weighted average common shares outstanding – basic and diluted		59,934			48,237			54,506			46,357

See notes to the condensed consolidated financial statements.

PONIARD PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	Nine Months Ended September 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(10,875	)	$	(24,884	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		951			989
Amortization of discount on note payable		0			820
Gain realized on sale of investment securities		(8	)		0
Accretion of premium on investment securities		14			390
Loss on disposal of facilities and equipment		0			58
Restructuring		0			321
Decrease in restricted cash for operating lease		136			0
Interest accrued on capital lease obligation		66			66
Share-based compensation issued for services		(12	)		369
Share-based employee compensation		2,519			6,998
Change in operating assets and liabilities:
Prepaid expenses and other assets		483			(25	)
Accounts payable		1,091			730
Accrued liabilities		224			(5,062	)

Net cash used in operating activities		(5,411	)		(19,230	)

Cash flows from investing activities:
Proceeds from maturities of investment securities		3,032			22,089
Purchases of investment securities		0			(7,322	)
Facilities and equipment purchases		(9	)		(7	)
Proceeds from disposals of equipment and facilities		0			58

Net cash provided by investing activities		3,023			14,818

Cash flows from financing activities:
Repayment of principal on note payable		0			(6,589	)
Repayment of capital lease obligation		0			(38	)
Decrease in restricted cash		0			123
Net proceeds from issuance of common stock		3,184			6,092
Payment of preferred dividends		(96	)		(96	)

Net cash provided by (used in) financing activities		3,088			(508	)

Net increase (decrease) in cash and cash equivalents		700			(4,920	)
Cash and cash equivalents:
Beginning of period		1,284			15,938

End of period	$	1,984		$	11,018

Supplemental disclosure of non-cash financing activities:
Accrual of preferred dividends	$	144		$	118
Preferred stock dividends, in-kind		0			570
Supplemental disclosure of cash paid during the period for:
Interest	$	0		$	897

See notes to the condensed consolidated financial statements.

PONIARD PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Business Overview and Summary of Significant Accounting Policies

Overview

Poniard Pharmaceuticals, Inc. is a biopharmaceutical company focused on the development and commercialization of cancer therapeutics. The Company’s lead product candidate is picoplatin, a chemotherapeutic designed to treat solid tumors that are resistant to existing platinum-based cancer therapies. Clinical studies to date suggest that picoplatin has an improved safety profile relative to existing platinum-based cancer therapies. The Company has completed a pivotal Phase 3 SPEAR (Study of Picoplatin Efficacy After Relapse) trial of picoplatin in the second-line treatment of patients with small cell lung cancer. This trial did not meet its primary endpoint of overall survival. The Company also has completed Phase 2 trials evaluating picoplatin as a first-line treatment of metastatic colorectal cancer and castration-resistant (hormone-refractory) prostate cancer and a Phase 1 study evaluating an oral formulation of picoplatin in solid tumors.

The accompanying condensed consolidated financial statements include the accounts of Poniard Pharmaceuticals, Inc. (“Poniard”) and its wholly-owned subsidiaries, NeoRx Manufacturing Group, Inc. and FV Acquisition Corp. (collectively, the “Company”). All intercompany balances and transactions have been eliminated.

Basis of Presentation

The accompanying condensed consolidated financial statements contained herein have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, the accompanying interim unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company’s financial position as of September 30, 2011, results of operations for the three and nine months ended September 30, 2011 and 2010, and cash flows for the nine months ended September 30, 2011 and 2010.

The results of operations for the periods ended September 30, 2011, are not necessarily indicative of the expected operating results for the full year.

The balance sheet as of December 31, 2010 has been derived from the audited financial statements at that date. The balance sheet presented herein does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 30, 2011, and available on the SEC’s website, www.sec.gov.

Merger Agreement with Allozyne, Inc.

On June 22, 2011, Poniard, FV Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Poniard (“Merger Sub”), and Allozyne, Inc., a private Delaware corporation (“Allozyne”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”). Under the terms of the Merger Agreement, which was approved by the boards of directors of Poniard and Allozyne, Merger Sub will merge with and into Allozyne, with Allozyne becoming a wholly-owned subsidiary of Poniard and the surviving corporation of the merger. The merger is expected to create a Nasdaq-listed biotechnology company focused on the development and commercialization of therapeutics in the area of autoimmune and inflammatory disease and cancer. The combined company expects to seek a partnership for the continued development of picoplatin. The resulting company will be named Allozyne, Inc. and will be headquartered in Seattle, Washington.

PONIARD PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

securities convertible into capital stock. Each share of Allozyne common stock and Allozyne preferred stock is expected to convert into the right to receive that number of shares of Company common stock equal to approximately 0.0610 after giving effect to a 1-for-40 reverse stock split of Company common stock to be implemented subject to approval by the Company’s shareholders and prior to the consummation of the merger. The actual number of shares of Company common stock to be issued in respect of each share of Allozyne common stock or preferred stock will be adjusted to reflect the Company’s and Allozyne’s net debt and net cash, respectively, and certain permitted financings completed prior to the closing of the merger, divided by the number of shares of Allozyne common stock and Allozyne preferred stock outstanding and deemed outstanding pursuant to the formula set forth in the Merger Agreement.

Consummation of the merger is subject to certain closing conditions, including, among other things, approval by the shareholders of the Company and Allozyne and approval for listing of the common shares of the combined company on The Nasdaq Capital Market. As a condition to the parties entering into the Merger Agreement, certain of Allozyne’s stockholders who in the aggregate beneficially own approximately 65% of the outstanding shares of Allozyne capital stock, and certain of the Company’s shareholders who in the aggregate beneficially own approximately 21% of the outstanding shares of Company common stock, entered into shareholder agreements, whereby they have agreed to vote in favor of the transactions contemplated by the Merger Agreement and against any competing acquisition proposal, subject to the terms of the shareholder agreements. In addition, subject to certain limited exceptions, such Allozyne and Company shareholders also have agreed not to sell or transfer their shares of Allozyne capital stock or Company common stock, including shares of Company common stock received in the merger or issuable upon exercise of Company options or warrants, until the earlier of the termination of the Merger Agreement or six months after the effective time of the merger.

The Merger Agreement contains certain termination rights for both the Company and Allozyne, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee of $1,000,000.

In addition, in connection with the merger, the employment of all of the Company’s current executive officers will be terminated prior to the consummation of the merger. The executive officers of Allozyne will assume their respective positions in the combined company following the closing of the merger. The combined company’s board of directors is expected to consist of a total of seven members, four of whom are currently directors of Allozyne, two of whom are currently directors of the Company (Ronald A. Martell and Fred B. Craves, Ph.D.), and one director to be appointed by a majority of the members of the board of directors of the combined company.

On July 25, 2011, the Company filed its Registration Statement on Form S-4 (No. 333-175778) (the “Registration Statement”) with the SEC in connection with the proposed merger. The SEC declared the Company’s Registration Statement effective on October 7, 2011.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Liquidity and Financial Resources

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for a reasonable period of time. The Company has historically experienced recurring operating losses and negative cash flows from operations. As of September 30, 2011, the Company had negative working capital of $727,000, an accumulated deficit of $449,962,000 and total shareholders’ equity of $3,117,000. The Company’s total cash and cash equivalent balances, excluding restricted cash of $22,000, was $1,984,000 at September 30, 2011. The Company has financed its operations to date primarily through the sale

PONIARD PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

of equity securities, borrowings under debt instruments, and through technology licensing and collaborative agreements. The Company invests any excess cash in investment securities to fund future operating costs. Cash used for operating activities for the nine months ended September 30, 2011 totaled $5,411,000.

Concurrent with execution of the Merger Agreement discussed above, Bay City Capital LLC (“BCC”), a related party, executed a binding commitment to loan the Company $2,400,000, on a nonrecourse basis, prior to the closing of the merger. Two Company directors, Fred B. Craves, Ph.D. and Carl S. Goldfischer M.D., are managing directors and managers of BCC and its affiliates. Michael S. Perry, D.V.M., Ph.D., the Company’s President and Chief Medical Officer, is a venture partner of BCC. The Company’s receipt of the loan funds is a condition to Allozyne’s obligation to effect the merger. The Company intends to use the loan proceeds to satisfy the employee severance, change of control and other related employee obligations arising in connection with the merger with Allozyne, which are expected to total approximately $2,400,000. The Company paid BCC a commitment fee of $50,000 in connection with BCC’s delivery of its binding commitment on June 22, 2011. The commitment fee is recorded as an issuance cost and will be amortized over the term of the loan. See Note 5 below for further details about the BCC loan.

In February 2011, the Company sold an aggregate of 9,444,116 shares of its common stock to Small Cap Biotech Value, Ltd. (“Small Cap Biotech”), pursuant to two draw downs under an equity line of credit facility dated December 20, 2010, described further in Note 6 below. Net proceeds of approximately $3,184,000 were received after deducting offering costs of approximately $274,000.

During the first half of 2010, the Company implemented two restructurings that reduced its workforce from 50 employees to 12 employees. On March 24, 2010, the Company announced that it was suspending its effort to seek regulatory approval for picoplatin in small cell lung cancer. The Company made this decision following a detailed analysis of primary and updated data from its Phase 3 trial and evaluation of the New Drug Application (“NDA”) process with the U.S. Food and Drug Administration (“FDA”). The Company subsequently has focused its efforts on developing registration strategies for advancing picoplatin into pivotal clinical trials in colorectal, prostate, ovarian and small cell lung cancers and exploring partnering and other transactions to enable execution of these strategies. In March 2010, the Company engaged the investment banking firm of Leerink Swann LLC to conduct a comprehensive review of strategic alternatives aimed at supporting and optimizing the value of its picoplatin program to its shareholders. The Company has completed internal preparation of potential registration strategies and is conducting stability studies of its picoplatin supplies and maintaining active investigational new drug applications (“INDs”) in the U.S. and IND equivalents in China and in Europe to preserve its picoplatin clinical program. However, the Company is not conducting significant picoplatin development activities while it explores potential picoplatin partnering opportunities and works to complete the proposed merger with Allozyne.

The Company will require substantial additional capital to support its future operations and the continued development of picoplatin. The Company may not be able to obtain required additional capital and/or enter into strategic transactions on a timely basis, on terms that ultimately prove favorable to it, or at all. Conditions in the capital markets in general, and in the life science capital markets specifically, may affect the Company’s potential financing sources and opportunities for strategic transactions. Uncertainty about current global conditions and the current financial uncertainties affecting capital and credit markets may make it particularly difficult for the Company to obtain capital market financing or credit on favorable terms, if at all, or to attract potential partners or enter into other strategic relationships. In addition, the Company has no assurance that any strategic transaction or financing would, once identified, be approved by its shareholders, if approval is required. The Company anticipates that any such transaction would be time-consuming and may require it to incur significant additional costs, even if not completed. The Company’s current financial condition may make securing additional capital extremely difficult. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

The Company believes that its current cash resources and cash equivalents will be adequate to continue operations at substantially their current level into the fourth quarter of 2011. The Company’s operating budget, however, does not include additional costs associated with the proposed merger with Allozyne or, if the Company is

PONIARD PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

unable to complete the proposed merger, the costs of a liquidation and winding up the Company. These costs may be substantial and include costs incurred in connection with the proposed merger, estimated to total approximately $1,550,000, in addition to severance and accrued vacation expense, accelerated payments due under existing contracts, and legal, accounting and/or advisory fees. The Company can provide no assurance that it will have sufficient cash to cover these additional costs.

If the merger with Allozyne is not completed, the Company’s board of directors will be required to explore alternatives for the Company’s business and assets. These alternatives might include raising capital, seeking to merge or combine with another company, seeking dissolution and liquidation, or initiating bankruptcy proceedings. There can be no assurance that any third party will be interested in merging with the Company or would agree to a price and other terms that the Company would deem adequate or that its shareholders would approve any such transaction. Although the Company may try to pursue an alternative transaction and would seek to continue its current efforts to enter into a partnership or other strategic collaboration to support the continued development of picoplatin, the Company likely will have very limited cash resources and, unless it raises additional capital, likely will be forced to file for federal bankruptcy protection.

Nasdaq Common Stock Listing

On July 20, 2010, the Company received a letter from the Nasdaq Listing Qualifications Staff (the “Staff”) stating that the minimum bid price of its common stock has been below $1.00 per share for 30 consecutive business days and that the Company was not in compliance with the minimum bid price requirements of The Nasdaq Global Market. The Company was provided 180 calendar days, or until January 18, 2011 (the “initial compliance period”), to regain compliance. The Company transferred the listing of its common stock from The Nasdaq Global Market to The Nasdaq Capital Market on December 17, 2010, at which time it was afforded the remainder of the initial compliance period. On January 19, 2011, the Company received a letter from the Staff notifying it that it had been granted an additional 180 calendar day period (the “additional compliance period”), to regain compliance with the minimum bid price requirement. The additional time period was granted based on the Company meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on The Nasdaq Capital Market, with the exception of the bid price requirement, and the Company’s written notice to Nasdaq of its intention to cure the deficiency during the additional compliance period by effecting a reverse stock split, if necessary. To regain compliance, the Company’s closing bid price of its common stock must meet or exceed $1.00 per share for at least ten consecutive trading days, but generally no more than 20 consecutive business days, before determining that it has demonstrated an ability to maintain long-term compliance.

On June 9, 2011, after election of directors and ratification of auditors, the Company adjourned its 2011 annual meeting of shareholders to July 8, 2011 and further adjourned to July 22, 2011, to solicit additional proxies to vote in favor of a proposal to authorize the board of directors to, on or before August 1, 2011, implement a reverse stock split of the Company’s outstanding common stock at a ratio between 1-for-15 and 1-for-25, with the exact ratio to be set by the Company board in its discretion. The purpose of the reverse stock split proposal was to facilitate Company’s efforts to regain compliance with The Nasdaq Capital Market minimum bid price requirement. The Company adjourned its reconvened annual meeting of shareholders on July 22, 2011, with an insufficient number of votes to approve the reverse stock split proposal. Although 91.6% of the shareholders who voted at the annual meeting voted in favor of the reverse stock split proposal, those shareholders held only 49.2% of the Company’s common stock outstanding and entitled to vote. A majority (50% plus one share) of the Company’s common stock outstanding and entitled to vote was required to approve the reverse stock split proposal. On July 19, 2011, the Company received a letter from the Staff advising that the Company has not regained compliance with the $1.00 per share minimum bid price requirement of Nasdaq Listing Rule 5550(a)(2) and, unless the Company requests an appeal of this determination, the Company’s common stock would be delisted from The Nasdaq Capital Market. On August 25, 2011, representatives of the Company attended a hearing to appeal the Staff decision and to present a plan for compliance. On September 2, 2011, the Nasdaq Hearings Panel determined to allow the continued listing of the Company’s common stock on The Nasdaq Capital Market subject to the conditions that, on or before December 31, 2011, the Company must have (i) held a shareholders’ meeting; (ii) obtained shareholder approval for the merger

PONIARD PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

with Allozyne and a reverse stock split in a ratio sufficient to allow the stock to trade above $4.00 per share; and (iii) obtained approval of the Staff for listing of the combined company on The Nasdaq Capital Market. The Company intends to regain compliance with the minimum bid price requirement by undertaking a reverse stock split of its outstanding common stock, at an exchange ratio of 1-for-40, in connection with the proposed merger with Allozyne. The Company is seeking shareholder approval of the proposed reverse stock split at the special meeting of Company shareholders to be held on November 21, 2011 in connection with the merger. A detailed description of the reverse stock split proposal and other matters to be voted on at the special meeting is included in the definitive proxy statement/prospectus/consent solicitation dated October 10, 2011, which was mailed to Company and Allozyne shareholders on or about October 13, 2011. There can be no assurance that the proposed reverse stock split will be approved by the Company’s shareholders or that the Company will in the future continue to meet the $2,500,000 shareholders’ equity and other requirements for continued listing on The Nasdaq Capital Market.

Note 2. Fair Value Measurements

The Company categorizes assets and liabilities recorded at fair value in its condensed consolidated balance sheets based upon the level of judgment associated with inputs used to measure their value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then ranks the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the Financial Accounting Standards Board (“FASB”). The three levels of the FASB fair value hierarchy are as follows:

•

Level 1—Quoted prices in active markets for identical assets or liabilities.

•

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The determination of a financial instrument’s level within the fair value hierarchy is based on an assessment of the lowest level of any input that is significant to the fair value measurement. The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The following tables present a summary of the Company’s assets that are measured at fair value on a recurring basis (in thousands):


	Fair Value Measurements as of September 30, 2011
	Total		Level 1		Level 2		Level 3
Cash equivalents	$	1,411	$	1,411	$	0	$	0


	Fair Value Measurements as of December 31, 2010
	Total		Level 1		Level 2		Level 3
Cash equivalents	$	965	$	965	$	0	$	0
Investment securities		3,046		0		3,046		0

	$	4,011	$	965	$	3,046	$	0

PONIARD PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

As of September 30, 2011 and December 31, 2010, the Company’s cash equivalents and investment securities are recorded at fair value as determined through market prices and other observable and corroborated sources (see Note 3 below for further details on investment securities). At September 30, 2011, the cash equivalents balance consists of $1,411,000 in money market funds. The Company did not have any investment securities as of September 30, 2011.

When the estimated fair value of a security is below its carrying value, the Company evaluates whether it is more likely than not that it will be required to sell the security before its anticipated recovery in market value and whether evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. The Company also evaluates whether or not it intends to sell the investment. If the impairment is considered to be other-than-temporary, the security is written down to its estimated fair value. In addition, the Company considers whether credit losses exist for any securities. A credit loss exists if the present value of cash flows expected to be collected is less than the amortized cost basis of the security. Other-than-temporary declines in estimated fair value and credit losses are charged to investment income. The Company has not deemed it necessary to record any charges related to impairments or other-than-temporary declines in the estimated fair values of its marketable debt securities or credit losses as of September 30, 2011.

Note 3. Investment Securities

The Company’s investment securities, consisting of debt securities, are classified as available-for-sale. Unrealized holding gains or losses on these securities are included in other comprehensive income on the condensed consolidated balance sheets. Realized gains and losses and declines in value judged to be other-than-temporary (of which there have been none to date) on available-for-sale securities are included in interest income and other, net, in the condensed consolidated statements of operations. The Company did not have any investment securities as of September 30, 2011.

Investment securities consisted of the following at December 31, 2010 (in thousands):


	Amortized Cost		Gross Unrealized				Estimated Fair Value
	Amortized Cost		Gains		(Losses)		Estimated Fair Value
Type of security:
Corporate debt securities, with unrealized gains	$	3,038	$	8	$	0	$	3,046
Corporate debt securities, with unrealized losses		0		0		0		0

	$	3,038	$	8	$	0	$	3,046

Net unrealized gain					$	8

Maturity:

Less than one year	$	3,038					$	3,046
Due in 1–2 years		0						0

	$	3,038					$	3,046

PONIARD PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):


	September 30, 2011		December 31, 2010
	September 30, 2011		December 31, 2010
Clinical trials	$	217	$	138
Accrued expenses		1,051		716
Compensation		228		176
Severance		0		194

	$	1,496	$	1,224

Accrued expenses above consist of general operating expenses such as legal and accounting fees, consulting, benefits and preferred dividends.

Note 5. Notes Payable

Bay City Capital Loan Commitment

On June 22, 2011, concurrent with the Merger Agreement discussed under Note 1 above, BCC, a related party, executed a binding commitment to loan the Company $2,400,000 (the “BCC Loan”), on a nonrecourse basis, immediately prior to the closing of the merger. Two of the Company’s directors, Fred B. Craves, Ph.D. and Carl S. Goldfischer, M.D., are managing directors and managers of BCC and its affiliates. Michael S. Perry, D.V.M., Ph.D., the Company’s President and Chief Medical Officer, is a venture partner of BCC. The receipt of the loan funds is a condition to Allozyne’s obligation to effect the merger, and the BCC Loan will continue as an obligation of the combined company following closing of the merger. The Company intends to use the loan proceeds to satisfy employee severance, change of control and other related employee obligations arising in connection with the merger with Allozyne, which are expected to total approximately $2,400,000. The Company paid BCC a commitment fee of $50,000 in connection with BCC’s delivery of its binding commitment. The commitment fee is recorded as an issuance cost and will be amortized over the term of the loan.

The terms of the BCC Loan will be as set forth in a loan and security agreement and related instruments (the “Loan Documents”) agreed upon by the Company and BCC at the time of delivery of the loan commitment. Under the loan and security agreement, BCC will lend the Company $2,400,000 against the Company’s issuance of a secured non-recourse promissory note. The BCC Loan will accrue interest at the rate of 18% per annum, with the principal amount of the BCC Loan, all accrued interest and all other amounts payable under the Loan Documents due and payable in full within one year after the date of the BCC Loan. Repayment and performance of the BCC Loan will be secured by a first priority exclusive security interest in the Company’s trademarks, patents, agreements and other rights and interests related to picoplatin (the “Collateral”).

Upon the occurrence and continuation of any event of default under the Loan Documents, BCC will have the right, without notice or demand, to any or all of the following:

•

declare all obligations under the Loan Documents immediately due and payable;

•

take possession of the Collateral and take any action that BCC considers necessary or reasonable to protect the Collateral and/or its security interest in the Collateral; or

•

exercise all rights and remedies available to BCC under the Loan Documents or at law or equity.

In addition, BCC may during any event of default require the Company (or the combined company) to:

•

seek any consent required to transfer or assign all or part of the Collateral to BCC or its designee;

•

grant to BCC or its designee an exclusive license or sublicense to all or part of the Collateral; and

PONIARD PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

•

assign to BCC any investigational new drug application or other regulatory approval pertaining to the Collateral, to the extent assignable.

Any of the following would be deemed “event of default” under Loan Documents:

•

the failure to pay the principal amount of the BCC Loan and all accrued interest in full on the maturity date;

•

any breach of any term, covenant, condition or agreement contained in the Loan Documents;

•

the material inaccuracy of any representation or warranty made in the Loan Documents;

•

the occurrence of a change of control of the combined company without the prior written consent of BCC;

•

the failure to create a valid and perfected first priority security interest in any Collateral; and

•

any bankruptcy or insolvency proceedings of the Company (or the combined company).

The loan and security agreement provides that BCC will not enter into, and will require that any transferee or licensee of any interest in the Collateral not enter into, any agreement or arrangement with W.C. Heraeus GmbH (“Heraeus”) or its affiliates, for the supply of picoplatin active pharmaceutical ingredient (“API”), without assuming the Company’s obligation to repay the costs to Heraeus for the purchase and set-up of dedicated equipment under the picoplatin API commercial supply agreement between the Company and Heraeus. This obligation is described further below under Note 12, Commitment and Contingency.

During the time that any obligations under the Loan Documents are outstanding, the Company agrees not to take the following actions without first obtaining the written consent of BCC:

•

create, incur or allow any mortgage, lien, pledge, security interest or other encumbrance on any Collateral or permit any Collateral not to be subject to the first priority security interest granted under the Loan Documents;

•

transfer or otherwise assign, pledge, license, or encumber, or enter into any agreement (except with or in favor of BCC) that directly or indirectly prohibits or has the effect of prohibiting BCC from selling, transferring, assigning, pledging, or encumbering any of the intellectual property included in the Collateral;

•

file a petition for bankruptcy or permit or suffer any receiver, trustee or assignee for the benefit of creditors, or any other custodian to be appointed to take possession of all or any of the Company’s assets;

•

change the Company’s state of organization, location of the Company chief executive office/chief place of business or remove its books and records from the location specified in the Loan Documents, or change the Company name, identity or structure to such an extent that any financing statement filed in connection with the Loan Documents would become ineffective or seriously misleading, except that the Company may change the Company’s name to “Allozyne, Inc.” upon closing of the merger;

•

take any action which could reasonably be expected to result in a material alteration or impairment of any of the assigned agreements included in the Collateral or of the Loan Documents which is materially adverse to the interests of BCC; and

•

deliver any notice of termination or terminate any of the assigned agreements included in the Collateral.

PONIARD PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

GE Business Financial Services, Inc. and Silicon Valley Bank Loan Agreement

On September 2, 2008, the Company entered into an Amended and Restated Loan and Security Agreement (“loan agreement”), with GE Business Financial Services Inc. and Silicon Valley Bank. The loan agreement amended and restated in its entirety the earlier loan and security agreement dated as of October 25, 2006, with the lenders, pursuant to which the Company obtained a $15,000,000 capital loan that was to mature on April 1, 2010.

The loan agreement provided for a $27,600,000 senior secured term loan facility (“loan facility”) that consisted of an initial term loan advance in the amount of $17,600,000 and a second term loan advance in the amount of $10,000,000, which was fully funded on September 30, 2008. The advances under the loan facility were repayable over 42 months, commencing on October 1, 2008. Interest on the advances was fixed at 7.8% per annum. Final loan payments in the amounts of $1,070,000 and $900,000 were due upon maturity or earlier repayment of the loan advances. All final payment amounts were accreted to the note payable balance over the term of the loan facility using the effective interest rate method and reflected as additional interest expense. The loan facility was secured by a first lien on all of the non-intellectual property assets of the Company.

On December 20, 2010, the Company voluntarily prepaid $12,353,000 of aggregate principal, interest and fees due under the loan facility. The payoff amount reflects approximately $9,857,000 of aggregate outstanding principal and accrued but unpaid interest as of December 20, 2010, approximately $480,000 remaining interest due to be paid in the future, and the aggregate final payment of $1,970,000. The Company recorded a loss on extinguishment of debt of $1,217,000 in the fourth quarter of 2010 in connection with the prepayment of the loan facility. The prepayment discharged the Company’s material liabilities and obligations under the loan facility which terminated, along with the security interests of the lenders, on the prepayment date.

Note 6. Common Stock Purchase Agreements

On December 20, 2010, the Company entered into an equity line of credit facility with Small Cap Biotech, pursuant to which Small Cap Biotech committed to purchase from the Company up to $10,000,000 worth of shares of the Company’s registered common stock, subject to a maximum aggregate limit of 9,444,116 common shares, which is equal to one share less than 20% of the Company’s outstanding common shares on the closing date of the facility, the trading market limit, less 221,218 shares issued to Small Cap Biotech as a commitment fee. The facility provided that the Company could, from time to time, at its sole discretion, present Small Cap Biotech with draw down notices to purchase Company common stock at a price equal to the daily volume weighted average price of the Company common shares on each day during the draw down period on which shares were purchased, less a discount ranging from 6.0% to 7.0%, based on the trading price of the Company’s common stock. On February 9, 2011, the Company completed a draw down and sale of 4,914,632 shares of common stock, at a price of approximately $0.39 per share, for net proceeds of approximately $1,702,000. On February 25, 2011, the Company completed a second draw down and sale of 4,529,484 shares of common stock, at a price of approximately $0.34 per share, for net proceeds of approximately $1,482,000. With the closing of the second draw, the Company had sold all of the 9,444,116 common shares available for issuance under the equity line and the facility, by its terms, automatically terminated on that date.

On February 23, 2010, the Company entered into an equity line of credit facility with Commerce Court Small Cap Value Fund, Ltd. (“Commerce Court”). The facility provides that, upon the terms and subject to the conditions therein, Commerce Court was committed to purchase up to $20,000,000 worth of shares of the Company’s registered common stock over approximately 18 months; provided, however, that in no event may the Company issue to Commerce Court more than 8,423,431 shares of common stock, which is equal to one share less than 20% of the Company’s outstanding common shares on the closing date of the facility, the trading market limit, less 121,183 shares issued to Commerce Court as a commitment fee. The facility provided that the Company could, from time to time, at its sole discretion, present Commerce Court with draw down notices to purchase Company common stock at a price equal to the daily volume weighted average price of the Company’s common shares on each date during the draw down period on which shares were purchased, less a discount ranging from 3.125% to 5.0%, based on the trading price of the Company’s common stock. On March 15, 2010, the Company completed a draw down and sale of 4,229,000 shares of common stock, at a price of approximately $1.49 per share, to

PONIARD PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Commerce Court under the equity line of credit facility. Net proceeds of approximately $6,092,000 were received, after deducting offering costs of approximately $228,000. On December 20, 2010, immediately preceding the Company’s entry into the Small Cap Biotech agreement discussed above, the Company and Commerce Court mutually agreed to terminate this equity line of credit facility. The Company did not incur any penalties in connection with such early termination.

Note 7. Restructuring

April 2010 Restructuring

On March 24, 2010, the Company announced a restructuring plan in connection with its decision to suspend efforts to pursue a NDA for picoplatin in small cell lung cancer. This restructuring plan resulted in a reduction of the Company’s workforce from 22 employees to 12 employees, effective April 30, 2010. In connection with this plan, the Company recorded a restructuring charge of approximately $543,000 for the period ended March 31, 2010, consisting of one-time employee termination benefits, which were paid in their entirety by January 31, 2011. The following table summarizes the activity related to these restructuring charges (in thousands):


Description	Initial Restructuring Charge March 2010		Payment of Restructuring Obligations			Accrued Restructuring Charge as of December 31, 2010		Payment of Restructuring Obligations			Accrued Restructuring Charge as of March 31, 2011
Employee termination benefits	$	543	$	(520	)	$	23	$	(23	)	$	0

As a consequence of the restructuring, approximately 965,000 restricted stock units (“RSUs”), which were awarded in February 2010 pursuant to the Amended and Restated 2004 Incentive Compensation Plan (the “2004 Plan”), became fully vested in accordance with the terms of the underlying RSU agreements (see Note 10 below for additional information). These RSUs converted to common stock on a one-for-one basis in the second quarter of 2010. The Company recognized approximately $1,486,000 in share-based compensation expense for the terminated employees in the first half of 2010 related to the accelerated vesting of these RSUs as a result of the restructuring.

February 2010 Restructuring

On February 5, 2010, the Company implemented a restructuring plan to conserve its capital resources, resulting in a reduction in the Company’s workforce from 50 employees to 22 employees. The Company incurred restructuring charges of approximately $1,083,000, primarily consisting of one-time employee termination benefits. The following table summarizes the activity related to these restructuring charges (in thousands):


Description	Initial Restructuring Charge February 2010		Payment of Restructuring Obligations			Accrued Restructuring Charge as of December 31, 2010		Payment of Restructuring Obligations			Accrued Restructuring Charge as of March 31, 2011
Employee termination benefits	$	1,061	$	(1,009	)	$	52	$	(52	)	$	0
Other termination costs		22		(22	)		0		0			0

Total	$	1,083	$	(1,031	)	$	52	$	(52	)	$	0

As a consequence of the restructuring, approximately 130,000 RSUs, which were awarded in July 2009 pursuant to the 2004 Plan, became fully vested in accordance with the terms of the underlying RSU agreements (see Note 10 below for additional information). These RSUs converted to common stock on a one-for-one basis in February 2010. The Company recognized approximately $174,000 in share-based compensation expense for the terminated employees in the first quarter of 2010 related to the accelerated vesting of these RSUs as a result of the restructuring.

PONIARD PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 8. Picoplatin License and Amendment

The Company has entered into an exclusive worldwide license, as amended, with Sanofi-Aventis (successor to Genzyme Corporation (successor to AnorMED, Inc.)) for the development and commercial sale of picoplatin. Under that license, the Company is solely responsible for the development and commercialization of picoplatin. Sanofi-Aventis retains the right, at the Company’s cost, to prosecute its patent applications and maintain all licensed patents. The parties executed the license agreement in April 2004, at which time the Company paid a one-time up-front payment of $1,000,000 in common stock and $1,000,000 in cash. The original agreement excluded Japan from the licensed territory and provided for $13,000,000 in development and commercialization milestones, payable in cash or a combination of cash and common stock, and a royalty rate of up to 15% on product net sales after regulatory approval. The parties amended the license agreement on September 18, 2006, modifying several key financial terms and expanding the licensed territory to include Japan, thereby providing the Company worldwide rights. In consideration of the amendment, the Company paid Sanofi-Aventis $5,000,000 in cash on October 12, 2006 and an additional $5,000,000 in cash on March 30, 2007. The amendment eliminated all development milestone payments to Sanofi-Aventis. Sanofi-Aventis remains entitled to receive up to $5,000,000 in commercialization milestones upon the attainment of certain levels of annual net sales of picoplatin after regulatory approval. The amendment also reduced the royalty payable to Sanofi-Aventis to a maximum of 9% of annual net product sales and eliminated the sharing of sublicense revenues with Sanofi-Aventis.

The Company accounted for all payments made in consideration of the picoplatin license, as amended, by capitalizing them as an intangible asset. The Company’s capitalization of the total $12,000,000 of picoplatin license payments is based on the Company’s reasonable expectation at the time of acquisition and through the date of the amendment that the intravenous formulation of picoplatin, as it existed at the time of the acquisition of the picoplatin license and the license amendment, would be used in research and development (“R&D”) projects and, therefore, had alternative future uses in the treatment of different cancer indications. At the time of acquisition, the Company planned to use intravenous picoplatin in a Phase 2 clinical trial in patients with small cell lung cancer and reasonably expected that the intravenous formulation could be used in additional, currently identifiable R&D projects in the form of clinical trials for other solid tumor cancer indications, such as prostate and colorectal cancers.

The Company, at the time of acquisition of the picoplatin license, reasonably anticipated using intravenous picoplatin in clinical trials that could be conducted during the remaining term of the primary patent, which is active through 2016. The Company concluded that the 12 years remaining for the primary patent term was the appropriate useful life for the picoplatin intangible asset, in accordance with the FASB’s guidance for intangibles, and is amortizing the initial $2,000,000 aggregate license payment over this 12 year useful life beginning in April 2004. The Company concluded that no change in the 12 year useful life of the picoplatin intangible asset occurred as a result of the 2006 license amendment and is, therefore, continuing to amortize the initial $2,000,000 aggregate license payment over the 12 year useful life and is amortizing the license amendment payment of $10,000,000 over the remainder of the 12 year useful life of the picoplatin intangible asset.

The Company reviews its long-lived assets for possible impairment whenever significant events indicate such impairment may have occurred. In November 2009, the Company announced that its pivotal Phase 3 SPEAR trial of picoplatin in the second-line treatment of patients with small cell lung cancer did not meet its primary endpoint of overall survival. The Company considered this event a trigger for testing its picoplatin intangible asset for possible impairment; however, upon analysis of the expected future undiscounted net cash flows identifiable to the picoplatin license, the Company determined that the picoplatin intangible asset was recoverable and that no impairment occurred. In connection with the Company’s current efforts to identify strategic partnering and other collaborative arrangements for picoplatin and its proposed merger with Allozyne, the Company considered it appropriate to update its analysis of the recoverability of the picoplatin intangible asset as of June 30, 2011. Consistent with prior periods, the Company estimated the fair value of the picoplatin intangible asset using a

PONIARD PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

discounted cash flow analysis. Such cash flows were based on the Company’s estimates of the probability of entering into various licensing and related arrangements for the future development of picoplatin and achieving potential milestones, and then discounted using an appropriate rate for such transactions, which is a level 3 basis of determining fair value as discussed above in Note 2. Based on the results of this updated analysis, the Company reaffirmed that no impairment to the picoplatin intangible asset has occurred. The Company continues to believe that the picoplatin intangible is recoverable as of September 30, 2011.

The licensed products balance consists of the picoplatin amortizable intangible asset with a gross amount of $12,000,000, net of accumulated amortization of $6,534,000 and $5,623,000 at September 30, 2011 and December 31, 2010, respectively.

Note 9. Net Loss Per Common Share

Basic and diluted loss per share are based on net loss applicable to common shares, which is comprised of net loss and preferred stock dividends in all periods presented. Shares used to calculate basic loss per share are based on the weighted average number of common shares outstanding during the period. Shares used to calculate diluted loss per share are based on the potential dilution that would occur upon the exercise or conversion of securities into common stock using the treasury stock method. The calculation of diluted loss per share excludes the effect of stock options and warrants to purchase additional shares of common stock because the share increments would not be dilutive. The following table presents the weighted-average number of shares that were excluded from the number of shares used to calculate diluted net loss per share (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Common stock options		4,844		5,758		5,042		5,829
Restricted stock units		3,350		2,982		3,287		2,521
Common stock warrants		197		4,991		2,017		5,054

In addition, 14,966 shares of common stock that would be issuable upon conversion of the Company’s Series 1 preferred stock are not included in the calculation of diluted loss per share for the three and nine month periods ended September 30, 2011 and 2010, respectively, because the effect of including such shares would not be dilutive.

Note 10. Share-based Compensation

The Company recorded the following amounts of share-based compensation expense, excluding expense for non-employee consultants, for the periods presented (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Research and development expense	$	86	$	136	$	277	$	2,139
General and administrative expense		566		1,433		2,242		4,859

Total	$	652	$	1,569	$	2,519	$	6,998

There were no options granted during the three or nine month periods ended September 30, 2011. The share-based compensation expense for the three and nine months ended September 30, 2011 and 2010 includes a stock option granted during the first quarter of 2010 to a Company officer to purchase an aggregate of 500,000 shares of common stock which vests over a four year period.

PONIARD PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

A summary of the Company’s fully vested stock options is presented below (shares and aggregate intrinsic value in thousands):


	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value
Options exercisable at September 30, 2011		4,279	$	5.87		5.1	$	0

Estimated fair values of stock options granted have been determined using the Black-Scholes option pricing model with the following assumptions for the periods presented:

Three Months Ended
September 30,

Nine Months Ended
September 30,

2011

2010

2011

2010

Expected term (in years)

5.0

Risk-free interest rate

2.22

Expected stock price volatility

Expected dividend rate

Certain options that were granted to officers of the Company during 2006 and 2007 vest 50% in equal monthly installments over four years from the date of grant and vest 50% on the seven year anniversary of the date of grant, subject to accelerated vesting of up to 25% of such portion of the options, based on the Company’s achievement of annual performance goals established under its management incentive plan, at the discretion of the equity awards subcommittee of the compensation committee of the Company’s board of directors. Based on the overall achievement of corporate goals in 2009, the equity awards subcommittee accelerated vesting with respect to 25% of the shares subject to the seven year vesting schedule in the first quarter of 2010. As of September 30, 2011, the cumulative accelerated vesting for options subject to the seven year vesting schedule equals 85% of the shares granted in 2006 and 65% of the shares granted in 2007.

The Company’s share-based compensation expense also includes RSUs awarded to employees and non-employee consultants. All RSUs awarded are subject to acceleration or forfeiture based upon the terms of their specific agreement. The table below summarizes RSU awards outstanding as of September 30, 2011 (RSUs in thousands):


	Restricted Stock Units (RSUs)																														Weighted Average Grant Date Fair Value per RSU
Award Date	Unvested as of Decem- ber 31, 2010		Awarded		Vested			Forfeited			Unvested as of March 31, 2011		Awarded		Vested			Forfeited		Unvested as of June 30, 2011		Awarded		Vested			Forfeited		Unvested as of Septe- mber 30, 2011		Weighted Average Grant Date Fair Value per RSU
03/14/2011		0		224		0			0			224		0		(112	)		0		112		0		0			0		112	$	0.38	(A)
02/15/2011		0		2,430		0			0			2,430		0		0			0		2,430		0		0			0		2,430		0.39	(B)
06/09/2010		836		0		(32	)		0			804		0		(355	)		0		449		0		0			0		449		0.83
04/09/2010		550		0		0			(2	)		548		0		(274	)		0		274		0		0			0		274		1.14
10/06/2009		75		0		0			0			75		0		0			0		75		0		0			0		75		7.27
07/11/2009		85		0		0			0			85		0		0			0		85		0		(85	)		0		0		6.60

Total RSUs		1,546		2,654		(32	)		(2	)		4,166		0		(741	)		0		3,425		0		(85	)		0		3,340

(A)

On March 14, 2011, the Company awarded 224,000 RSUs to an officer of the Company. The fair value of the RSU award was $0.38 per unit, or approximately $85,000 in total, based upon the closing market price of the Company’s common stock on the award date. These RSUs vested 50% on April 9, 2011 and the remaining 50% will vest on April 9, 2012.

PONIARD PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(B)

On February 15, 2011, the Company awarded an approximate aggregate of 1,973,000 RSUs to officers and an approximate aggregate of 457,000 RSUs to non-officer employees of the Company as an incentive for future performance. The fair value of the RSU award was $0.39 per unit, or approximately $948,000 in total, based upon the closing market price of the Company’s common stock on the award date. These RSUs vest on February 15, 2012, the one year anniversary of the award date.

On June 22, 2011, the board of directors of the Company, upon recommendation from the Compensation Committee of the board of directors, approved a resolution to modify the terms of all awards outstanding under the 2004 Plan such that 100% of awards outstanding under the 2004 Plan would be accelerated upon consummation of the Allozyne merger or, if earlier, upon termination of employment by the Company without cause. Management reviewed the resolution in conjunction with the specific terms of all outstanding awards (options and RSUs) and determined that a modification occurred. The modification, however, did not result in a change in accounting for the outstanding awards as the modification did not result in an increase in fair value of the awards nor would the expense be accelerated for the change of control until consummation of the merger.

Additionally, on June 22, 2011, the board of directors, upon recommendation from the Compensation Committee of the board of directors, approved a resolution to award the Company’s Chief Executive Officer (“CEO”) an RSU grant under the 2004 Plan in lieu of certain cash compensation payable to him under his severance and change of control agreements in the event of a qualifying termination of employment prior to or in connection with the merger. The RSU award is to be calculated as the equivalent number of shares of Company common stock equal to (i) the amount of accrued but unpaid vacation as of the effective date of termination and the total bonus severance amount payable to the CEO under his change of control agreement, divided by (ii) $9.08 (the 5-day average closing sales price of Company common stock prior to announcement of the Merger Agreement after giving effect to the 1-for-40 reverse stock split to be implemented subject to approval by the Company shareholders and prior to the consummation of the merger), rounded up to the nearest whole number of shares and the RSUs would vest and be settled in shares of Company common stock upon consummation of the merger. However, there is no guarantee that the reverse stock split or merger will occur. If the merger is not consummated, the CEO will forfeit the RSU award and will receive his accrued but unpaid vacation in cash at that time but will not be eligible to receive any portion of the bonus severance amount.

No income tax benefit has been recorded for share-based compensation expense as the Company has a full valuation allowance and management has concluded that it is more likely than not that the Company’s net deferred tax assets will not be realized. As of September 30, 2011, total unrecognized costs related to employee share-based compensation is approximately $1,985,000. Unrecognized share-based compensation expense from outstanding stock options is approximately $808,000 and is expected to be recognized over a weighted average period of approximately 1.9 years. Unrecognized share-based compensation expense from outstanding RSUs is approximately $1,177,000 and is expected to be recognized over a weighted average period of approximately six months subject to acceleration with the occurrence of certain qualifying events.

PONIARD PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 11. Comprehensive Loss

The Company’s comprehensive loss for the three and nine months ended September 30, 2011 and 2010 is summarized as follows (in thousands):


	Three Months Ended September 30,					Nine Months Ended September 30,
	2011		2010			2011		2010
Net loss	$	3,771	$	6,449		$	10,875	$	24,884
Net unrealized loss/(gain) on investment securities		0		(13	)		8		(33	)

Comprehensive loss	$	3,771	$	6,436		$	10,883	$	24,851

Note 12. Commitment and Contingency

Contractual Commitment

The Company entered into a picoplatin API commercial supply agreement with Heraeus in March 2008. Under this agreement, Heraeus will produce the picoplatin API to be used for preparing picoplatin finished drug product for commercial use. Manufacturing services are provided on a purchase order, fixed-fee basis, subject to certain purchase price adjustments and minimum quantity requirements. The costs to Heraeus for the purchase and set-up of dedicated equipment as required under the commercial supply agreement, will be repaid by the Company in the form of a surcharge on an agreed upon amount of the picoplatin API ordered and delivered on or before December 31, 2013. If the Company orders and takes delivery of less than the agreed upon amount of picoplatin API through December 31, 2013, it will be obligated to pay the balance of the dedicated equipment cost as of that date. As of December 31, 2009, Heraeus had completed construction of the dedicated equipment at a total cost of approximately $1,485,000. The Company determined that the equipment should be accounted for as a capital lease and accordingly recognized an asset and long-term obligation for the equipment of $1,485,000 on its consolidated balance sheet as of December 31, 2009. The Company will reflect the surcharge payments as reductions to the capital lease balance outstanding, and will accrete a finance charge to interest expense as specified under the agreement. The balance of the obligation at September 30, 2011 was $1,640,000, including accreted interest of approximately $155,000. The Company does not anticipate beginning production of commercial supplies of picoplatin API, thereby utilizing the dedicated equipment, within the next 12 months and has, therefore, classified the obligation as long-term. Future minimum payments for the obligation as of September 30, 2011 are approximately $1,841,000. Because payments are determined based on the production of commercial supplies, which has been delayed, the Company is not able to identify payment totals for each of the years after September 30, 2011, but assumes that the entire amount of $1,841,000 will be paid no later than December 31, 2013. Due to the delay in the Company’s plans for the commercialization of picoplatin, the Company determined that its capital lease asset for equipment under the Heraeus agreement was impaired as of December 31, 2009 and, therefore, recognized an asset impairment charge of $1,485,000 in the consolidated statement of operations for the year ended December 31, 2009.

Contingency

On June 27, 2011, a putative class action lawsuit was filed in the Superior Court of California, San Francisco County, against the Company, its board of directors and Allozyne. The action, titled Aronheim v. Poniard Pharmaceuticals, Inc., et al. (Case Number: CGC-11-512033) alleges in summary that, in connection with the proposed merger with Allozyne, the members of the Company board of directors breached their fiduciary duties by purportedly conducting an unfair sale process and agreeing to an unfair sale price, by purportedly making inadequate disclosures about the merger, and by purportedly engineering the proposed merger to provide them with improper personal benefits. The action also alleges that the Company and Allozyne aided and abetted the Company board members’ purported breaches of fiduciary duty. The plaintiff seeks, among other things, a declaration that the suit can be maintained as a class action, a declaration that the Merger Agreement was entered into in breach of the Company board members’ fiduciary duties, rescission of the Merger Agreement, an injunction against the proposed merger, a directive that the Company board members exercise their fiduciary duties to obtain a transaction that is in the best interests of the Company’s shareholders, the imposition of a constructive trust in favor of the plaintiff and

PONIARD PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

the class upon any benefits improperly received by the Company board members as a result of their purportedly wrongful conduct and fees and costs. The Company and its board of directors believe that the claims are without merit.

On August 24, 2011, a putative class action lawsuit was filed in the Superior Court of California, San Francisco County, against the Company and its board of directors, as well as against the Company’s Chief Executive Officer, its President and Chief Medical Officer, its Interim Chief Financial Officer, its Senior Vice President of Corporate Development, and its Vice President, Legal and Corporate Secretary. The action, titled Wing Sze Wu v. Robert S. Basso, et al. (Case Number: CGC-11-513652), alleges in summary that the members of the Company’s board of directors breached their fiduciary duties by agreeing to pay purportedly excessive compensation and benefits to the Company’s senior management, that such members of the Company’s senior management were allegedly unjustly enriched when they received such executive compensation and benefits, that the Company’s board of directors breached its fiduciary duties by conducting a purportedly unfair sale process in connection with the proposed transaction with Allozyne and agreeing to an allegedly unfair and dilutive sale price and a transaction that included improper “deal protection measures,” and by providing allegedly materially inadequate disclosures and material disclosure omissions to the Company’s shareholders. The plaintiff seeks, among other things, a declaration that the suit can be maintained as a class action, an injunction against the proposed merger, rescission of the proposed merger to the extent it occurs before final judgment in the lawsuit or rescissory damages, a directive that the defendants account for all damages allegedly caused by them and account for all profits and special benefits obtained as a result of their alleged breaches of their fiduciary duties, and for costs, attorneys fees, expenses and such other relief as the court deems just and proper. The Company, its board of directors and Company management believe that the claims are without merit.

The parties to both the Aronheim case and the Wu case signed a Memorandum of Understanding dated October 19, 2011, providing for the settlement of both cases. The settlement is subject to final settlement documentation, court approval, and the closing of the merger transaction, among other things. The settlement would provide for dismissal of both the Aronheim and Wu cases, for certain additional disclosures, and for payment of plaintiffs’ attorneys’ fees. The Company has estimated a possible range of loss and has accrued a loss contingency equal to the minimum value of this range, or $215,000. There can be no assurance that the settlement will become effective. If the settlement does not become effective, the Aronheim and Wu cases will continue. If that should happen, the Company would vigorously defend the lawsuits. An estimate of the possible loss or range of loss in that event cannot be made at this time.

Note 13. Exchange of Preferred Stock

On February 6, 2010, the Company issued 379,956 shares of its common stock to an institutional shareholder in exchange for the shareholder’s delivery to the Company of 126,572 shares of the Company’s outstanding $2.4375 convertible exchangeable preferred stock, Series 1 (“Series 1 shares”). The shareholder approached the Company with the proposed exchange transaction and the final terms of the exchange were determined by arms-length negotiation between the parties. A portion of the common stock issued by the Company in the exchange was in addition to the number of shares that were calculable under the exchange provisions of the Series 1 preferred stock designation of rights in the Company’s articles of incorporation. This portion was accounted for by the Company in 2010 as an in-kind dividend, the fair value of which is $570,000. The Series 1 shares received by the Company in the exchange constitute authorized but unissued shares of preferred stock of the Company.

Item 2.

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

Important Information Regarding Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “propose,” “continue,” “assume” or other similar expressions, or the negatives of those expressions. All statements contained in this Form 10-Q regarding our corporate objectives and strategies, future operations, the proposed merger with Allozyne, Inc., potential picoplatin partnering and other strategic collaborations, projected financial position, planned product development activities, proposed registration strategies and product indications, future regulatory approvals, proposed product commercialization, adequacy of current cash resources, projected costs, potential sources and availability of capital, ability to regain and maintain compliance with The Nasdaq Stock Market listing requirements, future prospects, the future of our industry, and results that might be obtained by pursuing management’s current plans and objectives are forward-looking statements.

You should not place undue reliance on our forward-looking statements because these statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties that are difficult to predict. Our forward-looking statements are based on the information currently available to us and speak only as of the date of this report. Over time, our actual results, performance or achievements may differ from those expressed or implied by our forward-looking statements, and such difference might be significant and materially adverse to our security holders. Factors that could contribute to such differences include, but are not limited to, our limited cash resources, our significant corporate expenses and limited or no revenue to offset those expenses, the failure of Poniard or Allozyne to meet any of the conditions to closing the merger, the failure to realize anticipated benefits of the merger, the availability of appropriate strategic opportunities, litigation and the risks discussed in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission, or SEC, on March 30, 2011 and available on the SEC’s website, www.sec.gov, including under the heading “Risk Factors” in the Form 10-K, and in this Form 10-Q, including in this “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and in the section entitled “Risk Factors” in Part II of this report. Please consider our forward-looking statements in light of these risks as you read this report and our other SEC filings.

Except as required by law, we undertake no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date of this report, or to reflect the occurrence of unanticipated events.

Recent Events

On June 22, 2011, we entered into an Agreement and Plan of Merger and Reorganization, or the Merger Agreement, with Allozyne, Inc., a private Delaware corporation, or Allozyne. Under the terms of the Merger Agreement, which was approved by our board of directors and the board of directors of Allozyne, FV Acquisition Corp., our wholly owned subsidiary, will merge with and into Allozyne, with Allozyne surviving the merger and becoming a wholly-owned subsidiary of Poniard. The merger is expected to create a Nasdaq-listed biotechnology company focused on the development and commercialization of therapeutics in the area of autoimmune and inflammatory disease and cancer. The combined company expects to seek a partnership for the continued development of picoplatin. The resulting company will be named Allozyne, Inc. and will be headquartered in Seattle, Washington.

If the merger is consummated, at the effective time of the merger, the outstanding shares of Allozyne common and preferred stock will be converted into the right to receive the number of shares of our common stock representing approximately 65% of the shares of outstanding common stock of the combined company, after giving effect to the issuance of shares pursuant to Allozyne’s and our outstanding options, warrants and other securities convertible into capital stock. Each share of Allozyne common stock and Allozyne preferred stock is expected to convert into the right to receive that number of shares of our common stock equal to approximately 0.0610, after giving effect to a 1-for-40 reverse stock split of our common stock to be implemented subject to approval by our shareholders and prior to the consummation of the merger. The actual number of shares of our common shares to be

issued in respect of each share of Allozyne common stock or preferred stock will be adjusted to reflect ours and Allozyne’s net debt and net cash, respectively, and certain permitted financings completed prior to the closing of the merger, divided by the number of shares of Allozyne common stock and Allozyne preferred stock outstanding and deemed outstanding pursuant to the formula set forth in the Merger Agreement.

Consummation of the merger is subject to certain closing conditions, including, among other things, approval by our shareholders and the stockholders of Allozyne and approval for listing of the common shares of the combined company on The Nasdaq Capital Market. As a condition to the parties entering into the Merger Agreement, certain of Allozyne’s stockholders who in the aggregate beneficially own approximately 65% of the outstanding shares of Allozyne capital stock, and certain of our shareholders who in the aggregate beneficially own approximately 21% of the our outstanding common shares, entered into shareholder agreements, whereby they have agreed to vote in favor of the transactions contemplated by the Merger Agreement and against any competing acquisition proposal, subject to the terms of the shareholder agreements. In addition, subject to certain limited exceptions, such shareholders also have agreed not to sell or transfer their shares of Allozyne capital stock or our common stock, including shares of our common stock received in the merger or issuable upon exercise of our options or warrants, until the earlier of the termination of the Merger Agreement or six months after the effective time of the merger.

The Merger Agreement contains certain termination rights for both us and Allozyne, and further provides that, upon termination of the Merger Agreement under specified circumstances, either we or Allozyne may be required to pay the other party a termination fee of $1.0 million.

In addition, in connection with the merger, the employment of all of our current executive officers will be terminated prior to the consummation of the merger. The executive officers of Allozyne will assume their respective positions in the combined company following the closing of the merger. The combined company’s board of directors is expected to consist of a total of seven members, four of whom are currently directors of Allozyne, two of whom are currently directors of Poniard (Ronald A. Martell and Fred B. Craves, Ph.D.), and one director to be appointed by a majority of the members of the board of directors of the combined company.

Important Additional Information Filed with the SEC

On July 25, 2011, we filed a Registration Statement on Form S-4 (No. 333-75778), which included a preliminary proxy statement/prospectus/consent solicitation in connection with the merger. The Registration Statement was declared effective by the SEC on October 7, 2011 and the definitive proxy statement/prospectus/consent solicitation dated October 10, 2011 was mailed to the Company and Allozyne shareholders on or about October 13, 2011. Investors and security holders of the Company and Allozyne are urged to carefully read the definitive proxy statement/prospectus/consent solicitation and any supplements or amendments thereto because these materials contain important information about the Company, Allozyne and the proposed transaction.

Investors and security holders of the Company may obtain free copies of the definitive proxy statement/prospectus/consent solicitation through the website maintained by the SEC at www.sec.gov. Free copies of the definitive proxy statement/prospectus/consent solicitation and our other filings with the SEC also may be obtained by contacting us at 750 Battery Street, Suite 330, San Francisco, CA 94111, or accessed via our website at www.poniard.com.

The Company, and our directors and executive officers, may be deemed to be participants in the solicitation of proxies from shareholders in favor of the proposed transaction. Information regarding our directors and executive officers and their interests in the proposed transaction is available in the definitive proxy statement/prospectus/information statement.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates have not materially changed from those reported in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 30, 2011. For a more complete description, please refer to our Annual Report on Form 10-K.

Results of Operations

Three and Nine Months Ended September 30, 2011 Compared to the Three and Nine Months Ended September 30, 2010

Research and Development

Research and development expenses decreased 68% to approximately $0.3 million in the third quarter of 2011 and decreased 87% to approximately $1.1 million in the first nine months of 2011 from the comparable periods in 2010. The significant decrease in our research and development expenses during the three and nine months ended September 30, 2011 is primarily a result of the wind down and completion of our picoplatin trials in 2010. Our research and development expenses are summarized as follows:


	Three Months Ended September 30,							Nine Months Ended September 30,
	2011		2010		% Change			2011		2010		% Change
	($ in thousands)							($ in thousands)
Contract manufacturing	$	15	$	167		-91	%	$	196	$	1,024		-81	%
Clinical		186		586		-68	%		589		4,309		-86	%
Share-based compensation		86		138		-38	%		277		2,537		-89	%

Total	$	287	$	891		-68	%	$	1,062	$	7,870		-87	%

Contract manufacturing costs decreased 91% to approximately $15,000 in the third quarter of 2011 and decreased 81% to approximately $0.2 million in the first nine months of 2011 from the comparable periods in 2010. These decreases reflect completed and reduced drug product stability testing and analyses in 2011 compared to 2010. Clinical costs decreased 68% to approximately $0.2 million in the third quarter of 2011 and decreased 86% to approximately $0.6 million in the first nine months of 2011 from the comparable periods in 2010. These decreases are primarily due to the wind down and completion of our clinical trials and the impact of our corporate restructurings in 2010. Share-based compensation expense decreased 38% to approximately $86,000 in the third quarter of 2011 and decreased 89% to approximately $0.3 million in the first nine months of 2011 from the comparable periods in 2010, primarily due to expense recognized for accelerated vesting of restricted stock units, or RSUs, in connection with our February 2010 and April 2010 restructurings and to lower expense recognized for options resulting from the reduction in our headcount in 2010, offset by RSUs awarded in the first quarter of 2011 as incentives for future performance.

Recap of Development and Clinical Program Costs. Our research and development administrative overhead costs, consisting of rent, utilities, indirect personnel costs, consulting fees and other various overhead costs, are included in total research and development expense for each period, but are not allocated to our picoplatin project. Our total research and development costs are summarized below:


	Three Months Ended September 30,							Nine Months Ended September 30,
	2011		2010		% Change			2011		2010		% Change
	($ in thousands)							($ in thousands)
Picoplatin	$	16	$	587		-97	%	$	208	$	3,838		-95	%
Other unallocated costs and overhead		185		166		11	%		577		1,495		-61	%
Share-based compensation		86		138		-38	%		277		2,537		-89	%

Total	$	287	$	891		-68	%	$	1,062	$	7,870		-87	%

Our external costs for picoplatin for the three and nine month periods ended September 30, 2011 and for the comparable periods in 2010, reflect costs associated with our various picoplatin clinical studies and the manufacture and development of drug product to support our clinical trials. We expect our external costs for picoplatin to continue to decrease for the remainder of 2011, reflecting reduced costs due to completion of our small cell lung, colorectal and prostate cancer trials and oral picoplatin study.

As of September 30, 2011, we have incurred external costs of approximately $77.4 million in connection with our entire picoplatin clinical program. Material cash inflows relating to the commercialization of picoplatin

will not commence unless and until required clinical studies are completed and U.S. Food and Drug Administration, or FDA, and other required regulatory approvals are obtained, and then only if picoplatin finds acceptance in the marketplace. To date, we have not received any revenues from sales of picoplatin.

Due to the risks inherent in our business and given the stage of development of picoplatin, we are unable to estimate with any certainty the future costs we will incur in support of picoplatin. Clinical development timeliness, the probability of success and development costs can differ materially from expectations. In addition, we cannot forecast with any degree of certainty when or whether picoplatin will be subject to collaboration or other strategic arrangement, the nature and terms of any such arrangement, and the extent to which such arrangement would impact our current operations and capital requirements.

The process of developing and obtaining FDA approval of product is costly and time consuming. Development activities and clinical trials can take years to complete and failure can occur at any time during the development and clinical trial process. In addition, the results from earlier trials may not be predictive of results of subsequent and larger clinical trials, and product candidates in later stages of clinical trials may fail to show the desired safety and efficacy, despite having progressed successfully through initial clinical testing. Although we seek to mitigate these risks, the successful development of picoplatin is highly uncertain. Further, even if picoplatin is approved for sale, it may not be successfully commercialized and, therefore, future revenues may not materialize.

If we fail to complete the development of picoplatin in a timely manner, our operations, financial position and liquidity could be severely impaired.

We are not conducting significant picoplatin development activities while we explore potential picoplatin partnering opportunities and work to complete the proposed merger with Allozyne, and we cannot predict the period in which material cash inflows from our picoplatin program will commence, if ever.

A further discussion of the risk and uncertainties associated with completing our picoplatin development program on schedule, or at all, and the consequences of failing to do so are discussed in our Annual Report on Form 10-K filed with the SEC and in Part II, Item 1A, of this report under the heading “Risk Factors.”

General and Administrative


	Three Months Ended September 30,							Nine Months Ended September 30,
	2011		2010		% Change			2011		2010		% Change
	($ in thousands)							($ in thousands)
General and administrative	$	2,895	$	3,633		-20	%	$	7,526	$	8,917		-16	%
Share-based compensation		566		1,427		-60	%		2,230		4,830		-54	%

Total	$	3,461	$	5,060		-32	%	$	9,756	$	13,747		-29	%

Total general and administrative expenses costs decreased 32% to approximately $3.5 million in the third quarter of 2011 and decreased 29% to approximately $9.8 million in the first nine months of 2011 from the comparable periods in 2010. Excluding share-based compensation expense, general and administrative expenses decreased 20% to approximately $2.9 million in the third quarter of 2011 and decreased 16% to approximately $7.5 million in the first nine months of 2011 from the comparable periods in 2010. The three and nine month periods ended September 30, 2011 reflect decreased personnel costs compared to the comparable periods in 2010 due to headcount reductions in 2010. However, this is offset by increased legal fees in connection with the proposed merger of approximately $0.5 million and $1.2 million for the three and nine months ended September 30, 2011, respectively, and additional legal fees of approximately $0.6 million in the third quarter of 2011 related to litigation. Share-based compensation expense decreased 60% to approximately $0.6 million in the third quarter of 2011 and decreased 54% to approximately $2.2 million in the first nine months of 2011 from the comparable periods in 2010, primarily as a result of the higher expense recognized in the six months of 2010 for accelerated vesting of RSUs in connection with our February 2010 and April 2010 restructurings and for accelerated vesting of stock options held by certain officers based on overall achievement of 2009 corporate goals, offset by RSUs awarded in the first quarter of 2011 as incentives for future performance.

Other Operating Expense


	Nine Months Ended September 30,
	2011		2010		% Change
	($ in thousands)
Restructuring	$	0	$	1,626		-100	%

2010 Restructurings. In February 2010, we restructured our operations to conserve resources and support our registration and partnering strategies, followed by another reduction in workforce headcount effective in April 2010. Through these two restructuring steps, our headcount was reduced from 50 to 12 employees. In connection with these two restructurings, in the first quarter of 2010 we recorded charges of approximately $1.1 million and $0.5 million, respectively, consisting of one-time employee termination benefits. There were no restructuring charges recorded in the second or third quarters of 2010 or in the first nine months of 2011.

As a consequence of the February 2010 restructuring, approximately 130,000 RSUs, held by the terminated employees, became fully vested in accordance with the terms of the underlying RSU agreements and converted to common stock on a one-for-one basis in February 2010. We recognized approximately $0.2 million in share-based compensation expense in the first quarter of 2010 related to the accelerated vesting of these RSUs resulting from this restructuring. As a consequence of the April 2010 restructuring, approximately 965,000 RSUs, held by the terminated employees, became fully vested in accordance with the terms of the underlying RSU agreements and converted to common stock on a one-for-one basis in the second quarter of 2010. We recognized approximately $1.5 million in share-based compensation expense in the nine month period ended September 30, 2010, related to the accelerated vesting of these RSUs resulting from this restructuring. There was no share-based compensation expense related to the accelerated vesting of RSUs resulting from restructurings in the third quarter of 2010 or in the first nine months of 2011.

Other Income and Expense


	Three Months Ended September 30,									Nine Months Ended September 30,
	2011			2010			% Change			2011			2010			% Change
	($ in thousands)									($ in thousands)
Interest expense	$	(23	)	$	(516	)		-96	%	$	(70	)	$	(1,744	)		-96	%
Interest income and other, net		0			18			-100	%		13			103			-87	%

Total	$	(23	)	$	(498	)		-95	%	$	(57	)	$	(1,641	)		-97	%

Interest expense decreased 96% to approximately $23,000 in the third quarter of 2011 and decreased 96% to approximately $70,000 in the nine months ended September 30, 2011 from the comparable periods in 2010. The decreases in interest expense are primarily due to the payoff of our secured loan facility in December 2010. Interest income and other, net decreased 100% to approximately $0 in the third quarter of 2011 and decreased 87% to approximately $13,000 in the nine months ended September 30, 2011 from the comparable periods in 2010. The decreases are primarily due to decreased balances in and lower average yields from our investment securities portfolio.

Liquidity and Capital Resources


	September 30, 2011			December 31, 2010
	($ in thousands)
Cash, cash equivalents and investment securities	$	1,984		$	4,330
Working capital		(727	)		3,601
Shareholders’ equity		3,117			8,453

	Nine Months Ended September 30,
	2011			2010
	($ in thousands)
Cash provided by (used in):
Operating activities	$	(5,411	)	$	(19,230	)
Investing activities		3,023			14,818
Financing activities		3,088			(508	)

We have historically experienced recurring operating losses and negative cash flows from operations. Cash and cash equivalents, net of restricted cash of approximately $22,000, totaled approximately $2.0 million at September 30, 2011. As of September 30, 2011, we had negative working capital of approximately $0.7 million, an accumulated deficit of approximately $450.0 million and total shareholders’ equity of approximately $3.1 million. We have historically maintained our financial position through strategic management of our resources, including the sale of equity securities, borrowings under debt instruments, technology licensing, and collaborative agreements. We invest any excess cash in investment securities to fund future operating costs. Cash used for operating activities for the nine months ended September 30, 2011 totaled approximately $5.4 million.

Capital Resources

Equity Financings. On December 20, 2010, we entered into an equity line of credit facility with Small Cap Biotech Value, Ltd., or Small Cap Biotech, pursuant to which Small Cap Biotech committed to purchase from us up to $10.0 million worth of shares of our registered common stock, subject to a maximum aggregate limit of approximately 9.4 million common shares. The facility provided that we could, from time to time, at our sole discretion, present Small Cap Biotech with draw down notices to purchase our common stock at a price equal to the daily volume weighted average price of our common stock on each day during the draw down period on which shares were purchased, less a discount ranging between 6 % and 7%. On February 9, 2011, we completed a draw down and sale to Small Cap Biotech of approximately 4.9 million shares of our common stock, at a price of approximately $0.39 per share, for net proceeds of approximately $1.7 million. On February 25, 2011, we completed a second draw down and sale to Small Cap Biotech of approximately 4.5 million common shares, at a price of approximately $0.34 per share, for net proceeds of approximately $1.5 million. With the closing of the second draw down, we had sold all of the 9.4 million common shares available for issuance under the equity line, and the facility, by its terms, automatically terminated on that date. We are using the net proceeds of these draw downs for working capital and other general corporate purposes.

On February 23, 2010, we entered into an equity line of credit facility with Commerce Court Small Cap Value Fund, Ltd., or Commerce Court. On March 15, 2010, we completed a draw down and sale to Commerce Court of approximately 4.2 million shares of our common stock, at a price of approximately $1.49 per share, for net proceeds of approximately $6.1 million. We are using the proceeds of this draw down to fund our efforts to develop registration strategies and explore partnering and other strategic relationships to support the continued development of picoplatin in small cell lung, colorectal, prostate and ovarian cancers. We and Commerce Court, by mutual agreement, terminated this facility immediately prior to our entry into the equity line with Small Cap Biotech on December 20, 2010.

Bay City Capital Loan Commitment. Concurrent with execution of the Merger Agreement discussed above in the section entitled “Recent Events”, Bay City Capital LLC, or BCC, a related party, executed a binding commitment to loan us $2.4 million, on a nonrecourse basis, prior to the closing of the merger. We refer to this as the BCC Loan. Two of our directors, Fred B. Craves, Ph.D. and Carl S. Goldfischer M.D., are managing directors and managers of BCC and its affiliates. Michael S. Perry, D.V.M., Ph.D., our President and Chief Medical Officer, is a venture partner of BCC. Our receipt of the loan funds is a condition to Allozyne’s obligation to effect the merger, and the BCC Loan will continue as an obligation of the combined company following closing of the merger. We intend to use the loan proceeds to satisfy employee severance, change of control and other related employee obligations arising in connection with the Allozyne merger, which are expected to total approximately $2.4 million. We paid BCC a commitment fee of $50,000 in connection with BCC’s delivery of its binding commitment on June 22, 2011. The commitment fee is recorded as an issuance cost and will be amortized over the term of the loan.

The terms of the BCC Loan will be as set forth in a loan and security agreement and related instruments, or the Loan Documents, agreed upon by us and BCC at the time of delivery of the loan commitment. Under the loan and security agreement, BCC will lend us $2.4 million, against our issuance of a secured non-recourse promissory note. The BCC Loan will accrue interest at the rate of 18% per annum, with the principal amount of the BCC Loan, all accrued interest and all other amounts payable under the Loan Documents due and payable in full within one year after the date of the BCC Loan. Repayment and performance of the BCC Loan will be secured by a first priority exclusive security interest in our trademarks, patents, agreements and other rights and interests related to picoplatin, or the Collateral.

Upon the occurrence and continuation of any event of default under the Loan Documents, BCC will have the right, without notice or demand, to any or all of the following:

•

declare all obligations under the Loan Documents immediately due and payable;

•

take possession of the Collateral and take any action that BCC considers necessary or reasonable to protect the Collateral and/or its security interest in the Collateral; or

•

exercise all rights and remedies available to BCC under the Loan Documents or at law or equity.

In addition, BCC may during any event of default require us (or the combined company) to:

•

seek any consent required to transfer or assign all or part of the Collateral to BCC or its designee;

•

grant to BCC or its designee an exclusive license or sublicense to all or part of the Collateral; and

•

assign to BCC any investigational new drug application or other regulatory approval pertaining to the Collateral, to the extent assignable.

Any of the following would be deemed “event of default” under Loan Documents:

•

the failure to pay the principal amount of the BCC Loan and all accrued interest in full on the maturity date;

•

any breach of any term, covenant, condition or agreement contained in the Loan Documents;

•

the material inaccuracy of any representation or warranty made in the Loan Documents;

•

the occurrence of a change of control of the combined company without the prior written consent of BCC;

•

the failure to create a valid and perfected first priority security interest in any Collateral; and

•

any bankruptcy or insolvency proceedings of us (or the combined company).

The loan and security agreement provides that BCC will not enter into, and will require that any transferee or licensee of any interest in the Collateral not enter into, any agreement or arrangement with W.C. Heraeus GmbH, or Heraeus, or its affiliates for the supply of picoplatin active pharmaceutical ingredient, or API, without assuming our obligation to repay the costs to Heraeus for the purchase and set-up of dedicated equipment under the picoplatin API commercial supply agreement between us and Heraeus. This obligation is described below under the heading “Operating Agreements”.

During the time that any obligations under the Loan Documents are outstanding, we will agree not to take the following actions without first obtaining the written consent of BCC:

•

change our state of organization, location of our chief executive office/chief place of business or remove its books and records from the location specified in the Loan Documents, or change its name, identity or structure to such an extent that any financing statement filed in connection with the Loan Documents would become ineffective or seriously misleading, except that we may change our name to “Allozyne, Inc.” upon closing of the merger;

•

deliver any notice of termination or terminate any of the assigned agreements included in the Collateral.

GE Business Financial Services, Inc. and Silicon Valley Bank Loan Agreement. In September 2008, we borrowed approximately $20.0 million of additional net cash proceeds under an amended and restated loan facility with GE Business Financial Services, Inc. and Silicon Valley Bank for an aggregate total principal amount of $27.6 million. The advances under the loan facility were repayable over 42 months, commencing on October 1, 2008. Interest on the advances was fixed at 7.8% per annum. Final loan payments in the amounts of $1.1 million and $0.9 million were due upon maturity or earlier repayment of the loan advances. All final payment amounts were accreted to the note payable balance over the term of the loan facility using the effective interest rate method and reflected as additional interest expense. The loan facility was secured by a first lien on all of our non-intellectual property assets.

On December 20, 2010, we voluntarily prepaid the $12.4 million aggregate principal, interest and fees due under the loan facility. The payoff amount reflects approximately $9.9 million of aggregate outstanding principal and accrued but unpaid interest as of December 20, 2010, approximately $0.5 million remaining interest due to be paid in the future, and a final payment of approximately $2.0 million. We recorded a loss on extinguishment of debt of approximately $1.2 million in the fourth quarter of 2010 in connection with the prepayment of the loan facility. The prepayment discharged our material liabilities and obligations under the loan facility, and the loan facility, including the security interests of the lenders, terminated on the prepayment date.

Operating Agreements. We entered into clinical supply agreements with Heraeus and Baxter Oncology GmbH, or Baxter, pursuant to which they produce picoplatin API and finished drug product, respectively, for our clinical trials. The API clinical supply agreement with Heraeus continues in effect until terminated by mutual agreement of the parties or by either party in accordance with its terms. Manufacturing services under the Heraeus clinical supply agreement are provided on a purchase order, fixed-fee basis. Our finished drug product clinical supply agreement with Baxter had an initial term ending December 31, 2009, with two one-year renewal options. In December 2009, we exercised our first renewal option, extending the term to December 31, 2010. We did not exercise our second renewal option, and the agreement terminated on December 31, 2010. The total aggregate cost during the three and nine month periods ended September 30, 2011 attributable to follow-on activities for clinical supplies of picoplatin API and finished drug product produced in prior periods were approximately $10,000 and $157,000, respectively. We did not have any purchase commitments under these agreements and did not incur any penalty or other costs as a result of our election not to renew the Baxter agreement.

We entered into a picoplatin API commercial supply agreement with Heraeus in March 2008 and a finished drug product commercial supply agreement with Baxter in November 2008. Under these agreements, Heraeus and Baxter will produce picoplatin API and finished drug product, respectively, for commercial use. Manufacturing services are provided on a purchase order, fixed-fee basis, subject to certain purchase price adjustments and minimum quantity requirements. The API commercial supply agreement continues for an initial term ending December 31, 2013, and the finished drug product commercial supply agreement continues for an initial term ending November 22, 2013, in each case subject to extension. We are required to repay Heraeus for the purchase and set-up of dedicated manufacturing equipment costing approximately $1.5 million in the form of a surcharge on an agreed upon amount of the picoplatin API ordered and delivered on or before December 31, 2013. If we order and take delivery of less than the agreed upon amount of picoplatin API through December 31, 2013, we will be obligated to pay the balance of the equipment cost as of that date. Heraeus completed construction of the equipment as of December 31, 2009. We determined that the equipment should be accounted for as a capital lease and, accordingly, recognized an asset and long-term obligation for the equipment of approximately $1.5 million, respectively. We will reflect the surcharge payments as reductions in the capital lease balance outstanding and will accrete a finance charge to interest expense as specified under the agreement. The balance of the obligation at September 30, 2011,

was approximately $1.6 million, including accreted interest of approximately $0.2 million. Due to the delay in our plans for the commercialization of picoplatin, which we do not anticipate will occur before 2014, if at all, we determined that our capital lease asset for equipment under the Heraeus agreement was impaired as of December 31, 2009, and, therefore, recognized an impairment charge of $1.5 million in 2009. We do not have any purchase commitments under these agreements.

On February 12, 2010, we entered into a sublease agreement with Veracyte, Inc., pursuant to which Veracyte leased from us, effective March 1, 2010, approximately 11,000 square feet of our 17,045 square feet of our former executive office space located at 7000 Shoreline Court, South San Francisco, California. Base sublease rental income for this space was $17,600 per month. In September 2010, the subleased space expanded to encompass the entire 17,045 square feet of our former executive office space. Base sublease rental income on this space is $28,124 per month until expiration of the sublease on July 10, 2011, at which time Veracyte began leasing the entire space directly from the landlord. Additional rent under the sublease was payable monthly to us by Veracyte, based on Veracyte’s share of operating expenses attributable to the subleased space. We saved approximately $0.7 million in aggregate rental and operating expenses over the term of the sublease.

During the three and nine month periods ended September 30, 2011, total rent (also equal to total aggregate minimum lease payments) was approximately $38,000 and $114,000, respectively, under the operating leases for our San Francisco and Seattle facilities. As discussed above, on September 1, 2010, we sublet all of our former executive office space in South San Francisco to Veracyte. On September 15, 2010, we relocated our executive offices to 750 Battery Street, Suite 330, San Francisco, where we occupy approximately 1,500 square feet of office space under a one-year cost sharing agreement with VIA Pharmaceuticals, Inc., cancelable upon 30 days prior notice. Monthly costs and shared expenses payable by us under this arrangement are approximately $5,200. In November 2010, we relocated our Seattle office to approximately 3,800 square feet of leased space located at 300 Elliott Avenue West, Suite 530. Under the Seattle lease agreement, we pay base rent and shared costs of approximately $7,400 per month. The Seattle lease has a one-year term that is cancelable upon 30 days prior notice and may be renewed for an additional term of three years. We and the landlord mutually agreed to terminate our prior Seattle office lease, without penalty, effective November 24, 2010. If the proposed merger is consummated, we will terminate both our San Francisco and Seattle leases prior to year-end 2011. We do not expect to incur any penalties or additional costs in connections with such terminations.

Potential Milestone and Royalty Obligations. If we are successful in our efforts to commercialize picoplatin, we would, under our amended license agreement with Sanofi-Aventis (successor to Genzyme Corporation (successor to AnorMED, Inc.)), be required to pay Sanofi-Aventis up to $5.0 million in commercialization milestones upon the attainment of certain levels of annual net sales of picoplatin. Sanofi-Aventis also would be entitled to royalty payments of up to 9% of annual net sales of picoplatin related products.

Additional Capital Requirements. We will require substantial additional capital to support our future operations and the continued development of picoplatin. We may not be able to obtain required additional capital and/or enter into strategic transactions on a timely basis, on terms that ultimately prove favorable to us, or at all. Conditions in the capital markets in general, and in the life science capital markets specifically, may affect our potential financing sources and opportunities for strategic transactions. Uncertainty about current global conditions and the current financial uncertainties affecting capital and credit markets may make it particularly difficult for us to obtain capital market financing or credit on favorable terms, if at all, or to attract potential partners or enter into other strategic relationships. In addition, we have no assurance that any strategic transaction or financing would, once identified, be approved by our shareholders, if approval is required. We anticipate that any such transaction would be time-consuming and may require us to incur significant additional costs, even if not completed. Our current financial condition may make securing additional capital extremely difficult. These factors, among others, raise substantial doubt about our ability to continue as a going concern.

We believe that our current cash resources and cash equivalents will be adequate to continue operations at substantially their current level into the fourth quarter of 2011. Our operating budget, however, does not include additional costs associated with the proposed merger with Allozyne or, if we are unable to complete the proposed merger, the costs of a liquidation and winding up the company. These costs may be substantial and include costs incurred in connection with the proposed merger, estimated to total approximately $1.6 million in addition to severance and accrued vacation expense, accelerated payments due under existing contracts, and legal, accounting and/or advisory fees. We can provide no assurance that we will have sufficient cash to cover these additional costs.

The amount of additional capital we will require in the future will depend on a number of factors, including:

•

our success in implementing the proposed merger with Allozyne and the costs and timing of such transaction;

•

the extent of our success in seeking a partnering and other strategic collaborations to support our current picoplatin program and the terms, costs and timing of any such arrangements;

•

if the merger with Allozyne is not consummated, the costs associated with the dissolution and winding up of the company;

•

the cost, timing and outcomes of any future picoplatin clinical studies and regulatory approvals;

•

the availability and cost of picoplatin API and finished drug product;

•

the timing and amount of any milestone or other payments we may receive from or be obligated to pay to potential collaborators and other third parties;

•

our degree of success in commercializing picoplatin;

•

the emergence of competing technologies and products, and other adverse market developments;

•

the acquisition or in-licensing of other products or intellectual property; and

•

the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights.

Our condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for a reasonable period following the date of such financial statements. These statements do not include any adjustments that might result from the outcome of this uncertainty. The report of our independent registered public accountants issued in connection with our annual report on Form 10-K for the year ended December 31, 2010 contains a statement expressing substantial doubt regarding our ability to continue as a going concern.

Nasdaq Capital Market Listing. On July 20, 2010, we received a letter from the Nasdaq Listing Qualifications Staff, or the Staff, stating that the minimum bid price of our common stock had been below $1.00 per share for 30 consecutive business days and that we were not in compliance with the minimum bid price requirement for listing on The Nasdaq Global Market. We were provided an initial period of 180 calendar days, or until January 18, 2011, to regain compliance. We transferred the listing of our common stock to The Nasdaq Capital Market on December 17, 2010, at which time we were afforded the remainder of the initial compliance period. On January 19, 2011, we received a letter from the Staff notifying us that we have been granted an additional 180 calendar day period, or until July 18, 2011, to regain compliance with the minimum bid price requirement. The additional time period was granted based on our meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on The Nasdaq Capital Market, with the exception of the bid price requirement, and our written notice to Nasdaq of our intention to cure the deficiency during the additional compliance period by effecting a reverse stock split, if necessary. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for at least ten consecutive business days during the additional time period. Nasdaq may, in its discretion, require our common stock to maintain a closing bid price of at least $1.00 for a period in excess of ten consecutive trading days, but generally no more than 20 consecutive business days, before determining that we have demonstrated an ability to maintain long-term compliance.

On June 9, 2011, after election of directors and ratification of auditors, we adjourned our 2011 annual meeting of shareholders to July 8, 2011 and further adjourned to July 22, 2011, to solicit additional proxies to vote in favor of a proposal to authorize our board of directors to, on or before August 1, 2011, implement a reverse stock split of our outstanding common stock at a ratio between 1-for-15 and 1-for-25, with the exact ratio to be set by the

board in its discretion. The purpose of the reverse stock split proposal was to facilitate our efforts to regain compliance with The Nasdaq Capital Market minimum bid price requirement. We adjourned our reconvened annual meeting of shareholders on July 22, 2011, with an insufficient number of votes to approve the reverse stock split proposal. Although 91.6% of the shareholders who voted at the annual meeting voted in favor of the reverse stock split proposal, those shareholders held only 49.2% of our common stock outstanding and entitled to vote. A majority (50% plus one share) of our common stock outstanding and entitled to vote was required to approve the reverse stock split proposal.

On July 19, 2011, we received a letter from the Staff advising that we have not regained compliance with the $1.00 per share minimum bid price requirement of Nasdaq Listing Rule 5550(a)(2) and, unless we request an appeal of this determination, our common stock would be delisted from The Nasdaq Capital Market. On August 25, 2011, our representatives attended a hearing to appeal the Staff decision and to present a plan for compliance. On September 2, 2011, the Nasdaq Hearings Panel determined to allow the continued listing of our common stock on The Nasdaq Capital Market subject to the conditions that on or before December 31, 2011, we must have (i) held a shareholders’ meeting; (ii) obtained shareholder approval for the merger with Allozyne and a reverse stock split in a ratio sufficient to allow the stock to trade above $4.00 per share; and (iii) obtained approval of the Staff for listing of the combined company on The Nasdaq Capital Market. We intend to regain compliance with the minimum bid price requirement by undertaking a reverse stock split of our outstanding common stock, at an exchange ratio of 1-for-40, in connection with the proposed merger with Allozyne. We are seeking shareholder approval of the proposed reverse stock split at the special meeting of our shareholders to be held on November 21, 2011 in connection with the merger. A detailed description of the reverse stock split proposal and other matters to be voted on at the special meeting is included in the definitive proxy statement/prospectus/consent solicitation dated October 10, 2011, which was mailed to our and Allozyne shareholders on or about October 13, 2011. See the section in Part I, Item 2 above entitled “Important Additional Information Filed with the SEC.” There can be no assurance that the proposed reverse stock split will be successfully implemented or that we will in the future continue to meet the $2.5 million shareholders’ equity and other requirements for continued listing on The Nasdaq Capital Market.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Our market rate risks at September 30, 2011 have not changed materially from those discussed in Item 7A of our Form 10-K for the year ended December 31, 2010 filed with the SEC on March 30, 2011.

Item 4.

Controls and Procedures

Under the supervision and with the participation of management, including the Chief Executive Officer and the Interim Chief Financial Officer, the Company has evaluated the effectiveness and design of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of September 30, 2011. Based on that evaluation, the Chief Executive Officer and the Interim Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of September 30, 2011.

There were no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s control over financial reporting.

Limitations on the Effectiveness of Controls

The Company’s management, including its Chief Executive Officer and its Interim Chief Financial Officer, does not expect that the Company’s disclosure controls or internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of that control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of control must be considered relative to their costs. Because of the inherent limitation in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the reality that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more persons, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become

inadequate because of changes in conditions or deterioration in the degree of compliance with the policies and procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

On June 27, 2011, a putative class action lawsuit was filed in the Superior Court of California, San Francisco County, against Poniard, its board of directors and Allozyne. The action, titled Aronheim v. Poniard Pharmaceuticals, Inc., et al. (Case Number: CGC-11-512033) alleges in summary that, in connection with the proposed merger with Allozyne, the members of the Poniard board of directors breached their fiduciary duties by purportedly conducting an unfair sale process and agreeing to an unfair sale price, by purportedly making inadequate disclosures about the merger, and by purportedly engineering the proposed merger to provide them with improper personal benefits. The action also alleges that Poniard and Allozyne aided and abetted the Poniard board members’ purported breaches of fiduciary duty. The plaintiff seeks, among other things, a declaration that the suit can be maintained as a class action, a declaration that the Merger Agreement was entered into in breach of the Poniard board members’ fiduciary duties, rescission of the Merger Agreement, an injunction against the proposed merger, a directive that the Poniard board members exercise their fiduciary duties to obtain a transaction that is in the best interests of Poniard’s shareholders, the imposition of a constructive trust in favor of the plaintiff and the class upon any benefits improperly received by the Poniard board members as a result of their purportedly wrongful conduct and fees and costs. Poniard and its board of directors believe that the claims are without merit

On August 24, 2011, a putative class action lawsuit was filed in the Superior Court of California, San Francisco County, against Poniard and its board of directors, as well as against Poniard’s Chief Executive Officer, its President and Chief Medical Officer, its Interim Chief Financial Officer, its Senior Vice President of Corporate Development, and its Vice President, Legal and Corporate Secretary. The action, titled Wing Sze Wu v. Robert S. Basso, et al. (Case Number: CGC-11-513652), alleges in summary that the members of the Poniard board of directors breached their fiduciary duties by agreeing to pay purportedly excessive compensation and benefits to Poniard’s senior management, that such members of Poniard’s senior management were allegedly unjustly enriched when they received such executive compensation and benefits, that Poniard’s board of directors breached their fiduciary duties by conducting a purportedly unfair sale process in connection with the proposed transaction with Allozyne and agreeing to an allegedly unfair and dilutive sale price and a transaction that included improper “deal protection measures,” and by providing allegedly materially inadequate disclosures and material disclosure omissions to Poniard’s shareholders. The plaintiff seeks, among other things, a declaration that the suit can be maintained as a class action, an injunction against the proposed merger, rescission of the proposed merger to the extent it occurs before final judgment in the lawsuit or rescissory damages, a directive that the defendants account for all damages allegedly caused by them and account for all profits and special benefits obtained as a result of their alleged breaches of their fiduciary duties, and for costs, attorneys fees, expenses and such other relief as the court deems just and proper. Poniard, its board of directors and Poniard’s management believe that the claims are without merit.

The parties to both the Aronheim case and the Wu case have signed a Memorandum of Understanding dated October 19, 2011, providing for the settlement of both cases. The settlement is subject to final settlement documentation, court approval, and the closing of the merger transaction, among other things. The settlement would provide for dismissal of both the Aronheim and Wu cases, for certain additional disclosures, and for payment of plaintiffs’ attorneys’ fees. The Company has estimated a possible range of loss and has accrued a loss contingency equal to the minimum value of this range, or $215,000. There can be no assurance that the settlement will become effective. If the settlement does not become effective, the Aronheim and Wu cases will continue. If that should happen, the Company would vigorously defend the lawsuits. An estimate of the possible loss or range of loss in that event cannot be made at this time.

Item 1A.

Risk Factors

Our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 30, 2011, contains a detailed discussion of certain risk factors that could materially adversely affect our business, operating results and/or financial condition. In addition to other information contained in this report, you should carefully consider the potential risks or uncertainties that we have identified in Part I, “Item 1A, Risk Factors,” in our Form 10-K. You are also urged to carefully review the section entitled “Risk Factors” included in the definitive proxy statement/prospectus/consent solicitation dated October 10, 2011, filed with the SEC on October 12, 2011, with respect to risks related to the proposed merger and transactions contemplated thereby. Additional risks and uncertainties not currently deemed to be material also may materially or adversely affect our business, financial condition or results of operations.

We may not be able to complete the merger with Allozyne, in which case, we will need to explore other alternatives and may file for bankruptcy.

We cannot assure you that we will be able to complete the proposed merger with Allozyne in a timely manner or at all or that the proposed merger will return value to our shareholders. The Merger Agreement is subject to many closing conditions and termination rights. In addition to our picoplatin product candidate, our assets currently consist primarily of our limited cash and cash equivalents.

We estimate that our current cash resources will be sufficient to continue operations at substantially their current level into the fourth quarter of 2011. Our operating budget, however, does not include additional costs associated with the proposed merger with Allozyne or, if we are unable to complete the proposed merger, the costs of a liquidation and winding up the company. These costs may be substantial and include costs incurred in connection with the proposed merger, estimated to total approximately $1.6 million in addition to severance and accrued vacation expense, accelerated payments due under existing contracts, and legal, accounting and/or advisory fees.

If the merger with Allozyne is not completed, our board of directors will be required to explore alternatives for our business and assets. These alternatives might include raising capital, seeking to merge or combine with another company, seeking dissolution and liquidation, or initiating bankruptcy proceedings. There can be no assurance that any third party will be interested in merging with us or would agree to a price and other terms that we would deem adequate or that our shareholders would approve any such transaction. Although we may try to pursue an alternative transaction and would seek to continue our current efforts to enter into a partnership or other strategic collaboration to support the continued development of picoplatin, we likely will have very limited cash resources and likely will be forced to file for federal bankruptcy protection, unless we raise additional capital. If we file for bankruptcy protection, our picoplatin license agreement and commercial supply contracts would be subject to termination by the other parties to those agreements and the obligation for dedicated manufacturing equipment under the commercial supply agreement with Heraeus, in the amount of $1.6 million as of September 30, 2011, would accelerate. In the event we seek bankruptcy protection, our creditors would have first claim on the value of our assets which, other than any remaining cash, would most likely be liquidated in a bankruptcy sale. We can give no assurance of the magnitude of the net proceeds of any such sale and whether such proceeds would be sufficient to satisfy our obligations to our creditors, let alone permit any distribution to our equity holders.

Item 6.

Exhibits

(a) Exhibits – See Exhibit Index below.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	PONIARD PHARMACEUTICALS, INC. (Registrant)

Date: October 28, 2011	By:	/s/ MICHAEL K. JACKSON
	Michael K. Jackson
	Interim Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX


Exhibit	Description

31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer	(A	)

31.2	Rule 13a-14(a)/15d-14(a) Certification of Interim Chief Financial Officer	(A	)

32.1	Section 1350 Certification of Chief Executive Officer	(A	)

32.2	Section 1350 Certification of Interim Chief Financial Officer	(A	)

101.	The following financial statements from the Poniard Pharmaceuticals, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of operations, (iii) condensed consolidated statements of cash flows, and (iv) the notes to the condensed consolidated financial statements.	(A	)

(A)	Filed herewith.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

PONIARD PHARMACEUTICALS, INC. 10-Q