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PONIARD PHARMACEUTICALS, INC.

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Note 1. Basis of Presentation (Continued)

Note 5 for further details). Taking into account the minimum unrestricted cash requirement and the Company's projected operating results, the Company believes that its current cash, cash equivalents and investment securities balances will provide adequate resources to fund operations at least into the first quarter of 2010. However, given the uncertainties of outcomes of the Company's clinical trials, there is no assurance that the Company can achieve its projected operating results. The Company has no assurance that, especially in light of the current distressed economic environment, the lenders will be willing to waive or renegotiate the terms of the loan agreement to address or avoid financial or other defaults. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management is developing plans to address the Company's liquidity needs, including raising additional capital through the public or private sale of equity or debt securities or through the establishment of credit or other funding facilities and entering into strategic collaborations, which may include joint ventures or partnerships for product development and commercialization, merger, sale of assets or other similar transactions, and taking actions to limit the Company's expenditures. There can be no assurance that the Company can obtain financing or otherwise raise additional funds, if at all, on terms acceptable to the Company or to its lenders.

Note 2. Fair value measurementsValue Measurements

        The Company holds available-for-sale securities that are measuredWe categorize assets and liabilities recorded at fair value whichin our condensed consolidated balance sheet based upon the level of judgment associated with inputs used to measure their value. Fair value is determined on a recurring basis. These securities are classified within Level 2 ofdefined as the fair value hierarchy prescribed by Statement of Financial Accounting Standard (SFAS) No. 157, "Fair Value Measurements," because the value of the securities is based on quoted market prices or broker/dealer quotations.

        The SFAS No. 157 framework requires fair value to be determined based on the exchange price that would be received forto sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants onat the measurement date. SFAS No. 157 establishes a fair value hierarchy which requires an entity toWe use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when measuring

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Note 2. Fairdetermining fair value measurements (Continued)

and then we rank the estimated values based on the reliability of the inputs used following the fair value.value hierarchy set forth by the Financial Accounting Standards Board ("FASB"). The standard describes the following three levels of inputs that may be used to measurethe FASB fair value:value hierarchy are as follows:

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



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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.



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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 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. 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.

        The following table presents a summary of the Company's assets and liabilities at fair value on a recurring basis:

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Note 2. Fair Value Measurements (Continued)

        The following table presents a summary of the Company's assets that are measured at fair value on a recurring basis (in thousands):

        As of September 30, 2009 and December 31, 2008, the Company's cash equivalents and investment securities are recorded at fair value as determined through market prices and other observable and corroborated sources. At September 30, 2009 the cash equivalents balance consists of $16,216,000 in money market funds and $1,304,000 of corporate debt securities purchased with a maturity date less than 90 days from the purchase date. Investment securities are comprised of corporate debt securities and federal government and agency securities (see Note 3 below for further details on investment securities).

        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, 2009.

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 (loss). 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.

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Note 3. Investment Securities (Continued)

        Investment securities consisted of the following at September 30, 2009 (in thousands):

        Investment securities consisted of the following at December 31, 2008 (in thousands):

        AsTable of September 30, 2008, the Company held a debt security issued by American General Finance Corporation (AGFC), a wholly-owned subsidiary of American International Group, Inc. (AIG), with a par value of $1,200,000, coupon rate of 3.875%, amortized cost of approximately $1,194,000 and maturity date of October 1, 2009. The market value for this security as of September 30, 2008, based on Level 2 inputs as described in SFAS No. 157, was approximately $788,000, resulting in an unrealized loss of approximately $406,000. This unrealized loss was the result of a downgrade by S&P in September 2008, reducing the credit rating of AGFC, from A+ to BBB, in connection with the downgrade in its rating on AIG. On October 3, 2008, Moody's followed with a downgrade of AGFC's credit rating, from A3 to Baa1. The Company's management has concluded that the unrealized loss on the AGFC debt security, and the other debt securities that it holds, is temporary due to a) the relatively short duration of the decline in value of the investments; b) the assessment of the Company's management that it is probable that all contractual amounts under the debt securities will be received and c) the Company's intent and ability to hold the securities until at least substantially all of the cost is recovered.Contents

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Note 4. Bank loanAccrued Liabilities

        Accrued liabilities consist of the following (in thousands):

Note 5. Note Payable

        On September 2, 2008, the Company entered into an Amended and Restated Loan and Security Agreement (loan agreement)("loan agreement"), with GE Business Financial Services Inc. (formerly known as Merrill Lynch Capital) and Silicon Valley Bank. The loan agreement amends and restates in its entirety the earlier Loan and Security Agreement dated as of October 25, 2006 (original loan)("original loan"), with Merrill Lynch Capital and Silicon Valley Bank, pursuant to which the Company obtained a $15,000,000 capital loan that was to mature on April 1, 2010.

        The loan agreement provides for a $27,600,000 senior secured term loan facility (loan facility)("loan facility") to be made available as follows: (i) an initial term loan advance in the amount of $17,600,000, which is comprised of (a) the outstanding principal balance of $7,600,000 remaining on the original loan and (b) an additional cash advance in the amount of $10,000,000 (cash portion)("cash portion"), which was fully funded on September 2, 2008; and (ii) a second term loan advance in the amount of $10,000,000, which was fully funded on September 30, 2008. The cash portion of the initial term loan advance and the proceeds of the second term loan advance will be used to fund the Company's clinical trials and for general

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Note 4. Bank loan (Continued)

corporate purposes. The advances under the loan facility are repayable over 42 months, commencing on October 1, 2008. Interest on the advances is fixed at 7.80% per annum. Final loan payments in the amounts of $1,070,000 and $900,000 are due upon maturity or earlier repayment of the initial term loan advance and the second term loan advance, respectively. Additionally, as a condition to the amendment and restatement of the original loan, the Company agreed to modification of the final payment obligations under the original loan, pursuant to which the Company paid $600,000 to Silicon Valley Bank on September 2, 2008, the effective date of the loan facility, and will pay $675,000 to GE Business Financial Services on the earlier of March 31, 2010 or the date of repayment of the loan facility. All final payment amounts will beare being 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. All interest payable under the loan agreement and the full amount of the final payments must be paid upon any prepayment of a term loan advance. The loan facility is secured by a first lien on all of the non-intellectual property assets of the Company.

        In connection with the loan agreement, the Company issued to the lenders ten-year warrants to purchase an aggregate of 219,920 shares of the Company's common stock at an exercise price of $4.297 per share. The fair value of the warrants using the Black-Scholes option-pricing model was approximately $928,000 based upon assumptions of expected volatility of 90%, a contractual term of ten

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Note 5. Note Payable (Continued)

years, an expected dividend rate of zero and a risk-free interest rate of 3.74%. The portion of the loan proceeds allocable to the warrants is approximately $806,000 based on the relative fair value of the warrants, which the Company recorded as additional discount to notes payable. The total of the final loan payments and the proceeds allocated to the warrants of approximately $4,051,000 will beare being amortized to interest expense using an effective interest rate of 13.8%. At September 30, 2009, the outstanding principal balance under the loan facility was $20,409,000, net of discount of $1,951,000.

        The loan agreement contains restrictions on the Company's ability to, among other things, dispose of certain assets, engage in certain mergers and acquisition transactions, incur indebtedness, create liens on assets, make investments, pay dividends and repurchase stock. The loan agreement also contains covenants requiring the Company to maintain unrestricted cash in an amount equal to the lesser of (i) $17,940,000 or (ii) the outstanding aggregate principal balance of the term loans plus $4,000,000. The loan agreement contains events of default that include nonpayment of principal, interest or fees, breaches of covenants, material adverse changes, bankruptcy and insolvency events, cross defaults to any other indebtedness, material judgments, inaccuracy of representations and warranties, and events constituting a change of control. The occurrence of an event of default would increase the applicable rate of interest by 5% and could result in the acceleration of the Company's payment obligations under the loan agreement. The Company was in compliance with all loan covenants as of September 30, 2009.

Note 6. Committed Equity Line of Credit

        On August, 19, 2009, the Company entered into an equity line of credit arrangement with Azimuth Opportunity Ltd. ("Azimuth") pursuant to a Common Stock Purchase Agreement ("Purchase Agreement"), which provides that, upon the terms and subject to the conditions set forth therein, Azimuth is committed to purchase up to $60 million worth of shares of the Company's common stock over the 18-month term of the Purchase Agreement. From time to time over the term of the Purchase Agreement, the Company may, at its sole discretion and upon presentation of a draw down notice, require Azimuth to purchase its common stock over ten consecutive trading days or such other period mutually agreed upon by the Company and Azimuth ("Draw Down Period"). Each draw down is subject to limitations based on the price of the Company's common stock and a limit of 2.5% of the Company's market capitalization at the time of the draw down. The Purchase Agreement requires a minimum price of $3.00 per share to allow the Company to issue shares to Azimuth. Under the Purchase Agreement, the Company may sell to Azimuth up to 6,955,606 shares of its common stock. The Company may present Azimuth with up to 24 draw down notices during the term of the Purchase Agreement with only one such draw down notice allowed per Draw Down Period and a minimum of five trading days required between each Draw Down Period. As of September 30, 2009, no shares have been sold under the Purchase Agreement.

Note 7. Restructuring and Asset Impairment

        Effective March 31, 2009, the Company implemented a strategic restructuring plan to refocus its cash resources on clinical and commercial development of picoplatin, resulting in the discontinuation of the Company's preclinical research operations and reducing its workforce by approximately 12%, or eight employees. The Company incurred severance charges totaling $296,000 related to the reduction in staff. All severance charges related to the restructuring have been paid as of September 30, 2009. The

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Note 7. Restructuring and Asset Impairment (Continued)

Company incurred additional charges totaling approximately $172,000 related to the closure of its lab facilities in South San Francisco, California. Of this amount, $6,000 was incurred as share-based compensation expense, $12,000 was a write-off of prepaid expenses, and $154,000 was incurred for contract and other termination costs. As of September 30, 2009, $14,000 remained unpaid and is payable within one year.

        The following table summarizes the impact of the restructuring charges through September 30, 2009 (in thousands):

        In conjunction with the decision to discontinue the Company's preclinical research operations, the Company recognized an asset impairment loss of $588,000 on certain facilities and equipment related to the lab in South San Francisco, California. The loss on the assets was determined based on estimates of potential sales values of used equipment. These impairment charges established new cost bases for the impaired assets, which are included in assets held for sale and reported in the prepaid expenses and other current assets line on the accompanying Condensed Consolidated Balance Sheets.

        The following table summarizes information related to the impairment charges (in thousands):

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Note 5.8. Picoplatin licenseLicense and amendmentAmendment

        The Company has entered into an exclusive worldwide license, as amended, with 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. Genzyme 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

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Note 5. Picoplatin license and amendment (Continued)

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 Genzyme $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 Genzyme. Genzyme 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 Genzyme to a maximum of 9% of annual net product sales. In addition, the amendment reducedsales and eliminated the sharing of sublicense revenues with Genzyme on and after September 18, 2007.Genzyme.

        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)("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 II 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, determined the original useful life of the picoplatin intangible asset in accordance with the requirements of FASB SFAS No. 142, "Goodwill and Other Assets." 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 twelve years remaining for the primary patent term was the appropriate useful life for the picoplatin intangible asset, in satisfaction ofaccordance with the expected use and legal life provisions of SFAS No. 142,FASB's guidance for intangibles, and is amortizing the initial $2,000,000 license payment over this twelve year useful life beginning in April 2004. The Company concluded that no change in the twelve-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 license payment over the twelve year useful life and is amortizing the license amendment payment of $10,000,000 over the remainder of the twelve year useful life of the picoplatin intangible asset.

        Licensed Products consistsproducts consist of the picoplatin amortizable intangible asset with a gross amount of $12,000,000, and net of accumulated amortization of $2,890,000$4,104,000 and $1,979,000$3,193,000 at September 30, 20082009 and December 31, 2007,2008, respectively.

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Note 6.9. Net loss per common shareLoss 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

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Note 6. Net loss per common share (Continued)

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 the following stock options and warrants to purchase additional shares of common stock because the share increments would not be dilutive.

        In addition, 39,015 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 periods ended September 30, 20082009 and 2007,2008, respectively, because the effect of including such shares would not be dilutive.

Note 7.10. Stock-based compensationCompensation

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

        The Company recorded the following amounts of stock-based compensation expense, not including expense for options granted to non-employee consultants, for the periods presented (in thousands):

        The amountscompensation expense for the three and nine months ended September 30, 2008 includeincludes the grant of stock options duringin the first quarter of 2008 to Company officers to purchase an aggregate of 460,000 shares of

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Note 10. Stock-based Compensation (Continued)

common stock. 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 option, to the extent ofoptions, based on the Company's achievement of annual performance goals established under its annualmanagement incentive plan, at the discretion of the equity awards subcommittee of the Company's

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Note 7. Stock-based compensation (Continued)

committee of the Company's board of directors. Based on the overall achievement of corporate goals in 2006 and 2007 the equity awards subcommittee accelerated vesting with respect to 20% of the shares subject to the seven-year vesting schedule in both the second quarter of 2007 and the first quarter of 2008, resulting in2008. As of September 30, 2009, the cumulative accelerated vesting of 40%equals 60% of the shares subject to the seven-year vesting as of September 30, 2008.

        No income tax benefit has been recorded for stock option exercises as the Company has a full valuation allowance and management has concluded it is more likely than not that the net deferred tax asset will not be realized. As of September 30, 2008, total unrecognized compensation costs related to stock options was $14,361,000, which is expected to be recognized over a weighted average period of approximately three years.schedule.

        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:

        During 2008 the Company awarded 92,000 restricted stock units ("RSUs") under the 2004 Incentive Compensation Plan, as amended and restated (the "2004 Plan"), to non-officer employees as an incentive for future performance. An additional 4,000 RSUs were awarded in 2009 for this incentive program. Upon vesting, each RSU is payable with one share of the Company's common stock. The average fair value of the RSUs was $3.13 per unit, or approximately $299,000 in total, based upon the closing market price of the Company's common stock on the award dates. The RSUs vest based on the achievement of certain performance milestones during 2009 and 2010. As of September 30, 2009, the first two performance milestones were achieved and therefore 40% of the shares have vested and been released. The third performance milestone, if achieved no later than June 30, 2010, would result in the vesting of the remaining 60% upon the date of achievement. As of September 30, 2009, the Company determined that the third milestone is probable of being achieved and is therefore recognizing the related stock-based compensation expense on a pro-rata basis through the estimated date of achievement.

        On July 23, 2009 the Company awarded an additional 290,400 RSUs under the 2004 Plan to non-officer employees as an incentive for future performance. The fair value of the RSUs was $7.34 per unit, or approximately $2,132,000 in total, based upon the closing market price of the Company's common stock on the award date. The RSUs vest based on the achievement of certain performance milestones during 2010. As of September 30, 2009, the Company determined that milestones are probable of being achieved and is therefore recognizing the related stock-based compensation expense on a pro-rata basis through the estimated dates of achievement.

        On July 11, 2009, a Company director, was awarded 170,000 RSUs as compensation for consulting services. The RSUs vest 50% on each of the first two anniversaries of the grant and is subject to 100% acceleration upon the achievement of a performance milestone. The fair value of the award is

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Note 10. Stock-based Compensation (Continued)

approximately $1,272,000 at September 30, 2009, and will be re-measured at each reporting date because it is a non-employee award. As of September 30, 2009, the Company determined that the performance milestone is probable of being achieved in 2010 and is thus recognizing stock compensation for the fair value of the award on a pro-rata basis through the estimated date of achievement.

        No income tax benefit has been recorded for stock-based compensation expense as the Company has a full valuation allowance and management has concluded it is more likely than not that the Company's net deferred tax assets will not be realized. As of September 30, 2009, total unrecognized costs related to employee stock-based compensation was $11,074,000, which is expected to be recognized over a weighted average period of approximately 2.3 years.

Note 8.11. Comprehensive lossLoss

        The Company's comprehensive loss for the three and nine months ended September 30, 2009 and 2008 is summarized as follows (dollars in(in thousands):

Note 9.12. Recent accounting pronouncementsAccounting Pronouncements

        In September 2006,June 2009, the FinancialFASB established the FASB Accounting Standards Board (FASB)Codification ("FASB ASC") as the source of authoritative accounting principles recognized by the FASB. The FASB will issue new standards in the form of Accounting Standards Updates ("ASUs"). FASB ASC is effective for financial statements issued SFAS No. 157,for interim and annual periods ending after September 15, 2009 and therefore is effective for the Company in the third quarter of 2009. The issuance of FASB ASC does not change accounting principles generally accepted in the United States and therefore the adoption of FASB ASC only affects the specific references to accounting literature in the notes to the Company's consolidated financial statements.

        In August 2009, the FASB issued ASU 2009-05, "Fair Value Measurements and Disclosures (Topic 820)—Measuring Liabilities at Fair Value" ("ASU 2009-05," currently within the scope of ASC Subtopic 820-10). ASU 2009-05 provides clarification regarding valuation techniques when a quoted price in an active market for all financial instrumentsan identical liability is not available in addition to treatment of the existence of restrictions that prevent the transfer of a liability. The ASU also clarifies that both a quoted price in an active market for an identical liability at the measurement date and non-financial instruments accountedthe quoted price for at fair value on a recurring basis. SFAS No. 157 introduces a framework for measuring fair value and expands disclosure requirements aboutan identical liability when traded as an asset in an active market (when no adjustments to the quoted price of the asset are required) are Level 1 fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements, but does not in itself require any new fair value measurements. SFAS No. 157 for financial assets and liabilitiesThe ASU is effective for fiscal yearsthe first reporting

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Note 9.12. Recent accounting pronouncementsAccounting Pronouncements (Continued)

period, including interim periods, beginning after November 15, 2007. The Company adoptedissuance. Adoption of ASU 2009-05 did not have a material effect on the standard for those assets and liabilities as of January 1, 2008 with no material impact on itsCompany's condensed consolidated financial statements.

        In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative InstrumentsNote 13. Commitments and Hedging Activities." SFAS No. 161 requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.Contingencies

        The Company is currently evaluatingentered into a picoplatin active pharmaceutical ingredient ("API") commercial supply agreement with W.C. Heraeus ("Heraeus") in March 2008. Under this statementagreement Heraeus will produce 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 its impact, if any,minimum quantity requirements. The costs to Heraeus for the purchase and set-up of dedicated equipment as required under the commercial supply agreement, estimated to be approximately $1,800,000 (including interest charges of approximately $336,000) will be repaid by the Company in the form of a surcharge on the Company's consolidated financial statements.

        In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, "Determinationan agreed upon amount of the Useful Lifepicoplatin API ordered and delivered on or before December 31, 2013. If the Company orders and takes delivery of Intangible Assets." This FSP amendsless than the factors that shouldagreed upon amount of picoplatin API through December 31, 2013, it will be considered in developing renewal or extension assumptions usedobligated to determinepay the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets." The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair valuebalance of the asset under SFAS No. 141R, and other GAAP. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating this statement and its impact, if any, ondedicated equipment cost as of that date. As of September 30, 2009, Heraeus had completed partial construction of the Company's consolidated financial statements.

        In December 2007, the FASB issued SFAS No. 141R (revised 2007), "Business Combinations," which replaces SFAS No. 141. The statement retains the purchase methoddedicated equipment at a cost of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the accounting for a purchase. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for acquisitions occurring in fiscal years beginning after December 15, 2008. Whileapproximately $1,722,000 (including interest). Because the Company is currently evaluatingnot under a present obligation to pay this statementamount and its impact, ifthe agreement is not under any potential circumstance of default or termination, it is not probable that a financial liability exists for this amount as of September 30, 2009 and therefore no such liability was recorded on the Company'scondensed consolidated financial statements, it believesbalance sheet as of that date. The Company anticipates that the adoption of SFAS No. 141R would have an impact on the accounting for any future acquisition, if one were to occur.

        In June 2007, the FASB ratified the EITF consensus on EITF Issue No. 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities." EITF Issue No. 07-3 requires that nonrefundable advance payments for goods or services thatdedicated equipment will be used or renderedready for future researchuse during the fourth quarter of 2009, after which it expects to account for the equipment and development activities should be deferred and capitalized. Such amounts should be recognizedrelated surcharge payments as an expense as the related goods are delivered or the related services are performed. Entities should continue to evaluate whether they expect the goods to be delivered or services to be rendered. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. The Company adopted EITF Issue No. 07-3 on January 1, 2008, resulting in the temporary deferral of costs incurred for research and development activities from the time payouts are made until the time goods or services are provided.a capital lease.

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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 Private Securities Litigation Reform Act of 1995. These statements relate to future events or future financial performance and are subject to change based on various important factors, many of which are beyond our control. In some cases, you can identify forward-looking statements by terminology such as "currently," "may," "will," "should," "expect," "plan," "intend," "anticipate," "believe," "target," "estimate," "predict," "potential," "propose" or "continue," the negative of these terms or other terminology. These statements reflect our current views with respect to future events and are only predictions. Actual events or results may differ materially.based on assumptions and are subject to risks and uncertainties that are difficult to predict. In evaluating these statements, you should specifically consider various factors described below in the section entitled "Risk Factors." These and other factors may cause our actual results to differ materially from any forward-looking statements contained in this report or otherwise made by us.

        Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on our forward-looking statements, which speak only as of the date of this report. 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.

Critical Accounting Policies and Estimates

        Our critical accounting policies and estimates have not materially changed except for our accounting for the fair value measurements of financial assets and liabilities, from those reported in our Annual Report on Form 10-K for the year ended December 31, 20072008 filed with the SEC on March 13, 2008.16, 2009. For a more complete description, please refer to our Annual Report on Form 10-K. Refer to Note 9, Fair Value Measurements, included in this Form 10-Q for the three and nine months ended September 30, 2008, for a more complete discussion of our accounting for the fair value measurements of our financial assets and liabilities and the related disclosures.

Results of Operations

Three and Nine Months Ended September 30, 20082009 Compared to the Three and Nine Months Ended September 30, 20072008

        We had no revenue for the three and nine months ended September 30, 2008 and 2007, respectively.

        Total operating expenses for the third quarter of 2008 increased 58% to $12.4 million, from $7.9 million for the third quarter of 2007, and increased 44% to $35.8 million for the nine months ended September 30, 2008, from $24.9 million for the same period in 2007.

        Research and development (R&D) expenses increased 79% to $9.0 million for the third quarter of 2008, from $5.1 million for the third quarter of 2007. R&D expenses increased 50% to $24.5 million for the nine months ended September 30, 2008, from $16.4 million for the same period in 2007. The increase in R&D expenses for the three and nine months ended September 30, 2008 resulted primarily from increased costs associated with our picoplatin clinical trials and pre-clinical programs.

        General and administrative (G&A) expenses increased 21% to $3.4 million for the third quarter of 2008, from $2.8 million for the third quarter of 2007. G&A expenses increased 32% to $11.3 million for the nine months ended September 30, 2008, from $8.6 million for the same period in 2007. The increases in G&A expenses for the three months ended September 30, 2008 are due primarily to higher stock-based compensation expense, higher costs for consultants and increased legal costs. The increases

in G&A expenses for the nine months ended September 30, 2008 are due primarily to higher stock-based compensation expense and increased personnel costs.

        Cash, cash equivalents and investment securities as of September 30, 2008 were $84.0 million, compared with $92.6 million at December 31, 2007. During September 2008, we received approximately $20.0 million in net proceeds from our amended and restated bank term loan facility. On April 30, 2007, we received approximately $70.0 million in net proceeds from a public offering of 11.8 million shares of our common stock. We are using these proceeds for the continued clinical development of picoplatin, including funding our ongoing clinical trials in small cell lung cancer, advanced colorectal cancer and hormone-refractory prostate cancer, for discovery and research for new product candidates, and for general corporate purposes, including working capital. We believe that our current cash and cash equivalent balances will provide adequate resources to fund operations at least through the first quarter of 2010.

        As discussed below, we currently are conducting multiple ongoing clinical studies of picoplatin and, in April 2007, treated our first patient in our Phase III pivotal clinical study in small cell lung cancer. These clinical studies, as well as increases in personnel, initiation of internal research programs and plans for continued future growth, are expected to result in significant increases in our operating costs, including research and development and administrative expenses. We will require substantial additional funding to support our picoplatin and other proposed clinical development programs and to fund our operations. In the event that we do not obtain sufficient additional funds, we may be required to delay, reduce or curtail the scope of our picoplatin and other product development activities.

Major Research and Development Programs

        Our major research and development program is picoplatin, a new generation platinum-based chemotherapeutic designed to overcome platinum resistance in the treatment of solid tumors. We completed patient enrollment in our Phase II clinical study of picoplatin in small cell lung cancer in August 2006 and, based on positive interim median overall survival data from that ongoing study, we initiated a Phase III pivotal clinical trial of picoplatin in small cell lung cancer in April 2007. We completed enrollment in our Phase III trial in March 2009. In September 2009, we announced that 320 evaluable events (patient deaths) have occurred in our Phase III trial, enabling us to begin final analysis of data. We currently anticipate completing and reporting results of our preliminary analysis in November 2009 and, if positive, initiating a rolling submission of a new drug application ("NDA") with the U.S. Food and Drug Administration ("FDA") by year-end.

In May 2006, we treated our first patients in separatetwo Phase I/II clinical studies evaluating picoplatin as a first-line treatment ofof: (1) advanced colorectal cancer and hormone-refractory(2) castration-resistant (or hormone-refractory) prostate cancer. We initiated the Phase II component of our prostate cancer study in July 2007 and completed enrollment in December 2007. We initiated enrollment in the Phase II component of our colorectal cancer study in November 2007 and completed enrollment in May 2008. In AprilWe initiated the Phase II component of our prostate cancer study in July 2007 we initiatedand completed enrollment in December 2007. We also have completed a Phase I study of an oral formulation of picoplatin in advanced solid tumors.

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        Research and development expenses decreased 40% to $5.4 million from $9.0 million during the third quarter of 2009 and decreased 22% to $19.2 million from $24.5 million in the nine months ended September 30, 2009 compared to the comparable periods in 2008. Our research and development expenses are summarized as follows:

        Research and development expenses decreased significantly during the third quarter of 2009 from the comparable period in 2008 as a result of our picoplatin trials entering their final stages. We did not incur any research expenses during the third quarter of 2009 due to our strategic restructuring implemented effective March 31, 2009. Contract manufacturing costs decreased 38% to $0.7 million in the third quarter of 2009 and decreased 23% to $2.5 million in the first nine months of 2009 from the comparable periods in 2008. These decreases reflect reduced clinical drug production activity resulting from our trials nearing completion. Clinical costs decreased 35% to $4.2 million in the third quarter of 2009 and decreased 15% to $14.7 million in the first nine months of 2009 from the comparable periods in 2008. These decreases reflect reduced clinical activity in connection with our current picoplatin studies, all of which are fully enrolled and two of which are in a follow-up or extended follow-up stage. Share-based compensation expense increased 11% to $0.5 million in the third quarter of 2009 from the comparable period in 2008, due primarily to an employee incentive program introduced during the third quarter of 2009. Share-based compensation expense decreased 7% to $1.2 million for the nine months ended September 30, 2009 from the comparable period in 2008, primarily due to the effects of the acceleration of vesting of certain stock options in the first quarter of 2008.

        The following table shows expenses incurred for preclinical study support, contract manufacturing for clinical supplies and clinical trial services provided by third parties, as well as other associated costs for our picoplatin product candidate. The table also presents unallocated costs which consist of facilities, consulting fees, patent costs and other costs not directly allocable to development programs:

        Our external costs for picoplatin for the three and nine month periods ended September 30, 2009 and for the comparable periods in 2008, reflect costs associated with our various picoplatin clinical studies and the manufacture of drug product to support our clinical trials. We expect our external costs for picoplatin to increase slightly during the balance of 2009, compared to early 2009, as we prepare for submission of our rolling NDA, offset by lower costs for clinical trials upon completion of our Phase III pivotal trial of picoplatin in small cell lung cancer.

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        As of September 30, 2008,2009, we have incurred external costs of approximately $47.0$68.6 million in connection with our entire picoplatin clinical program. Total estimated future costs of our picoplatin Phase II and Phase III clinical trialstrial in small cell lung cancer areis in the rangesrange of $0.1$20.0 million to $0.3$25.0 million and $33.0 million to $39.0 million, respectively, through 2009,2010, including the cost of drug supply. Total estimated future costs of our picoplatin Phase II clinical trial in colorectal cancer and our Phase II clinical trial in hormone-refractorycastration-resistant prostate cancer are in the ranges of $3.5 million to $4.0 million to $6.0 million and $1.8$1.0 million to $2.5$1.5 million, respectively, through 2009,2010, including the cost of drug supply. Total remaining estimated future costs of our Phase I clinical trial inof an oral formulation of picoplatin are in the range of $0.2 million$50,000 to $0.5 million$100,000 through 2009, including the cost of drug supply.2010. These costs could be substantially higher if we have to repeat, revise or expand the scope of any of our clinical trials. Material cash inflows relating to our picoplatin development will not commence unless and until we complete required clinical trials and obtain U.S. Food and Drug Administration, or FDA and foreign regulatory agency marketing approvals, and then only if picoplatin finds acceptance in the marketplace. To date, we have not received any revenues from product sales of picoplatin.

        The risks and uncertainties associated with completing the development of picoplatin on schedule, or at all, include the following, as well as the other risks and uncertainties described in this report and in our Annual Report on Form 10-K for the year ended December 31, 2007:2008:

•

we may not have adequate funds to complete the development of picoplatin;



•

we may be unable to secure adequate supplies of picoplatin active pharmaceutical ingredient, or API, and finished drug product in order to complete our clinical trials;



•

picoplatin may not be shown to be safe and efficacious in clinical trials; and



•

we may be unable to obtain regulatory approvals of the drug or may be unable to obtain such approvals on a timely basis.

        If we fail to obtain marketing approvals for picoplatin, are unable to secure adequate clinical and commercial supplies of picoplatin APIactive pharmaceutical ingredient and finished drug product, or do not complete development and obtain United States and foreign regulatory agency approvals on a timely basis, our operations, financial position and liquidity could be severely impaired, including as follows:

•

we would not earn any sales revenue from picoplatin, which would increase the likelihood that we would need to obtain additional financing for our other research and development efforts; and



•

our reputation among investors might be harmed, which could make it more difficult for us to obtain equity capital on attractive terms, or at all.

        Because of the many risks and uncertainties relating to completion of clinical trials, receipt of marketing approvals and acceptance in the marketplace, we cannot predict the period in which material cash inflows from our picoplatin program will commence, if ever.

         SummaryGeneral and Administrative

        The increase in general and administrative expense of Research7% to $2.4 million for the third quarter of 2009, is due primarily to higher compensation costs and, Development Costs.for the nine months ended September 30, 2009, the decrease of 2% to $6.8 million is due primarily to lower consulting costs. Share-based compensation expense included in general and administrative expenses increased 23% to $1.4 million

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for the third quarter of 2009, over the comparable period of 2008, due primarily to the effects of restricted stock units awarded during the third quarter of 2009 to non-officer employees and a consultant. Share-based compensation expense decreased 19% to $3.5 million for the first nine months of 2009 from the comparable period in 2008 primarily due to the effects of the acceleration of vesting of certain stock options in the first quarter of 2008.

Restructuring and Asset Impairment Loss    Our

        Effective March 31, 2009, we implemented a strategic restructuring plan to refocus our cash resources on clinical and commercial development administration overhead costs,of picoplatin, resulting in the discontinuation of our preclinical research operations and reducing our workforce by approximately 12%, or eight employees. This restructuring resulted in charges of $0.5 million in the first quarter of 2009 consisting of rent, utilities, consulting fees, patent costs$0.3 million in severance charges and $0.2 million in other various overhead costs,expenses related to the closure of our lab facilities in South San Francisco, California.

        In conjunction with the decision to discontinue our preclinical research operations, we also recognized an asset impairment loss of $0.6 million on certain facilities and equipment related to the lab in South San Francisco, California. The loss on the assets was determined based on estimates of potential sales values of used equipment. These impairment charges established new cost bases for the impaired assets, which are included in total researchassets held for sale and development expense for each period, but are not allocated among our various projects. Our total researchreported in the prepaid expenses and development costs includeother assets line on the costs of various research efforts directed toward the identificationaccompanying Condensed Consolidated Balance Sheets.

Other Income and evaluation of future product candidates. These other research projects are preclinical and not considered major projects. Our total research and development costs are summarized below:

Summary of Research and Development Costs
Expense