Portfolio Press Release

Anesiva

10-K: ANESIVA, INC.

Anesiva, Inc. Press Release
25 March 2009

(EDGAR Online via COMTEX) — Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This report contains certain statements that may be deemed "forward-looking statements" within the meaning of United States of America securities laws. All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate and similar expressions or future conditional verbs such a will, should, would, could or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.

These statements include, without limitation, statements about our anticipated expenditures, including those related to clinical research studies, and general and administrative expenses; the potential size of the market for our products, future development and/or expansion of our products in our markets; our ability to obtain regulatory clearance; expectations as to our future performance; the future impact and ongoing appeal with respect to on-going litigation and the "Liquidity and Capital Resources" section of this report, including our need for additional financing. Our actual results will likely differ, perhaps materially, from those anticipated in these forward-looking statements as a result of various factors, including: our need and ability to raise additional cash, our ability to manage our current creditors and business partners, risks associated with laws or regulatory requirements applicable to us, market conditions, and unforeseen litigation to name a few. The forward-looking statements included in this report are subject to a number of additional material risks and uncertainties, including but not limited to the risks described in our filings with the Securities and Exchange Commission and under the "Risk Factors" section in Part I above.

We encourage you to read the "Risk Factors" section in Part 1 carefully. We caution you not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless an earlier date is indicated) and we undertake no obligation to update or revise the statements except as required by law. Such forward-looking statements are not guarantees of future performance and actual results will likely differ, perhaps materially, from those suggested by such forward-looking statements. You should also read the following discussion and analysis in conjunction with "Item 6. Selected Financial Data," and "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report on Form 10-K.

Liquidity

We incurred net losses of $103.2 million, $59.3 million and $55.6 million for the years ended December 31, 2008, 2007, and 2006 respectively. We have an accumulated deficit of $312.0 million as of December 31, 2008. Additionally, we have used net cash of $74.8 million, $48.2 million and $44.6 million to fund our operating activities for years ended December 31, 2008, 2007, and 2006, respectively. During the year ended December 31, 2008, we invested heavily in Adlea clinical development to complete the two Phase 3 trials in bunionectomy and total knee arthroplasty (TKA, or total knee replacement surgery) and the commercial product launch and discontinuation of Zingo, which ultimately caused us to incur significant restructuring charges. In addition, our net cash used in financing, including the repayment of the GE equipment loan and the Oxford loan, was $11.0 million. All of which contributed to our ending cash and cash equivalent balance of approximately $658,000 at December 31, 2008. To date these operating losses have been funded primarily from outside sources of invested capital.

During 2008, we initiated our commercialization activities relating to Zingo while simultaneously pursuing available financing sources to support operations and growth. We have had, and continue to have, an ongoing need to raise additional cash from outside sources to fund our operations. However, our announcement in November 2008 that we discontinued Zingo manufacturing and commercial operations and that the ACTIVE-1 Phase 3 clinical trial evaluating Adlea for use in bunionectomy surgeries did not meet its primary end point has significantly depressed our stock price. The current credit conditions and the downturn in the financial markets and the global economy may have severely impaired our ability to raise additional funds. At year-end December 31, 2008, we had higher total liabilities compared to total assets on our consolidated balance sheets. We believe that our existing cash and cash equivalents, including amounts received subsequent to December 31, 2008, will be sufficient to fund our activities into April 2009. Accordingly, the combination of these facts raises substantial doubt as to our ability to continue as a going concern. The accompanying consolidated financial statements and financial statement schedule have been prepared assuming that we will continue as a going concern. If we are unsuccessful in our efforts to raise additional outside capital in the near term, we will be required to significantly reduce our research, development, and administrative operations, including further reduction of our employee base, or we may be required to cease operations in order to offset the lack of available funding.

We are pursuing financing opportunities in both the private and public debt as well as through strategic transactions and corporate partnerships. We have an established history of raising capital through these platforms, and we are actively pursuing our options. On January 20, 2009, we entered into a securities purchase agreement (the "Investor Agreement") with Sofinnova Venture Partners VII, L.P., Alta California Partners III, L.P., Alta Embarcadero Partners III, LLC, Alta Partners VIII, LP, CMEA Ventures VII, L.P., CMEA Ventures VII (Parallel), L.P., InterWest Partners VIII, LP, InterWest Investors VIII, LP, and InterWest Investors Q VIII, LP (each an "Investor" and together the "Investors"), where we agreed to sell and issue securities (each a "Security" and together the "Securities") for a total principal amount of up to $7.0 million, subject to the terms and conditions set forth in the Investor Agreement. The Securities are secured by a first priority security interest in all of the assets we own. We will pay interest at a continuously compounding rate of seven percent per year. If we default under the Investor Agreement, we will pay interest at a continuously compounding rate of 14% per year. If a change of control event occurs as defined under the Investor Agreement, we will owe the Investors seven (7) times the amount of the outstanding principal amount of the Securities, plus all accrued but unpaid interest. Unless we pay the principal back early under the terms of the Investor Agreement or it is accelerated because of a default, we will pay the outstanding principal and accrued but unpaid interest at any time at the request of a certain majority of the Investors on or after July 20, 2009. Under the terms and conditions set forth in the Investor Agreement, we received an initial $3.0 million on January 20, 2009, and we requested and received a second tranche of $2.0 million on March 3, 2009. We have requested the final tranche of $2.0 million under the Investor Agreement to be received before April 1, 2009. Additional amounts under the Investor Agreement may become available to us at any time prior to April 1, 2009 upon the request our board of directors of the Company provided that: (1) the amount requested does not exceed $2.0 million for each subsequent closing; (2) we do not request more than two subsequent closings; and (3) the request for a subsequent closing is approved in writing by the Investors holding, at any time, at least sixty percent (60%) of the aggregate unpaid principal of the then outstanding Securities purchased pursuant to the Investor Agreement. We may not be able to access the remaining $2.0 million under this facility if the request is not approved by the Investors.

We expect to continue to utilize our cash and cash equivalents, including amounts received subsequent to December 31, 2008, to fund operations into April 2009, subject to minimum cash and cash liquidity requirements of the Investor Agreement with the Investors, which requires that we maintain at least $250,000 of cash on hand to avoid an event of default under the Investor Agreement. Although there can be no assurance given, we hope to successfully complete one or more additional financing transactions and corporate partnerships in the near-term. Without this additional capital, current working capital and containment of operating costs will not provide adequate funding for research, clinical trials, and development activities relating to Adlea. When we raise funds in the near future, we may be required to raise those funds through public or private financings, strategic relationships or other arrangements. The sale of additional equity and debt securities may result in additional dilution to our stockholders. Additional financing may not be available in amounts or on terms acceptable to us or at all. If such efforts are not successful, we may need to further reduce or curtail our current workforce or may even cease operations if we do not obtain any additional funding. Based on our recent reductions described below and impact of other actions taken by management, the cash operating requirements in the near term have been reduced. In addition, we are pursuing strategic transactions and alternatives with respect to all aspects of our business, including sales of our Zingo product and asset and seeking a partner or acquirer for our Adlea program or opportunities for the merger, sale or other combination of Anesiva.

Overview

Anesiva, Inc. ("we" or "Anesiva") is a biopharmaceutical company focused on the development and commercialization of novel therapeutic treatments for pain management. Our portfolio of products includes:

Adlea™, a long-acting, site-specific, non-opioid analgesic, is being developed for moderate to severe pain, and has completed multiple Phase 2 trials in post-surgical, musculoskeletal and neuropathic pain and Phase 3 trials in bunionectomy and total knee replacement surgery. We are initially pursuing an indication for Adlea for the management of acute pain associated with orthopedic surgeries.

Zingo™ (lidocaine hydrochloride monohydrate) powder intradermal injection system, was approved by the Food and Drug Administration (the "FDA") in August 2007 to reduce the pain associated with peripheral intravenous ("IV") insertions or blood draws in children three to 18 years of age. Zingo was approved in January 2009 to reduce the pain associated with blood draws in adults. On November 8, 2008, our board of directors approved the restructuring of our operations and discontinuing Zingo manufacturing and commercial operations as a result of manufacturing challenges and limited market penetration.

Adlea is a novel non-opioid drug candidate that is a vanilloid receptor 1 agonist, or TRPV1 agonist, based on the compound capsaicin which provides analgesia from weeks to months. Zingo and Adlea are different drugs, each with its own mechanisms of action. Zingo is comprised of microcrystals of lidocaine delivered into the skin by compressed gas. Zingo employs a proprietary needle-free dispenser.

In June 2008, we commenced our principal business operations with the shipment of our first commercialized product, Zingo, and we exited the development stage. Prior to our first commercial shipment, we were a development stage company in accordance with the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 7, Accounting and Reporting by Development Stage Enterprises. We operate in one business segment.

On September 2, 2008, we announced that we were realigning our operations. Accordingly, we reduce our workforce by 21 employees to focus primarily on sales, marketing, late-stage clinical development and outsourced manufacturing.

On September 30, 2008, we paid the remaining $10.7 million in principal, interest and prepayment fees under the terms of an equipment loan and security agreement with General Electric Capital Corporation ("GE equipment loan"). In connection with the debt extinguishment, we recorded a charge of approximately $656,000 for legal costs, termination and penalty fees and unamortized debt discounts.

On November 8, 2008, our board of directors approved a further restructuring of our operations to focus on the clinical and commercial development of Adlea and discontinuing Zingo manufacturing and commercial operations as a result of manufacturing challenges and limited market penetration. On November 10, 2008, we initiated a recall of Zingo due to a non-safety related shelf life issue observed in a lot of unreleased product. We are currently exploring strategic transactions and alternatives, including the sale of the assets related to Zingo.

In connection with the November 2008 restructuring, we reduced our workforce by 23 employees and eliminated our sales and marketing functions relating to Zingo commercial activities. In accordance with FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we reclassified our Zingo related assets to assets held-for-sale on the consolidated balance sheet as of December 31, 2008. In addition, since we expect to have no significant or direct involvement in future operations related to these assets, the results of the Zingo manufacturing and commercial activities, including our cooperative joint venture ("CJV") with Wanbang Pharmaceuticals Corporation Limited, have been presented as discontinued operations. For the years ended December 31, 2008, 2007 and 2006, we recorded net loss from discontinued operations for Zingo manufacturing and commercial activities of $51.1 million, $21.4 million and $19.5 million, respectively. Discontinued operations are reported as a separate component within the consolidated statement of operations outside of loss from continuing operations.

On November 10, 2008, we announced that the ACTIVE-1 Phase 3 trial evaluating Adlea missed its primary endpoint of reducing post-surgical pain versus placebo (p=0.07) following bunionectomy surgery at four to 32 hours post-surgery. The same measure was highly significant (p=0.004) from four to 48 hours post-surgery. The trial also achieved a key secondary endpoint of reducing opioid use for Adlea versus placebo (p=0.012) over the four to 32 hour period. Adverse events rates were largely similar for both active treatment and placebo groups.

On November 10, 2008, we provided the Worker Adjustment and Retraining Notification Act notices to 62 employees to inform them that their employment would end on January 9, 2009 as a result of the November 2008 restructuring.

On November 10, 2008, we repaid approximately $20.1 million in outstanding principal and accrued interest pursuant to a loan and security agreement (the "Oxford loan"), dated September 30, 2008 between us and Compass Horizon Funding Company LLC, CIT Healthcare LLC, and Oxford Finance Corporation (collectively, the "Oxford Lenders"), as a result of the discontinuance of Zingo manufacturing and commercial operations. On December 5, 2008, we paid the Oxford Lenders' termination and legal fees of approximately $800,000. In connection with the debt extinguishment, we recorded a charge of approximately $3.1 million for legal costs, terminal fees and unamortized debt discounts associated with warrants.

In November 2008, in connection with the discontinuance of all Zingo manufacturing and commercial operations, we immediately commenced discussions with our CJV partners to wind down the CJV activities and terminate the entity. On December 23, 2008, in cooperation with our partners, the CJV ceased operations and terminated all but one employee. Furthermore, Wanbang took control of operating and financial decisions on this date. These actions constituted a significant curtailment of the CJV's activities. In accordance FIN 46R, Consolidation of Variable Interest Entities this represented a qualified reconsideration event and effective December 23, 2008 we determined that we are no longer the primary beneficiary of the CJV. Therefore, as of December 23, 2008, we ceased consolidation of the CJV with Anesiva.

On December 16, 2008, we announced that the ACTIVE-2 Phase 3 trial evaluating Adlea achieved its primary efficacy endpoint of reducing post-surgical pain versus placebo (p=0.03) following total knee replacement surgery at four to 48 hours after surgery. The trial also met its key secondary endpoint with Adlea demonstrating a highly significant statistical difference in opioid medication consumption compared to placebo (p=0.005). Adverse events rates were largely similar for both active treatment and placebo groups. During the year ended December 31, 2008, we invested heavily in Adlea clinical development to complete the two Phase 3 trials in bunionectomy and TKA and the commercial product launch and discontinuation of Zingo, which ultimately caused us to incur significant restructuring charges. For the year ended December 31, 2008, net loss was $103.2 million, net cash used in operating activities was $74.8 million, and net cash used in financing, including the repayment of the GE equipment loan and the Oxford loan, was $11.0 million, all contributed to our ending cash and cash equivalent balance of approximately $658,000 at December 31, 2008.

On January 20, 2009, we entered into an Investor Agreement with the Investors, where we agreed to sell and issue Securities for a total principal amount of up to $7.0 million. The Securities are secured by a first priority security interest in all of the assets we own. We will pay interest at a continuously compounding rate of seven percent per year. If we default under the Investor Agreement, we will pay interest at a continuously compounding rate of 14% per year. If a change of control event occurs as defined under the Investor Agreement, we will owe the Investors seven (7) times the amount of the outstanding principal amount of the Securities, plus all accrued but unpaid interest. Unless we paid the principal back early under the terms of the Investor Agreement or it is accelerated because of a default, we will owe the outstanding principal and accrued but unpaid interest at any time at the request of a certain majority of the Investors on or after July 20, 2009. Under the terms and conditions set forth in the Investor Agreement, we received an initial $3.0 million on January 20, 2009, and we requested and received a second tranche of $2.0 million on March 3, 2009. We have requested the final tranche of $2.0 million under the Investor Agreement to be received before April 1, 2009.

Our objective is to actively seek partnership for the continued development and commercialization of Adlea for the treatment of pain and pursue other potential business combination transactions. Key elements of our strategy include:

Advance the Clinical Development of Adlea

Initiation of a Phase 2 dose-validation study in total knee arthroplasty patients;

Conduct a supportive study in arthroscopic shoulder surgeries; and

Conduct a replacement Phase 3 study in an appropriate surgical model during 2009 and 2010.

Be Opportunistic About Partnering our Existing Products and About Expanding Our Pain Management Franchise. Evaluate partnership opportunities for Adlea that would provide maximum exposure of the product in the marketplace. Seek to in-license product candidates that would enhance our product pipeline of pain management products.

Explore other Potential Business Combination Transactions. Explore and evaluate opportunities for the merger, sale or other combination of Anesiva that would provide maximum return to our creditors and stockholders.

Financial Operations Overview

Contract Revenues

Contract revenues are revenues from licensing agreements that are based on the performance requirements of the agreement. If we have an ongoing involvement or performance obligation, non-refundable up-front fees are generally recorded as deferred revenue in the balance sheet and amortized into license fees in the consolidated statement of operations over the term of the performance obligation. If we have no ongoing involvement or performance obligation, non-refundable up-front fees are generally recorded as revenue in the period in which the rights are transferred.

Research and Development Expenses

Our research and development expenses consist primarily of:

salaries and related expenses for personnel;

costs of operating facilities and equipment;

fees paid to regulatory agencies, consultants, and clinical research organizations in conjunction with independently monitoring our clinical trials and acquiring and evaluating data in conjunction with the clinical trials;

fees paid to research organizations in conjunction with preclinical studies;

costs to develop manufacturing processes at third-party manufacturers;

upfront and milestone payments under in-licensing agreements;

consulting fees paid to third parties; and

depreciation of capital resources used to develop products.

We expense both internal and external research and development costs as incurred.

We use our employee and infrastructure resources across several projects, and some costs are not attributable to an individually-named project but rather are directed across these research projects. The following table shows, for the years ended December 31, 2008, 2007 and 2006, the total costs associated with Adlea, 1207, NF-kB Decoy and other research and development activities (in thousands):

For the year ended December 31,

	2008	2007	2006
Adlea	24,863	11,034	4,353
NF-kB Decoy	33	657	1,678
1207	6	350	2,291
Other R&D	11,284	11,220	12,271
Total	36,186	23,261	20,593

We expect that a large percentage of our research and development expenses in the future will be incurred in support of Adlea for management of pain following orthopedic surgery and osteoarthritis pain. These expenditures are subject to numerous uncertainties in timing and cost to completion. We test our product candidates in numerous preclinical studies for toxicology, safety, and efficacy. We then conduct early stage clinical trials for each drug candidate. As we obtain results from clinical trials, we may elect to discontinue or delay clinical trials for certain product candidates or programs in order to focus our resources on more promising product candidates or programs. Completion of clinical trials by us or our future collaborators may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a drug candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:

the number of patients included in the trials;

the length of time required to enroll suitable patient subjects;

the number of sites that participate in the trials;

the number of doses that patients receive;

the duration of patient follow-up;

the phase of development the product is in; and

the efficacy and safety profile of the product.

Adlea is still being studied in clinical trials and has not yet received approval by the FDA or any foreign regulatory authority. In order to grant marketing approval, the FDA or foreign regulatory agencies must conclude that our clinical data establish the safety and efficacy of our drug candidates.

As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will receive cash inflows from the commercialization and sale of a product.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation, including stock-based compensation, for employees in executive and operational functions, including finance and business development. Other significant costs include facilities costs and professional fees for accounting and legal services, including legal services associated with obtaining and maintaining patents.

Discontinued Operations

Discontinued operations consist primarily of Zingo related costs including: Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an on-going basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the following accounting policies are most critical to a full understanding and evaluation of our reported financial results.

Contract and Other Revenues

Our revenue recognition policies are in accordance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 104, or SAB 104, and EITF 00-21, ...

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