You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the "Risk Factors" section of this Form 10-K (see Part I-Item 1A above) for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a specialty biopharmaceutical company focused on the development and commercialization of innovative treatments for diabetes that may be safer, more effective and more convenient for patients. We develop our product candidates by applying our proprietary formulation technologies to existing drugs in order to improve their therapeutic profiles. Our most advanced program involves developing proprietary formulations of injectable recombinant human insulin, or RHI, designed to be more rapid-acting than the "rapid-acting" mealtime insulin analogs currently used to treat patients with Type 1 and Type 2 diabetes. We, therefore, refer to these formulations as our "ultra-rapid-acting" insulin formulations. In addition to our RHI-based formulations, we are using our formulation technologies to develop new ultra-rapid-acting formulations of insulin analogs. These insulin analog-based formulations generally use the same or similar excipients as our RHI-based formulations and are designed to be more rapid-acting than the "rapid-acting" mealtime insulin analogs, but they may present characteristics that are different from those offered by our RHI-based formulations. We are also developing liquid glucagon formulations for use as a rescue treatment for diabetes patients experiencing severe hypoglycemia.

An earlier RHI-based formulation known as LinjetaTM (and previously referred to as VIAjectฎ) was the subject of a New Drug Application, or NDA, that we submitted to the FDA in December 2009. In October 2010, the FDA issued a complete response letter stating that the NDA for LinjetaTM could not be approved in its submitted form and that we should conduct two new Phase 3 clinical trials using our preferred commercial formulation of LinjetaTM prior to re-submitting the NDA. Based upon the complete response letter and subsequent feedback that the FDA provided to us at a meeting in January 2011, we decided to study newer RHI-based formulations in earlier stage clinical trials. The objective of these clinical trials was to identify an RHI-based formulation with pharmacokinetic and pharmacodynamic profiles similar to the LinjetaTMformulation, but with improved injection site toleration characteristics. These earlier stage clinical trials evaluated the pharmacokinetic, pharmacodynamic and injection site toleration profiles of our product candidates relative to Humalogฎ, a rapid-acting insulin analog.

In September 2011, we announced that two newer formulations, BIOD-105 and BIOD-107, did not demonstrate our target profile in Phase 1 clinical trials. We subsequently conducted a Phase 1 clinical trial of two additional formulations, BIOD-123 and BIOD-125, and announced top line results from that trial in April 2012. Both BIOD-123 and BIOD-125 achieved our target pharmacokinetic, pharmacodynamic and toleration profiles. Based on our assessment of these two formulations, we selected BIOD-123 as our lead RHI-based product candidate, and in the third calendar quarter of 2012, we began enrolling patients in a Phase 2 clinical trial of BIOD-123. This Phase 2 clinical trial is designed to assess the clinical impact of BIOD-123 relative to Humalogฎ. The trial is being conducted at investigative centers in the United States and is expected to enroll approximately 130 randomized patients with Type 1 diabetes. We expect to announce top-line results from this Phase 2 clinical trial in the third calendar quarter of 2013.

In May 2012, we selected two insulin analog-based formulations, BIOD-238 and BIOD-250, to evaluate in a Phase 1 clinical trial. BIOD-238 and BIOD-250 generally use the same or similar excipients as BIOD-123 and are intended to be optimized for rapid absorption and injection site toleration. We began enrolling patients in the Phase 1 clinical trial in the third calendar quarter of 2012. This trial, which is being conducted in Australia, is designed to compare the pharmacokinetic and injection site toleration profiles of these formulations relative to a rapid-acting mealtime insulin analog. We expect to announce top-line results from

this clinical trial in the first calendar quarter of 2013. In parallel with the Phase 1 clinical trial of BIOD-238 and BIOD-250, we are continuing our formulation development work to improve the stability characteristics of our ultra-rapid-acting insulin analog-based formulations.

In addition to our ultra-rapid-acting insulin formulation program, we are developing a liquid glucagon formulation for use as a rescue treatment for diabetes patients experiencing severe hypoglycemia, or very low concentrations of blood glucose. To date, we have not selected a lead formulation to advance into clinical trials. We are continuing to conduct preclinical testing to develop formulations that achieve a combination of pharmacokinetic, pharmacodynamic and stability characteristics that we believe would be required for a glucagon rescue treatment product to be commercially successful.

We are a development stage company. We were incorporated in December 2003 and commenced active operations in January 2004. To date, we have generated no revenues and have incurred significant losses. We expect to continue to incur operating losses as we continue our efforts to develop and commercialize our product candidates. We have financed our operations and internal growth through various financing transactions, including our initial public offering in May 2007 and several subsequent transactions, including, most recently, our June 2012 private placement. We have devoted substantially all of our efforts to research and development activities, including clinical trials. Our net loss was $20.7 million for the year ended September 30, 2012. As of September 30, 2012, we had a deficit accumulated during the development stage of $196.1 million. Research and development and general and administrative expenses, as a percentage of net loss applicable to common stockholders, represent approximately 73% and 33%, respectively, of the expenses that we have incurred since our inception.

As of September 30, 2012, we had approximately $39.1 million in cash and cash equivalents compared to $38.7 million in cash and cash equivalents as of September 30, 2011. We believe that our existing cash, cash equivalents and restricted cash will be sufficient to fund our anticipated operating expenses and capital expenditures at least until the second calendar quarter of 2014. We believe that future cash expenditures will be partially offset by raising additional capital from research grants, capital markets, proceeds derived from collaborations, including, but not limited to, upfront fees, research and development funding, milestone payments and royalties. We can give no assurances that such funding will, in fact, be realized in the time frames we expect, or at all. We may be required to secure alternative financing arrangements or defer or limit some or all of our research, development or clinical projects.

Financial Operations Overview

Revenues

To date, we have generated no revenues. We do not expect to begin generating any revenues unless any of our product candidates receive marketing approval, or if we receive payments in connection with strategic collaborations that we may enter into for the commercialization of our product candidates.

Research and Development Expenses

Research and development expenses consist of the costs associated with our basic research activities, as well as the costs associated with our drug development efforts, conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings. Our research and development expenses consist of:

• external research and development expenses incurred under agreements with third-party contract research organizations and investigative sites, third-party manufacturing organizations and consultants;

• employee-related expenses, which include salaries and benefits for the personnel involved in our preclinical and clinical drug development and manufacturing activities; and

• facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment and laboratory and other supplies.

We intend to focus our research and development efforts on conducting preclinical studies and Phase 1 and Phase 2 clinical trials to determine our preferred development, clinical and regulatory program for our

ultra-rapid-acting insulin formulations and our liquid glucagon formulations. We anticipate that our research and development expenses for the fiscal year ending September 30, 2013 will increase as compared to the fiscal year ended September 30, 2012, as we continue to:

• study BIOD-123 in a Phase 2 clinical trial;

• study our ultra-rapid-acting insulin analog-based formulations in early stage clinical trials and conduct additional formulation development work to improve the stability, pharmacokinetic, and pharmacodynamic properties of our ultra-rapid-acting insulin analog-based formulations; and

• conduct the development work necessary to select a lead formulation for our liquid glucagon rescue product candidate and commence clinical trials of that formulation.

Over the longer term, we anticipate that these expenses will increase further as we:

• conduct later stage clinical trials of our ultra-rapid-acting insulin formulations and a liquid glucagon formulation, including one or more pivotal clinical trials required for FDA approval of NDAs for these product candidates; and

• purchase active pharmaceutical ingredients and other materials to support our research and development activities.

We have used our employee and infrastructure resources across multiple research projects and our drug development programs for our ultra-rapid-acting insulin formulations, including BIOD-123, BIOD-238 and BIOD-250, and our liquid glucagon formulations. To date, we have not tracked expenses related to our product development activities on a project or program basis. Accordingly, we cannot reasonably estimate the amount of research and development expenses that we incurred with respect to each of our clinical and preclinical product candidates. However, substantially all of our research and development expenses incurred to date are attributable to our ultra-rapid-acting insulin program.

In July and September 2012, we received two National Institutes of Health (NIH) awards for the development of concentrated ultra-rapid-acting insulin formulation and glucagon formulation for use in an artificial pancreas. The July 2012 award is intended to fund research to develop a proprietary ultra-rapid-insulin product candidate at high concentrations suited to provide sufficient quantities of insulin in an external artificial pancreas pump device that has limited volume capacity. The July award is for two years and totals $582 thousand. The September 2012 award is intended to fund research to develop a proprietary glucagon product candidate optimized to algorithmically deliver glucagon as part of a bihormonal closed loop system to mitigate hypoglycemic events. The September 2012 award is for two years and totals $583 thousand.

The following table illustrates, for each period presented, our research and development costs by nature of the cost.

                                                              Year Ended September 30,
                                                    --------------------------------------------
                                                                                                      December 3,
                                                                                                          2003
                                                                                                     (Inception) to
                                                                                                     September 30,
                                                        2010            2011            2012              2012
                                                    ------------    ------------    ------------    ----------------
                                                                   (In thousands)
Research and development expenses:
Preclinical expenses                                 $  2,746        $  3,665        $  3,974         $    22,639
Manufacturing expenses                                  8,894           5,332           2,644              38,931
Clinical/regulatory expenses                           14,537           4,904           5,953              81,130
Total                                                $ 26,177        $ 13,901        $ 12,571         $   142,700

The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, specific timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from our product candidates. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

• our ability to complete our Phase 2 clinical trial of BIOD-123 in a timely manner and the outcome of that trial;

• the success of our formulation development work to improve the stability, pharmacokinetic and pharmacodynamic characteristics of our ultra-rapid-acting insulin analog-based formulations;

• our ability to conduct the development work necessary to select a lead formulation for our liquid glucagon product candidate for the rescue treatment of severe hypoglycemia and commence clinical trials of that formulation;

• the results of our real-time stability programs for our insulin and glucagon product candidates, including the reproducibility of earlier, smaller scale, stability studies and our ability to accurately project real-time stability on the basis of accelerated testing;

• our ability to accurately anticipate technical challenges that we may face in the development of a glucagon rescue product candidate;

• our ability to secure approval by the FDA for our product candidates under
Section 505(b)(2) of the FFDCA;

• our ability to conduct pivotal clinical trials and other tests or analyses required by the FDA to secure approval to commercialize an ultra-rapid-acting insulin formulation or a liquid glucagon formulation;

• our ability to enter into collaboration arrangements for the commercialization of our product candidates and the success or failure of any such collaborations into which we enter, or our ability to commercialize our product candidates ourselves;

• our ability to enforce our patents for our product candidates and our ability to secure additional patents for our product candidates;

• our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

• the degree of clinical utility of our product candidates, particularly with regard to our ultra-rapid-acting insulin formulations, which have not yet been shown to be clinically superior to existing rapid-acting insulin analogs;

• the emergence of competing technologies and products and other adverse market developments, such as advancements in glucagon stabilization technologies that could enable a room-temperature rescue product in a portable, easy to use presentation;

• the ability of our major suppliers to produce our products in our final dosage form;

• our commercialization, marketing and manufacturing capabilities and strategies; and

• our ability to accurately estimate anticipated operating losses, future revenues, capital requirements and our needs for additional financing.

A change in the outcome of any of these variables with respect to the development of ultra-rapid-acting insulin formulations or our liquid glucagon formulation, could mean a significant change in the costs and timing associated with product development.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related expenses for personnel, including stock-based compensation expenses, in our executive, legal, accounting, finance and information technology functions. Other general and administrative expenses include facility-related costs not otherwise allocated to research and development expense, travel expenses, costs associated with industry conventions and professional fees, such as legal and accounting fees and consulting costs.

We anticipate that our general and administrative expenses in the fiscal year ending September 30, 2013 will remain substantially the same as in the fiscal year ended September 30, 2012 as we continue to focus our efforts on product formulation activities and earlier stage clinical trials. Over the longer term, however, these expenses could increase if we are successful in advancing our product candidates into later stage clinical trials, including Phase 3 pivotal trials.

Warrant Liability

In June 2012, we issued warrants to purchase 2,749,469 shares of our common stock at an exercise price of $2.66 per share in connection with our June 2012 private placement. These warrants will expire on June 26, 2017, five years from the original issuance date of June 27, 2012. In May 2011, we issued warrants to purchase 2,256,929 shares of our common stock at an exercise price of $9.92 per share in connection with our May 2011 registered direct offering. These warrants will expire on May 17, 2016, five years from the original issuance date of May 18, 2011. Under the terms of both the 2012 warrants and the 2011 warrants, if we enter into a merger or change of control transaction, the holders of the warrants will be entitled to receive consideration as if they had exercised the warrants immediately prior to such transaction, or they may require us to purchase the unexercised warrants at the Black-Scholes value (as defined in the applicable warrant) of the warrant on the date of such transaction. The holders have up to 30 days following any such transaction to exercise this right. As a result of this provision, we recognize the 2012 and 2011 warrants as liabilities at their fair value on each reporting date.

We use the Black-Scholes valuation model to estimate the fair value of the warrants. The Black-Scholes valuation model takes into account, as of the valuation date, factors including the current exercise price, the expected life of the warrant, the current price of the underlying stock and its expected volatility, expected dividends on the stock, and the risk-free interest rate for the term of the warrant. Using this model, we recorded an initial warrant liability of $4.8 million for the 2012 warrants and $9.4 million for the 2011 warrants, in each case as of the initial warrant issuance date. The significant assumptions for the model used for the 2012 warrants were remaining terms of the warrants, the common stock price of $2.97 per share, the warrant exercise price of $2.66 per share, a risk-free interest rate of 0.62% and an expected volatility rate of 98%. The significant assumptions for the model used for the 2011 warrants were remaining terms of the warrants, the common stock price of $2.97 per share, the warrant exercise price of $9.92 per share, a risk-free interest rate of 0.31% and an expected volatility rate of 82%. The liability for both the 2012 and 2011 warrants is revalued at each reporting period and changes in fair value are recognized currently in the statements of operations under the caption "Adjustment to fair value of common stock warrant liability."

In August 2010, we issued warrants to purchase 599,550 shares of our common stock in connection with our August 2010 registered direct offering. On December 1, 2011, the unexercised warrants to purchase 589,000 shares of common stock expired. We revalued the liability from September 30, 2011 through the date of expiration and there was no impact on the statement of operations. The common stock warrant liability associated with these warrants no longer exists.

In addition to the 2012 and 2011 warrants, as of June 30, 2012, we had outstanding warrants to purchase 10,415 shares of our common stock at an exercise price of $5.64. These warrants expired unexercised in July 2012.

Interest Income

Interest income consists of interest earned on our cash and cash equivalents and marketable securities. In November 2007, our board of directors approved investment policy guidelines, the primary objectives of which are the preservation of capital, the maintenance of liquidity and maintenance of appropriate fiduciary control - subject to our business objectives and tax situation. We have maintained an investment strategy of investing primarily in a premier commercial money market account, which consists primarily of short-term debt securities issued by the U.S. government, Treasury securities and U.S. government agencies. We intend to maintain this conservative strategy in fiscal year 2013.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our audited financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. 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 expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various assumptions that we believe are reasonable under the circumstances, the results of

which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 to our financial statements appearing at the end of this Annual Report on Form 10-K, we believe that the following accounting policies, which we have discussed with our audit committee, are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.

Preclinical Study and Clinical Trial Accruals

In preparing our financial statements, we must estimate accrued expenses pursuant to contracts with multiple research institutions, clinical research organizations and contract manufacturers that conduct and manage preclinical studies, clinical trials and manufacture product for these trials on our behalf. This process involves communicating with relevant personnel to identify services that have been performed on our behalf and estimating the level of services performed and the associated costs incurred for services when we have not yet been invoiced for or otherwise notified of the actual cost. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. The financial terms of these agreements vary and may result in uneven payment flows. To date, we have not adjusted our estimates at any balance sheet date in any material amount. Examples of preclinical study, clinical trial and manufacturing expenses include the following:

• fees paid to contract research organizations in connection with preclinical and toxicology studies and clinical trials;

• fees paid to investigative sites in connection with clinical trials;

• fees paid to contract manufacturers in connection with the production of clinical trial materials; and

• professional service fees.

Government Grants

Grants received are recognized as grant income when the grants become receivable, provided there is reasonable assurance that we will comply with the conditions attached to the grant and there is reasonable assurance the grant will be received. We request cash funding under approved grants as expenses are incurred (not in advance) and report these receipts on the statement of operations as a separate line item entitled "Government Grants." The corresponding expenses are included in research and development expenses. In July and September 2012, we were awarded two National Institutes of Health grants for the development of concentrated ultra-rapid-acting insulin formulations and liquid glucagon formulations, respectively, for use in an artificial pancreas. Both awards are for two years and total approximately $580 thousand each. Work on the grant for the development of concentrated ultra-rapid-acting insulin formulation started in August 2012 and expenses incurred were $88 thousand during the twelve months ended September 30, 2012 and corresponding income and a receivable were recorded.

Share-Based Compensation

Stock Incentive Plan

In March 2010, our shareholders approved our 2010 Stock Incentive Plan, which we refer to as the 2010 Plan. Up to 1,350,000 shares of our common stock may be issued pursuant to awards granted under the 2010 Plan, plus 851,908 shares of common stock underlying already outstanding awards under our prior plans. In addition, on March 8, 2012, our stockholders approved an amendment to the 2010 Plan to increase the number of shares of common stock authorized for issuance under the plan solely for the purpose of allowing us to issue an aggregate of 274,192 RSUs to certain of our employees in place of discretionary cash bonuses in connection with the fiscal year ended September 30, 2011.

The contractual life of options granted under the 2010 Plan may not exceed seven years. The 2010 Plan uses a "fungible share" concept under which any awards that are not a full-value award will be counted against the share limit as one (1) share for each share of common stock and any award that is a full-value award will be counted against the share limit as 1.6 shares for each one share of common stock. We have not

made any new awards under any prior equity plans after March 2, 2010 - the effective date the 2010 Plan was approved by our stockholders. We will continue to use the Black-Scholes pricing model to assist in the calculation of fair value. The expected life for these grants was calculated in accordance with the simplified method described in the Securities and Exchange Commission Staff Accounting Bulletin (SAB) Topic 14.D.2 in accordance with SAB No. 110. The . . .