Summary of ACCENTIA BIOPHARMACEUTICALS INC

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

When you read this section of this Annual Report on Form 10-K, it is important that you also read the financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This section of this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the matters discussed under the caption "Item 1A. Risk Factors" in this Annual Report on Form 10-K for the fiscal year ended September 30, 2012 and other risks and uncertainties discussed in our other filings with the Securities and Exchange Commission.

Overview

Accentia is a biotechnology company focused on discovering, developing and commercializing innovatative therapies that address the unmet medical needs of patients utilizing therapeutic clinical products including personalized immunotherapies designed to treat autoimmune related diseases and cancer. We were incorporated in the State of Florida in 2002.

Cyrevia™ is a potential comprehensive system of care for the treatment of various autoimmune diseases. Cyrevia seeks to eliminate virtually all circulating white blood cells, including those driving autoimmunity, while seeking to spare the patient's stem cells. The therapeutic theory of Cyrevia is that as the patient's eliminated white blood cells are replenished with new white blood cells derived from these stem cells, the patient's immune system becomes effectively replaced or "rebooted". Cyrevia's active ingredient is cyclophosphamide. We are repurposing cyclophosphamide and administering it as part of our integrated risk-management system designed to assure consistency in use and to minimize the risks of treatment. Cyclophosphamide is currently U.S. Food and Drug Administration ("FDA") approved to treat disorders other than autoimmune disease, including various forms of cancer.

BiovaxID™ is being developed by our majority-owned subsidiary, Biovest International, Inc. ("Biovest"), as an active immunotherapy, personalized therapeutic cancer vaccine for the treatment of non-Hodgkin's lymphoma ("NHL"), a B-cell cancer, specifically, follicular lymphoma ("FL") and mantle cell lymphoma ("MCL"), and potentially other B-cell cancers. Both FL and MCL are generally considered to be incurable with currently approved therapies. These generally fatal diseases arise from the lymphoid tissue and are characterized by an uncontrolled proliferation and spread throughout the body of mature B-cells, which are a type of white blood cell. Three clinical trials conducted under Biovest's investigational new drug application ("IND") have studied BiovaxID in NHL. These studies include a Phase 2 clinical trial and a Phase 3 clinical trial in patients with FL, as well as a Phase 2 clinical trial in patients with MCL. BiovaxID has demonstrated statistically significant Phase 3 clinical benefit by prolonging disease-free survival in FL patients treated with BiovaxID. Biovest believes that these clinical trials demonstrate the safety and efficacy of BiovaxID.

Based on scientific advice meetings conducted by Biovest with multiple European Union ("EU")-Member national medicines agencies, Biovest filed its formal notice of intent to file a marketing authorization application ("MAA") with the European Medicines Agency ("EMA"), which begins the EU marketing approval application process. Additionally, based on a scientific advice meeting conducted with Health Canada, Biovest has announced plans to file a new drug submission application ("NDS") seeking regulatory approval in Canada. Biovest could receive a decision regarding EU marketing and Canadian regulatory approval for BiovaxID within 12 months after the submission and acceptance of our MAA and NDS, assuming that the rigorous review process advances forward in a timely and positive manner and no substantial regulatory issues or problems are encountered. Biovest also conducted a formal guidance meeting with the FDA in order to define the path for Biovest's filing of a biologics licensing application ("BLA") for BiovaxID's U.S. regulatory/marketing approval. Further in its guidance, the FDA required that Biovest conduct a second Phase 3 clinical trial to complete the clinical data gained through Biovest's first Phase 3 clinical trial and Biovest's BiovaxID development program to support the filing of its BLA for BiovaxID. Biovest is preparing, subject to required funding, to initiate this second Phase 3 clinical trial to advance BiovaxID toward the U.S. market.

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To support Biovest's planned commercialization of BiovaxID and to support the products of personalized medicine and particularly, patient specific oncology products, Biovest developed and commercialized a fully automated, reusable instrument that employees a fully disposable, closed-system cell-growth chamber incorporating a hollow fiber cell-growth cartridge called AutovaxID. Since it is fully enclosed, computer controlled and automated, AutovaxID requires limited supervision and manpower to operate compared to manual instruments. AutovaxID is suitable for growing antibody-secreting cell lines, including hybridomas and Chinese hamster ovary ("CHO") cells, which are among the leading kinds of cell lines used for commercial therapeutic protein manufacture. AutovaxID has a small footprint and supports scalable production. Biovest plans to utilize the AutovaxID technology to streamline the commercial manufacture of BiovaxID. Biovest believes that AutovaxID is the first cell culture system that enables production of personalized cell-based treatments economically. AutovaxID uses a disposable production unit which provides for robust and dependable manufacturing while complying with the industry current good manufacturing practices ("cGMP") standards. Biovest is collaborating with the U.S. Department of Defense ("DoD") and others to further develop AutovaxID and related hollow fiber systems and to explore potential production of additional vaccines, including vaccines for viral indications such as influenza and other contagious diseases. Biovest also manufactures instruments and disposables used in the hollow fiber production of cell culture products. Biovest manufactures mammalian cell culture products such as whole cells, recombinant and secreted proteins, and monoclonal antibodies for third parties, primarily researchers. Biovest has produced over 7,000 cell based products for an estimated 2,500 researchers around the world. Biovest considers its vast experience in manufacturing small batches of different cell based products, together with Biovest's expertise in designing and manufacturing instruments for personalized medicines as important competencies supporting its development of patient specific immunotherapies.

We anticipate developing the SinuNasal™ Lavage System ("SinuNasal") as a medical device for the treatment of patients with refractory, post-surgical chronic sinusitis ("CS"). SinuNasal is believed to provide benefit by delivering a proprietary patented buffered irrigation solution to mechanically flush the nasal passages to improve the symptoms of refractory post-surgical CS patients.

Corporate Overview

In April 2002, we commenced business with the acquisition of Analytica International, Inc. ("Analytica"). Analytica conducted a global research and strategy consulting business that provided services to the pharmaceutical and biotechnology industries. We acquired Analytica in a merger transaction for $3.7 million cash, $1.2 million of convertible promissory notes, and the issuance of 8.1 million shares of our Series B preferred stock. Analytica was founded in 1997 and has offices in New York and Germany. On December 15, 2011, we closed on the sale of substantially all of the assets and business of Analytica to a third-party, for a combination of fixed and contingent payments aggregating up to $10 million. The purchase agreement included the name "Analytica International, Inc." Accordingly, we changed the name of our subsidiary from Analytica International, Inc. to Accentia Biotech, Inc.

In June 2003, we acquired an 81% interest in Biovest pursuant to an investment agreement for an initial investment of $20 million. Biovest's business consists of three primary business segments: the development of BiovaxID™for B-cell blood cancers; the manufacture and sale of AutovaxID® and other instruments and disposables; and the commercial sale and production of cell culture products and services. As of September 30, 2012, we owned approximately 59% of Biovest's outstanding common stock with the minority interest being held by approximately 400 shareholders of record. Following our investment, Biovest continued to be a reporting company under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Biovest files periodic and other reports with the Securities and Exchange Commission ("SEC").

In November 2010, our Company and Biovest completed reorganizations and formally exited Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11") as fully restructured companies. Through the provisions of our respective bankruptcy plans (as amended) (the "Plan" and the "Biovest Plan", respectively), both of which were effective on November 17, 2010 (the "Effective Date"), our Company and Biovest restructured our debt into a combination of new debt and equity. On March 19, 2012, the Bankruptcy Court entered a Final Decree closing Biovest's Chapter 11 proceedings. Notwithstanding the effectiveness of the Plan, the Bankruptcy Court retains jurisdiction to adjudicate any remaining issues regarding, inter alia, the validity, amount, and method of payment of claims filed in connection with our Chapter 11 proceeding. Accordingly, we anticipate that there may be ongoing proceedings before the Bankruptcy Court to resolve any filed objections or disputes as to claims filed in our Chapter 11 proceeding.

On November 17, 2012, an aggregate of approximately $14.1 million in principal became due under our convertible debentures issued in November 2010 (the "Matured Obligations"). Because we were unable to pay the amount due on November 17, 2012, an event of default occurred under the Matured Obligations. As a result of this event of default, interest has begun accruing on the Matured Obligations at a default rate of 18% and the holders of the Matured Obligations have the right to an additional default payment of 30% on the outstanding balance due. The holders of the Matured Obligations could also cause all amounts outstanding, to be immediately due and payable. At present, the holders of the Matured Obligations have not taken any action to secure monetary judgment(s) against us for the outstanding principal owed to them.

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Also, on November 17, 2012, an aggregate of approximately $27.7 million in principal became due under (1) a secured convertible promissory note issued to Corps Real, LLC ("Corps Real") with an aggregate principal balance of $3.0 million (the "Biovest Corps Real Note"), (2) secured convertible promissory notes issued to Laurus Master Fund, Ltd. (in liquidation), PSource Structured Debt Limited, Valens U.S. SPV I, LLC, Valens Offshore SPV I, Ltd., Valens Offshore SPV II, Corp., and Erato Corp. (collectively, "Laurus/Valens") with an aggregate principal balance of $23.5 million (the "Term A Notes"), and
(3) unsecured convertible promissory notes (the "Exchange Notes") issued to the holders of the Exit Financing with an aggregate principal balance of $1.2 million (collectively, the "Biovest Matured Obligations"). Because Biovest was unable to pay the amount due on November 17, 2012, an event of default occurred under the Biovest Matured Obligations. As a result of Biovest's default under the Exchange Notes issued in the Exit Financing, interest has begun accruing on those Exchange Notes at rate of 15% per annum. On December 19, 2012, a majority of the holders (Whitebox Credit Arbitrage Partners, LP, Whitebox Special Opportunities Fund Series B Partners, LP, Pandora Select Partners, LP, Whitebox Multi-Strategy Partners, LP, Whitebox Concentrated Convertible Arbitrage Partners, LP, (collectively, the "Whitebox Entities")) of the outstanding Exchange Notes issued in the Exit Financing commenced a breach of contract action to secure monetary judgment(s) against Biovest for the outstanding principal and interest owed to them (the "Whitebox Litigation"). With the exception of the Whitebox Litigation, Biovest has not been notified of an event of default by the other holders of the outstanding Exchanges Notes.

Pursuant to cross-default provisions contained in certain of Biovest's other outstanding notes in the aggregate of approximately $0.3 million and $4.2 million, may be declared to be in default as well, and were issued to (a) the Economic Development Authority for the City of Coon Rapids ("EDA") and the Minnesota Investment Fund ("MIF") and (b) Laurus/Valens, respectively. Biovest has not been notified of an event of default by the EDA and/or MIF and the standstill agreement (discussed below) precludes Laurus/Valens from declaring a cross-default under its Term B Notes.

Effective November 17, 2012, Biovest entered into a standstill agreement with Corps Real and Laurus/Valens, pursuant to which (i) the maturity dates of the Biovest Corps Real Note and the Term A Notes were extended from November 17, 2012 to January 31, 2013 and (ii) Corps Real and Laurus/Valens granted Biovest a forbearance (until January 31, 2013) from their exercise of the rights and/or remedies available to them under the Biovest Corps Real Note, Term A Notes and Term B Notes. The standstill agreement allows Biovest the time and opportunity to negotiate with Corps Real and Laurus/Valens a potential restructuring of the Biovest Corps Real Note, Term A Notes, and Term B Notes. If Biovest defaults under the Biovest Corps Real Note following the expiration of the period covered by the standstill agreement, Corps Real will have the right to foreclose upon its first priority security interest in all of Biovest's assets. If Biovest defaults under the Term A Notes following the expiration of the period covered by the standstill agreement, Laurus/Valens (a) will have right to foreclose upon their lien on all of Biovest's assets (which is subordinate only to the security interest of Corps Real) and (b) may appoint one-third of the total membership of Biovest's Board of Directors. The outcome of the negotiations relating to the restructuring of the Biovest Matured Obligations, which may include the remainder of Biovest's outstanding debt, may negatively affect our ownership interest in Biovest and cause our potential deconsolidation/loss of control in Biovest.

Results of Operations

Year Ended September 30, 2012 Compared to the Year Ended September 30, 2011

Consolidated Results of Operations

Net Sales. Net sales for the year ended September 30, 2012 were $4.1 million, a 2.5% increase over the year ended September 30, 2011. Biovest experienced an increase of approximately $0.7 million in product revenue over the prior year, primarily due to the number of cultureware units, tubing sets and other disposable products sold to customers who have previously purchased Biovest's hollow fiber instruments. These increases in product revenue were offset in part by a decrease of $0.4 million in service revenue. For the year ended September 30, 2012, Biovest completed five contracts for the manufacture of mammalian cell culture products at an average of $0.06 million per contract. For the year ended September 30, 2011, Biovest completed work on 15 contracts at an average of $0.07 million per contract.

Grant revenue received from the U.S. Internal Revenue Service, issued under the Qualifying Therapeutic Discovery Project under section 48D of the Internal Revenue Code decreased from $0.3 million during the year ended September 30, 2011 to $0.2 million for the year ended September 30, 2012. These federal grants were awarded to projects that show a reasonable potential to: (a) result in new therapies to treat areas of unmet medical need or prevent, detect or treat chronic or acute disease and conditions; (b) reduce the long-term growth of health care costs in the U.S.; or (c) significantly advance the goal of curing cancer within 30 years. We were awarded the federal grant to support the advancement of Cyrevia™ and Biovest was awarded the federal grant to support the advancement of BiovaxID™.

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Research and Development Expenses. Our research and development expenses were $5.2 million for the year ended September 30, 2012 compared to $2.2 million for the year ended September 30, 2011, an increase of approximately $3.0 million. This increase is primarily due to an increase in stock compensation expense associated with stock options awarded by us and Biovest to our research and development personnel, which vested immediately, and were therefore expensed in the year ended September 30, 2012. In addition, the increase is also attributed to an increase in outsourced consulting services, travel expenses associated with our regulatory strategy, wages and cost of laboratory supplies, as Biovest continues its analyses of the available data from its BiovaxID™ clinical trials and Biovest seeks regulatory/marketing approval in the EU, Canada, and the U.S.

General and Administrative Expenses. Our general and administrative expenses were $7.4 million for the year ended September 30, 2012, a decrease of approximately $12.8 million over the year ended September 30, 2011. The decrease is primarily due to a decrease in share-based compensation of approximately $12.4 million compared to the year ended September 30, 2011. The prior period expense included compensation expense related to stock options granted during our Chapter 11 proceedings with vesting contingent upon our emergence from Chapter 11, in addition to the market value of 1.5 million shares of our common stock issued to our executives on November 17, 2010.

Interest Expense. For the year ended September 30, 2012, our interest expense was $7.9 million, a decrease of $0.2 million from the year ended September 30, 2011. The decrease is primarily due to the reduction of principal on our debt through conversions into shares of our common stock pursuant to the Plan.

Derivative gain (loss). Derivative gain was $1.4 million for the year ended September 30, 2012, as compared to a gain of $1.1 million for the year ended September 30, 2011. This difference of approximately $0.3 million is primarily related to the derivative instruments associated with our issuance of convertible debt and common stock purchase warrants. This gain was primarily due to a decrease in our common stock price and Biovest's common stock price during the year ended September 30, 2012.

Gain on Reorganization. We have recognized gains of $5.7 million and $12.7 million for the years ended September 30, 2012 and 2011, respectively, as a result of the settlement of our prepetition claims through our Chapter 11 proceedings. Pursuant to the Plan, holders of existing voting shares immediately before the confirmation of the Plan received more than 50 % of the voting shares of the emerging entity, thus we did not adopt fresh-start reporting upon emergence from Chapter 11. We instead followed the guidance as described in Accounting Standards Codification ("ASC") 852-45-29 for entities which do not qualify for fresh-start reporting. Liabilities compromised by the Plan were stated at present values of amounts to be paid, and forgiveness of debt has been reported as an extinguishment of debt resulting in the gain on reorganization.

Discontinued Operations. Income from discontinued operations was approximately $3.2 million for the year ended September 30, 2012, compared to $0.2 million for the year ended September 30, 2011. The difference is primarily related to the gain on sale of assets, which was approximately $4.0 million during the year ended September 30, 2012, as a result of the sale of substantially all the assets and business of Analytica. The initial proceeds of $4.0 million along with the $1.5 million earnout received on March 30, 2012 were used to calculate the gain, as the $1.5 million earnout was assured at the time of the determination of the gain. There was no gain on sale of assets during the year ended September 30, 2011. Accrued taxes of $0.6 million were recorded for estimated state and local taxes associated with the gain on this transaction.

Liquidity and Capital Resources

Sources of Liquidity

Our goal is to meet our cash requirements through proceeds from Biovest's instruments and disposables and cell culture products and services manufacturing activities, the use of cash on hand, trade vendor credit, short-term borrowings, debt and equity financings, the modification of existing cash commitments, and strategic transactions such as collaborations and licensing. Our ability to continue present operations, to continue Biovest's detailed analyses of BiovaxID's clinical trial results, to meet our debt obligations as they mature (discussed below), and to pursue ongoing development and commercialization of Cyrevia™, BiovaxID™, AutovaxID® and SinuNasal™ including potentially seeking marketing approval, is dependent upon our ability to obtain significant external funding in the immediate term, which raises substantial doubt about our ability to continue as a going concern. Cash and cash equivalents, at September 30, 2012, were approximately $0.1 million, of which $0.07 million was attributable to Biovest compared to $0.4 million at September 31, 2011. Additional sources of funding have not been established; however, additional financing is currently being sought by us from a number of sources, including the sale of equity or debt securities, strategic collaborations, recognized research funding programs, as well as domestic and/or foreign licensing of our product candidates. We are currently in the process of exploring various financing alternatives. There can be no assurance that we will be successful in securing such financing at acceptable terms, if at all. If adequate funds are not available from the foregoing sources in the immediate term, or if we determine it to otherwise be in our best interest, we may consider additional strategic financing options, including sales of assets, or we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or curtail some or all of our commercialization efforts.

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