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EX-32.1 - EX-32.1 - ANADYS PHARMACEUTICALS INC | a58867exv32w1.htm |
EX-23.1 - EX-23.1 - ANADYS PHARMACEUTICALS INC | a58867exv23w1.htm |
EX-31.2 - EX-31.2 - ANADYS PHARMACEUTICALS INC | a58867exv31w2.htm |
EX-31.1 - EX-31.1 - ANADYS PHARMACEUTICALS INC | a58867exv31w1.htm |
EX-10.21 - EX-10.21 - ANADYS PHARMACEUTICALS INC | a58867exv10w21.htm |
EX-10.19 - EX-10.19 - ANADYS PHARMACEUTICALS INC | a58867exv10w19.htm |
EX-10.23 - EX-10.23 - ANADYS PHARMACEUTICALS INC | a58867exv10w23.htm |
EX-10.20 - EX-10.20 - ANADYS PHARMACEUTICALS INC | a58867exv10w20.htm |
EX-10.22 - EX-10.22 - ANADYS PHARMACEUTICALS INC | a58867exv10w22.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(MARK ONE)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-50632
ANADYS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
22-3193172 (I.R.S. Employer Identification No.) |
5871 Oberlin Drive, Suite 200, San Diego, California | 92121 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: 858-530-3600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Common Stock, $0.001 par value |
Name of each exchange on which registered Nasdaq Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark whether the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of the common stock held by non-affiliates of the registrant
computed by reference to the closing price of the registrants common stock reported on the Nasdaq
Global Market as of the last business day of the registrants most recently completed second fiscal
quarter was approximately $60,521,084 as of such date. In calculating such aggregate market value,
shares of common stock owned of record or beneficially by officers or directors, and persons or
entities known to the registrant to own more than ten percent of the registrants voting securities
were excluded because such persons or entities may be deemed to be affiliates. This number is
provided only for purposes of this Annual Report on Form 10-K and the registrant disclaims the
existence of control or any admission thereof for any other purpose.
As of February 28, 2010, the Registrant had outstanding 57,141,223 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Companys Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the 2011 Annual Meeting of Stockholders are incorporated herein by
reference into Part III.
ANADYS PHARMACEUTICALS, INC.
ANNUAL REPORT ON FORM 10-K
ANNUAL REPORT ON FORM 10-K
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Table of Contents
INFORMATION RELATED TO FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements. These forward-looking
statements involve a number of risks and uncertainties. Such forward-looking statements include
statements about our development plans and programs, clinical trials, strategies and objectives,
and other statements that are not historical facts, including statements which may be preceded by
the words intend, will, plan, expect, anticipate, estimate, aim, seek, believe,
hope or similar words. For such statements, we claim the protection of the Private Securities
Litigation Reform Act of 1995. Readers of this Annual Report on Form 10-K are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of the date on which
they are made. We undertake no obligation to update publicly or revise any forward-looking
statements. Actual events or results may differ materially from our expectations. Important factors
that could cause actual results to differ materially from those stated or implied by our
forward-looking statements include, but are not limited to, the risk factors identified in our
periodic reports filed with the Securities and Exchange Commission (SEC), including, without
limitation, those discussed in Item 1A. Risk Factors and in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K.
PART I
Item 1. Business
Overview
Anadys Pharmaceuticals, Inc. is a biopharmaceutical company dedicated to improving patient
care by developing novel medicines for the treatment of hepatitis C. We believe hepatitis C
represents a large and significant unmet medical need. Our objective is to contribute to an
improved treatment outcome for patients with this serious disease.
We are currently focusing most of our efforts on the development of ANA598, a direct-acting
antiviral (DAA) for the treatment of hepatitis C. We are also making plans to resume the clinical
development of ANA773, an oral, small-molecule inducer of endogenous interferons that acts via the
Toll-like receptor 7, or TLR7, pathway for the treatment of hepatitis C.
Our expertise is based on two distinct scientific approaches to treating disease. With ANA598
we are focused on developing a direct-acting antiviral, meaning a product candidate that acts by
directly interacting with, and blocking the function of, a component of the virus. We discovered
ANA598 through an extensive structure-based drug design program that focused on parameters we feel
are critical for success in chronic viral diseases, including potency and sustained drug levels in
blood. With ANA773, the focus is to stimulate the patients own immune systems to block cells
infected with the hepatitis C virus from further producing more virus particles and amplifying the
infection. ANA773 stimulates the immune system through activating a key receptor on immune cells
known as TLR7. Our knowledge of TLR7 is buttressed by an extensive preclinical program exploring
the pharmacology of this receptor and by previous clinical experience with other molecules that act
via the TLR7 mechanism.
We have also investigated ANA773 in a separate Phase I trial for the treatment of patients
with advanced cancer. Although we believe that ANA773 has potential utility in cancer, we do not
have plans to continue the development of ANA773 for this indication at this time.
Anadys retains all commercialization rights to both ANA598 and ANA773, which were discovered
at Anadys.
ANA598
ANA598 is a DAA that blocks the hepatitis C virus (HCV) ability to multiply by inhibiting the
viral RNA polymerase. ANA598 belongs to a class of DAAs referred to as non-nucleosides. We believe
non-nucleosides will become an important component of future combination regimens used to treat HCV
infection, similar to the role played by non-nucleoside inhibitors in HIV therapy. ANA598 has
demonstrated positive antiviral response and a favorable safety and tolerability profile in a Phase
IIa combination study, as described below. ANA598 has also completed two long-term chronic
toxicology studies (26 weeks duration in rats and 39 weeks duration in monkeys) with favorable
results. Furthermore, ANA598 has demonstrated the preclinical properties, including potency,
pharmacokinetics and early safety, that we believe are prerequisites for successful development in
the HCV area.
In 2009 we initiated a Phase IIa clinical study of ANA598 in combination with pegylated
interferon-alfa and ribavirin, which is the current standard of care (SOC) for the treatment of
hepatitis C. Dosing of ANA598 in this study concluded in 2010. In the Phase
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IIa study, treatment-naïve (previously untreated) genotype 1 patients received ANA598 or
placebo in combination with SOC for 12 weeks at dose levels of 200 mg twice daily (bid) or 400 mg
bid, each with a loading dose of 800 mg bid on day one. After week 12, patients continued receiving
SOC alone. Patients who achieved undetectable levels of virus at weeks four and 12 were randomized
to stop all treatment at week 24 or 48. The primary endpoint of the study was the proportion of
patients who achieved undetectable levels of virus at week 12 (defined as complete
Early Virological Response, or cEVR). Additional endpoints include safety
and tolerability as well as the proportion of patients with undetectable levels of virus at week
four (defined as Rapid Virological Response, or RVR). Patients are being
followed for 24 weeks after stopping therapy to determine the rate of Sustained
Virological Response, or SVR. Approximately 90 patients participated in this study
with approximately 30 patients receiving ANA598 and 15 receiving placebo at each dose level.
In 2010, we reported cEVR data from the ANA598 Phase IIa study, showing that ANA598 added to
SOC accelerated the rate of viral clearance, with comparable antiviral response at ANA598 doses of
200 mg bid and 400 mg bid. ANA598 showed an excellent safety profile at both dose levels through
the 12 weeks of dosing, with reported adverse events being typical for patients treated with
interferon and ribavirin alone, although conclusions regarding safety cannot be made until results
in more patients over longer duration are known. Based on a more favorable tolerability profile at
200 mg bid compared to 400 mg bid, and comparable antiviral response at both doses, we selected 200
mg bid as the dose to take forward into Phase IIb. The resistance profile of ANA598 seen in the
Phase IIa study was very favorable, with only a single patient (<2% of patients in the ANA598
arms) experiencing viral breakthrough while receiving ANA598 plus SOC. Initial SVR data has also
been encouraging. We intend to analyze the remaining SVR data after all patients have been off
therapy for 24 weeks, which we expect to occur in the summer of 2011. We plan to analyze the entire
data set at that time and potentially submit the data for presentation at a medical conference. We
cannot guarantee that the remaining SVR data will be as favorable as the data we have seen to date.
In January 2011 we initiated a Phase IIb clinical study of ANA598 in combination with SOC for
the treatment of hepatitis C. In the Phase IIb study, approximately 200 chronically infected
genotype 1 hepatitis C patients are to receive ANA598 200 mg bid in combination with SOC, with a
loading dose of 800 mg ANA598 bid on day one. In addition, approximately 66 chronically infected
genotype 1 hepatitis C patients are to receive placebo added to SOC. Enrollment is expected to
include approximately equal numbers of treatment-naïve patients and treatment-experienced patients
who have failed a prior course of pegylated interferon and ribavirin, including difficult to treat
prior null-responders. Treatment duration for treatment-naïve patients will be response-guided,
while treatment-experienced patients are to receive all three agents for 48 weeks, with all
patients receiving SOC and either ANA598 or placebo for a concurrent duration. We expect to receive
viral response data through 24 weeks of treatment prior to the end of 2011. The Phase IIb study is
being conducted at a number of sites within and outside of the United States.
Substantial further investment will be necessary in order to progress ANA598 beyond the events
referenced above and through additional clinical testing before regulatory approval can be sought.
ANA773
ANA773 is a novel, oral inducer of endogenous interferons that acts via the TLR7 pathway that
we have investigated as a treatment for both HCV and cancer. Both the prodrug and its active
substance were discovered, designed and synthesized by Anadys scientists. Animal pharmacology
studies have shown that ANA773 can elicit desired immune responses and that components of the
response can be modulated by both dose and schedule of administration. We have also shown in our
Phase I HCV clinical study that ANA773 can stimulate the immune system at a tolerated dose.
Because interferon-alfa is the foundation of the current standard of care for hepatitis C and
the current approval strategies of DAAs are based on the addition of such DAAs to interferon-based
regimens, we believe that an oral agent that stimulates interferon production with improved
tolerability could potentially displace interferon from future regimens that contain DAAs. We
believe that ANA773 may offer the opportunity to be such an oral interferon replacement.
In June 2009, in order to direct sufficient investment toward ANA598, we suspended development
of ANA773 prior to our receipt of data from the last cohort enrolled in a monotherapy trial of
ANA773 in HCV patients. The data from this last 2000 mg cohort suggests that the antiviral activity
of ANA773 in HCV patients could be comparable to pegylated interferon over a similar timeframe. We
also believe that recent developments in the HCV landscape, including clinical data indicating that
it may be difficult to replace pegylated interferon entirely in the treatment of HCV, support the
potential commercial value of an oral interferon replacement such as ANA773. As a result, in the
fall of 2010 we decided to resume clinical investigation of ANA773 in HCV. We are preparing to
conduct a 28 day combination study of ANA773 with ribavirin. If supported by the data from the
first cohorts utilizing ANA773 and
ribavirin only, this study may also include additional cohorts in which ANA773 will be tested
as a triple combination with ribavirin
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and a DAA, to parallel the likely future use of interferon.
We intend to conduct this study in Europe and potentially other countries, and we expect that up to
approximately 75 patients will participate in the trial, inclusive of the DAA cohorts. We expect
to receive four week data from the first two cohorts of ANA773 plus ribavirin in this study during
the fourth quarter of 2011.
Substantial further investment will be necessary in order to progress ANA773 beyond the events
referenced above and through additional clinical testing before regulatory approval can be sought.
Industry Background
HCV
Based on available market data, we estimate that the global HCV market in 2010 was between $2
and 3 billion. Due to significant global prevalence and substantial unmet medical need, improving
the treatment of chronic HCV infection remains an important priority for the medical community and
the pharmaceutical industry. Many patients with chronic HCV infection do not receive the current
standard of care due to concerns about adverse events or have incomplete response to the current
standard of care. If untreated or inadequately treated, chronic HCV infection can result in
significant liver damage (cirrhosis), liver transplantation and liver cancer.
The World Health Organization (WHO) estimates that 170 million people globally are chronically
infected with HCV and 3 to 4 million people are newly infected each year. Cirrhosis develops in
about 10% to 20% of people with chronic infection, and liver cancer develops in 1% to 5% of people
with chronic infection over a period of 20 to 30 years. It is estimated that more than 3 million
people are chronically infected with HCV in the U.S. and that as of 2009 only about 100,000 of
these patients were under treatment. The National Institutes of Health estimates that HCV results
in approximately 15,000 deaths in the U.S. annually and the Center for Disease Control and
Prevention has estimated that the number of deaths would increase to nearly 40,000 by 2010. HCV
also exacerbates the severity of underlying liver disease when it coexists with other hepatic
conditions. In particular, liver disease progresses more rapidly among persons with alcoholic liver
disease and HIV infection.
There is currently no vaccine available to prevent infection with HCV. The current standard of
care for treatment of chronic HCV infection is a combination of pegylated interferon-alfa and
ribavirin. Interferon-alfa is administrated by injection and results in abnormally high levels of
this cytokine circulating systemically throughout the body. Therapy with interferon-alfa causes a
number of side effects in many patients, including depression, drops in blood cell count and
flu-like symptoms, sometimes experienced during the entire year-long primary course of therapy that
is standard for treatment of patients infected with genotype 1 HCV, the most difficult patient
group to treat. These side effects may make patients feel worse than foregoing treatment, which
reduces their motivation to initiate or continue HCV therapy. Many patients take additional drugs
to treat these side effects, further increasing the cost and the risk of additional side effects to
the patient. As a result, poor compliance with the HCV course of therapy may decrease the patient
response rate.
In addition to the side effects, current therapies do not provide sustained elimination of the
virus, called Sustained Virologic Response (SVR), for a large proportion of chronically infected
patients. For example, in clinical trials, approximately 50 percent of the genotype 1 patients,
which represent the largest portion of HCV patients in the U.S., Europe and Japan, do not achieve
sustained virologic response six months after the end of the treatment. Due to the lack of
alternative treatments, patients without a sustained virologic response have no other treatment
option but to undergo a second 48-week course of interferon-alfa-based therapy with a different
brand of interferon-alfa. This second course of therapy subjects the relapsed patient to a similar
risk of side effects as the previous course of therapy and offers the benefit of SVR in only a
small fraction of patients who complete the 48 week treatment.
In response to the limitations of existing treatments for HCV infection, direct acting
antiviral (DAA) therapies (including protease, polymerase and NS5A inhibitors) have emerged as a
potential addition to or alternative to the current standard of care. Unlike interferons, which
work by stimulating the immune systems response to viral infection, HCV DAAs directly target the
virus by inhibiting the protease, polymerase or NS5A region of the virus. Accordingly, DAAs have
the potential to significantly improve treatment outcomes, when added to the standard of care in
difficult-to-treat patients, including patients infected with HCV genotype 1. The addition of DAAs
to the standard of care could also lead to shorter treatment duration, which could increase patient
compliance. While DAAs will likely initially be used in combination with pegylated interferon-alfa
and ribavirin, it may be possible eventually to replace one or both components of the current
treatment regimen with a combination of oral therapies directed at HCV, including protease,
polymerase and NS5A inhibitors.
Quantification of viral concentration (viral load) in the blood is an accepted surrogate of
clinical effect in viral diseases. New treatments are evaluated on the ability to decrease or
eliminate detectable viral particles in blood. With viral load as an accepted
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surrogate, proof of
concept in the treatment of viral diseases can be obtained in Phase I human clinical trials. We
believe this early proof of concept results in a higher probability of success post Phase I than
the probability of success associated with drug development in many other therapeutic areas.
Toll-Like Receptors
Toll-like receptors or TLRs are a relatively new scientific discovery, though their
origins date back hundreds of millions of years. TLRs evolved as a way to protect organisms against
pathogens such as viruses and bacteria. This defense mechanism has proven so effective that it is
an integral part of the human immune system today and a promising target for innovative new
medicines.
In 1997, the first human TLR was cloned. To date, scientists have discovered 10 TLRs in
humans, each recognizing generic molecular patterns associated with a variety of invading
pathogens.
TLR Agonists in Viral Diseases
Certain TLRs are responsible for fighting bacterial and fungal infections; others respond
specifically to viral infections.
Unlike adaptive immunity, which enables the immune system to remember and fight specific
infections that it has encountered before, innate immunity is the ability to recognize foreign
invaders upon their very first meeting. This function is regulated in part by TLRs, a family of
proteins that serve as a first line of defense in the body.
Once a TLR recognizes a particular pathogen, it launches a dual assault. First, it triggers
the bodys innate immunity, initiating an inflammatory response to fight the invader that includes
induction of interferon, a natural disease fighter that is the basis for many approved products. It
then alerts and educates the bodys adaptive immune system so that it will recognize the pathogen
in the future. If TLRs fail, the body is left vulnerable to infection.
Our Strategy
The key elements of our strategy include the following:
| Advance the Development of ANA598 in HCV. We are developing ANA598, a DAA, as a treatment for hepatitis C. During 2011 we intend to: |
| Conduct a Phase IIb study of ANA598 with SOC; | ||
| Obtain 8-week viral response data for treatment-naive patients from the ANA598 Phase IIb study; | ||
| Obtain 12-week viral response data from the ANA598 Phase IIb study; | ||
| Obtain 24-week viral response data from the ANA598 Phase IIb study; and | ||
| Analyze final SVR data from the ANA598 Phase IIa study. |
| Maintain flexible development avenues for ANA598. We are developing ANA598 with the intention of maintaining flexibility to participate in a broad array of potential treatment paradigms as the HCV landscape evolves. Among other things, this flexibility encompasses: |
| Building up the safety database by conducting the current Phase IIb study, which will be relevant for all development avenues; and | ||
| Setting the stage for utilizing ANA598 in combination with other DAAs. |
| Advance the Development of ANA773 in HCV. We are also developing ANA773, a selective TLR7 agonist, as a treatment for hepatitis C. During 2011 we intend to: |
| Initiate a Phase IIa 28-day combination study of ANA773 and ribavirin; and | ||
| Obtain 4 week viral load data for ANA773 with ribavirin. |
| Opportunistically Explore Strategic Alliances around our product candidates. We intend to continue to explore potential strategic alliances and other transactions around ANA598 and ANA773. |
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We currently have no ongoing collaborations.
Our Development Programs
ANA598 for HCV
ANA598 is a direct-acting antiviral (DAA) that blocks the hepatitis C virus ability to
multiply by inhibiting the viral RNA polymerase. ANA598 belongs to a class of DAAs referred to as
non-nucleosides. We believe non-nucleosides will become an important component of future
combination regimens used to treat HCV infection, similar to the role played by non-nucleoside
inhibitors in HIV therapy. In 2007 we selected ANA598 as a development candidate. This selection
represented the culmination of a comprehensive structure-based drug design program directed towards
the viral RNA polymerase. ANA598 has demonstrated positive antiviral response and a favorable
safety and tolerability profile in a Phase IIa combination trial, as described below. ANA598 has
also completed two long-term chronic toxicology studies (26 weeks duration in rats and 39 weeks
duration in monkeys) with favorable results. The completed toxicology studies confirm the favorable
toxicology profile of ANA598 and support dosing durations of as long as one year if desired.
Furthermore, ANA598 has demonstrated the preclinical properties, including potency,
pharmacokinetics and early safety, that we believe are prerequisites for successful development in
the HCV area. We are currently conducting a Phase IIb combination study of ANA598.
We believe that non-nucleoside NS5B polymerase inhibitors offer an exciting potential new way
to treat HCV infection, as part of combination regimens which may include other DAAs (such as
protease inhibitors, nucleoside polymerase inhibitors, NS5A inhibitors and/or cyclophilin
inhibitors) and/or immunomodulators (such as pegylated interferon). We believe that polymerase
inhibitors have the potential to be equally important components of future regimens as protease
inhibitors, which is another class of HCV DAAs currently in clinical development by a number of
companies, including Vertex (with Mitsubishi and Tibotec/Johnson & Johnson) and Merck.
Historically, it has been challenging to identify non-nucleoside polymerase inhibitors that display
both potency and sustained drug levels in blood. With ANA598, we believe we have created a product
candidate that has the potential to overcome this challenge. We believe that we have the
opportunity to be competitive in the HCV landscape as we believe that ANA598 is one of the most
advanced and well characterized non-nucleoside polymerase inhibitors in development for the
treatment of HCV. Furthermore, to our knowledge the number of non-nucleosides in development is
smaller than the number of potentially attractive combinations that can be formed with attractive
protease inhibitors and nucleoside polymerase inhibitors in development. We believe that the future
evolution of HCV therapy will likely include protease inhibitors, nucleosides and non-nucleosides
used in various combinations and potential additional mechanisms such as cyclophilin inhibitors and
NS5A inhibitors. Therefore, we view ANA598 as complementary to, rather than competitive with,
protease inhibitors and nucleosides that are currently in development as HCV therapies.
Preclinical evaluation of ANA598 required for initiation of clinical investigation was
completed in the first quarter of 2008, leading to submission of an Investigational New Drug
application (IND) to the U.S. Food and Drug Administration (FDA), subsequent allowance of the IND
by the FDA and initiation of clinical investigation in the second quarter of 2008. In December
2008, we announced that the FDA had granted fast track designation to ANA598 for the treatment of
chronic HCV infection. We have completed three Phase I studies of ANA598 that have demonstrated
potent antiviral activity and good tolerability and are nearing conclusion of a Phase IIa study in
which ANA598 was dosed in patients for 12 weeks in combination with pegylated interferon-alfa and
ribavirin, which is the current standard of care (SOC) for the treatment of hepatitis C. In
January 2011, we initiated a Phase IIb study of ANA598 in combination with SOC in which ANA598 will
be dosed for 28 or 48 weeks.
In the Phase IIb study, approximately 200 chronically infected genotype 1 hepatitis C patients
are to receive ANA598 200 mg twice-daily (bid) in combination with SOC, with a loading dose of 800
mg bid of ANA598 day one. In addition, approximately 66 chronically infected genotype 1 hepatitis C
patients are to receive placebo added to SOC. Enrollment is expected to include approximately
equal numbers of treatment-naïve (previously untreated) patients and treatment-experienced patients
who have failed a prior course of pegylated interferon and ribavirin, including difficult to treat
prior null-responders. Treatment duration for naïve patients will be response-guided, with patients
being dosed for either 28 or 48 weeks, while treatment-experienced patients are to receive all
three agents for 48 weeks. While HCV patients who respond quickly to dual or triple therapy may
largely be treated with a treatment duration of six months in the future, we believe there will
remain a significant population for harder to treat patients in
whom viral load decline is slower. We believe these patients may benefit from extended
treatment with ANA598 through 48 weeks. The Phase IIb trial design is intended to further define
patient populations suitable for shortened therapy and populations who may benefit from extended
therapy. We expect to receive viral response data through 24 weeks of treatment prior to the end of
2011. We are conducting the study at a number of sites within and outside of the United States.
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We are nearing conclusion of a Phase IIa study of ANA598 in combination with SOC for the
treatment of hepatitis C. In this study, ANA598 was dosed with SOC, after which patients continued
to receive SOC alone. Dosing of ANA598 was completed in 2010 and we are currently in the follow-up
stage of collecting SVR data. In the Phase IIa study, treatment-naïve genotype 1 patients received
ANA598 or placebo in combination with SOC for 12 weeks at dose levels of 200 mg bid or 400 mg bid,
each with a loading dose of 800 mg bid on day one. Patients who achieved undetectable levels of
virus at weeks four and 12 were randomized to stop all treatment at week 24 or 48. Patients are
then measured 12 weeks and 24 weeks after all treatment is ended to determine their hepatitis C
virus (HCV) levels. Those who show undetectable levels of virus 24 weeks after cessation of all
treatment are deemed to have achieved a Sustained Virologic Response (SVR
or SVR24), recognized as a viral cure. Those patients who show undetectable levels of virus 12
weeks following cessation of treatment are deemed to have achieved a sustained virologic response
as of week 12 (SVR12), which is recognized within the HCV community as having significant
predictive effect of achieving SVR24. The primary endpoint of the study is the proportion of
patients who achieve undetectable levels of virus at week 12 (defined as cEVR). Additional
endpoints include safety and tolerability as well as the proportion of patients with undetectable
levels of virus at week four (defined as RVR). Approximately 90 patients participated in the
Phase IIa study with approximately 30 patients receiving ANA598 and 15 receiving placebo at each
dose level. The study is being conducted at a number of clinical sites in the United States.
In May of 2010 we announced antiviral response, safety and tolerability results through 12
weeks from the Phase IIa study. The data showed that ANA598 added to SOC accelerated the rate of
viral clearance, with comparable response at ANA598 doses of 200 mg bid and 400 mg bid. At the 200
mg bid dose level, 73% of patients receiving ANA598 in combination with SOC achieved undetectable
levels of virus (<15 IU/ml) at week 12, referred to as cEVR. At the 400 mg bid dose level, the
cEVR rate was 75% and for the control arm the cEVR rate was 63%.
Antiviral Response Through 12 Weeks
Proportion of Patients (%) with Undetectable Levels of Virus (<15 IU/mL) by Week
Week 1 | Week 2 | Week 3 | Week 4 | Week 6 | Week 8 | Week 10 | Week 12 | |||||||||||||||||||||||||
ANA598 + SOC
200 mg bid |
11 | 22 | 44 | 56 | 65 | 69 | 73 | 73 | ||||||||||||||||||||||||
ANA598 + SOC 400 mg
bid |
9 | 27 | 30 | 42 | 56 | 72 | 75 | 75 | ||||||||||||||||||||||||
Placebo + SOC |
0 | 3 | 9 | 13 | 19 | 38 | 48 | 63 |
One patient who received ANA598 400 mg bid experienced viral breakthrough (defined as a
confirmed increase of >1 log from any prior measurement) between weeks 10 and 12. No other
patient who received either dose of ANA598 experienced viral breakthrough while receiving ANA598.
In 2009, a genetic marker in patients was discovered that predicts response to SOC. Recent
scientific studies have shown that individuals with the IL28B CC genotype, which is estimated to be
present in approximately 37% of Caucasian HCV patients and a lower percentage of patients in other
ethnic groups, are substantially more responsive to SOC than patients with other IL28B genotypes.
This industry knowledge became available after the ANA598 Phase IIa study was designed and
initiated and so patients were not stratified based on IL28B genotype in the study. Subsequently,
we determined the available patients IL28B genotypes. In the SOC control arm of the Phase IIa
study, 46% of the patients who were genotyped were of the CC genotype, while in the ANA598-treated
arms only 22% of the patients who were genotyped were of the CC genotype. These numbers are based
on the assessment of IL28B genotyping from approximately 81% of the patients in the Phase IIa
study. We believe that the high proportion of CC patients in the SOC control arm relative to the
overall population may have contributed to a higher cEVR rate in the control arm than has been seen
historically with interferon and ribavirin.
As reported during 2010, our analysis of the available IL28B genotype information has led to a
further understanding of ANA598s potential for beneficial effect on HCV patients regardless of
IL28B genotype. The IL28B marker is represented in the human population as one of three values
CC, CT or TT. As described above, it has been determined that patients with the CC marker have a
much faster antiviral response to SOC over 12 weeks than patients with CT or TT, who are
collectively grouped as non-CC. Within the context of response-guided therapy, which is expected to
become standard if and when DAAs are approved, patients
with faster antiviral response could be candidates for successful treatment with a six-month
treatment course instead of the standard twelve-month course, thereby eliminating the tolerability
and cost burdens of the second six months of pegylated interferon and ribavirin treatment. Data
generated from the ANA598 Phase IIa study demonstrated that adding ANA598 to SOC accelerated the
antiviral response in both CC and non-CC patient types.
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Also during 2010, we reported the safety and tolerability results from the ANA598 Phase IIa
study. Both doses of ANA598 demonstrated a favorable safety and tolerability profile through 12
weeks, although conclusions regarding safety and tolerability cannot be made until results in more
patients over longer duration are known. Safety laboratory values were comparable between the
ANA598 and control arms. At the 200 mg bid dose level, the incidence of all adverse events was
similar between the active and control arms, with reported adverse events being typical for
patients treated with interferon and ribavirin. In the 400 mg bid arm, a higher incidence of rash
was seen relative to the 200 mg bid and control arms. The incidence of all other adverse events was
comparable between the 400 mg bid and control arms. In the 400 mg bid arm, 62% of patients
receiving ANA598 developed rash, compared to 41% of patients that received 200 mg bid and 34% of
patients that received placebo plus SOC. In the 400 mg bid group, 17 of 21 rashes were mild, with
one grade 2 rash and three grade 3 rashes. In the 200 mg bid arm, the incidence of rash was
comparable with the placebo control arm and also consistent with historical reports of rash
incidence due to interferon and ribavirin alone. The rashes that were classified as grade 3 were
done so due to the extent of body surface covered by the rash, which was maculopapular in nature
(red spots, some raised). In the 200 mg bid arm, one patient in the ANA598 group experienced a
grade 3 rash which began resolving rapidly upon stopping all study medication. Per protocol, this
patient resumed interferon/ribavirin alone and continued in the study. In the 400 mg bid arm, four
patients discontinued ANA598 due to rash; three with grade 3 rash and one with grade 1 rash.
We are encouraged by the preliminary SVR data from the Phase IIa study. In the 200 mg bid
cohort, six patients who received ANA598 were randomized to stop all treatment at week 24. We have
analyzed the HCV level data measured 24 weeks after all treatment was ended for four of these six
patients. This data shows that all four of these patients achieved SVR24. A fifth patient in this
group, who was previously reported to have achieved SVR12, was determined to have continued
receiving SOC past week 24 due to an error in duration of administration at a clinical site. This
patient has maintained undetectable levels of virus through week 48, but this response is now
properly characterized as undetectable levels of virus at end-of-treatment. We have not yet
assessed achievement of SVR24 for the final patient in this first group.
In the 400 mg bid cohort, seven patients who received ANA598 were randomized to stop all
treatment at week 24. We currently have data on the HCV levels for six of these seven patients,
measured 12 weeks after all treatment was ended. This data shows that three out of the six reported
patients achieved SVR12, while three did not. Based on our initial analysis of the data from this
group, it appears that the three patients who did not achieve SVR12 had low levels of ribavirin at
week four of the study. Industry literature references regarding HCV therapy have reported that
patients who have low levels of ribavirin early in the treatment regimen are less likely to achieve
a sustained virologic response after completion of therapy, despite achieving undetectable levels
of virus while on therapy. This phenomenon is well recognized within the HCV community as the
unexplained positive effect of ribavirin, which is necessary in the large majority of patients in
order to achieve an SVR after having achieved undetectable levels of virus during treatment. We
believe that this phenomenon was a contributing factor leading to the failure of these three
patients to achieve SVR12. We have not yet assessed achievement of SVR12 for the last patient in
this group.
We intend to analyze the remaining SVR data from the ANA598 Phase IIa study after all patients
have been off therapy for 24 weeks, which we expect to occur in the summer of 2011. We plan to
analyze the entire data set at that time and potentially submit the data for presentation at a
medical conference. We cannot guarantee that the remaining SVR data will be as favorable as the
data we have seen to date.
Previously, we conducted three Phase I studies of ANA598 that led to Phase II development.
We have presented pre-clinical data showing enhanced antiviral activity and suppression of
resistance when ANA598 is combined in vitro with other anti-HCV agents that act through
diverse mechanisms, including protease inhibition, polymerase inhibition (both nucleoside and
complementary non-nucleoside inhibitors), NS5A inhibition, and cyclophillin
inhibition, as well as interferons. In particular, we have presented in
vitro data showing that combinations of ANA598 with either the
protease inhibitor telaprevir, the nucleoside polymerase inhibitor PSI-6130 (the prodrug of
RG-7128), an NS5A inhibitor or interferon-alfa appear to be synergistic whereas
other combinations are additive. Synergistic means that the actual combined effect of the two
agents is greater than would be predicted from simply adding the effects of each agent alone.
The combination of ANA598 with any one of these agents has demonstrated the ability
in vitro to eliminate virus that is resistant to any single
therapeutic agent. These studies also show that
ANA598 retained activity in vitro against mutants known to confer resistance to
other classes of DAAs, including protease inhibitors, nucleoside inhibitors and non-nucleosides
that, through virtue of binding at a different site than ANA598, display a resistance profile
distinct from that of ANA598. We also showed that genotypic mutations resistant to ANA598 appear to
be fully susceptible to interferon-alfa, telaprevir and PSI-6130. Previously, we have also
presented data demonstrating synergy between ANA598 and immunoregulatory proteins termed
cytokines induced by ANA773, Anadys TLR7 agonist oral prodrug.
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ANA773 for HCV
Because interferon-alfa is the foundation of the current standard of care for hepatitis C and
the current approval strategies of DAAs are based on the addition of such direct antivirals to
interferon-based regimens, we believe that an oral agent that stimulates interferon production with
improved tolerability could potentially displace interferon from future regimens that contain
direct antivirals. We believe that ANA773 may offer the opportunity to be such an oral interferon
replacement.
In 2009 we concluded a Phase I clinical trial of ANA773 in HCV patients. In the first three
cohorts of the patient portion of this trial, HCV patients received oral ANA773 or placebo at every
other day over 28 days, at doses of 800 mg, 1200 mg or 1600 mg, with six subjects receiving ANA773
and two receiving placebo in each cohort. At these doses, data showed an encouraging trend toward
viral load reduction. We then amended the protocol to provide for a higher dose. In this final
cohort of the trial, in which patients received 2000 mg of ANA773 every other day over 10 days, the
mean maximal decline in viral load was 1.3 log10, compared to a mean maximal decline of 0.3 log10
in patients who received placebo. Five of the eight patients who received 2000 mg ANA773
experienced a maximal decline of greater than 1 log, while none of the eight patients who received
placebo experienced a decline of greater than 1 log. The mean end-of-treatment decline was 0.6
log10 in patients who received 2000 mg ANA773 compared to 0.1 log 10 in patients who received
placebo. ANA773 was well-tolerated in patients throughout the course of the study and there were no
serious adverse events reported.
Results from pre-clinical pharmacology studies showed that ANA773 elicited desired immune
responses and that the profile of response could be modulated by both dose and schedule of
administration. Results of 13-week GLP toxicology studies showed that with every-other-day dosing
of ANA773, immune stimulation of a magnitude believed to confer therapeutic potential could be
achieved without adverse toxicology findings. The immune stimulation observed with every-other-day
dosing of ANA773 in monkeys included induction of interferon-alfa and interferon dependent
responses at levels that were sustained over 13 weeks of dosing.
In the fall of 2010 we decided to resume clinical investigation of ANA773 in HCV. We are
preparing to conduct a 28 day combination study of ANA773 with ribavirin. If supported by the data
from the first cohorts utilizing ANA773 and ribavirin only, this study may also include additional
cohorts in which ANA773 will be tested as a triple combination with ribavirin and a DAA, to
parallel the likely future use of interferon. We intend to conduct this study in Europe and
potentially other countries, and we expect that up to approximately 75 patients will participate in
the trial, inclusive of the DAA cohorts. We expect to receive four week data from the first two
cohorts of ANA773 plus ribavirin in this study during the fourth quarter of 2011.
Manufacturing and Supply
All of our manufacturing is out-sourced to third parties, with control by our internal
managers. We rely on third-party manufacturers to produce sufficient quantities of ANA598 and
ANA773 for use in clinical trials. We intend to continue this practice for any future clinical
trials and large-scale commercialization of ANA598 and/or ANA773. Both ANA598 and ANA773 are
small-molecule drugs. Historically, these drugs have been simpler and less expensive to manufacture
than biologic drugs.
Intellectual Property
Our policy is to pursue patents and to otherwise endeavor to protect our technology,
inventions and improvements that are commercially important to the development of our business. We
also rely upon trade secrets that may be important to the development of our business.
Our success will depend in large part on our ability to:
| Obtain and maintain patent and other proprietary protection for the technology, inventions and improvements we consider important to our business; | ||
| Defend and enforce our patents; | ||
| Preserve the confidentiality of our trade secrets; and | ||
| Operate without infringing the patents and proprietary rights of third parties. |
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We hold issued patents and pending patent applications in the United States and in foreign
countries we deem appropriate, covering intellectual property developed as part of our research and
development programs. Our intellectual property holdings as of December 31, 2010, include, but are
not limited to, the United States and foreign patents and patent applications described below.
In our HCV non-nucleoside polymerase program, we hold three issued United States patents
related to our ANA598 program (patent numbers 7,462,611; 7,582,754; and 7,842,838) with expiration
dates in 2027 and 2028, one issued patent in Singapore expiring in 2027, one issued patent in each
of Malta and Lebanon expiring in 2028, and 62 pending United States and/or foreign patent
applications (in Australia, Brazil, Canada, China, the European Patent Convention, India, Japan,
Mexico, Taiwan and certain other foreign jurisdictions) covering ANA598 and/or other non-nucleoside
NS5B polymerase inhibitor compounds and the manufacture, pharmaceutical compositions, and methods
of use of these compounds.
In our ANA773 program, we hold three issued United States patents (patent numbers 7,560,544;
7,709,448; and 7,781,581) with expiration dates in 2026, 2027 and 2028, two issued patents in Malta
with expiration dates in 2025 and 2027, one issued patent in each of Belarus, Eurasia, New Zealand,
Russian Federation, Singapore, and Ukraine expiring in 2025, one issued patent in each of France,
Germany, Italy, Netherlands, Spain, Switzerland and the United Kingdom expiring in 2026, and 77
pending United States and/or foreign patent applications (in Australia, Brazil, Canada, China, the
European Patent Convention, India, Japan, Mexico, Taiwan and certain other foreign jurisdictions)
covering ANA773 and related compounds and prodrugs, and the manufacture, pharmaceutical
compositions, and methods of use of these compounds.
We also hold two United States patents (patent numbers 7,576,068 and 7,858,637) with
expiration dates in 2024 and 2026, one issued patent in each of Australia, New Zealand, Mexico,
Morocco and Georgia expiring in 2024, one issued patent in each of France, Germany, Italy,
Netherlands, Spain, Switzerland and the United Kingdom expiring in 2024, and 10 pending United
States and/or foreign patent applications (in Brazil, Canada, China, Japan, Taiwan and certain
other foreign jurisdictions) that relate to methods of use of certain TLR7 agonists and TLR7
agonist prodrugs. In addition, we hold patents and patent applications in the United States and
foreign countries covering composition of matter and methods of use of certain other TLR7 agonists
and TLR7 agonist prodrugs, with patent expiration dates beginning in 2022.
We intend to continue using our scientific expertise to pursue and file patent applications on
new developments with respect to uses, methods and compositions of matter in order to enhance our
intellectual property position in our areas of therapeutic focus.
We intend to aggressively prosecute our patent applications and enforce and defend our patents
and otherwise protect our proprietary technology. Although we believe our rights under patents and
patent applications provide a competitive advantage, the patent positions of pharmaceutical and
biotechnology companies are highly uncertain and involve complex legal and factual questions. We
may not be able to develop patentable products or processes, and may not be able to obtain patents
from pending applications. Even if patent claims are allowed, the claims may not issue, or in the
event of issuance, may not be sufficient to protect the technology owned by or licensed to us. Any
patents or patent rights that we obtain may be circumvented, challenged or invalidated by our
competitors.
We also rely on trade secrets and proprietary know-how, especially when we do not believe that
patent protection is appropriate or can be obtained. Our practice is to require our employees,
consultants, outside scientific collaborators, sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or other relationships with us.
These agreements generally provide that all confidential information developed by or made known to
the individual during the course of the individuals relationship with us is to be kept
confidential and not disclosed to third parties. In the case of employees, the agreements generally
provide that all discoveries, developments, inventions and other intellectual property conceived or
reduced to practice by the individual while employed by us will be our exclusive property. In the
case of advisors and consultants, the agreements generally provide that all discoveries,
developments, inventions, and other intellectual property conceived or reduced to practice by the
individual as a result of performance of services for us and not resulting from research related to
work supported by another entity with which the individual is party to a confidentiality agreement,
shall be our exclusive property. These agreements may not effectively prevent disclosure of
confidential information nor result in the effective assignment to us of intellectual property, and
may
not provide an adequate remedy to us in the event of unauthorized disclosure of confidential
information or other breaches of the agreements.
Competition
The biotechnology and pharmaceutical industries are very competitive and subject to rapid and
significant technological change. Our product candidates, if approved for sale, will compete with
existing therapies. In addition, a number of companies are pursuing
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the development of therapies
for hepatitis C. We believe that a significant number of drugs are currently under development and
may become available in the future for the treatment of HCV. Due to the level of focus on
developing treatments for this indication, ongoing research efforts are intense and new treatments
are being sought out and developed by our competitors. Some of these products use therapeutic
approaches that may compete directly or indirectly with ANA598 or ANA773. In addition, less
expensive generic forms of currently marketed drugs could lead to additional competition upon
patent expiration or invalidations.
HCV
Treating HCV with Interferon-based Therapies
Current standard treatments for HCV include an interferon-based product combined with
ribavirin. Although interferons result in antiviral effects, they are thrice-weekly injectable
products and cause numerous side effects. Next generation interferon-based products, so-called
pegylated interferons, were developed to provide an improved dosing regimen and are approved as
once-per-week injected products. Currently approved therapies for the treatment of HCV infection
include Peg-Intron (pegylated interferon-alfa-2b) and Intron-A (interferon-alfa-2b), which are
marketed by Merck, Pegasys (pegylated interferon-alfa-2a) and Roferon-A (interferon-alfa-2a), which
are marketed by Roche and several branded and generic versions of ribavirin.
Many patients experience unpleasant side effects when receiving interferon-based products,
including flu-like symptoms such as fatigue, pyrexia, myalgia, cough, headache, and rigors,
psychiatric reactions, such as depression, irritability and anxiety, as well as neutropenia and
thyroid dysfunction. Due to the nature of HCV infection, a majority of patients do not show any
symptoms from the disease. Ironically, the harsh side effects associated with the current treatment
regimen often make patients feel sicker than the disease itself. As a result, physicians often
delay treatment of HCV-infected patients until tests of liver function demonstrate initial liver
degeneration due to the infection. In clinical studies, harsh side effects have caused
discontinuation of treatment in approximately 10 to 20 percent of patients. Some of these side
effects may also require additional drug therapies, which increase the cost to the patient.
Further, the optimal dose, treatment length and response rates to interferon and ribavirin therapy
vary considerably based on HCV genotype and mode of therapy, i.e., monotherapy or combination
therapy.
Direct Antivirals in Development for Treating HCV
In response to the
limitations of existing
treatments for HCV infection, companies are developing direct-acting antivirals (DAAs) for use in combination with the
current treatment regimen of interferon and ribavirin. Two DAAs, both protease inhibitors
are currently under review by the FDA for regulatory approval;
telaprevir developed by Vertex in collaboration with Tibotec
(Janssen Pharmaceutica / Johnson & Johnson) and Mitsubishi-Tanabe Pharma and boceprevir
developed by Merck.
Unlike interferons, which work by stimulating the immune systems
response to viral infection, HCV DAAs inhibit viral replication by targeting viral proteins
essential for replication: the protease, polymerase or NS5A region of the virus. Accordingly, DAAs
when added to the current standard of care may significantly improve treatment outcomes in
difficult to treat patients such as those infected with HCV genotype 1. The addition of DAAs to the
current standard of care could also lead to shorter treatment duration, which could increase
patient compliance. While DAAs will likely initially be used in combination with pegylated
interferon-alfa and ribavirin, it may be possible to eventually replace one or both of these agents
with a combination of DAAs. This would allow for an all oral-based treatment regimen for HCV that
eliminates the untoward side effects associated with inferferon-alfa treatment.
ANA598 belongs to a class of DAAs known as non-nucleoside polymerase inhibitors. If approved,
ANA598 would likely be used in combination with the current standard of care and/or other DAAs,
such as protease inhibitors, other polymerase inhibitors, or NS5A inhibitors. ANA598 may also be
combined with cyclophilin inhibitors whose action is mediated via inhibition of a host (human)
enzyme. Although any product currently approved or approved in the future for the treatment of HCV
infection could potentially decrease or eliminate the commercial opportunity of ANA598, we expect
that in a combination setting a non-nucleoside polymerase inhibitor would be complementary with a
protease inhibitor, a nucleoside polymerase inhibitor, NS5A inhibitor and cyclophilin inhibitors.
We believe that other non-nucleoside polymerase inhibitors would likely be the most direct
competitors of ANA598, but
depending on the resistance profiles of the compounds, it is possible that even two
non-nucleoside polymerase inhibitors could be complementary. To our knowledge, the following
non-nucleoside polymerase inhibitor programs are currently under clinical evaluation: filibuvir by
Pfizer, GS-9190 by Gilead, TMC-647055 by Tibotec/Johnson & Johnson (Janssen), ABT-072 and ABT-333
by Abbott, BI-207127 by Boehringer Ingelheim, BMS-791325 by Bristol-Myers Squibb, IDX-375 by
Idenix, and VX-222 by Vertex. Further, a number of companies have non-nucleoside polymerase
inhibitor research and pre-clinical development programs.
Additional late stage DAAs in clinical development for HCV that may be complementary to or
competitive with ANA598 include: the protease inhibitors telaprevir, in development by Vertex
Pharmaceuticals, Tibotec (Janssen Pharmaceutica / Johnson & Johnson)
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and Mitsubishi Tanabe Pharma;
boceprevir, in development by Merck; danoprevir, in development by Roche; TMC-435350, in
development by Tibotec (Janssen Pharmaceutica / Johnson & Johnson) and Medivir and BMS-650032, in
development by Bristol-Myers Squibb; as well as, BI-201335, in development by Boehringer Ingelheim;
the nucleoside polymerase inhibitors RG7128, in development by Roche; and PSI-7977 in development
by Pharmasset; and the NS5A inhibitor BMS-790052, in development by Bristol-Myers Squibb. Cyclophilin inhibitors, such
as DEB-025, in development by Novartis may also be competitive with ANA598.
Immunological Agents in Development for Treating HCV
Due to the side effects and poor treatment response to interferon therapy discussed above,
there are currently a number of agents in development that could potentially replace todays
pegylated interferons. ANA773 is an oral prodrug of a TLR7 agonist that we have evaluated for the
treatment of HCV. There are a number of agents in clinical development that could potentially
compete with ANA773 as a new agent for the treatment of HCV, including Locteron, in development by
Biolex Therapeutics and Omega DUROS interferon (ITCA-638) in development by Intarcia Therapeutics,
both of which are longer-acting versions of interferon alfa. Also, in development as potential
improvements to existing interferons are PEG-Interferon Lambda, in development by Bristol
Myers-Squibb, IMO-2125, a TLR9 agonist in development by Idera, and SD-101, a TLR9 agonist in
development by Dynavax Technologies, each of which is currently being studied in early stage
clinical trials in HCV patients. In addition, Gilead has advanced GS-9620, a TLR7 agonist into a
Phase I clinical trial in HCV patients.
Competitive Risks
We are in the early stages of a Phase IIb study of ANA598, which was initiated following
completion of three short term Phase I studies and a nearly concluded Phase IIa study in which
ANA598 was dosed in combination with standard of care for 12 weeks, and we have only conducted
short term Phase I studies of ANA773. Therefore, it is difficult to predict the efficacy, safety
and tolerability that these product candidates will demonstrate in longer term trials, alone or in
combination with other agents. It is also difficult to predict how these product candidates will
interact with other product candidates in development or on the market, until we perform
combination studies. Further, it is difficult to predict whether our product candidates will cause
any toxicity issues, potential side effects, or other negative consequences associated with their
long-term use. During the course of future clinical trials, we may discover that these product
candidates are less effective, require unacceptable dosing regimens, or have a similar side effect
profile as the profile associated with current therapies or future competitors. This may result in
our product candidates being less advantageous or less desirable from a patient and treating
physician perspective as compared to current or alternative therapies for HCV.
We face competition from pharmaceutical and biotechnology companies both in the U.S. and
abroad. Our competitors may utilize discovery technologies and techniques or partner with
collaborators in order to develop products more rapidly or successfully than we or our future
collaborators are able to do. Many of our competitors, particularly large pharmaceutical companies,
have substantially greater financial, technical and human resources than we do and far more
experience in the development of product candidates and the commercialization of potential
products. In addition, academic institutions, government agencies, and other public and private
organizations conducting research may seek patent protection with respect to potentially
competitive products or technologies. These organizations may also establish exclusive
collaborative or licensing relationships with our competitors.
We believe that our ability to compete depends, in part, upon our ability to create, maintain
and license scientifically advanced technology. Further, we need to attract and retain qualified
personnel, obtain patent protection or otherwise develop proprietary technology or processes and
secure sufficient capital resources for the substantial time period between technological
conception and commercial sales of products based upon our technology.
We expect that competition among HCV therapies approved for sale will be based on various
factors, including improved product efficacy, safety and tolerability, resistance profiles, ease of
administration (e.g., oral vs. intravenous administration), availability, price, reimbursement
status and patent position. Potential competitors may develop treatments for HCV that are more
effective and/or
safer or more convenient than our product candidates or that would make our technology and
product candidates obsolete or non-competitive.
Government Regulations
We are subject to regulation by the FDA and comparable regulatory agencies in foreign
countries with respect to the development and commercialization of products and services resulting
from our drug discovery activities. These agencies and other federal, state and local entities
regulate research and development activities and the testing, manufacture, quality control, safety,
efficacy, labeling, storage, record keeping, advertising and promotion of these products and
services.
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As an initial step in the drug approval process of pharmaceuticals, an applicant typically
conducts preclinical laboratory and animal studies of the product candidate. Following these
studies, the applicant will submit an IND (or equivalent) application to the FDA (or comparable
foreign regulatory agency). Once the IND becomes effective, the applicant can commence clinical
studies of the product candidate in humans to determine safety, tolerability and efficacy.
Following clinical studies, the marketing of a new drug requires the filing of a New Drug
Application (NDA) with the FDA and its subsequent approval (similar requirements exist within
foreign agencies). The process required by the FDA and comparable agencies before a pharmaceutical
or biologic device may be marketed in the U.S. or in any other country generally requires many
years and substantial effort and financial resources, and approval from the FDA may not be received
in a timely manner, if at all. The time required to satisfy FDA requirements or similar
requirements of foreign regulatory agencies may vary substantially based upon the type, complexity
and novelty of the product or the targeted disease. Even if a product receives regulatory approval,
later discovery of previously unknown problems with a product may result in restrictions on the
product or even complete withdrawal of the product from the market.
Under the FDAs regulations, the clinical testing program required for marketing approval of a
new drug typically involves three sequential phases, which may overlap.
| Phase I: Studies are conducted on normal, healthy human volunteers or patients to determine safety, dosage tolerance, absorption, metabolism, distribution and excretion. If possible, Phase I studies may also be designed to gain early evidence of effectiveness. | ||
| Phase II: Studies are conducted on small groups of patients afflicted with a specific disease to gain preliminary evidence of efficacy, to determine the common short-term side effects and risks associated with the substance being tested and to determine dosage tolerance and optimal dosage. | ||
| Phase III: Involves large-scale studies conducted on disease-afflicted patients to provide statistical evidence of efficacy and safety and to provide an adequate basis for physician labeling. |
Frequent reports are required in each phase, and, if unwarranted hazards to subjects are
found, the FDA may request modification or discontinuance of clinical testing until further
preclinical testing is conducted. Additional testing (Phase IV) may be conducted after FDA approval
for marketing is granted and could be designed to evaluate alternative utilizations of drug
products prior to their being marketed for such additional utilizations as well as to test for
complications resulting from long-term exposure not revealed in earlier clinical testing.
Environmental and Safety Matters
Certain of our development activities involve the controlled use of biological, hazardous and
radioactive materials and waste. We are also subject to numerous federal, state and local
environmental and safety laws and regulations, including those governing the use, manufacture,
storage, handling and disposal of hazardous materials and waste products. The cost of compliance
with and any violation of these regulations could have a material adverse effect on our business
and results of operations. Although we believe that our safety procedures for handling and
disposing of these materials comply with the standards prescribed by state and federal regulations,
we cannot assure investors that accidental contamination or injury from these materials will not
occur.
To date, compliance with laws and regulations relating to the protection of the environment
has not had a material effect on our capital expenditures or our competitive position. However, we
are not able to predict the extent of government regulation, and the cost and effect thereof on our
results of operations, which might result from any legislative or administrative action pertaining
to environmental or safety matters. In the event of contamination or injury, we could be held
liable for substantial damages or penalized
with fines in an amount exceeding our resources, and our clinical trials could be suspended.
In addition, we may have to incur significant costs to comply with future environmental laws and
regulations.
Research and Development Expenses
Research and development expenses consist primarily of costs associated with the discovery,
preclinical and clinical development of our product candidates. Research and development expenses
are the primary source of our expenses and totaled $12.0 million, $19.5 million and $26.0 million
for the years ended December 31, 2010, 2009 and 2008, respectively.
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Employees
As of March 1, 2011, we had 24 regular, full-time employees and three other employees, including
16 in research and development, and the balance in general and administrative positions, with 14 of
our employees holding Ph.D., M.D. or other advanced degrees. None of our employees is represented
by a labor union, and we consider our employee relations to be good.
Executive Officers of the Registrant
The following table sets forth information regarding our executive officers as of March 1,
2011:
Name | Age | Position | ||||
Steve Worland, Ph.D.
|
53 | President and Chief Executive Officer | ||||
James L. Freddo, M.D.
|
56 | Senior Vice President, Drug Development and Chief Medical Officer | ||||
Kevin L. Eastwood
|
47 | Senior Vice President, Corporate Development | ||||
James Appleman, Ph.D.
|
54 | Senior Vice President, Research and Chief Scientific Officer | ||||
Elizabeth E. Reed, J.D.
|
40 | Senior Vice President, Legal Affairs and General Counsel | ||||
Peter T. Slover, CPA
|
36 | Vice President, Finance and Operations |
Steve Worland, Ph.D. was appointed President and Chief Executive Officer and a member of the
Board of Directors in 2007. Dr. Worland joined Anadys in 2001 as Chief Scientific Officer and
served as President, Pharmaceuticals prior to being named CEO. Prior to joining Anadys, Dr. Worland
was Vice President, Head of Antiviral Research at Agouron Pharmaceuticals, a Pfizer Company. Dr.
Worland was at Agouron from 1988 through the acquisition of Agouron by Warner-Lambert in 1999,
where he held various positions and responsibilities that culminated with him assuming global
responsibility for anti-infective strategy as Vice President for Warner-Lambert. At Agouron,
Warner-Lambert and Pfizer, Dr. Worland led teams responsible for discovery and clinical development
in the areas of HIV, HCV and respiratory infections. Dr. Worland was a National Institutes of
Health Postdoctoral Fellow in Molecular Biology at Harvard University from 1985 to 1988. He
received his B.S. with highest honors in Biological Chemistry from the University of Michigan and
his Ph.D. in Chemistry from the University of California, Berkeley.
James L. Freddo, M.D. was appointed a member of the Board of Directors in January 2011 and has
served as Senior Vice President, Drug Development and Chief Medical Officer since July 2008. Prior
to joining Anadys in July 2006, Dr. Freddo was Vice President, Clinical Site Head and Development
Site Head, Pfizer Global Research and Development, La Jolla. Previously at Pfizer, he was Executive
Director, Site Therapeutic Area Leader, Clinical Development, Oncology. While at Pfizer, Dr. Freddo
led the team responsible for the registration of Sutent® (sunitinib malate), a drug approved by the
FDA in January 2006 for treating advanced kidney cancer and gastrointestinal stromal tumors. Prior
to Pfizer, Dr. Freddo held a variety of senior management positions at Wyeth-Ayerst Research from
December 1996 until June 2002, including Senior Director, Oncology, Senior Director, Infectious
Diseases, and Senior Director, Transplantation Immunology. Dr. Freddo currently serves as a member
of the Board of Directors of InfuSystem Holdings, Inc., a healthcare services company. He holds a
B.S. degree in Medical Technology from the State University of New York at Stony Brook, and a M.D.
degree from the University of North Carolina, where he also completed his fellowship training.
Kevin L. Eastwood joined us in January 2011 as Senior Vice President, Corporate Development.
Prior to joining Anadys, Mr. Eastwood was Vice President, Corporate Development at Ambrx, Inc. from
May 2006 to December 2010, Senior Vice President, Business Development at Achillion
Pharmaceuticals, Inc. from June 2000 to May 2006 and Senior Manager, Business Development at
Agouron Pharmaceuticals, Inc. from August 1997 to June 2000. In these positions, Mr. Eastwood was
responsible for executing business transactions with a number of leading biotechnology and
pharmaceutical companies, including Pfizer, Inc., Merck and Co., Inc., Eli Lilly and Co., and
Gilead Sciences. Mr. Eastwood began his pharmaceuticals career in sales and marketing at Marion
Laboratories and transitioned to business development while at Agouron. He received a B.S. degree
in Biology from Missouri State University.
James Appleman, Ph.D. was named Senior Vice President, Research and Chief Scientific Officer
in January 2011. Dr. Appleman joined us in 2001 and has held several positions of increasing
responsibility with us including Senior Vice President, Research in 2010, Vice President, Research
in 2009, Vice President, Biology from February 2007 to 2009 and Senior Director of Project
Management and Planning from 2005 to February 2007, as well as earlier positions. Prior to joining
Anadys, Dr. Appleman was a faculty member at St. Jude Childrens Research Hospital and subsequently
held positions at Gensia, Inc., a biopharmaceutical company and Metabasis, a biopharmaceutical
company. Dr. Appleman received a Ph.D. in Biochemistry from Oklahoma State University and completed
his postdoctoral training at Dartmouth Medical School.
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Elizabeth E. Reed, J.D. has served as our Senior Vice President, Legal Affairs and General
Counsel since August 2009. Ms. Reed joined us in 2001 and has served as our Corporate Secretary
since January 2002. Previously, Ms. Reed served as our Vice President, Legal Affairs from December
2006 to August 2009, as our Senior Director, Legal Affairs from December 2002 to December 2006 and
as our Director of Legal Affairs from October 2001 to December 2002. Prior to joining us, Ms. Reed
was associated with the law firms of Cooley Godward LLP and Brobeck, Phleger & Harrison LLP. Ms.
Reed is a member of the State Bar of California and received her B.S. in Business Administration
with an emphasis in finance from the Haas School of Business at the University of California,
Berkeley and holds a J.D., cum laude, from Harvard Law School.
Peter T. Slover has served as our Vice President, Finance and Operations since July 2009. Mr.
Slover joined us in 2004 as Manager of Financial Reporting and served in this position through
December 2005. From January 2006 to July 2006, Mr. Slover served as the Companys Senior Manager,
Financial Reporting and Internal Controls, from August 2006 to December 2006 as our Associate
Controller, from January 2007 to December 2008 as our Controller and from January 2009 to July 2009
as our Senior Director, Finance and Corporate Controller. Prior to joining the Company, Mr. Slover
began his career as an auditor at KPMG LLP where he spent seven years in public accounting. Mr.
Slover is a licensed Certified Public Accountant in the State of California. Mr. Slover received a
B.S. degree in Business Administration from Shippensburg University.
Company Website
We file annual, quarterly, current reports, proxy statements and other information with the
Securities and Exchange Commission. Our primary website can be found at
http://www.anadyspharma.com. We make available free of charge at this website (under the
Investors SEC Filings caption) all of our reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, including our Annual Report on Form 10-K, our
Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K and amendments to those reports.
These reports are made available on the website as soon as reasonably practicable after their
filing with, or furnishing to, the Securities and Exchange Commission. Furthermore, we also make
available on our website free of charge, and in print to any shareholder who requests it, the
Committee Charters for our Audit, Compensation, and Corporate Governance and Nominating Committees,
as well as the Code of Business Conduct and Ethics that applies to all directors, officers and
employees of the Company. Amendments to these documents or waivers related to the Code of Business
Conduct and Ethics will be made available on our website as soon as reasonably practicable after
their execution.
The Company was incorporated in Delaware in September 1992 as ScripTech Pharmaceuticals, Inc.,
and in 1994 we changed our name to Scriptgen Pharmaceuticals, Inc. In May 2000, following the
addition of a substantially new management team and the infusion of new capital, product candidates
and technologies, we changed our name to Anadys Pharmaceuticals, Inc.
Item 1A. Risk Factors
You should consider carefully the following information about the risks described below,
together with the other information contained in this Annual Report and in our other public filings
before making any investment decisions regarding our stock. If any of the following risks actually
occurs, our business, financial condition, results of operations and future growth prospects would
likely be materially and adversely affected. In these circumstances, the market price of our common
stock would likely decline, and you may lose all or part of the money you paid to buy our common
stock.
Risks Related to Our Business
Any significant set-back regarding, or the failure of, ANA598 will have a large negative
impact on our business and stock price.
Currently, we are focusing most of our resources on the development of ANA598. As a result,
our development portfolio entails a highly concentrated risk of failure. If the timing or results
of clinical trials and non clinical studies of ANA598 do not meet our, your, analysts or others
expectations, the market price of our common stock could decline significantly. Any significant
set-back regarding, or the failure of, ANA598 will have a significant negative impact on us and our
stock price.
We may be unable to enter into future strategic or collaborative transactions, and in
particular transactions around ANA598 or ANA773, on terms acceptable to us, or at all.
Our near and long-term viability will depend in part on our ability to successfully establish
transactions with pharmaceutical and biotechnology companies. Since we do not currently possess the
resources necessary to advance ANA598 or ANA773 fully through
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later stage development, we either
will need to develop or acquire these resources on our own, which will require substantial funding,
time and effort, or will need to enter into collaborative agreements to assist in the development
of these programs. If we fail to establish collaborations or licensing arrangements on acceptable
terms, we may need to forego the future development of one or both of our programs. Even if we
successfully establish new collaborations, these relationships may never result in the successful
development or commercialization of any product candidates or the generation of milestone, sales or
royalty revenue.
In order to advance ANA598 and ANA773 through later stage development, we will require
additional funds and we may not be able to obtain such funds.
Prior to advancing ANA598 and ANA773 through completion of later stage development, we will
need to obtain additional funds. However, we may not be successful in obtaining such funds.
Potential sources of additional funds include a new strategic alliance or other transaction, the
sale of equity securities, project financing or debt financing. We cannot be sure that additional
funding will be available or that such funding will be obtained on terms favorable to us or our
stockholders.
We will need additional funding and may be unable to raise capital when needed, which would
force us to delay, reduce or eliminate our development programs.
Our December 31, 2010 cash, cash equivalents and marketable securities balance was $38.0
million. We believe that this balance will be sufficient to satisfy our anticipated operational
cash needs for at least the next 12 months. However, we will need to seek additional funding in
order to advance our programs fully through later stage development. There is no guarantee that
additional funding will be available to us on acceptable terms, or at all. If funds are not
available, we may be required to delay, reduce the scope of or eliminate one or both of our
development programs.
In addition, we will need to raise additional capital if we choose to conduct certain
activities, including:
| fund our development programs; | ||
| acquire rights to products or product candidates, technologies or businesses; | ||
| establish and maintain manufacturing, sales and marketing operations; and | ||
| commercialize our product candidates, if any, that receive regulatory approval. |
Our future funding requirements will depend on, and could increase significantly as a result
of many factors, including:
| the progress of our clinical trials; | ||
| the progress of our nonclinical development activities; | ||
| our ability to establish and maintain strategic alliances; | ||
| the costs involved in enforcing or defending patent claims and other intellectual property rights; | ||
| the pace and timing of development activities conducted under joint development arrangements we may establish; | ||
| the cost and timing of regulatory approvals; | ||
| the costs of establishing or expanding manufacturing, sales and distribution capabilities; | ||
| the costs related to development and manufacture of pre-clinical, clinical and validation lots for regulatory and commercialization of drug supply; | ||
| the commercialization of ANA598, ANA773 and any additional products; and | ||
| the extent to which we acquire or invest in other products technologies and businesses. |
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We do not anticipate that we will generate significant revenues from operations for
at least several years, if ever. Until we can generate significant revenues from operations, we
expect to satisfy our future cash needs through public or private equity offerings, debt
financings, strategic alliances or other transactions, project financing and grant funding, as well
as through interest income earned on cash balances. We cannot be certain that additional funding
will be available to us on acceptable terms, or at all. If funds are not available, we may be
required to delay, reduce the scope of or eliminate one or both of our development programs or our
commercialization efforts.
Raising additional funds by issuing securities or through debt or project financing or
strategic alliances and licensing arrangements may cause dilution to existing stockholders,
restrict our operations or require us to relinquish proprietary rights.
We may seek to raise additional funds through public or private equity offerings, debt
financings, project financings or strategic alliances and licensing arrangements. We cannot be
certain that additional funding will be available on acceptable terms, or at all. To the extent
that we raise additional capital by issuing equity securities, our stockholders ownership will be
diluted. Other financing activities may also have an equity component, which also may lead to
dilution. Any debt or project financing we enter into may involve covenants that restrict our
operations. These restrictive covenants may include limitations on borrowing, specific restrictions
on the use of our assets as well as prohibitions on our ability to create liens, pay dividends,
redeem capital stocks or make investments. In addition, if we raise additional funds through
strategic alliances and licensing arrangements, it may be necessary to relinquish potentially
valuable rights to our potential products or proprietary technologies, or grant licenses on terms
that are not favorable to us. For example, we might be forced to relinquish all or a portion of our
sales and marketing rights with respect to potential products or license intellectual property that
enables licensees to develop competing products.
We are at an early stage of development, and we may never attain product sales.
Our existing organizational structure was formed in May 2000. Since then, most of our
resources have been dedicated to the development of our proprietary drug discovery technologies,
research and development and preclinical and early-stage clinical testing of compounds. Our current
product candidates are at only the early-to-mid stages of clinical trials. ANA598, ANA773 and any
other compounds that we may develop, may never be approved for commercial sales. These compounds
will require extensive and costly development, preclinical testing and clinical trials prior to
seeking regulatory approval for commercial sales. The time required to attain product sales and
profitability is lengthy and highly uncertain, and we cannot assure you that we will be able to
achieve or maintain product sales.
We expect our net losses to continue for at least several years, and we are unable to predict
the extent of future losses and when we will become profitable in our business operations, if ever.
We have incurred net losses since our incorporation in 1992, and through December 31, 2010 we
have an accumulated deficit of $299.7 million. Our losses are attributable in large part to the
significant research and development costs required to identify and validate potential product
candidates and conduct preclinical studies and clinical trials. To date, we have generated limited
revenues, consisting of one-time or limited payments associated with past collaborations or grants,
and we do not anticipate generating product revenues for at least several years, if ever. We will
need to increase our operating expenses over at least the next several years in order to fund the
development costs of our product candidates and further our development activities. As a result we
expect to continue to incur significant and increasing operating losses for the foreseeable future.
Because of the numerous risks and uncertainties associated with our research and product
development efforts, we are unable to predict the extent of any future losses or when we will
become profitable in our business operations, if ever. Even if we do achieve profitability in our
business operations, we may not be able to sustain or increase such profitability on an ongoing
basis.
The technologies on which we rely are unproven and may not result in the development of
commercially viable products.
Our current product candidates, ANA598 and ANA773, were selected based on the presumption that
intervention at their respective targets, HCV polymerase and TLR7, offers a therapeutic benefit.
There can be no assurance that intervention at either target will offer sufficient benefit and
acceptable toxicity to warrant continued development and approval. ANA773 relies on the biology of
a specific receptor, or protein, named Toll-Like Receptor-7, or TLR7. However, the interaction
between small molecules and TLR7 represents a relatively new mechanism of action for the treatment
of disease, including HCV, and there is no guarantee that an acceptable balance between therapeutic
benefit and risk will be achieved with TLR7 agonists in HCV infected patients. For example, in June
2006 we suspended dosing of ANA975, a TLR7 agonist prodrug, in our then on-going ANA975 clinical
trial due to information from 13-week toxicology studies in animals that showed intense immune
stimulation. We subsequently conducted
additional pre-clinical studies and were unable to identify an acceptable balance between
therapeutic benefit and risk using a daily
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dosing schedule over 13-weeks. Accordingly, we
subsequently discontinued the development of ANA975 as a therapy for HCV infection. The science
underlying ANA598 is also new and unproven, as no products acting at the HCV polymerase have been
approved for marketing. ANA598 and ANA773 are at only the early stage to mid stage of clinical
investigation. The process of successfully discovering product candidates is expensive,
time-consuming and unpredictable, and the historical rate of failure for drug candidates is
extremely high. If our approaches to drug discovery and development are not successful, we will not
be able to establish or maintain a clinical development portfolio or generate product revenue.
Because the results of preclinical studies and early clinical trials are not necessarily
predictive of future results, we can provide no assurances that ANA598 or ANA773 will have
favorable results in on-going or future clinical trials, or receive regulatory approval.
Positive results from preclinical studies or early clinical trials should not be relied upon
as evidence that later or larger-scale clinical trials will succeed. There is typically an
extremely high rate of attrition from the failure of drug candidates proceeding through clinical
trials. There is no guarantee that viral load declines or durability of response seen in early
patient trials will be replicated in future trials of longer duration and/or larger patient
populations. For example, the favorable 12 week viral response data from our ANA598 Phase IIa study
may not be repeated in the ANA598 Phase IIb study and may not translate into long-term benefit due
to the potential emergence of resistant variants or other factors, such as low ribavirin levels in
patients. Similarly, there is no guarantee that favorable safety and tolerability seen in short
term studies will be replicated in studies of longer duration and/or in larger subject populations.
Furthermore, if future toxicology studies have unexpected results, the clinical development of the
compound at issue could be suspended, delayed and/or terminated. If ANA598 or ANA773 fails to
demonstrate sufficient safety and efficacy in any clinical trial or shows unexpected findings in
future toxicology studies, we would experience potentially significant delays in, or be required to
abandon, development of ANA598 or ANA773. If we delay or abandon our development efforts related to
ANA598 or ANA773, we may not be able to generate sufficient revenues to become profitable, and our
reputation in the industry and in the investment community would likely be significantly damaged,
each of which would cause our stock price to decrease significantly.
Future results of our ongoing ANA598 Phase II combination studies and results of future trials
may not be as favorable as results we have seen to date.
To date, we have seen positive preliminary antiviral response and safety data in our ongoing
Phase IIa combination study in which ANA598 was dosed for 12 weeks in combination with pegylated
interferon and ribavirin, after which patients continued to receive pegylated interferon and
ribavirin. This data includes on-treatment data showing a durable antiviral response through 12
weeks, with only a single patient (<2%of patients in the ANA598 arms) experiencing viral
breakthrough while receiving ANA598 plus pegylated interferon and ribavirin. This data also
includes data through 48 weeks for the 200 mg bid cohort and through 36 weeks for the 400 mg bid
dose cohort. Included in the 48 week data for the 200 mg cohort is data showing that four of four
patients for whom data has been analyzed who received ANA598 and were randomized to stop all
therapy at week 24 maintained undetectable levels of virus 24 weeks later, referred to as achieving
a Sustained Virological Response, or SVR. Included in the 36 week data for the 400 mg cohort is
data showing that three of six patients for whom data is available who received ANA598 and were
randomized to stop all therapy at week 24 maintained undetectable levels of virus 12 weeks later
(SVR12). We believe that low ribavirin levels in the three patients who failed to achieve an SVR12
were a contributing factor to this outcome. There is no guarantee that additional data from this
study, once analyzed, or data from future studies, will be as favorable, or viewed as favorably, as
the data analyzed to date. The overall number of patients in this study is small, and therefore it
may be difficult to assess the true impact of ANA598 based on limited SVR data. If the SVR rates
from this small study are less than hoped for, or do not meet your, analysts, potential
collaborators or others expectations, the perception of the value of ANA598 could be harmed,
causing our stock price to suffer.
More generally, it remains unknown whether the favorable antiviral response and durability of
response we have seen to date with ANA598 will provide sustained benefit resulting in improved SVR
rates in larger studies. Also, there is no guarantee that the very low viral breakthrough rate
that we have seen in the Phase IIa study will be replicated in future studies. If the results of
future ANA598 studies do not show improved SVR rates over pegylated interferon and ribavirin alone
and if there are no alternative paths in which ANA598 shows benefit in combination with another
direct-acting antiviral, then the prospects for developing ANA598 as a competitive component of
future HCV treatment could be limited.
We intend to develop ANA598 and ANA773 as components of combination treatments, which presents
additional challenges to the drug development process.
We are developing ANA598 and ANA773 as potential components of future combination treatments.
We may face additional challenges with this approach, as opposed to developing product candidates
for monotherapy. For example, any negative properties of
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our product candidates may be exacerbated when combined with other agents and/or have unexpected effects in humans. Furthermore, the optimal
development of our product candidates may entail explorations of combinations with other agents,
which, except for drugs about to be approved, could require us to establish agreements or alliances
with other companies or third parties. There is no guarantee that we will be able to enter into
such alliances or agreements on terms that we view as favorable, or at all. An important element of
development for an agent such as ANA598 will be to test the agent in combination with one or more
other direct antivirals. In order for us to pursue this development strategy, we will need to
utilize approved DAAs if available or engage the interest of other biopharmaceutical or
pharmaceutical companies, since we do not have another direct antiviral to combine with ANA598. Our
ability to engage this interest from other companies that have direct antivirals in development
will be impacted by such companies internal HCV portfolio dynamics, with such dynamics influencing
the companies perceived attractiveness of combining with an agent such as ANA598. For those
companies that have a desire to combine with an agent such as ANA598, we will be dependent on their
perception of the profile of ANA598. If they do not view the profile of ANA598 as favorably as we
do, or if they establish other criteria for combination that we have not yet satisfied with ANA598,
we could experience difficulties or delays in pursuing such combination trials. For example, within
the HCV community to date there has been an emphasis on the genetic barrier to resistance of
antiviral agents (leading to a potential conclusion that the administration of non-nucleosides is
more likely to result in resistance than the administration of nucleosides due to the lower genetic
barrier of resistance of nucleosides). Only more recently has there been an appreciation of the
importance of a pharmacological barrier to resistance, which ANA598 exhibited in the Phase IIa
combination study. Depending on other companies perception of this issue, we could experience less
enthusiasm for ANA598 as a combination partner. If we are unable to optimize the development of
ANA598, our business prospects could be harmed, causing our stock price to suffer.
There is no guarantee that in future studies of ANA598, in which ANA598 will be dosed for
longer duration in combination with other agents, that we will be able to identify safe and
tolerable doses that result in clinical benefit, as measured by clearance of virus and durability
of that clearance.
We have recently initiated a Phase IIb study in which ANA598 will be dosed for up to 48 weeks
in combination with current standard of care. To date, ANA598 has not been dosed beyond 12 weeks,
and there is no guarantee that the safety, tolerability or durability of response of ANA598 will be
as favorable when dosed for longer durations. In addition, although we have presented in vitro data
showing that combinations of ANA598 with current standard of care and with certain direct antiviral
agents appear to be synergistic, these results may not be replicated in clinical trials. Also, it
is possible that ANA598 will not be additive or synergistic with other potential components of
future treatment regimens. Furthermore, it is possible that tolerability will be worse over longer
durations of treatment than was seen for the same dose at a shorter duration of treatment. For
example, in a 14 day healthy volunteer study conducted in 2009, three of the 24 subjects who
received ANA598 discontinued from the study due to the onset of a skin rash characterized as mild
to moderate with itching during the study, at comparable dose levels that were well tolerated over
three days in patients. Similarly, if the tolerability of doses of ANA598 required for long-term
treatment as part of future combinations is unacceptable or unfavorable relative to competitive
product candidates, then the prospects for developing ANA598 as a treatment for chronic hepatitis C
will be diminished, causing our stock price to decrease significantly.
Our projected development timelines for ANA598 and ANA773 are contingent, among other things,
on our anticipated interactions with ex-US regulatory authorities for both programs. There is no
guarantee that the ex-US regulatory authorities will allow the studies to proceed or that they will
not impose requirements which could result in unexpected cost increases and/or delays to our
desired timelines for the studies.
We will need to obtain clearance from applicable foreign regulatory authorities prior to
initiating dosing in the ANA598 Phase IIb study in countries outside of the United States and prior
to initiating the ANA773 Phase IIa study. There is no guarantee that we will be able to timely
satisfy the requests of any such foreign regulatory authorities or that such regulatory authorities
will not impose additional requirements on the conduct or the studies, or allow the studies to
proceed.
The FDA could impose additional requirements on the development of ANA598 which could result
in unexpected cost increases and/or delays to our development timelines.
The development of ANA598 in the United States is subject to ongoing regulation by the FDA.
There is no guarantee that the FDA will not impose additional requirements on our development
program for ANA598, including requirements associated with patient
enrollment, manufacturing processes of our clinical trials materials or other development
activities related to ANA598, which could result in increased costs to us or a delay in our desired
timelines.
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Fast track designation does not guarantee approval, or expedited approval, of ANA598 and there
is no guarantee that ANA598 will maintain fast track designation.
In December 2008, we announced that the FDA granted fast track designation to ANA598 for the
treatment of chronic HCV infection. Under the FDA Modernization Act of 1997, fast track designation
is designed to facilitate the development and expedite the review of new drugs that are intended to
treat serious or life-threatening conditions. Compounds selected must demonstrate the potential to
address an unmet medical need for such a condition. Mechanisms intended to facilitate development
include opportunities for frequent dialogue with FDA reviewers and for timely review of submitted
protocols. However, the designation does not guarantee approval or expedited approval of any
application for the product. Furthermore, the FDA may revoke fast track designation from a product
candidate at any time if it determines that the criteria are no longer met.
We have recently decided to resume clinical investigation of ANA773 for HCV. There is no
guarantee that development of the program will be continued beyond the upcoming Phase IIa study.
We have recently decided to resume clinical investigation of ANA773 in HCV. We intend to
conduct a Phase IIa 28 day combination study of ANA773 where initial cohorts will be dosed with
ANA773 and ribavirin and subsequent cohorts will test ANA773 as a triple combination with ribavirin
and a direct-acting antiviral, to parallel the likely future use of interferon. We plan to conduct
this trial in Europe and potentially countries outside of Europe. If ANA773 does not achieve viral
load reduction at levels comparable to injectable interferon but with a cleaner side effect
profile, the prospects for developing ANA773 as a competitive HCV product will be diminished.
Furthermore, prior clinical development of ANA773 for HCV was conducted in the Netherlands and not
under a U.S. Investigational New Drug Application, or IND. If, in the future, we want to proceed
with the development of ANA773 for HCV in the United States, approval from the FDA under a U.S. IND
will be required. There is no assurance that the FDA will agree that ANA773 should be tested as an
investigational treatment for HCV. Currently, there is no evidence that a TLR7 agonist can confer
long-term benefit as a therapy for HCV at an acceptable safety risk, and there is no assurance that
the FDA will view the data from our ex-US studies as sufficiently compelling to allow clinical
investigation. If the FDA does not view the data from our ex-US studies as sufficiently compelling,
it may not allow studies under a U.S. IND, in which case development and commercialization of
ANA773 for HCV in the United States would be precluded.
In 2007 we terminated our ANA975 development program due to challenges seen in animal
toxicology studies. To the extent that the ANA975 toxicology observations are mechanism related,
our ANA773 program could be negatively impacted, causing our stock price to decline.
ANA975 is an oral prodrug of isatoribine, a TLR7 agonist. In 2007 we discontinued the
development of ANA975 as a treatment for HCV infection due to intense immune stimulation in
animals. To the extent that any of the ANA975 toxicology observations are mechanism related, rather
than compound specific, we, or a potential future collaborator, will need to determine whether the
level of immune stimulation induced by TLR7 agonists can be modulated to achieve a potential
therapeutic benefit with an acceptable safety profile. Although results from our ANA773 13-week
animal toxicology study indicated that with every-other-day dosing of ANA773, immune stimulation of
a magnitude believed to confer therapeutic potential can be achieved without adverse toxicology
findings, there is no guarantee that this favorable toxicology profile will persist in future
toxicology studies of longer duration, or that we will not see adverse safety findings in humans.
If we are unable to modulate the immunomodulatory effect with a dose and schedule that provides
therapeutic benefit without causing unacceptable adverse events, then the future development of
ANA773 may not be viable, or attractive to a potential licensee, which could materially and
adversely affect our business and cause our stock price to decline.
Delays in the commencement of clinical testing of our current and potential product candidates
could result in increased costs to us and delay our ability to generate revenues.
Our potential drug products will require additional nonclinical testing and extensive clinical
trials prior to submission of any regulatory application for commercial sales. Previously, we have
conducted only early-stage clinical trials on our own. As a result, we have very limited experience
conducting clinical trials. In part because of this limited experience, we cannot be certain that
planned clinical trials will begin or be completed on time, if at all. Delays in the commencement
of clinical testing could significantly increase our product development costs and delay product
commercialization. In addition, many of the factors that may cause, or lead to, a delay in the
commencement of clinical trials may also ultimately lead to denial of regulatory approval of a
product candidate.
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The commencement of clinical trials can be delayed for a variety of reasons, including delays
in:
| demonstrating sufficient safety and efficacy to obtain regulatory approval to commence a clinical trial; | ||
| reaching agreement on acceptable terms with prospective contract research organizations and trial sites; | ||
| manufacturing sufficient quantities or producing drug meeting our quality standards for a product candidate; | ||
| obtaining approval of an IND application or proposed trial design from the FDA; and | ||
| obtaining institutional review board approval to conduct a clinical trial at a prospective site. |
In addition, the commencement of clinical trials may be delayed due to insufficient patient
enrollment, which is a function of many factors, including the size and nature of the patient
population, the nature of the protocol, the proximity of patients to clinical sites, the
availability of effective treatments for the relevant disease, the number of other products under
development competing for the same patients in trials and the eligibility criteria for the clinical
trial.
Delays in the completion of, or the termination of, clinical testing of our current and
potential product candidates could result in increased costs to us and delay or prevent us from
generating revenues.
Once a clinical trial has begun, it may be delayed, suspended or terminated by us, potential
future collaborators, the FDA, or other regulatory authorities due to a number of factors,
including:
| ongoing discussions with the FDA or other regulatory authorities regarding the scope or design of our clinical trials; | ||
| failure to conduct clinical trials in accordance with regulatory requirements; | ||
| lower than anticipated enrollment or retention rate of patients in clinical trials; | ||
| inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold; | ||
| lack of adequate funding to continue clinical trials; | ||
| negative results of clinical trials; | ||
| negative or potentially problematic results of ongoing and concurrent non-clinical toxicology studies; | ||
| requests by the FDA for supplemental information on, or clarification of, the results of clinical trials conducted in other countries; | ||
| insufficient supply or deficient quality of drug candidates or other materials necessary for the conduct of our clinical trials; or | ||
| serious adverse events or other undesirable drug-related side effects experienced by participants. |
Many of the factors that may lead to a delay, suspension or termination of clinical testing of
a current or potential product candidate may also ultimately lead to denial of regulatory approval
of a current or potential product candidate. If we experience delays in the completion of, or
termination of, clinical testing, our financial results and the commercial prospects for our
product candidates may be harmed, and our ability to generate product revenues will be delayed.
Even if we successfully complete clinical trials of ANA598, ANA773 or any future product
candidate, there are no assurances that we will be able to submit, or obtain FDA approval of, a new
drug application.
There can be no assurance that if our clinical trials of ANA598, ANA773 or any other potential
product candidate are successfully completed, we will be able to submit a new drug application, or
NDA, to the FDA or that any NDA we submit will be approved by the FDA in a timely manner, if at
all. If we are unable to submit a NDA with respect to ANA598, ANA773
or any future product candidate, or if any NDA we submit is not approved by the FDA, we will be unable to commercialize
that product in the United States. The FDA can and does reject NDAs and may require additional
clinical trials, even when drug candidates performed well or achieved favorable results in
large-scale Phase III clinical trials. If we fail to commercialize ANA598, ANA773 or any future
product
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candidate, we may be unable to generate sufficient revenues to attain profitability, and
our reputation in the industry and in the investment community would likely be damaged, each of
which would cause our stock price to decrease.
If we successfully develop products but those products do not achieve and maintain market
acceptance, our business will not be profitable.
Even if ANA598, ANA773 or any future product candidates are approved for commercial sale by
the FDA or other regulatory authorities, the degree of market acceptance of any approved product
candidate by physicians, healthcare professionals and third-party payors and our profitability and
growth will depend on a number of factors, including:
| our ability to provide acceptable evidence of safety and efficacy; | ||
| relative convenience and ease of administration; | ||
| the prevalence and severity of any adverse side effects; | ||
| availability of alternative treatments; | ||
| pricing and cost effectiveness; | ||
| effectiveness of our or our collaborators sales and marketing strategy; | ||
| our ability to obtain sufficient third-party insurance coverage or reimbursement; and | ||
| our ability to establish or maintain an attractive price for ANA598 when used in combination with other agents. |
If ANA598, ANA773 or any future product candidate does not provide additional clinical benefit
when included within a treatment regimen, that product likely will not be accepted favorably by the
market. If any products we or our collaborators may develop do not achieve market acceptance, then
we will not generate sufficient revenue to achieve or maintain profitability.
In addition, even if our products achieve market acceptance, we may not be able to maintain
that market acceptance over time if:
| new products or technologies are introduced that are more favorably received than our products, are more cost effective or render our products obsolete; or | ||
| complications, such as long-term toxicities and viral resistance, arise with respect to use of our products. |
We depend on outside parties to conduct our clinical trials, which may result in costs and
delays that prevent us from obtaining regulatory approval or successfully commercializing product
candidates.
We engage clinical investigators and medical institutions to enroll patients in planned
clinical trials and contract research organizations to perform data collection and analysis and
other aspects of our preclinical studies and clinical trials. As a result, we depend on these
clinical investigators, medical institutions and contract research organizations to properly
perform the studies and trials. If these parties do not successfully carry out their contractual
duties or obligations or meet expected deadlines, or if the quality or accuracy of the clinical
data they obtain is compromised due to the failure to adhere to our clinical protocols or for other
reasons, our clinical trials may be extended, delayed or terminated. We may not be able to enter
into replacement arrangements without undue delays or excessive expenditures. If there are delays
in testing or regulatory approvals as a result of the failure to perform by third-parties, our drug
development costs will increase and we may not be able to obtain regulatory approval for or
successfully
commercialize our product candidates. In addition, we may not be able to maintain any of these
existing relationships, or establish new ones on acceptable terms, if at all.
We do not have internal manufacturing capabilities, and if we fail to develop and maintain
supply relationships with future collaborators or other outside manufacturers, we may be unable to
develop or commercialize any of our products.
Our ability to develop and commercialize products will depend in part on our ability to
manufacture, or arrange for collaborators or other parties to manufacture, our products at a
competitive cost, in accordance with regulatory requirements and in sufficient
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quantities for clinical testing and eventual commercialization. Our current manufacturing agreements reflect a
much smaller scale than would be required for commercialization. If we are unable to enter into or
maintain commercial-scale manufacturing agreements with future collaborators or capable contract
manufacturers on acceptable terms the development and commercialization of our products could be
delayed, which would adversely affect our ability to generate revenues and would increase our
expenses.
If we are unable to establish sales and marketing capabilities or enter into agreements with
third parties to sell and market any products we may develop, we may not be able to generate
product revenue.
We do not currently have the capabilities for the sales, marketing and distribution of
pharmaceutical products. In order to commercialize any products, we would have to build our sales,
marketing, distribution, managerial and other non-technical capabilities or make arrangements with
third parties to perform these services. The establishment and development of our own sales force
to market any products we may develop in the United States will be expensive and time-consuming and
could delay any product launch, and we cannot be certain that we would be able to successfully
develop this capacity. If we are unable to establish our sales and marketing capability or any
other non-technical capabilities necessary to commercialize any product we may develop, we will
need to contract with third parties to market and sell any products we may develop in the United
States. We will also need to develop a plan to market and sell any products we may develop outside
the United States. If we are unable to establish adequate sales, marketing and distribution
capabilities, whether independently or with third parties, we may not be able to generate product
revenue and may not become profitable.
If we are unable to retain key management and scientific staff, we may be unable to
successfully develop or commercialize our product candidates.
We are a small company and have approximately 25 employees. Our success depends on our
continued ability to retain and motivate highly qualified management and scientific personnel. In
particular, our programs depend on our ability to retain highly skilled clinical and preclinical
personnel in the field of HCV.
We may not be able to retain qualified management and scientific personnel in the future due
to the intense competition for qualified personnel among biotechnology and pharmaceutical
businesses, particularly in the San Diego, California area. If we are not able to retain the
necessary personnel to accomplish our business objectives, we may experience constraints that will
impede significantly the achievement of our development objectives. In addition, all of our
employees are at will employees, which means that any employee may quit at any time and we may
terminate any employee at any time. Currently we do not have employment agreements with any
employees or members of senior management that provide any guarantee of continued employment by us.
We do not currently carry key person insurance covering members of senior management other than
Steve Worland, Ph.D., our President and Chief Executive Officer. The insurance covering Dr. Worland
is in the amount of $1.5 million. If we lose the services of Dr. Worland, or James L. Freddo, M.D.,
our Senior Vice President, Drug Development and Chief Medical Officer, or other members of our
senior management team or key personnel, we may not be able to find suitable replacements, and our
business may be harmed as a result.
Earthquake or wildfire damage to our facilities could delay our research and development
efforts and adversely affect our business.
Our headquarters and research and development facilities in San Diego, California, are located
in a seismic zone, and there is the possibility of an earthquake, which could be disruptive to our
operations and result in delays in our research and development efforts. In addition, San Diego has
experienced several severe wildfires during the past several years which have destroyed or damaged
many businesses and residences in the San Diego area. In the event of an earthquake or a severe
wildfire, if our facilities or the equipment in our facilities are significantly damaged or
destroyed for any reason, or we are otherwise required to shut down our operations, we may
not be able to rebuild or relocate our facility or replace any damaged equipment, or otherwise
recommence our business operations, in a timely manner and our business, financial condition and
results of operations could be materially and adversely affected.
Our securities available-for-sale held in the form of marketable securities are subject to
market, interest and credit risk that may reduce their value.
A portion of our securities available-for-sale is invested in marketable securities. Our cash
position may be adversely affected by changes in the value of these securities. In particular, the
value of these holdings may be adversely affected by increases in interest rates, downgrades by
rating agencies on the issuers of corporate bonds included in the portfolio and by other factors
which may result
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in other than temporary declines in value of the investments. Each of these events
may cause us to record charges to reduce the carrying value of our investment portfolio and may
adversely affect our cash position.
Risks Related to Our Industry
Because our product candidates and development and collaboration efforts depend on our
intellectual property rights, adverse events affecting our intellectual property rights will harm
our ability to commercialize products.
Our commercial success depends on obtaining and maintaining patent protection and trade secret
protection of our product candidates, proprietary technologies and their uses, as well as
successfully defending these patents against third-party challenges. We will only be able to
protect our product candidates, proprietary technologies and their uses from unauthorized use by
third parties to the extent that valid and enforceable patents or effectively-protected trade
secrets cover them.
Due to evolving legal standards relating to the patentability, validity and enforceability of
patents covering pharmaceutical inventions and the scope of claims made under these patents, our
ability to obtain and enforce patents is uncertain and involves complex legal and factual
questions. Accordingly, rights under any issued patents may not provide us with sufficient
protection for ANA598 or ANA773 or provide sufficient protection to afford us a commercial
advantage against competitive products or processes. In addition, we cannot guarantee that any
patents will issue from any pending or future patent applications owned by or licensed to us.
Even with respect to patents that have issued or will issue, we cannot guarantee that the
claims of these patents are, or will be valid, enforceable or will provide us with any significant
protection against competitive products or otherwise be commercially valuable to us. For example:
| we might not have been the first to make, conceive, or reduce to practice the inventions covered by all or any of our pending patent applications and issued patents; | ||
| we might not have been the first to file patent applications for these inventions; | ||
| others may independently develop similar or alternative technologies or duplicate any of our technologies; | ||
| it is possible that none of our pending patent applications will result in issued patents; | ||
| our issued or acquired patents may not provide a basis for commercially viable products, may not provide us with any competitive advantages, or may be challenged by third parties; | ||
| our issued patents may not be valid or enforceable; | ||
| we may not develop additional proprietary technologies that are patentable; or | ||
| the patents of others may have an adverse effect on our business. |
Patent applications in the United States are maintained in confidence for up to 18 months or
longer after their filing. Consequently, we cannot be certain that we were the first to invent, or
the first to file patent applications on our product candidates. In the event that a third party
has also filed a U.S. patent application relating to our product candidates or a similar invention,
we may have to participate in interference proceedings declared by the U.S. Patent Office to
determine priority of invention in the United States. The costs of these proceedings could be
substantial and it is possible that our efforts would be unsuccessful, resulting in a material
adverse effect on our U.S. patent position. Furthermore, we may not have identified all U.S. and foreign
patents or published applications that affect our business either by blocking our ability to
commercialize our drugs or by covering similar technologies that affect our drug market.
In addition, some countries, including many in Europe, do not grant patent claims directed to
methods of treating humans, and in these countries patent protection may not be available at all to
protect our drug candidates. Even if patents issue, we cannot guarantee that the claims of those
patents will be valid and enforceable or provide us with any significant protection against
competitive products, or otherwise be commercially valuable to us. We may be particularly affected
by this because we expect that ANA598, if approved, will be marketed in foreign countries with high
incidences of HCV infection.
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Other companies may obtain patents and/or regulatory approvals to use the same drugs to treat
diseases other than HCV. As a result, we may not be able to enforce our patents effectively because
we may not be able to prevent healthcare providers from prescribing, administering or using another
companys product that contains the same active substance as our products when treating patients
infected with HCV.
If we fail to obtain and maintain patent protection and trade secret protection of ANA598 or
ANA773, proprietary technologies and their uses, the competition we face would increase, reducing
our potential revenues and adversely affecting our ability to attain or maintain profitability.
If we are sued for infringing intellectual property rights of others, it will be costly and
time-consuming, and an unfavorable outcome in that litigation would have a material adverse effect
on our business.
Our commercial success also depends upon our ability to develop, manufacture, market and sell
our product candidates and use our proprietary technologies without infringing the proprietary
rights of third parties. We may be exposed to future litigation by third parties based on claims
that our product candidates, technologies or activities infringe the intellectual property rights
of others. Numerous U.S. and foreign issued patents and pending patent applications owned by others
exist in HCV. These could materially affect our ability to develop our drug candidates or sell our
products. Because patent applications can take many years to issue, there may be currently pending
applications, unknown to us, which may later result in issued patents that our product candidates
or technologies may infringe. There also may be existing patents, of which we are not aware, that
our product candidates or technologies may inadvertently infringe. Further, there may be issued
patents and pending patent applications in fields relevant to our business, of which we may become
aware from time to time, that we believe we do not infringe or that we believe are invalid or
relate to immaterial portions of our overall drug discovery and development efforts. We cannot
assure you that third parties holding any of these patents or patent applications will not assert
infringement claims against us for damages or seeking to enjoin our activities. We also cannot
assure you that, in the event of litigation, we will be able to successfully assert any belief we
may have as to non-infringement, invalidity or immateriality, or that any infringement claims will
be resolved in our favor.
There is a substantial amount of litigation involving patent and other intellectual property
rights in the biotechnology and biopharmaceutical industries generally. Any litigation or claims
against us, with or without merit, may cause us to incur substantial costs, could place a
significant strain on our financial resources, divert the attention of management from our core
business and harm our reputation. In addition, intellectual property litigation or claims could
result in substantial damages and force us to do one or more of the following if a court decides
that we infringe on another partys patent or other intellectual property rights:
| cease selling, incorporating or using any of our product candidates or technologies that incorporate the challenged intellectual property; | ||
| obtain a license from the holder of the infringed intellectual property right, which license may be costly or may not be available on reasonable terms, it at all; or | ||
| redesign our processes or technologies so that they do not infringe, which could be costly and time consuming and may not be possible. |
If we find during clinical evaluation that our drug candidates for the treatment of HCV should
be used in combination with a product covered by a patent held by another company or institution,
and that a labeling instruction is required in product packaging recommending that combination, we
could be accused of, or held liable for, inducing infringement of the third-party patents covering
the product recommended for co-administration with our product. In that case, we may be required to
obtain a license from the other company or institution to use the required or desired package
labeling, which may not be available on reasonable terms, or at all.
If we fail to obtain any required licenses or make any necessary changes to our technologies,
we may be unable to develop or commercialize some or all of our product candidates.
We may be involved in lawsuits or proceedings to protect or enforce our patent rights, trade
secrets or know-how, which could be expensive and time-consuming.
The defense and prosecution of intellectual property suits and related legal and
administrative proceedings can be both costly and time-consuming. Litigation and interference
proceedings could result in substantial expense to us and significant diversion of effort by our
technical and management personnel. Further, the outcome of patent litigation is subject to
uncertainties that cannot be adequately
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quantified in advance, including the demeanor and
credibility of witnesses and the identity of the adverse party. This is especially true in
biotechnology related patent cases that may turn on the testimony of experts as to technical facts
upon which experts may reasonably disagree and which may be difficult to comprehend by a judge or
jury. An adverse determination in an interference proceeding or litigation with respect to ANA598
or ANA773, to which we may become a party could subject us to significant liabilities to third
parties or require us to seek licenses from third parties. If required, the necessary licenses may
not be available on acceptable terms, or at all. Adverse determinations in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent us from
commercializing ANA598 or ANA773, which could have a material and adverse effect on our results of
operations.
Furthermore, because of the substantial amount of pre-trial document and witness discovery
required in connection with intellectual property litigation, there is risk that some of our
confidential information could be compromised by disclosure during this type of litigation. In
addition, during the course of this kind of litigation, there could be public announcements of the
results of hearings, motions or other interim proceedings or developments. If securities analysts
or investors perceive these results to be negative, it could have a substantial adverse effect on
the trading price of our common stock.
Confidentiality agreements with employees and others may not adequately prevent disclosure of
trade secrets and other proprietary information and may not adequately protect our intellectual
property.
We also rely on trade secrets to protect our technology, especially where we do not believe
patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. In
order to protect our proprietary technology and processes, we also rely in part on confidentiality
and intellectual property assignment agreements with our corporate partners, employees,
consultants, outside scientific collaborators and sponsored researchers and other advisors. These
agreements may not effectively prevent disclosure of confidential information nor result in the
effective assignment to us of intellectual property, and may not provide an adequate remedy in the
event of unauthorized disclosure of confidential information or other breaches of the agreements.
In addition, others may independently discover our trade secrets and proprietary information, and
in such case we could not assert any trade secret rights against such party. Enforcing a claim that
a party illegally obtained and is using our trade secrets is difficult, expensive and
time-consuming, and the outcome is unpredictable. In addition, courts outside the United States may
be less willing to protect trade secrets. Costly and time-consuming litigation could be necessary
to seek to enforce and determine the scope of our proprietary rights, and failure to obtain or
maintain trade secret protection could adversely affect our competitive business position.
Many competitors have significantly more resources and experience, which may harm our
commercial opportunity.
The biotechnology and pharmaceutical industries are subject to intense competition and rapid
and significant technological change. We have many potential competitors, including major drug and
chemical companies, specialized biotechnology firms, academic institutions, government agencies and
private and public research institutions. Many of our competitors have significantly greater
financial resources, experience and expertise in:
| research and development; | ||
| preclinical testing; | ||
| clinical trials; | ||
| regulatory approvals; | ||
| manufacturing; and | ||
| sales and marketing of approved products. |
Smaller or early-stage companies and research institutions may also prove to be significant
competitors, particularly through collaborative arrangements with large and established
pharmaceutical or other companies. We will also face competition from these parties in recruiting
and retaining qualified scientific and management personnel, establishing clinical trial sites and
patient registration for clinical trials, and acquiring and in-licensing technologies and products
complementary to our programs or potentially advantageous to our business. If any of our
competitors succeed in obtaining approval from the FDA or other regulatory authorities for their
products sooner than we do or for products that are more effective or less costly than ours, our
commercial opportunity could be significantly reduced.
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If our competitors develop treatments for HCV that are approved faster, marketed better or
demonstrated to be more effective than ANA598, ANA773, or any other products that we may develop,
our commercial opportunity will be reduced or eliminated.
We believe that a significant number of drugs are currently under development and may become
available in the future for the treatment of HCV. Potential competitors may develop treatments for
HCV that are more effective or less costly than our product candidates or that would make our
product candidates obsolete or non-competitive. Some of these products may use therapeutic
approaches that compete directly with ANA598 or ANA773. In addition, less expensive generic forms
of currently marketed drugs could lead to additional competition upon patent expiration or
invalidations.
ANA598, a non-nucleoside polymerase inhibitor, was selected as a development candidate for the
treatment of chronic hepatitis C virus infection in June 2007. If approved, ANA598 would likely be
used in combination with the current standard of care and/or other direct antiviral agents (DAAs)
such as protease inhibitors, NS5A inhibitors, and/or polymerase inhibitors. ANA598 may also be
used in combination with cyclophilin inhibitors which target a host (human) enzyme. Any product
currently approved or approved in the future for the treatment of HCV infection could decrease or
eliminate the commercial opportunity of ANA598. Other non-nucleoside inhibitors would likely be the
most direct competitors for ANA598. To our knowledge, non-nucleoside polymerase inhibitor programs
are currently under clinical evaluation by Pfizer, Gilead, Tibotec/Johnson & Johnson (Janssen),
Abbott, Boehringer Ingelheim, Bristol-Myers Squibb, Idenix, and Vertex. Further, a number of
companies have non-nucleoside polymerase inhibitor research and pre-clinical development programs.
Other potential competitors are products currently approved for the treatment of HCV
infection: PegIntron (pegylated interferon-alfa-2b), which are marketed by Merck; and Pegasys
(pegylated interferon-alfa-2a), Copegus (ribavirin USP), and Roferon- A (interferon-alfa-2a), which
are marketed by Roche. ANA598 may also face competition from DAAs currently in later stage
clinical development for the treatment of HCV including the protease inhibitors (telaprevir, which
is being developed by Vertex Pharmaceuticals, Tibotec (Janssen Pharmaceutica / Johnson & Johnson)
and Mitsubishi Tanabe Pharma; boceprevir, in development by Merck; TMC-435350, in development by
Johnson & Johnson (Tibotec) and Medivir; BMS-650032 in development by Bristol-Myers Squibb;
BI-201335, in development by Boehringer Ingelheim; and danoprevir, in development by Roche), the
nucleoside polymerase inhibitors (RG7128, in development by Roche; and PSI-7977, in development by
Pharmasset), the NS5A inhibitor (BMS-790052, in development by Bristol-Myers Squibb), and the
non-nucleoside inhibitors (GS-9190, in development by Gilead; VX-222, in development by Vertex;
ABT-072 and ABT-333, in development by Abbott; BMS-791325, in development by BMS, IDX375 by Idenix,
BI-207127 by Boehringer Ingelheim, TMC-647055 by Tibotec / Johnson & Johnson; and filibuvir, in
development by Pfizer). Cyclophilin inhibitors, such as DEB-025, in
development by Novartis may also
be competitive with ANA598.
If we cannot establish pricing of our product candidates acceptable to the government,
insurance companies, managed care organizations and other payors, any product sales will be
severely hindered.
The continuing efforts of the government, insurance companies, managed care organizations and
other payors of health care costs to contain or reduce costs of health care may adversely affect:
| our ability to set a price we believe is fair for any products we or our collaborators may develop; | ||
| our ability to generate adequate revenues and gross margins; and | ||
| the availability of capital. |
In certain foreign markets, the pricing of prescription pharmaceuticals is subject to
government control. In the United States, comprehensive health care reform legislation was recently
enacted by the Federal government and we expect that there will continue to be a number of federal
and state proposals to implement government control over the cost of prescription pharmaceuticals
and on the reform of the Medicare and Medicaid systems. The trend toward managed health care in the
United States will continue to put pressure on the rate of adoption and pricing of prescription
pharmaceuticals, which may result in lower prices for our product candidates. We are currently
unable to predict what additional legislation or regulation, if any, relating to the health care
industry or third-party coverage and reimbursement may be enacted in the future or what effect the
recently enacted federal health care reform legislation or any such additional legislation or
regulation would have on our business.
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If we cannot arrange for reimbursement policies favorable to our product candidates, their
sales will be severely hindered.
Our ability to commercialize ANA598 or any other product candidate successfully will depend in
part on the extent to which governmental authorities, private health insurers and other
organizations establish appropriate reimbursement levels for the cost of ANA598 or any other
product and related treatments. Third party payors are increasingly challenging the prices charged
for medical products and services, including treatments for HCV. Also, the trend toward managed
health care in the United States as well as the comprehensive health care reform legislation
recently enacted by the Federal government could result in exclusion of our product candidates from
reimbursement programs such as Medicare and Medicaid. The cost containment measures that health
care payors and providers are instituting and the effect of the comprehensive health care reform
legislation recently enacted by the Federal government could materially and adversely affect our
ability to earn product revenue and generate significant profits and could impact our ability to
raise capital.
Product liability claims may damage our reputation and, if insurance proves inadequate, the
product liability claims may harm our results of operations.
We face an inherent risk of product liability exposure for claimed injuries related to the
testing of our product candidates in human clinical trials, and will face an even greater risk if
we or our potential future collaborators sell our product candidates commercially. If we cannot
successfully defend ourselves against product liability claims, we will incur substantial
liabilities. Regardless of merit or eventual outcome, product liability claims may result in:
| decreased demand for our product candidates; | ||
| injury to our reputation; | ||
| withdrawal of clinical trial participants; | ||
| the inability to establish new collaborations with potential collaborators; | ||
| substantial costs of related litigation; | ||
| substantial monetary awards to patients; and | ||
| the inability to commercialize our product candidates. |
We currently have product liability insurance that covers our clinical trials and plan to
increase and expand this coverage as we commence larger scale trials. We also intend to expand our
insurance coverage to include the sale of commercial products if marketing approval is obtained for
any of our product candidates. However, insurance coverage is increasingly expensive. We may not be
able to maintain insurance coverage at a reasonable cost and we may not be able to obtain insurance
coverage that will be adequate to satisfy any liability that may arise.
Any claims relating to our improper handling, storage or disposal of biological, hazardous and
radioactive materials could be time-consuming and costly.
Our research and development involves the controlled use of hazardous materials, including
chemicals that cause cancer, volatile solvents, including ethylacetate and acetonitrile,
radioactive materials and biological materials including plasma from patients infected with HCV or
other infectious diseases that have the potential to transmit disease. Our operations also produce
hazardous waste products. We are subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of these materials and waste products. If we
fail to comply with these laws and regulations or with the conditions attached to our operating
licenses, the licenses could be revoked, and we could be subjected to criminal sanctions and
substantial liability or required to suspend or modify our operations. Although we believe that our
safety procedures for handling and disposing of these materials comply with legally prescribed
standards, we cannot completely eliminate the risk of accidental contamination or injury from these
materials. In the event of contamination or injury, we could be held liable for damages or
penalized with fines in an amount exceeding our resources, and our clinical trials could be
suspended. In addition, we may have to incur significant costs to comply with future environmental
laws and regulations.
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Our business and operations would suffer in the event of system failures.
Despite the implementation of security measures, our internal computer systems are vulnerable
to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and
telecommunication and electrical failures. Any system failure, accident or security breach that
causes interruptions in our operations could result in a material disruption of our development
programs. To the extent that any disruption or security breach results in a loss or damage to our
data or applications, or inappropriate disclosure of confidential or proprietary information, we
may incur liability as a result, our development programs may be adversely affected and the further
development of our product candidates may be delayed. In addition, we may incur additional costs to
remedy the damages caused by these disruptions or security breaches.
Risks Related to Our Common Stock
Future sales of our common stock may cause our stock price to decline.
Our current stockholders hold a substantial number of shares of our common stock that they are
able to sell in the public market. Significant portions of these shares are held by a small number
of stockholders. Sales by our current stockholders of a substantial number of shares or the
expectation that such sale may occur, could significantly reduce the market price of our common
stock.
Our stock price may be volatile.
The market price of our common stock may fluctuate significantly in response to a number of
factors, most of which we cannot control, including:
| changes in the regulatory status of our product candidates, including the status and results of our clinical trials of ANA598 and ANA773; | ||
| significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments; | ||
| disputes or other developments relating to proprietary rights, including patents, trade secrets, litigation matters, and our ability to patent or otherwise protect our product candidates and technologies; | ||
| conditions or trends in the pharmaceutical and biotechnology industries; | ||
| fluctuations in stock market prices and trading volumes of similar companies, of our competitors or of the markets generally; | ||
| variations in our quarterly operating results; | ||
| changes in securities analysts estimates of our financial performance; | ||
| failure to meet or exceed securities analysts or investors expectations of our quarterly financial results, clinical results or our achievement of milestones; | ||
| sales of large blocks of our common stock, or the expectation that such sales may occur, including sales by our executive officers, directors and significant stockholders; | ||
| additions or departures of key personnel; | ||
| discussion of our business, products, financial performance, prospects or our stock price by the financial and scientific press and online investor communities such as chat rooms; | ||
| regulatory developments in the United States and foreign countries; | ||
| economic and political factors, including wars, terrorism and political unrest; and | ||
| technological advances by our competitors. |
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Our quarterly results may fluctuate significantly, resulting in fluctuations in our stock
price.
We expect our results of operations to be subject to quarterly fluctuations. The level of our
revenues, if any, and results of operations at any given time, will be based primarily on the
following factors:
| the status of development of ANA598, ANA773 and our other product candidates, including results of preclinical studies and clinical trials and changes in regulatory status; | ||
| our execution of collaborative, licensing or other arrangements and the timing and accounting treatment of payments we make or receive under these arrangements; | ||
| whether or not we achieve specified research or commercialization milestones under any agreement that we enter into with collaborators and the timely payment by commercial collaborators of any amounts payable to us; | ||
| variations in the level of expenses related to our product candidates or potential product candidates during any given period; and | ||
| the effect of competing technological and market developments. |
These factors, some of which are not within our control, may cause the price of our stock to
fluctuate substantially. In particular, if our quarterly operating results fail to meet or exceed
the expectations of securities analysts or investors, our stock price could drop suddenly and
significantly. We believe that quarterly comparisons of our financial results are not necessarily
meaningful and should not be relied upon as an indication of our future performance.
Our largest stockholders may take actions that are contrary to your interests, including
selling their stock.
A small number of our stockholders hold a significant amount of our outstanding stock. These
stockholders may support competing transactions and have interests that are different from yours.
In addition, the average number of shares of our stock that trade each day is generally low. As a
result, sales of a large number of shares of our stock by these large stockholders or other
stockholders within a short period of time could adversely affect our stock price.
Anti-takeover provisions in our organizational documents and Delaware law may discourage or
prevent a change in control, even if an acquisition would be beneficial to our stockholders, which
could affect our stock price adversely and prevent attempts by our stockholders to replace or
remove our current management.
Our amended and restated certificate of incorporation and amended and restated bylaws contain
provisions that may delay or prevent a change in control, discourage bids at a premium over the
market price of our common stock and adversely affect the market price of our common stock and the
voting and other rights of the holders of our common stock. These provisions include:
| dividing our board of directors into three classes serving staggered three-year terms; | ||
| prohibiting our stockholders from calling a special meeting of stockholders; | ||
| permitting the issuance of additional shares of our common stock or preferred stock without stockholder approval; | ||
| prohibiting our stockholders from making certain changes to our amended and restated certificate of incorporation or amended and restated bylaws except with 66 2/3% stockholder approval; and | ||
| requiring advance notice for raising matters of business or making nominations at stockholders meetings. |
We are also subject to provisions of the Delaware corporation law that, in general, prohibit
any business combination with a beneficial owner of 15% or more of our common stock for three years
unless the holders acquisition of our stock was approved in advance by our board of directors.
Although we believe these provisions collectively provide for an opportunity to receive higher bids
by requiring potential acquirers to negotiate with our board of directors, they would apply even if
the offer may be considered beneficial by some stockholders. In addition, these provisions may
frustrate or prevent any attempts by our stockholders to replace or remove our current management
by making it more difficult for stockholders to replace members of our board of directors, which is
responsible for appointing the members of our management.
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We have never paid cash dividends on our capital stock and we do not anticipate paying
dividends in the foreseeable future.
We have paid no cash dividends on any of our classes of capital stock to date, and we
currently intend to retain our future earnings, if any, to fund the development and growth of our
business. In addition, the terms of any future debt or credit facility may preclude us from paying
any dividends. As a result, capital appreciation, if any, of our common stock will be your sole
source of potential gain for the foreseeable future.
Item 1B. Unresolved Staff Comments
Not Applicable.
Item 2. Properties
Our headquarters and research and development facility is located in approximately 14,000
square feet of office and laboratory space in San Diego, California. We occupy this facility under
a lease, which expires on January 31, 2012.
Item 3. Legal Proceedings
We are currently not a party to any material legal proceedings.
Item 4. Reserved
Reserved.
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Part II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchase of
Equity Securities
Market Information
Our common stock is traded on the Nasdaq Global Market under the symbol ANDS. The following
table sets forth the high and low sales prices for our common stock for the periods indicated, as
reported on the Nasdaq Global Market.
2010 | High | Low | ||||||
First Quarter |
$ | 2.65 | $ | 1.83 | ||||
Second Quarter |
3.24 | 1.92 | ||||||
Third Quarter |
2.42 | 1.67 | ||||||
Fourth Quarter |
2.38 | 0.90 |
2009 | High | Low | ||||||
First Quarter |
$ | 8.43 | $ | 1.61 | ||||
Second Quarter |
6.90 | 1.68 | ||||||
Third Quarter |
3.32 | 1.44 | ||||||
Fourth Quarter |
3.02 | 1.79 |
Holders
As of January 28, 2011, there were approximately 5,400 holders of our common stock.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We currently intend to
retain future earnings, if any, for development of our business and therefore do not anticipate
that we will declare or pay cash dividends on our capital stock in the foreseeable future.
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Performance Measurement Comparison (1)
The following graph shows a comparison of the five year total cumulative returns of an
investment of $100 in cash on December 31, 2005 in (i) our common stock (ii) the Nasdaq Composite
Index and (iii) the Nasdaq Biotechnology Index. All values assume reinvestment of the full amount
of all dividends (to date, we have not declared any dividends).
Comparison of cumulative total return on investment since December 31, 2005:
December 31, 2005 | December 31, 2006 | December 31, 2007 | December 31, 2008 | December 31, 2009 | December 31, 2010 | |||||||||||||||||||
Anadys Pharmaceuticals,
Inc. |
$ | 100.00 | $ | 55.91 | $ | 18.30 | $ | 17.84 | $ | 23.98 | $ | 16.14 | ||||||||||||
NASDAQ
Composite Index |
100.00 | 109.52 | 120.27 | 71.51 | 102.89 | 120.29 | ||||||||||||||||||
NASDAQ Biotechnology Index |
100.00 | 101.02 | 105.65 | 92.31 | 106.74 | 122.76 |
(1) | This section is not soliciting material, is not deemed filed with the SEC and is not to be incorporated by reference in any filing of the Company under the 1933 Act or the 1934 Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. |
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Item 6. Selected Financial Data
The selected financial data set forth below with respect to our consolidated statements of
operations for each of the three years in the period ended December 31, 2010 and, with respect to
our consolidated balance sheets, at December 31, 2010 and 2009 are derived from our audited
consolidated financial included elsewhere in this Annual Report on Form 10-K. The statement of
operations data for the years ended December 31, 2007 and 2006 and the balance sheet data as of
December 31, 2008, 2007 and 2006 are derived from our audited consolidated financial statements
that are not included in this Annual Report on Form 10-K. The information set forth below is not
necessarily indicative of the results of future operations and should be read in conjunction with
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and
the consolidated financial statements and notes thereto appearing
elsewhere in this Annual Report on
Form 10-K.
Form 10-K.
For the year ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(In thousands, except net loss per share) | ||||||||||||||||||||
Consolidated Statements of Operations Data: |
||||||||||||||||||||
Revenues |
$ | | $ | | $ | | $ | 24,118 | $ | 5,420 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Research and development |
12,026 | 19,494 | 25,993 | 28,192 | 25,419 | |||||||||||||||
General and administrative |
6,478 | 8,243 | 8,109 | 8,692 | 11,308 | |||||||||||||||
Total operating expenses |
18,504 | 27,737 | 34,102 | 36,884 | 36,727 | |||||||||||||||
Loss from operations |
(18,504 | ) | (27,737 | ) | (34,102 | ) | (12,766 | ) | (31,307 | ) | ||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
106 | 478 | 1,482 | 3,611 | 4,727 | |||||||||||||||
Interest expense |
| | | | (69 | ) | ||||||||||||||
Gain (loss) from valuation of common
stock warrant liability |
2,016 | (151 | ) | | | | ||||||||||||||
Other, net |
33 | 132 | 218 | (17 | ) | (111 | ) | |||||||||||||
Total other income (expense), net |
2,155 | 459 | 1,700 | 3,594 | 4,547 | |||||||||||||||
Net loss |
$ | (16,349 | ) | $ | (27,278 | ) | $ | (32,402 | ) | $ | (9,172 | ) | $ | (26,760 | ) | |||||
Net loss per share, basic and diluted: |
$ | (0.38 | ) | $ | (0.81 | ) | $ | (1.13 | ) | $ | (0.32 | ) | $ | (0.94 | ) | |||||
Shares used in calculating net loss per
share, basic and diluted: |
43,570 | 33,775 | 28,750 | 28,646 | 28,512 | |||||||||||||||
As of December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Consolidated Balance Sheet Data: |
||||||||||||||||||||
Cash, cash equivalents and securities available-for-sale |
$ | 37,984 | $ | 20,490 | $ | 27,936 | $ | 56,495 | $ | 82,149 | ||||||||||
Working capital |
34,452 | 13,769 | 24,325 | 52,084 | 75,054 | |||||||||||||||
Total assets |
39,537 | 21,735 | 31,674 | 61,526 | 89,401 | |||||||||||||||
Long-term debt, net of current portion |
| | | | | |||||||||||||||
Accumulated deficit |
(299,681 | ) | (283,332 | ) | (256,054 | ) | (223,652 | ) | (214,480 | ) | ||||||||||
Total stockholders equity |
34,673 | 14,429 | 25,825 | 55,679 | 60,325 |
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with our financial statements and
notes thereto included in this Annual Report on Form 10-K (this Annual Report). Operating results
are not necessarily indicative of results that may occur in future periods.
This Annual Report contains forward-looking statements. These forward-looking statements
involve a number of risks and uncertainties. Such forward-looking statements include statements
about our development plans and programs, clinical trials, strategies, objectives, and other
statements that are not historical facts, including statements which may be preceded by the words
intend, will, plan, expect, anticipate, estimate, aim, seek, believe, hope or
similar words. For such statements, we claim the protection of the Private Securities Litigation
Reform Act of 1995. Readers of this Annual Report are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date on which they are made. We
undertake no obligation to update publicly or revise any forward-looking statements. Actual events
or results may differ materially from our expectations. Important factors that could cause actual
results to differ materially from those stated or implied by our forward-looking statements
include, but are not limited to, the risk factors identified in our periodic reports filed with the
Securities and Exchange Commission (SEC), including those set forth in Item 1A. Risk Factors in
this Annual Report.
Overview
Anadys Pharmaceuticals, Inc. is a biopharmaceutical company dedicated to improving patient
care by developing novel medicines for the treatment of hepatitis C. We believe hepatitis C
represents a large and significant unmet medical need. Our objective is to contribute to an
improved treatment outcome for patients with this serious disease. We are currently focusing most
of our efforts on the development of ANA598, a direct-acting antiviral (DAA) for the treatment of
hepatitis C. We are currently conducting a Phase II study of ANA598 in combination with pegylated
interferon alfa and ribavirin, which is the current standard of care (SOC) for the treatment of
hepatitis C. This study is being conducted in patients infected with hepatitis C virus (HCV).
We are also making plans to resume the clinical investigation of ANA773, an oral,
small-molecule inducer of endogenous interferons that acts via the Toll-like receptor 7, or TLR7,
pathway. In 2009, we elected to suspend the development of ANA773 so that we could focus our
resources on ANA598. In October 2010, we announced that we are resuming development of ANA773 for
the treatment of hepatitis C. We have also previously investigated ANA773 for the treatment of
cancer.
In June 2009, we initiated a strategic restructuring to focus our operations on the
development of ANA598. The strategic restructuring resulted in a reduction in our workforce of
approximately 40%.
On June 1, 2010, we sold approximately 5.8 million registered shares of common stock to
institutional investors for gross proceeds of approximately $12.5 million. The shares of common
stock were at a purchase price of $2.15 per share. The net proceeds related to this transaction
were $11.4 million. On October 20, 2010, we sold approximately 13.9 million registered shares of
common stock to institutional and retail investors for gross proceeds of approximately $25.0
million. The shares of common stock were at a purchase price of $1.80 per share. The net proceeds
related to this transaction were $23.3 million. We intend to use the net proceeds from these
financings to support the Phase IIb study of ANA598 and for general corporate purposes, including
working capital.
We have incurred significant operating losses since our inception and, as of December 31,
2010, our accumulated deficit was $299.7 million. We expect to incur substantial losses for at
least the next several years as we:
| continue the development of ANA598 for the treatment of HCV; | ||
| optimize methods for and scale-up manufacturing of ANA598 for clinical trials and potential commercialization; | ||
| commercialize any product candidates that receive regulatory approval; and | ||
| potentially in-license technology and acquire or invest in businesses, products or technologies that are synergistic with our own. |
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Research and Development
During 2010, 2009 and 2008, research and development expenses consisted primarily of costs
associated with clinical development of the Companys product candidates. Research and development
expenses may include external costs such as fees paid to clinical research organizations, clinical
trial investigators, contract research organizations, drug substance and drug product manufacturers
and consultants. Research and development expenses may also include internal costs such as
compensation, supplies, materials, an allocated portion of facilities costs, an allocated portion
of information systems support personnel and depreciation.
At this time, due to the risks inherent in the clinical trial process and given the multiple
potential avenues for the development of our product candidates, we are unable to estimate with any
certainty the costs we will incur in the continued development of our product candidates for
commercialization. Clinical development timelines, likelihood of success and total costs vary
widely. However, we expect our research and development costs to be substantial and to increase as
we advance our product candidates through clinical development.
The following summarizes our research and development expenses for the years ended December
31, 2010, 2009 and 2008 (in thousands):
For the year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
ANA598 |
$ | 8,808 | $ | 10,355 | $ | 11,044 | ||||||
ANA773 |
264 | 3,103 | 8,177 | |||||||||
Infrastructure, support personnel and other |
2,718 | 4,052 | 5,501 | |||||||||
Section 48D grant |
(489 | ) | | | ||||||||
Severance related to 2009 strategic restructuring |
| 630 | | |||||||||
Non-cash
employee and non-employee share-based compensation |
725 | 1,354 | 1,271 | |||||||||
Total research and development expense |
$ | 12,026 | $ | 19,494 | $ | 25,993 | ||||||
We submitted applications for qualified investments for ANA598 and ANA773 in a qualifying
therapeutic discovery project under section 48D of the Internal Revenue Code. In October 2010, we
received notification of grants in the aggregate amount of $0.5 million being approved.
General and Administrative
General and administrative expenses consist primarily of salaries and benefits for executive,
finance, investor relations, business development, human resources and legal personnel. In
addition, general and administrative expenses include insurance costs, professional services and an
allocated portion of facilities costs and information systems support personnel.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on
our consolidated financial statements, which have been prepared in accordance with United States
generally accepted accounting principles (GAAP). The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities and expenses and related disclosure of contingent assets and liabilities. We review our
estimates on an on-going basis and make adjustments to the consolidated financials statements as
considered necessary. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities. Actual results may
differ from these estimates under different assumptions or conditions. While all of our significant
accounting policies are described in Note 1 to our consolidated financial statements included in
this Annual Report, we believe the following accounting policies involve the judgments and
estimates used in the preparation of our consolidated financial statements:
Drug Development Costs. Drug development costs include costs associated with the development
of our product candidates including the manufacturing of clinical trial material, payments to
clinical trial investigators, payments to clinical research organizations and certain non-clinical
activities. We review and accrue drug development costs based on work performed. We estimate work
performed utilizing factors such as subject enrollment, estimated timeline for completion of
studies and other factors. These costs and estimates vary based on the type, scope and length of
non-clinical and clinical studies as well as other factors. Drug development cost accruals are
subject to revisions as studies, projects and trials progress to completion. Expense is adjusted
for revisions in the period in which the facts that give rise to the revision become known.
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Common Stock Warrant Liability. We account for common stock warrants which may potentially be
settled with cash as a liability. The common stock warrants have been recorded at their fair value
at issuance and will continue to be recorded at fair value each subsequent balance sheet date until
such time that they are exercised or are otherwise modified to remove the provisions that require
this treatment, at which time the warrants will be adjusted to fair value and reclassified from
liabilities to stockholders equity. Any change in value between reporting periods will be recorded
as other income (expense) at each reporting date. The fair value of the warrants is estimated using input assumptions derived by management to
the Black-Scholes pricing model.
Share-Based Compensation. Share-based compensation cost is estimated at the grant date based
on the awards fair-value as calculated by a Black-Scholes pricing model and the portion that is
expected to vest is recognized as expense evenly over the requisite service period. The
determination of the fair value of share-based payment awards on the date of grant using an
option-pricing model is affected by our stock price as well as assumptions regarding a number of
complex and subjective variables. These variables include, but are not limited to, our expected
stock price volatility over the term of the awards, the risk-free interest rate, the expected term
of the awards and expected forfeitures. If any of the assumptions used in the model change
significantly, share-based compensation expense may differ materially in the future from that
recorded in the current period.
Results of Operations
Comparison of the Years Ended December 31, 2010, 2009 and 2008
Research and Development Expenses.
Research and development expenses were $12.0 million, $19.5
million and $26.0 million for the years ended December 31, 2010, 2009 and 2008, respectively. The
$7.5 million decrease from 2009 to 2010 was attributable to a $2.8 million decrease in ANA773
development costs, a $1.5 million decrease in ANA598 development costs and a $0.7 million decrease
in facility costs associated with the relocation of our corporate headquarters in July 2009. The
remaining decrease of $2.5 million was primarily attributed to personnel cost savings from our
completed strategic restructuring which was initiated in June 2009. During 2010, we incurred
external development costs of $4.1 million associated with our ANA598 program. External development
costs in 2010 related to the following: our Phase IIa combination study, the manufacturing of
clinical trial materials for our Phase IIb combination study and our Phase IIb combination study
which initiated screening in December 2010. During 2009, we incurred external development costs of
$5.0 million associated with our ANA598 program. External development costs in 2009 related to the
following: our completed Phase Ib clinical trial in HCV patients, our completed long-term chronic
toxicology studies of ANA598, our completed 14-day healthy volunteer study and our Phase IIa
clinical trial in HCV patients. During 2009, we elected to suspend further development of ANA773 in
order to focus our resources on ANA598. As such, development costs associated with ANA773 decreased
$2.8 million during 2010 when compared to the same period in 2009. ANA773 development costs during
the year ended December 31, 2009 were primarily driven by our now completed Phase Ib clinical trial
for the treatment of HCV. Our non-cash share-based compensation expense associated with share-based
payments granted to our research and development employees was $0.7 million and $1.4 million for
the years ended December 31, 2010 and 2009, respectively. Included as a component of our share-based
compensation expense for the year ended December 31, 2009 was $0.3 million of expense associated
with the modification of stock options for individuals included in our completed 2009 strategic
restructuring.
The $6.5 million decrease from 2008 to 2009 was primarily due to $6.4 million in cost savings
associated with our strategic restructuring initiated in June 2009 of which $5.1 million was due to
reduced ANA773 development costs and $1.3 million of which was due to reduced infrastructure and
support personnel costs. These decreases were partially offset by severance costs of $0.6 million.
During 2009, we incurred $5.0 million of external development costs associated with the following
ANA598 program activities which consisted of the following: our completed Phase Ib clinical trial in HCV patients, our completed
long-term chronic toxicology studies of ANA598, our completed 14-day healthy volunteer study and
our on-going Phase IIa clinical trial in HCV patients. During 2009, we incurred $1.7 million of
external development costs associated with our ANA773 program activities: our completed Phase Ib
clinical trial for HCV and our Phase I clinical trial for oncology. As we are not currently pursing
the development of ANA773 for oncology we do not anticipate incurring significant costs related to
this indication in future periods. Our non-cash share-based compensation expense associated with
share-based payments granted to our research and development employees was $1.4 million for the
year ended December 31, 2009 compared to $1.3 million for the year ended December 31, 2008.
Included in our non-cash share-based compensation expense for the year-ended December 31, 2009 is
$0.3 million associated with the modification of stock options for individuals included in our
strategic restructuring.
General and Administrative Expenses. General and administrative expenses were $6.5 million,
$8.2 million and $8.1 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Included as a component of our general and administrative expenses for the year ended December 31, 2009 was $0.7 million in severance related costs associated
with our 2009 strategic restructuring. The remaining decrease in costs from 2009 to 2010 was
primarily related to personnel cost savings associated with our completed
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strategic restructuring and to a lesser extent fluctuations in costs associated with our patent portfolio. The $0.1 million
increase from 2008 to 2009 was primarily attributable to severance costs of $0.7 million, which
were partially offset by a reduction in allocated facility costs associated with the relocation of
our corporate headquarters to a smaller facility. Non-cash share-based compensation expense
associated with share-based payments granted to our general and administrative employees and
non-employee directors for the years ended December 31, 2010, 2009 and 2008 was $1.1 million, $1.4
million and $1.5 million, respectively. Included in our non-cash share-based compensation expense
for the year-ended December 31, 2009 is $0.1 million associated with the modification of stock
options for individuals included in our 2009 strategic restructuring.
Interest Income. Interest income was $0.1 million, $0.5 million and $1.5 million for the years
ended December 31, 2010, 2009 and 2008, respectively. The $0.4 million decrease in our interest
income from 2009 to 2010 was primarily the result of lower yields on our securities as higher yield
securities matured in 2009 and 2010 and were replaced with lower yield securities. The $1.0 million
decrease in our interest income from 2008 to 2009 was the result of a lower average cash, cash
equivalents and securities available-for-sale balance and lower interest rates during 2009 compared
to 2008. Our average balance of cash, cash equivalents and securities available-for-sale, which
were invested in interest bearing securities, was $22.9 million in 2009 compared to $40.6 million
in 2008. The decrease in our average cash balance from 2008 to 2009 was driven by our use of cash,
cash equivalents and securities to fund our on-going operations partially offset by proceeds
received from the equity financing during June 2009.
Valuation of Common Stock Warrant Liability. During 2010, the Company recorded a non-cash gain
of $2.0 million associated with the decrease in the fair value our common stock warrant liability
from December 31, 2009 to December 31, 2010. This decrease was primarily a result of a decrease in
the Companys stock price from December 31, 2009 and December 31, 2010. The fair value was
calculated using the Black Scholes pricing model and is remeasured at each reporting period. During
2009, the Company recorded a non-cash loss of $0.2 million associated with an increase in our
common stock liability from June 3, 2009 (issuance date of the warrants) to December 31, 2009.
Potential future increases in our stock price will result in losses being recognized in our
statement of operations in future periods. Conversely, potential future declines in our stock price
will result in gains being recognized in our statement of operations in future periods.
Liquidity and Capital Resources
Overview
Our December 31, 2010 cash, cash equivalents and marketable securities balance was $38.0
million. Our cash, cash equivalents and available-for sale securities increased by $17.5 million
from December 31, 2009 to December 31, 2010. The increase in cash, cash equivalents and securities
available-for-sale is the result of net proceeds of $34.7 million received from our completed
equity financings in June and October 2010, partially offset by our year-to-date cash utilization
to fund our operations. We believe that our existing cash, cash equivalents and securities
available-for-sale will be sufficient to meet our projected operating requirements for at least the
next twelve months.
On June 1, 2010, we sold approximately 5.8 million registered shares of common stock to
institutional investors for gross proceeds of approximately $12.5 million. The shares of common
stock were at a purchase price of $2.15 per share. The net proceeds related to this transaction
were $11.4 million. On October 20, 2010, we sold approximately 13.9 million registered shares of
common stock to institutional and retail investors for gross proceeds of approximately $25.0
million. The shares of common stock were at a purchase price of $1.80 per share. The net proceeds
related to this transaction were $23.3 million.
Excluding the net proceeds from our equity financings completed during June and October 2010,
we used $17.2 million in cash to fund operations during the year ended December 31, 2010 compared
to $23.4 million during the year ended December 31, 2009. The decease in our operating cash burn
can be attributed to the following factors: our strategic restructuring, initiated in June 2009,
our decision to suspend the development of ANA773 for HCV and oncology and the relocation of our
corporate headquarters to a smaller facility in July 2009.
Future Cash Requirements
We expect our cash burn to increase significantly in 2011 when compared to 2010 as we conduct
our Phase IIb combination study for ANA598. In addition, we announced in October 2010 that we are
resuming development of ANA773 for the treatment of hepatitis C. We plan to begin a Phase IIa
combination study for ANA773 in the second quarter of 2011.
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Over time we expect our development expenses to be substantial and to increase as we continue
the advancement of our development programs. The lengthy process of completing clinical trials and
seeking regulatory approval for our product candidates requires the expenditure of substantial
resources. Any failure by us or delay in completing clinical trials, or in obtaining regulatory
approvals, could cause our research and development expenses to increase and, in turn, have a
material adverse effect on our results of operations.
Our future capital uses and requirements depend on numerous forward-looking factors. These
factors may include but are not limited to the following:
| the progress of our clinical trials; | ||
| the progress of our nonclinical development activities; | ||
| our ability to establish and maintain strategic alliances; | ||
| the costs involved in enforcing or defending patent claims and other intellectual property rights; | ||
| the costs and timing of regulatory approvals; | ||
| the costs of establishing or expanding manufacturing, sales and distribution capabilities; | ||
| the costs related to development and manufacture of non-clinical, clinical and validation lots for regulatory and commercialization of drug supply; | ||
| the success of the commercialization of ANA598, ANA773 or any other product candidates we may develop; and | ||
| the extent to which we acquire or invest in other products, technologies and businesses. |
Investment Portfolio
As of December 31, 2010, we have $37.7 million of marketable securities consisting
of money market funds, commercial paper, municipal bonds, U.S. government sponsored enterprise
securities and corporate debt securities with maturities that range from one day to 27.4 months
with an overall average months to maturity of 6.2 months. We have the ability to liquidate these
marketable securities without restriction or penalty.
As of December 31, 2010, we performed a review of all of the securities in our portfolio with
an unrealized loss position, to determine if any other-than-temporary impairments were required to
be recorded. Factors considered in our assessment included but were not limited to the following:
our ability and intent to hold the security until maturity; the number of months until the
securitys maturity, the number of quarters that each security was in an unrealized loss position,
ratings assigned to each security by independent rating agencies, the magnitude of the unrealized
loss compared to the face value of the security and other market conditions. No
other-than-temporary impairments were identified as of December 31, 2010 related to securities
currently in our portfolio. We also noted that none of the securities as of December 31, 2010 have
been in an unrealized loss position for greater than one year. As of December 31, 2010 we do not
own any asset-backed securities or auction rate securities.
Cash Flows from Operating Activities and Investing Activities
Our consolidated statements of cash flows are summarized as follows (in thousands):
For the year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net cash used in operating activities |
$ | (16,988 | ) | $ | (24,229 | ) | $ | (28,288 | ) | |||
Cash (used in) provided by investing activities |
||||||||||||
Purchase of securities available-for-sale |
$ | (38,934 | ) | $ | (24,657 | ) | $ | (8,806 | ) | |||
Proceeds from sale of securities available-for-sale |
24,191 | 26,484 | 12,463 | |||||||||
Purchase of property and equipment |
(7 | ) | (88 | ) | (213 | ) | ||||||
Proceeds from disposal of property and equipment |
6 | 111 | 392 | |||||||||
Net cash (used in) provided by investing activities |
$ | (14,744 | ) | $ | 1,850 | $ | 3,836 | |||||
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We expect to continue to utilize cash and marketable securities to fund our operating
activities as we continue to advance our wholly owned product candidates ANA598 and ANA773. We are
not currently party to any development collaborations and therefore cash to fund future operations
will most likely have to be obtained from one of the following sources: our current investment
portfolio, the sale of equity securities, new strategic alliance agreements or other transactions,
project financing or debt financing.
Cash Flows from Financing Activities
Our consolidated statements of cash flows are summarized as follows (in thousands):
For the year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash provided by financing activities |
||||||||||||
Proceeds from exercise of stock options and employee stock purchase plan |
$ | 158 | $ | 385 | $ | 259 | ||||||
Proceeds from equity financing, net of issuance costs |
34,694 | 16,015 | | |||||||||
Net cash provided by financing activities |
$ | 34,852 | $ | 16,400 | $ | 259 | ||||||
On June 1, 2010, we sold approximately 5.8 million registered shares of common stock to
institutional investors for gross proceeds of approximately $12.5 million. The shares of common
stock were at a purchase price of $2.15 per share. The net proceeds related to this transaction
were $11.4 million. On October 20, 2010, we sold approximately 13.9 million registered shares of
common stock to institutional and retail investors for gross proceeds of approximately $25.0
million. The shares of common stock were at a purchase price of $1.80 per share. The net proceeds
related to this transaction were $23.3 million. The proceeds from these equity financings are being
utilized to fund operating activities and to advance ANA598 and ANA773 for the treatment of HCV.
Aggregate Contractual Obligations
The following summarizes our contractual obligations as of December 31, 2010 (in thousands):
Less | ||||||||||||||||||||
than 1 | 20012 to | 2014 to | ||||||||||||||||||
Contractual Obligations | Total | Year | 2013 | 2015 | Thereafter | |||||||||||||||
Operating leases 1 |
$ | 324 | $ | 296 | $ | 28 | $ | | $ | | ||||||||||
Minimum royalty commitment |
600 | 100 | 200 | 200 | 100 | |||||||||||||||
$ | 924 | $ | 396 | $ | 228 | $ | 200 | $ | 100 | |||||||||||
1 | On February 28, 2011, we entered into a lease agreement with ARE-SD Region No. 31, LLC for the lease of 13,674 square feet of office and laboratory space in which the Company will continue to use for our headquarters and research and development facility. The lease replaces our expired sublease with Phenomix Corporation for the same space located in San Diego, California. Obligations associated with this lease are included in the table above. |
We also enter into agreements with clinical sites and contract research organizations that
conduct our clinical trials. We generally make payments to these entities based upon the number of
subjects enrolled and the length of their participation in the trials. To date, the majority of our
clinical costs have been related to the costs of subjects entering our clinical trials as well as
the manufacturing of compounds to be used in our clinical trials. Costs associated with clinical
trials will continue to vary as the trials go through their natural phases of enrollment and
follow-up. The costs will also be influenced by the pace of the development activities, timing of
the development activities and regulatory requirements associated with the conduct of our clinical
trials. At this time, due to the risks inherent in the clinical trial process and given the early
stage of development of our product development programs, we are unable to estimate with any
certainty the total costs we will incur in the continued development of our product candidates for
potential commercialization. Due to these same factors, we are unable to determine the anticipated
completion dates for our current product development programs. Clinical development timelines,
probability of success and development costs vary widely. As we continue our development programs,
we anticipate that we will make determinations as to how much funding to direct to each program on
an ongoing basis in response to the scientific and clinical success of each product candidate, as
well as an ongoing assessment of the product candidates commercial potential. In addition, we
cannot forecast with any degree of certainty whether any of our product candidates will be subject
to future partnering, when such arrangements will be secured, if at all, and to what degree such
arrangements would affect our development plans and capital requirements. As a result, we
cannot be certain when, or if, and to what extent we will receive cash inflows from the
commercialization of our product candidates.
41
Table of Contents
Fair Value Inputs
Fair value is a market-based measurement that is determined based on assumptions that market
participants would use in pricing an asset or liability. See Notes 2 and 3 to the audited
consolidated financial statements, which are included elsewhere in this Annual Report.
We value our marketable securities by using quoted market prices, broker or dealer quotations
or alternative pricing sources with reasonable levels of price transparency. The types of
securities valued based on quoted market prices in active markets include money market securities.
We do not adjust the quoted price for such securities. The types of instruments valued based on
quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing
sources with reasonable levels of price transparency include commercial paper, municipal bonds,
U.S. treasury notes, U.S. government sponsored enterprise securities and corporate debt securities.
The price for each security at the measurement date is sourced from an independent pricing vendor.
Periodically, management assesses the reasonableness of these sourced prices by comparing them to
the prices provided by our portfolio managers to derive the fair value of these financial
instruments. Historically, we have not experienced significant deviation between the prices from
the independent pricing vendor and our portfolio managers. Management assesses the inputs of the
pricing in order to categorize the financial instruments into the appropriate hierarchy levels. The
fair value of the common stock warrants, which may potentially be settled with cash and are
therefore treated as a liability, is estimated using the Black-Scholes pricing model.
Off-Balance Sheet Arrangements
As of December 31, 2010, 2009 and 2008, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we
do not engage in trading activities involving non-exchange traded contracts. As such, we are not
materially exposed to any financing, liquidity, market or credit risk that could arise if we had
engaged in these relationships. We do not have relationships or transactions with persons or
entities that derive benefits from their non-independent relationship with us or our related
parties.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Our primary exposure to market risk is interest income sensitivity, which is affected by
changes in the general level of U.S. interest rates, particularly because the majority of our
investments are in short-term marketable securities. Due to the nature of our short-term
investments, we believe that we are not subject to any material market risk exposure. We do not
have any foreign currency or other derivative financial instruments.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and related financial information required to be filed
are indexed on page F-1 of this Annual Report on Form 10-K and are incorporated herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable.
42
Table of Contents
Item 9A. Controls and Procedures
Managements Report on Internal Control Over Financial Reporting
Evaluation of Disclosure Controls and Procedures: Our President and Chief Executive Officer
and Vice President, Finance and Operations performed an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-l5(e) and l5d-15(e) of the Securities
Exchange Act of 1934) as of the end of the period covered by this Annual Report. Based on that
evaluation, our Chief Executive Officer and Vice President, Finance and Operations concluded that
our disclosure controls and procedures were effective as of December 31, 2010 in providing them
with material information related to the Company in a timely manner, as required to be disclosed in
the reports the Company files under the Exchange Act.
Managements Annual Report on Internal Control over Financial Reporting: Our management is
responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Under the supervision and with the participation of our management, including our President
and Chief Executive Officer and Vice President, Finance and Operations, we conducted an evaluation
of the effectiveness of our internal control over financial reporting based on the framework in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under the framework in Internal Control Integrated
Framework, our management concluded that our internal control over financial reporting was
effective as of December 31, 2010.
The effectiveness of our internal control over financial reporting as of December 31, 2010 has
been audited by Ernst & Young LLP, an independent registered public accounting firm.
Changes in Internal Control Over Financial Reporting: There was no significant change in our
internal control over financial reporting that occurred during our most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
43
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Anadys Pharmaceuticals, Inc.
We have audited Anadys Pharmaceuticals, Inc.s internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Anadys
Pharmaceuticals, Inc.s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Anadys Pharmaceuticals, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Anadys Pharmaceuticals, Inc. as
of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders
equity and cash flows for each of the three years in the period ended December 31, 2010 of Anadys
Pharmaceuticals, Inc. and our report dated March 4, 2011 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP |
San Diego, California
March 4, 2011
March 4, 2011
44
Table of Contents
Table of Contents
Part III
Certain information required by Part III of Form 10-K is omitted from this report because we
expect to file a definitive proxy statement for our 2011 Annual Meeting of Stockholders (the Proxy
Statement) within 120 days after the end of our fiscal year pursuant to Regulation 14A promulgated
under the Securities Exchange Act of 1934, as amended, and the information included in the Proxy
Statement is incorporated herein by reference to the extent provided below.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 of Form 10-K is incorporated by reference to the
information under the headings Election of Directors, Section 16(a) Beneficial Ownership
Reporting Compliance, Audit Committee and Shareholder Communications with the Board of
Directors in our Proxy Statement.
Certain information required by Item 10 of Form 10-K regarding our executive officers is set
forth in Item 1of Part I of this Annual Report under the caption Executive Officers of the
Registrant.
We have adopted a Code of Business Conduct and Ethics, which applies to all our directors,
officers and employees, including our President and Chief Executive Officer and Vice President,
Finance and Operations and all of our finance team. The Code of Business Conduct and Ethics is
posted on our website, http://www.anadyspharma.com (under the Investors Corporate
Governance caption). In addition, we will provide to any person without charge, upon request,
addressed to the Corporate Secretary at Anadys Pharmaceuticals, Inc., 5871 Oberlin Drive, Suite
200, San Diego, CA 92121, a copy of our Code of Business Conduct and Ethics. We intend to satisfy
the disclosure requirement regarding any amendment to, or waiver of, a provision of the Code of
Business Conduct and Ethics for our President and Chief Executive Officer and Vice President,
Finance and Operations or persons performing similar functions, by posting such information on our
website.
Item 11. Executive Compensation
The information required by Item 11 of Form 10-K is incorporated by reference to the
information under the heading Compensation of Executive Officers and Compensation of Directors
in our Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The following table summarizes our outstanding securities and securities available for future
issuance under our equity compensation plans as of December 31, 2010. Security holders of the
Company have approved the 2002 Equity Incentive Plan, 2004 Equity Incentive Plan (2004 Plan), 2004
Non-Employee Directors Stock Option Plan and 2004 Employee Stock Purchase Plan.
In connection with the hiring of certain executive officers during 2006, the Compensation
Committee of our Board of Directors approved inducement grants of non-qualified stock options.
These option awards were granted without security holder approval pursuant to NASDAQ Marketplace
Rule 4350(i)(1)(A)(iv). Although these options were granted outside the 2004 Plan, they are subject
to substantially identical terms and conditions as those contained in the 2004 Plan.
(c) | ||||||||||||
Number of securities | ||||||||||||
remaining available for | ||||||||||||
(a) | (b) | future issuance under equity | ||||||||||
Number of securities to | Weighted-average | compensation plans | ||||||||||
be issued upon exercise | exercise price of | (excluding securities | ||||||||||
Plan Category | of outstanding options | outstanding options | reflected in column (a)) | |||||||||
Equity
compensation plans
approved by
security holders |
6,820,466 | $ | 3.25 | 3,027,533 | ||||||||
Equity compensation
plans not approved
by security holders |
200,000 | $ | 3.00 | | ||||||||
Total |
7,020,466 | 3,027,533 | ||||||||||
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Table of Contents
The additional information required by Item 12 of Form 10-K related to security ownership of
certain beneficial owners and management is incorporated herein by reference to the information
under the heading Security Ownership of Certain Beneficial Owners and Management in our Proxy
Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 of Form 10-K related to transactions with related persons,
promoters and certain control persons, if any, is incorporated herein by reference to the
information under the heading Certain Transactions in our Proxy Statement. The information
required by Item 13 of Form 10-K relating to director independence is incorporated herein by
reference to the information under the heading Election of Directors in our Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by Item 14 of Form 10-K is incorporated herein by reference to the
information under the heading Ratification of Selection of Independent Registered Accounting Firm
in our Proxy Statement.
47
Table of Contents
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following financial statements, financial statements schedules and exhibits are filed
as part of this report or incorporated herein by reference:
(1) | Financial Statements. See index to consolidated financial statements on page F-1. | ||
(2) | Financial Statement Schedules. All financial statements schedules for which provision is made in Regulation S-X are omitted because they are not required under the related instructions, are inapplicable, or the required information is given in the financial statements, including the notes thereto. | ||
(3) | Exhibits. |
Exhibit | ||||
Number | Exhibit Description | Incorporated by Reference or Attached Hereto | ||
3.1
|
Form of Amended and Restated Certificate of Incorporation of the Registrant | Incorporated by reference to the Registrants Quarterly Report on Form 10-Q (SEC File No. 000-50632) filed on May 14, 2004. | ||
3.2
|
Amended and Restated Bylaws of the Registrant | Incorporated by reference to the Registrants Current Report on Form 8-K (SEC File No. 000-50632) filed on December 5, 2007. | ||
4.1
|
Form of Specimen Common Stock Certificate | Incorporated by reference to the Registrants Registration Statement on Form S-1 (SEC File No. 333-110528) filed on March 18, 2004. | ||
4.2
|
Form of Warrant | Incorporated by reference to the Registrants Current Report on Form 8-K (SEC File No. 000-50632) filed on June 4, 2009. | ||
10.1#
|
2002 Equity Incentive Plan | Incorporated by reference to Exhibit 10.3 in the Registrants Registration Statement on Form S-1 (SEC File No. 333-110528) filed on November 14, 2003. | ||
10.2#
|
Form of Stock Option Agreement under 2002 Equity Incentive Plan | Incorporated by reference to Exhibit 10.4 in the Registrants Registration Statement on Form S-1 (SEC File No. 333-110528) filed on November 14, 2003. | ||
10.3#
|
2004 Equity Incentive Plan | Incorporated by reference to Exhibit 10.5 in the Registrants Registration Statement on Form S-1 (SEC File No. 333-110528) filed on March 18, 2004. | ||
10.4#
|
Form of Stock Option Agreement under 2004 Equity Incentive Plan | Incorporated by reference to Exhibit 10.6 in the Registrants Registration Statement on Form S-1 (SEC File No. 333-110528) filed on March 18, 2004. | ||
10.5#
|
Form of Amendment to Stock Option Agreement Under 2004 Equity Incentive Plan, applicable to Non-Employee Director grants | Incorporated by reference to Exhibit 10.5 in the Registrants Annual Report on Form 10-K (SEC File No. 000-50632) filed on March 3, 2009. | ||
10.6#
|
2004 Employee Stock Purchase Plan | Incorporated by reference to Exhibit 10.7 in the Registrants Registration Statement on Form S-1 (SEC File No. 333-110528) filed on March 18, 2004. | ||
10.7#
|
Form of Offering Document under the 2004 Employee Stock Purchase Plan | Incorporated by reference to Exhibit 10.8 in the Registrants Registration Statement on Form S-1 (SEC File No. 333-110528) filed on March 18, 2004. | ||
10.8#
|
Form of Indemnification Agreement by and between the Registrant and each of its directors and officers | Incorporated by reference to Exhibit 10.11 in the Registrants Registration Statement on Form S-1 (SEC File No. 333-110528) filed on November 14, 2003. |
48
Table of Contents
Exhibit | ||||
Number | Exhibit Description | Incorporated by Reference or Attached Hereto | ||
10.9#
|
Form of Stock Option Agreement Under 2004 Non-Employee Directors Stock Option Plan | Incorporated by reference to Exhibit 10.10 in the Registrants Registration Statement on Form S-1 (SEC File No. 333-110528) filed on March 18, 2004. | ||
10.10#
|
Terms of Employment dated February 1, 2001 by and between the Registrant and Steve Worland, Ph.D. | Incorporated by reference to Exhibit 10.27 in the Registrants Registration Statement on Form S-1 (SEC File No. 333-110528) filed on November 14, 2003. | ||
10.11#
|
Terms of Employment dated October 2, 2001 by and between the Registrant and Elizabeth E. Reed | Incorporated by reference to Exhibit 10.30 in the Registrants Registration Statement on Form S-1 (SEC File No. 333-110528) filed on March 18, 2004. | ||
10.12#
|
Form of Inducement Stock Option Agreement | Incorporated by reference to Exhibit 10.42 in the Registrants Current Report on Form 8-K (SEC File No. 000-50632) filed on September 25, 2006. | ||
10.13#
|
Terms of Employment dated June 21, 2006 by and between the registrant and James L. Freddo, M.D. | Incorporated by reference to Exhibit 10.21 in the Registrants Annual Report on Form 10-K (SEC File No. 000-50632) filed on March 5, 2008. | ||
10.14#
|
Amended and Restated 2004 Non-Employee Directors Stock Option Plan | Incorporated by reference to Exhibit 10.24 in the Registrants Quarterly Report on Form 10-Q (SEC File No. 000-50632) filed on May 1, 2008. | ||
10.15
|
Sub-lease agreement dated June 18, 2009 by and between the Registrant and Phenomix Corporation | Incorporated by reference to Exhibit 10.24 in the Registrants Quarterly Report on Form 10-Q (SEC File No. 000-50632) filed on July 31, 2009. | ||
10.16#
|
Terms of Employment dated July 1, 2009 for Peter T. Slover | Incorporated by reference to Exhibit 10.26 in the Registrants Quarterly Report on Form 10-Q (SEC File No. 000-50632) filed on July 31, 2009. | ||
10.17#
|
Anadys Pharmaceuticals, Inc. Executive Officer Bonus Plan | Incorporated by reference to Exhibit 10.29 in the Registrants Quarterly Report on Form 10-Q (SEC File No. 000-50632) filed on October 30, 2009. | ||
10.18#
|
Amended and Restated Severance and Change in Control Agreement dated January 24, 2011 by and between the Registrant and James L. Freddo, M.D. | Incorporated by reference to Exhibit 10.27 in the Registrants Current Report on Form 8-K (SEC File No. 000-50632) filed on January 24, 2011. | ||
10.19#
|
Amended and Restated Severance and Change in Control Agreement dated February 6, 2011 by and between the Registrant and Stephen T. Worland, Ph.D. | Attached Hereto. | ||
10.20#
|
Amended and Restated Severance and Change in Control Agreement dated January 24, 2011 by and between the Registrant and Elizabeth E. Reed | Attached Hereto. | ||
10.21#
|
Amended and Restated Severance and Change in Control Agreement dated January 24, 2011 by and between the Registrant and Peter T. Slover | Attached Hereto. | ||
10.22
|
First Amendment to Lease dated December 20, 2010 by and between the Registrant, ARE-SD Region No. 31, LLC, and Phenomix Corporation | Attached Hereto. | ||
10.23
|
Lease dated February 28, 2011 by and between the Registrant and ARE-SD Region No. 31, LLC. | Attached Hereto. | ||
21.1
|
List of Subsidiaries of the Registrant | Incorporated by reference to Exhibit 21.1 in the Registrants Registration Statement on Form S-1 (SEC File No. 333-110528) filed on November 14, 2003. | ||
23.1
|
Consent of Independent Registered Public Accounting Firm | Attached Hereto. |
49
Table of Contents
Exhibit | ||||
Number | Exhibit Description | Incorporated by Reference or Attached Hereto | ||
31.1
|
Certification of President and Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Act of 1934, as amended | Attached Hereto. | ||
31.2
|
Certification of Vice President, Finance and Operations pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Act of 1934, as amended | Attached Hereto. | ||
32.1
|
Certifications of President and Chief Executive Officer and Vice President, Finance and Operations pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Attached Hereto. |
# | Indicates management contract or compensatory plan. |
50
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Diego, State of California, on the 4th day of March,
2011.
ANADYS PHARMACEUTICALS, INC. |
||||
By: | /s/ STEPHEN T. WORLAND, PH.D. | |||
Stephen T. Worland, Ph.D. | ||||
President and Chief Executive Officer | ||||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Stephen T. Worland, Ph.D. and Peter T. Slover, and each of them, as his true and
lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him
and in his name, place, and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K, and any other documents in connection therewith, and to file the
same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or any of them or their or his substitute or substituted, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been
signed by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Signature | Title | Date | ||
/s/ STEPHEN T. WORLAND, PH.D.
|
President, Chief Executive Officer and Director (Principal Executive Officer) |
March 4, 2011 | ||
/s/ PETER T. SLOVER
|
Vice President, Finance and Operations (Principal Financial and Accounting Officer) |
March 4, 2011 | ||
/s/ STELIOS PAPADOPOULOS, PH.D.
|
Chairman of the Board | March 4, 2011 | ||
/s/ MARK G. FOLETTA
|
Director | March 4, 2011 | ||
/s/ MARIOS FOTIADIS
|
Director | March 4, 2011 | ||
/s/ JAMES L. FREDDO
|
Director | March 4, 2011 | ||
/s/ KLEANTHIS G. XANTHOPOULOS, PH.D.
|
Director | March 4, 2011 |
51
Table of Contents
ANADYS PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||
F-2 | ||
F-3 | ||
F-4 | ||
F-5 | ||
F-6 | ||
F-7 |
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Anadys Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Anadys Pharmaceuticals, Inc. as of
December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended December 31, 2010. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Anadys Pharmaceuticals, Inc. at December
31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Anadys Pharmaceuticals, Inc.s internal control over financial reporting as
of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March
4, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP |
San Diego, California
March 4, 2011
March 4, 2011
F-2
Table of Contents
ANADYS PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(In thousands, except share data)
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 7,617 | $ | 4,497 | ||||
Securities available-for-sale |
30,367 | 15,993 | ||||||
Prepaid expenses and other current assets |
1,319 | 559 | ||||||
Total current assets |
39,303 | 21,049 | ||||||
Property and equipment, net |
234 | 626 | ||||||
Other assets |
| 60 | ||||||
Total assets |
$ | 39,537 | $ | 21,735 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 251 | $ | 740 | ||||
Accrued expenses |
2,719 | 2,643 | ||||||
Common stock warrant liability |
1,881 | 3,897 | ||||||
Total current liabilities |
4,851 | 7,280 | ||||||
Other long-term liabilities |
13 | 26 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.001 par value; 10,000,000 shares authorized at December 31, 2010 and
December 31, 2009; no shares issued and outstanding at December 31, 2010 and
December 31, 2009 |
| | ||||||
Common stock, $0.001 par value; 90,000,000 shares authorized at December 31, 2010 and
December 31, 2009; 57,141,223 and 37,341,957 shares issued and outstanding at
December 31, 2010 and December 31, 2009, respectively |
57 | 37 | ||||||
Additional paid-in capital |
334,298 | 297,687 | ||||||
Accumulated other comprehensive (loss) gain |
(1 | ) | 37 | |||||
Accumulated deficit |
(299,681 | ) | (283,332 | ) | ||||
Total stockholders equity |
34,673 | 14,429 | ||||||
Total liabilities and stockholders equity |
$ | 39,537 | $ | 21,735 | ||||
See accompanying notes to consolidated financial statements.
F-3
Table of Contents
ANADYS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except net loss per share)
(In thousands, except net loss per share)
For the year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Operating Expenses: |
||||||||||||
Research and development |
$ | 12,026 | $ | 19,494 | $ | 25,993 | ||||||
General and administrative |
6,478 | 8,243 | 8,109 | |||||||||
Total operating expenses |
18,504 | 27,737 | 34,102 | |||||||||
Loss from operations |
(18,504 | ) | (27,737 | ) | (34,102 | ) | ||||||
Other income (expense): |
||||||||||||
Interest income |
106 | 478 | 1,482 | |||||||||
Gain (loss) from valuation of common stock warrant liability |
2,016 | (151 | ) | | ||||||||
Other, net |
33 | 132 | 218 | |||||||||
Total other income (expense), net |
2,155 | 459 | 1,700 | |||||||||
Net loss |
$ | (16,349 | ) | $ | (27,278 | ) | $ | (32,402 | ) | |||
Net loss per share, basic and diluted |
$ | (0.38 | ) | $ | (0.81 | ) | $ | (1.13 | ) | |||
Shares used in calculating net loss per share, basic and diluted |
43,570 | 33,775 | 28,750 | |||||||||
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
ANADYS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share data)
(In thousands, except share data)
Accumulated | ||||||||||||||||||||||||||||||||
other | ||||||||||||||||||||||||||||||||
Additional | comprehensive | Total | ||||||||||||||||||||||||||||||
Preferred stock | Common stock | paid-in | gain | Accumulated | stockholders | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | capital | (loss) | deficit | equity | |||||||||||||||||||||||||
Balance at December 31, 2007 |
| $ | | 28,696,948 | $ | 29 | $ | 279,221 | $ | 81 | $ | (223,652 | ) | $ | 55,679 | |||||||||||||||||
Issuance of common stock pursuant to the exercise of stock options and
warrants |
| | 36,567 | | 106 | | | 106 | ||||||||||||||||||||||||
Issuance of common stock pursuant to the employee stock purchase plan |
| | 83,248 | | 153 | | | 153 | ||||||||||||||||||||||||
Compensation related to stock options and warrants issued to non-employees |
| | | | 66 | | | 66 | ||||||||||||||||||||||||
Share-based compensation expense including forfeitures |
| | | | 2,751 | | | 2,751 | ||||||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||
Unrealized loss on securities available for sale |
| | | | | (528 | ) | | (528 | ) | ||||||||||||||||||||||
Net loss |
| | | | | | (32,402 | ) | (32,402 | ) | ||||||||||||||||||||||
Comprehensive loss |
| | | | | | | (32,930 | ) | |||||||||||||||||||||||
Balance at December 31, 2008 |
| $ | | 28,816,763 | $ | 29 | $ | 282,297 | $ | (447 | ) | $ | (256,054 | ) | $ | 25,825 | ||||||||||||||||
Issuance of common stock pursuant to the exercise of stock options and
warrants |
| | 84,465 | | 232 | | | 232 | ||||||||||||||||||||||||
Issuance of common stock pursuant to the employee stock purchase plan |
| | 82,729 | | 153 | | | 153 | ||||||||||||||||||||||||
Issuance of common stock associated with equity financing, net of issuance
costs |
| | 8,358,000 | 8 | 16,007 | | | 16,015 | ||||||||||||||||||||||||
Fair value of common stock warrants issued in connection with equity
financing |
| | | | (3,746 | ) | | | (3,746 | ) | ||||||||||||||||||||||
Compensation related to stock options and warrants issued to non-employees |
| | | | 125 | | | 125 | ||||||||||||||||||||||||
Share-based compensation expense including forfeitures |
| | | | 2,619 | | | 2,619 | ||||||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||
Unrealized gain on securities available for sale |
| | | | | 484 | | 484 | ||||||||||||||||||||||||
Net loss |
| | | | | | (27,278 | ) | (27,278 | ) | ||||||||||||||||||||||
Comprehensive loss |
| | | | | | | (26,794 | ) | |||||||||||||||||||||||
Balance at December 31, 2009 |
| $ | | 37,341,957 | $ | 37 | $ | 297,687 | $ | 37 | $ | (283,332 | ) | $ | 14,429 | |||||||||||||||||
Issuance of common stock pursuant to the exercise of stock options |
| | 21,619 | | 47 | | | 47 | ||||||||||||||||||||||||
Issuance of common stock pursuant to the employee stock purchase plan |
| | 74,804 | | 111 | | | 111 | ||||||||||||||||||||||||
Issuance of common stock associated with equity financings, net of issuance
costs |
| | 19,702,843 | 20 | 34,674 | | | 34,694 | ||||||||||||||||||||||||
Compensation related to stock options and warrants issued to non-employees |
| | | | 18 | | | 18 | ||||||||||||||||||||||||
Share-based compensation expense including forfeitures |
| | | | 1,761 | | | 1,761 | ||||||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||
Unrealized loss on securities available for sale |
| | | | | (38 | ) | | (38 | ) | ||||||||||||||||||||||
Net loss |
| | | | | | (16,349 | ) | (16,349 | ) | ||||||||||||||||||||||
Comprehensive loss |
| | | | | | | (16,387 | ) | |||||||||||||||||||||||
Balance at December 31, 2010 |
| $ | | 57,141,223 | $ | 57 | $ | 334,298 | $ | (1 | ) | $ | (299,681 | ) | $ | 34,673 | ||||||||||||||||
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
ANADYS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(In thousands)
For the year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net loss |
$ | (16,349 | ) | $ | (27,278 | ) | $ | (32,402 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
Depreciation and amortization |
397 | 853 | 1,141 | |||||||||
Share-based compensation |
1,761 | 2,619 | 2,751 | |||||||||
Amortization of premium/discount on securities available-for-sale |
331 | 155 | 157 | |||||||||
(Gain) loss on the sale of available-for-sale securities |
| (31 | ) | 24 | ||||||||
Compensation related to stock option issuances to non-employees |
18 | 96 | 16 | |||||||||
(Gain) loss on valuation of common stock warrant liability |
(2,016 | ) | 151 | | ||||||||
Rent expense related to warrants issued in connection with operating
lease of the Companys former facility |
| 29 | 50 | |||||||||
Gain from disposal of property and equipment |
(4 | ) | (26 | ) | (149 | ) | ||||||
Changes in operating assets and liabilities: |
||||||||||||
Prepaid expenses and other current assets |
(760 | ) | 1,643 | (1,198 | ) | |||||||
Other assets |
60 | | 1,320 | |||||||||
Accounts payable |
(489 | ) | 182 | (526 | ) | |||||||
Accrued expenses |
76 | (2,180 | ) | 1,057 | ||||||||
Deferred rent |
| (348 | ) | (584 | ) | |||||||
Other liabilities |
(13 | ) | (94 | ) | 55 | |||||||
Net cash used in operating activities |
(16,988 | ) | (24,229 | ) | (28,288 | ) | ||||||
Cash Flows from Investing Activities: |
||||||||||||
Purchase of securities available-for-sale |
(38,934 | ) | (24,657 | ) | (8,806 | ) | ||||||
Proceeds from sale and maturity of securities available-for-sale |
24,191 | 26,484 | 12,463 | |||||||||
Purchase of property and equipment |
(7 | ) | (88 | ) | (213 | ) | ||||||
Proceeds from the sale of property and equipment |
6 | 111 | 392 | |||||||||
Net cash (used in) provided by investing activities |
(14,744 | ) | 1,850 | 3,836 | ||||||||
Cash Flows from Financing Activities: |
||||||||||||
Proceeds from exercise of stock options and employee stock purchase plan |
158 | 385 | 259 | |||||||||
Proceeds from equity financings, net of issuance costs |
34,694 | 16,015 | | |||||||||
Net cash provided by financing activities |
34,852 | 16,400 | 259 | |||||||||
Net increase (decrease) in cash and cash equivalents |
3,120 | (5,979 | ) | (24,193 | ) | |||||||
Cash and cash equivalents at beginning of year |
4,497 | 10,476 | 34,669 | |||||||||
Cash and cash equivalents at end of year |
$ | 7,617 | $ | 4,497 | $ | 10,476 | ||||||
Supplemental Disclosure of Non-Cash Investing and Financing Activities: |
||||||||||||
Initial recognition of the fair value of common stock warrant liability
upon issuance of warrants |
$ | | $ | 3,746 | $ | | ||||||
Unrealized (loss) gain on securities available-for-sale |
$ | (38 | ) | $ | 484 | $ | (528 | ) | ||||
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
ANADYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization and Business
Anadys Pharmaceuticals, Inc. (Anadys or the Company) is a biopharmaceutical company dedicated
to improving patient care by developing novel medicines for the treatment of hepatitis C. The
Company believes hepatitis C represents a large and significant unmet medical need. The Companys
objective is to contribute to an improved treatment outcome for patients with this serious disease.
The Company is currently focusing its efforts on the development of ANA598, a direct-acting
antiviral (DAA) for the treatment of hepatitis C. The Company is also making plans to resume the
clinical development of ANA773, an oral, small-molecule inducer of endogenous interferons that acts
via the Toll-like receptor 7, or TLR7, pathway in hepatitis C.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, Anadys Pharmaceuticals Europe GmbH and Anadys Development Limited. All
significant intercompany accounts and transactions have been eliminated. In 2003, the Company
discontinued its Anadys Pharmaceuticals Europe GmbH operations and intends to dissolve that entity.
Anadys Development Limited was established in 2005 to serve as a legal representative of the
Company for conducting clinical trials in Europe. As of and for the year ended December 31, 2010,
neither Anadys Pharmaceuticals Europe GmbH nor Anadys Development Limited had active operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles (GAAP) in the United States requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes. Actual
results could differ materially from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of highly liquid investments with an original maturity
of less than three months when purchased and are readily convertible without prior notice or
penalty to known amounts of cash.
Securities Available-for-Sale
Investments with an original maturity of more than three months when purchased have been
classified by management as securities available-for-sale. Such investments are carried at fair
value, with unrealized gains and losses included as a component of accumulated other comprehensive
gain (loss) in stockholders equity. 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 cost of securities sold is based on the specific-identification
method. The Company views its available-for-sale securities as available for use in current
operations. Accordingly, the Company has classified all investments as short-term, even though the
stated maturity date may be one year or more beyond the current balance sheet date.
Fair Value of Financial Instruments
The carrying amount of cash, cash equivalents, securities available-for-sale, accounts payable
and accrued expenses are considered to be representative of their respective fair value because of
the short-term nature of those items.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a significant concentration of
credit risk consist primarily of cash, cash equivalents and securities available-for-sale. The
Company maintains deposits in federally insured financial institutions in excess of federally
insured limits. Management, however, believes the Company is not exposed to significant credit risk
due to the financial position of the depository institutions in which those deposits are held.
Additionally, the Company has established guidelines regarding diversification of its investments
and their maturities, which are designed to maintain safety and liquidity.
F-7
Table of Contents
ANADYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment are stated at cost and depreciated over the estimated useful lives of
the assets (ranging from three to five years) using the straight-line method. Leasehold
improvements are amortized over the estimated useful life of the asset or the lease term, whichever
is shorter.
Impairment of Long-Lived Assets
If indicators of impairment exist, the Company assesses the recoverability of the affected
long-lived assets by determining whether the carrying value of such assets can be recovered through
undiscounted future operating cash flows. If impairment is indicated, the Company measures the
amount of such impairment by comparing the fair value of the asset to the carrying value of the
asset and records the impairment as a reduction in the carrying value of the related asset and a
charge to operating results. The Company has not recognized any impairment loss for the periods
ended December 31, 2010, 2009 and 2008.
Research and Development
During 2010, 2009 and 2008, research and development expenses consisted primarily of costs
associated with clinical development of the Companys product candidates. Research and development
expenses may include external costs such as fees paid to clinical research organizations, clinical
trial investigators, contract research organizations, drug substance and drug product manufacturers
and consultants. Research and development expenses may also include internal costs such as
compensation, supplies, materials, an allocated portion of facilities costs, an allocated portion
of information systems support personnel and depreciation.
Accumulated Other Comprehensive Gain (Loss)
All components of comprehensive gain (loss), including net income (loss), are reported in the
financial statements in the period in which they are recognized. Comprehensive income (loss) is
defined as the change in equity during a period from transactions and other events and
circumstances from non-owner sources. Net income (loss) and other comprehensive income (loss),
including unrealized gains and losses on investments and foreign currency translation adjustments,
are reported, net of their related tax effect, to arrive at comprehensive income (loss).
Share-Based Compensation
Share-based compensation expense for options granted to employees and non-employee directors
is estimated at the grant date based on the awards fair value as calculated using a Black-Scholes
pricing model and the portion that is ultimately expected to vest is recognized as expense on a
straight-line basis over the requisite service period. The Company accounts for compensation
expense for options granted to non-employees based on the fair value of the options issued using
the Black-Scholes pricing model and is periodically re-measured as the underlying options vest. The
Company records share-based compensation as components of either research and development expense
or general and administrative expense.
Net Loss Per Share
Basic loss per share (EPS) is calculated by dividing the net loss by the weighted-average
number of common shares outstanding for the period, without consideration for common stock
equivalents. Diluted EPS is computed by dividing the net loss by the weighted-average number of
common stock equivalents outstanding for the period determined using the treasury-stock method. For
purposes of this calculation, common stock subject to repurchase by the Company, preferred stock,
options and warrants are considered to be common stock equivalents and are only included in the
calculation of diluted earnings per share when their effect is dilutive.
Common stock equivalents from stock options and warrants of approximately 10.0 million, 10.1
million and 6.6 million were excluded from the calculation of net loss per share for the years
ended December 31, 2010, 2009 and 2008, respectively, because the effect would be antidilutive.
Subsequent Events
The Company evaluated all events or transactions that occurred after the balance sheet date of
December 31, 2010 through the date it issued these financial statements. No subsequent events were
identified requiring additional disclosure in the notes to these financial statements.
F-8
Table of Contents
ANADYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Securities Available-for-Sale
Securities available-for-sale consisted of the following as of December 31, 2010 and 2009,
respectively (in thousands):
December 31, 2010 | ||||||||||||||||
Amortized | Unrealized | Market | ||||||||||||||
Cost | Gain | Loss | Value | |||||||||||||
Commercial paper |
$ | 10,018 | $ | | $ | (1 | ) | $ | 10,017 | |||||||
Municipal bonds |
1,654 | | | 1,654 | ||||||||||||
U.S. government
sponsored enterprise
securities |
15,983 | 7 | (5 | ) | 15,985 | |||||||||||
Corporate debt securities |
2,713 | | (2 | ) | 2,711 | |||||||||||
$ | 30,368 | $ | 7 | $ | (8 | ) | $ | 30,367 | ||||||||
December 31, 2009 | ||||||||||||||||
Amortized | Unrealized | Market | ||||||||||||||
Cost | Gain | Loss | Value | |||||||||||||
Commercial paper |
$ | 2,199 | $ | | $ | | $ | 2,199 | ||||||||
Municipal bonds |
1,026 | | | 1,026 | ||||||||||||
U.S. treasury notes |
2,048 | | (1 | ) | 2,047 | |||||||||||
U.S. government
sponsored enterprise
securities |
9,127 | 8 | (5 | ) | 9,130 | |||||||||||
Corporate debt securities |
1,556 | 35 | | 1,591 | ||||||||||||
$ | 15,956 | $ | 43 | $ | (6 | ) | $ | 15,993 | ||||||||
The amortized cost and estimated fair value of the Company securities available-for-sale by
contractual maturity as of December 31, 2010 and 2009 are shown below (in thousands):
December 31, 2010 | ||||||||||||||||
Amortized | Unrealized | Market | ||||||||||||||
Cost | Gain | Loss | Value | |||||||||||||
Within one year |
$ | 23,731 | $ | 2 | $ | (5 | ) | $ | 23,728 | |||||||
After one year |
6,637 | 5 | (3 | ) | 6,639 | |||||||||||
$ | 30,368 | $ | 7 | $ | (8 | ) | $ | 30,367 | ||||||||
December 31, 2009 | ||||||||||||||||
Amortized | Unrealized | Market | ||||||||||||||
Cost | Gain | Loss | Value | |||||||||||||
Within one year |
$ | 15,956 | $ | 43 | $ | (6 | ) | $ | 15,993 | |||||||
After one year |
| | | | ||||||||||||
$ | 15,956 | $ | 43 | $ | (6 | ) | $ | 15,993 | ||||||||
As of December 31, 2010, the Company performed a review of all of the securities in its
portfolio with an unrealized loss position to determine if any other-than-temporary impairments
were required to be recorded. Factors considered in the Companys assessment included, but were not
limited to the following: the Companys ability and intent to hold the security until maturity; the
number of months until the securitys maturity, the number of quarters that each security has been
in an unrealized loss position, ratings assigned to each security by independent rating agencies,
the magnitude of the unrealized loss compared to the face value of the security and other market
conditions. No other-than-temporary impairments were identified as of December 31, 2010 related to
securities currently in the Companys portfolio. The Company also noted that none of the securities
as of December 31, 2010 have been in an unrealized loss position for greater than one year.
3. Fair Value Measurements
As of December 31, 2010, the Company has $37.7 million of marketable securities consisting of
money market funds, commercial paper, municipal bonds, U.S. government sponsored enterprise
securities and corporate debt securities with maturities that range from 1 day to 27.4 months with
an overall average time to maturity of 6.2 months. The Company has the ability to liquidate these
F-9
Table of Contents
ANADYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
investments without restriction. The Company determines fair value for marketable securities
with Level 1 inputs through quoted market prices. The Company determines fair value for marketable
securities with Level 2 inputs through broker or dealer quotations or alternative pricing sources
with reasonable levels of price transparency. The Companys Level 2 marketable securities have been
initially valued at the transaction price and subsequently valued, at the end of each reporting
period, typically utilizing third party pricing services or other market observable data. The
pricing services utilize industry standard valuation models, including both income and market based
approaches and observable market inputs to determine value. These observable market inputs include
reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, and other
industry and economic events. The Companys Level 3 inputs are unobservable inputs based on the
Companys assessment that market participants would use in pricing the instruments.
On June 3, 2009, the Company sold warrants to purchase 2.9 million shares of common stock to
institutional investors as part of an equity financing. The Company accounts for the common stock
warrants which may potentially be settled with cash as a liability. See additional discussion
relating to the forms of these warrants at Note 10. The Company determines fair value for the
common stock warrants with Level 3 inputs through a Black-Scholes pricing model.
There have been no transfers of assets or liabilities between the fair value measurement
classifications for the years ended December 31, 2010 and 2009.
The following table presents the Companys assets and liabilities that are measured at fair
value on a recurring basis as of December 31, 2010 (in thousands):
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||
Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
December 31, 2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Description |
||||||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$ | 475 | $ | 475 | $ | | $ | | ||||||||
Commercial paper |
16,916 | | 16,916 | | ||||||||||||
Municipal bonds |
1,654 | | 1,654 | | ||||||||||||
U.S. government sponsored enterprise securities |
15,985 | | 15,985 | | ||||||||||||
Corporate debt securities |
2,711 | | 2,711 | | ||||||||||||
Total financial assets |
$ | 37,741 | $ | 475 | $ | 37,266 | $ | | ||||||||
Liabilities: |
||||||||||||||||
Common stock warrants |
$ | 1,881 | $ | | $ | | $ | 1,881 | ||||||||
Total financial liabilities |
$ | 1,881 | $ | | $ | | $ | 1,881 | ||||||||
The Company reassesses the fair value of the common stock warrants at each reporting date
utilizing a Black-Scholes pricing model. The following inputs were utilized in the Black-Scholes
pricing model at December 31, 2010 and 2009:
For the year ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Risk-free interest rate |
1.02 | % | 2.69 | % | ||||
Dividend yield |
0.00 | % | 0.00 | % | ||||
Volatility factors of the expected market price
of the Companys common stock |
92.99 | % | 93.82 | % | ||||
Weighted-average expected life of warrant (years) |
3.42 | 4.42 |
As a result of the Companys reassessment of the fair value of the common stock warrants, the
Company recorded a gain of $2.0 million for the year ended December 31, 2010. The Company recorded
a loss of $0.2 million for the year ended December 31, 2009. The reassessment of the fair value of
the common stock warrants is reflected in the Companys consolidated Statement of Operations as a
component of other income (expense), net.
F-10
Table of Contents
ANADYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table is a roll forward of the fair value of the common stock warrants, as to
which fair value is determined by Level 3 inputs (in thousands):
For the year ended December 31, | ||||||||
2010 | 2009 | |||||||
Beginning balance |
$ | 3,897 | $ | | ||||
Purchases, issuances, and settlements |
| 3,746 | ||||||
Realized gain (loss) included in net
loss |
2,016 | (151 | ) | |||||
Ending balance |
$ | 1,881 | $ | 3,897 | ||||
4. Property and Equipment
Property and equipment consist of the following (in thousands):
As of December 31, | ||||||||
2010 | 2009 | |||||||
Furniture and fixtures |
$ | 41 | $ | 41 | ||||
Equipment |
3,885 | 3,914 | ||||||
Computers and software |
1,392 | 1,399 | ||||||
Leasehold improvements |
30 | 30 | ||||||
5,348 | 5,384 | |||||||
Less accumulated depreciation and amortization |
(5,114 | ) | (4,758 | ) | ||||
$ | 234 | $ | 626 | |||||
Depreciation and amortization expense relating to property and equipment for the years ended
December 31, 2010, 2009 and 2008 was $0.4 million, $0.9 million and $1.1 million, respectively.
5. Equity Financings
On June 1, 2010, the Company sold approximately 5.8 million registered shares of common stock
to institutional investors for gross proceeds of approximately $12.5 million. The shares of common
stock were at a purchase price of $2.15 per share. The net proceeds related to this transaction
were $11.4 million.
On October 20, 2010, the Company sold approximately 13.9 million registered shares of common
stock to institutional and retail investors for gross proceeds of approximately $25.0 million. The
shares of common stock were at a purchase price of $1.80 per share. The net proceeds to the Company
related to this transaction were $23.3 million.
6. Restructuring
On June 3, 2009, the Company initiated a strategic restructuring to focus its operations on
the development of ANA598, in particular a Phase IIa study of ANA598 in combination with interferon
and ribavirin. The strategic restructuring resulted in a reduction in the Companys workforce of
approximately 40%. The Company incurred a cash charge of $1.3 million for the year ended December
31, 2009, which was included in operating expenses, for cash severance, benefits and outplacement
services in connection with the workforce reduction. In addition, the Company incurred a noncash
charge of $0.4 million associated with the modification of stock options for individuals included
in the strategic restructuring. All payments related to this strategic restructuring have been
completed as of December 31, 2010.
7. Qualifying Therapeutic Discovery Project
The Company submitted applications for qualified investments for ANA598 and ANA773 in a
qualifying therapeutic discovery project under section 48D of the Internal Revenue Code. In October
2010, the Company received notification of grants in the amount of $0.5 million being approved. The
Section 48D grants are recorded as an offset to research and development expense for the year ended
December 31, 2010.
F-11
Table of Contents
ANADYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Other Balance Sheet Captions
As of December 31, | ||||||||
2010 | 2009 | |||||||
Prepaid expenses and other current assets consist of the following (in thousands): |
||||||||
Prepaid insurance |
$ | 181 | $ | 208 | ||||
Interest receivable |
150 | 138 | ||||||
Section 48D grant |
489 | | ||||||
Tenant deposit |
30 | | ||||||
Other prepaid expenses |
469 | 213 | ||||||
$ | 1,319 | $ | 559 | |||||
As of December 31, | ||||||||
2010 | 2009 | |||||||
Other assets consist of the following (in thousands): |
||||||||
Note receivable |
$ | | $ | 30 | ||||
Tenant deposit |
| 30 | ||||||
$ | | $ | 60 | |||||
As of December 31, | ||||||||
2010 | 2009 | |||||||
Accrued expenses consist of the following (in thousands): |
||||||||
Accrued personnel costs |
$ | 322 | $ | 320 | ||||
Accrued employee bonus |
1,076 | 988 | ||||||
Accrued drug development |
680 | 708 | ||||||
Accrued legal and patent costs |
98 | 243 | ||||||
Accrued facility costs |
14 | 20 | ||||||
Accrued severance costs associated with the 2009 strategic restructuring |
| 52 | ||||||
Other accrued expenses |
529 | 312 | ||||||
$ | 2,719 | $ | 2,643 | |||||
9. Commitments and Contingencies
On
February 28, 2011, the Company entered into a lease agreement with ARE-SD Region No. 31,
LLC for the lease of 13,674 square feet which the Company uses for its headquarters and research
and development facility. This lease replaces the Companys expired sublease for the same space
located in San Diego, California. The effective term of the 12 month lease commenced on February 1, 2011. Under the terms of the lease the Company will receive 1.5 months of free base rent.
With the exception of the 1.5 months during which the Company receives free base rent, the monthly base rent during the term of the lease will be $0.03 million. The lease also
provides for additional payments, including common area maintenance charges, taxes, maintenance and
utilities. Gross rent expense for the years ended December 31, 2010, 2009 and 2008 was
approximately $0.4 million, $1.4 million and $2.1 million, respectively.
Future minimum lease payments under facility leases are as follows as of December 31, 2010 (in
thousands):
2011 |
$ | 296 | ||
2012 |
28 | |||
$ | 324 | |||
10. Stockholders Equity
Warrants
As of December 31, 2010, the Company had outstanding warrants to purchase 2.9 million shares
of common stock with an average exercise price of $2.78. These warrants expire at various times
between December 17, 2012 and June 3, 2014. On June 3, 2009, the Company sold warrants to purchase
2.9 million shares of common stock to institutional investors as part of an equity financing. Each
warrant has an exercise price of $2.75 per share, is exercisable 6 months after issuance and will
expire five years from the date of issuance. The warrants included in this transaction contain a
fundamental change provision, which may in certain circumstances allow the common stock warrants
to be redeemed for cash at an amount equal to the Black-Scholes Value, as defined in the warrants.
In addition, the warrants include a failure to timely deliver shares provision, which may require
the Company to pay
F-12
Table of Contents
ANADYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cash to the warrant holder in certain circumstances as defined in the warrants. Accordingly,
the common stock warrants are recorded as a liability and then marked to market each period through
earnings in other income (expense). See a discussion on the fair value of the common stock warrants
at Note 3.
Stock Options
In 2002, the Company adopted the 2002 Equity Incentive Plan (the 2002 Plan). In connection
with the adoption of the 2002 Plan, the Companys 1994 Stock Option Plan and 1998 Equity Incentive
Plan (collectively, the Prior Plans) were amended and restated into the 2002 Plan. All options
that were previously granted under the Prior Plans became governed by the 2002 Plan and the Prior
Plans no longer existed as individual plans. The 2002 Plan provided for the issuance of incentive
stock options to officers and other employees of the Company and non-qualified stock options,
awards of stock and direct stock purchase opportunities to directors, officers, employees and
consultants of the Company.
During March 2004 upon the effectiveness of the Companys initial public offering (IPO), the
2004 Equity Incentive Plan (the 2004 Plan) was adopted. The initial share reserve under the 2004
Plan was equal to the number of shares of common stock reserved under the 2002 Plan that remained
available for future stock awards upon the effectiveness of the IPO. Options granted under the 2002
Plan continue to be governed by the provisions of the 2002 Plan. On November 9, 2010, the Company
registered an additional 1,000,000 shares for issuance under the 2004 Plan in accordance with the
provisions of the 2004 Plan. The total number of shares which remain available for grant under the
2004 Plan is 1,595,950 shares at December 31, 2010. The options which are granted from the 2004
Plan are exercisable at various dates and will expire no more than ten years from their date of
grant, or in the case of certain non-qualified options, ten years from the date of grant. The
exercise price of each option shall be determined by the Board of Directors although generally
options have an exercise price equal to the fair market value of the Companys stock on the date of
the option grant. In the case of incentive stock options, the exercise price shall not be less than
100% of the fair market value of the Companys common stock at the time the option is granted. For
holders of more than 10% of the Companys total combined voting power of all classes of stock,
incentive stock options may not be granted at less than 110% of the fair market value of the
Companys common stock at the date of grant and for a term not to exceed five years.
Upon the effectiveness of the initial public offering, the 2004 Non-Employee Directors Stock
Option Plan (the NEDSOP Plan) was adopted. On November 9, 2010, the Company registered an
additional 216,071 shares for issuance under the NEDSOP Plan in accordance with the provisions of
the NEDSOP Plan. The total number of shares which remain available for grant under the NEDSOP Plan
is 465,333 shares at December 31, 2010. The options granted from the NEDSOP Plan are exercisable at
various dates and will expire no more than ten years from their date of grant. The exercise price
of each option shall be determined by the Board of Directors although generally options have an
exercise price equal to the fair market value of the Companys stock on the date of the option
grant.
In connection with the hiring of certain executive officers during 2006, the Compensation
Committee of the Companys Board of Directors approved inducement grants of non-qualified stock
options to purchase shares of Anadys common stock. The total number of shares which remain
outstanding under the inducement grants is 200,000 shares at December 31, 2010. These option awards
were granted without stockholder approval pursuant to NASDAQ Marketplace Rule 4350(i)(1)(A)(iv).
Although these options were granted outside the 2004 Plan, they are subject to substantially
identical terms and conditions as those contained in the 2004 Plan.
The following table summarizes information about stock options outstanding under the 2002
Plan, 2004 Plan, the NEDSOP Plan and inducement grants as of December 31, 2010:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||
Range of | Average | Average | Average | |||||||||||||||||
Exercise | Number | Remaining | Exercise | Number | Exercise | |||||||||||||||
Price | Outstanding | Contractual Life | Price | Exercisable | Price | |||||||||||||||
$1.02-$1.99 |
1,666,068 | 8.66 | $ | 1.51 | 491,773 | $ | 1.88 | |||||||||||||
$2.00-$2.32 |
1,646,402 | 7.22 | $ | 2.23 | 1,240,188 | $ | 2.23 | |||||||||||||
$2.40-$2.95 |
1,827,639 | 5.51 | $ | 2.70 | 1,225,570 | $ | 2.83 | |||||||||||||
$3.00-$8.16 |
1,719,832 | 4.87 | $ | 5.71 | 1,712,287 | $ | 5.72 | |||||||||||||
$8.37-$15.61 |
160,525 | 4.50 | $ | 11.51 | 160,525 | $ | 11.51 | |||||||||||||
7,020,466 | 4,830,343 | |||||||||||||||||||
F-13
Table of Contents
ANADYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Companys stock option activity and related information is as follows:
Weighted | Weighted-Average | Aggregate Intrinsic | ||||||||||||||
Options | Average | Remaining | Value | |||||||||||||
Outstanding | Exercise Price | Contractual Term | (in thousands) | |||||||||||||
Balance at December 31, 2007 |
5,547,827 | $ | 4.44 | |||||||||||||
Granted |
1,508,493 | 2.07 | ||||||||||||||
Exercised |
(36,567 | ) | 2.90 | |||||||||||||
Cancelled |
(474,387 | ) | 5.47 | |||||||||||||
Balance at December 31, 2008 |
6,545,366 | $ | 3.83 | |||||||||||||
Granted |
1,359,736 | 2.34 | ||||||||||||||
Exercised |
(84,465 | ) | 2.74 | |||||||||||||
Cancelled |
(660,626 | ) | 4.34 | |||||||||||||
Balance at December 31, 2009 |
7,160,011 | $ | 3.57 | |||||||||||||
Granted |
889,188 | 1.22 | ||||||||||||||
Exercised |
(21,619 | ) | 2.16 | |||||||||||||
Cancelled |
(1,007,114 | ) | 3.77 | |||||||||||||
Balance at December 31, 2010 |
7,020,466 | $ | 3.25 | 6.48 | $ | 345 | ||||||||||
Exercisable at December 31, 2010 |
4,830,343 | $ | 3.89 | 5.40 | $ | | ||||||||||
The total intrinsic value of options exercised determined as of the date of exercise was $0.01
million and $0.2 million for the years ended December 31, 2010 and 2009, respectively. There was no
material intrinsic value for options exercised during the year ended December 31, 2008. The Company
settles employee stock option exercises with newly issued common shares.
Excluding stock option grants to non-employee directors, the Company did not grant any stock
options to non-employees for the year ended December 31, 2010 and 2008. The Company granted 15,000
stock options to non-employees for the year ended December 31, 2009. Compensation expense related
to non-employee stock option grants was $0.02 million, $0.1 million and $0.01 million for the years
ended December 31, 2010, 2009 and 2008, respectively.
Share-Based Compensation
The Company is required to record share-based compensation as components of either research
and development expense or general and administrative expense. The Company has reported the
following amounts of share-based compensation expense in the consolidated Statements of Operations
(in thousands, except per share data):
For the year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Research and development expense |
$ | 725 | $ | 1,354 | $ | 1,271 | ||||||
General and administrative expense |
1,054 | 1,361 | 1,492 | |||||||||
Total share-based compensation expense |
$ | 1,779 | $ | 2,715 | $ | 2,763 | ||||||
Net share-based compensation expense, per common share
basic and diluted |
$ | 0.04 | $ | 0.08 | $ | 0.10 | ||||||
Included in the research and development expense and general and administrative expense for
the year ended December 31, 2009 is $0.3 million and $0.1 million, respectively, of share-based
compensation expense related to the modification of stock options for employees included in the
June 2009 reduction in workforce.
As of December 31, 2010, there was an additional $2.0 million of total unrecognized
compensation cost related to unvested share-based awards granted under the Companys stock option
plans. This unrecognized compensation cost is expected to be recognized over a weighted-average
period of 2.48 years.
The fair value of options granted to employees and non-employee directors was estimated at the
date of grant using a Black-Scholes pricing model with the weighted-average assumptions stated
below.
F-14
Table of Contents
ANADYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Risk-free interest rate |
2.16 | % | 2.20 | % | 2.45 | % | ||||||
Dividend yield |
0.00 | % | 0.00 | % | 0.00 | % | ||||||
Volatility factors of the expected market price
of the Companys common stock |
84.68 | % | 80.14 | % | 71.43 | % | ||||||
Weighted-average expected life of option (years) |
6.31 | 5.94 | 5.76 |
The estimated weighted-average fair value of stock options granted during 2010, 2009 and 2008
was $0.89, $1.62 and $1.31, respectively.
Dividend YieldThe Company has never declared or paid dividends on common stock and has no
plans to do so in the foreseeable future.
Expected VolatilityVolatility is a measure of the amount by which a financial variable such
as a share price has fluctuated or is expected to fluctuate during a period. The Company considered
the historical volatility from its IPO through the dates of grants, in combination with the
historical volatility of peer companies and business and economic considerations in order to
estimate the expected volatility, due to the Companys short history as a public company.
Risk-Free Interest RateThis is the U.S. Treasury rate for the week of each option grant
during the quarter having a term that most closely resembles the expected life of the option.
Expected Life of the Option TermThis is the period of time that the options granted are
expected to remain unexercised. Options granted during the year have a maximum contractual term of
ten years. The Company estimates the expected life of the option term based on actual past behavior
for similar options with further consideration given to the class of employees to whom the options
were granted.
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. The Company assesses the forfeiture rate
on an annual basis and revises the rate when deemed necessary.
Employee Stock Purchase Plan
Under the Companys 2004 Employee Stock Purchase Plan (Purchase Plan), employees may purchase
common stock every six months (up to but not exceeding 12% of each employees wages) over the
offering period at 85% of the fair market value of the common stock at certain specified dates. The
offering period may not exceed 24 months. This purchase discount is significant enough to be
considered compensatory. The Company did not record any share-based compensation related to the
Purchase Plan for the year ended December 31, 2010 as our current year expense was offset by the reversal of prior year expense associated with employee withdrawals from the Purchase Plan during the year ended December 31, 2010. The Company recorded $0.1 million and $0.2
million in share-based compensation related to the Purchase Plan for the years ended December 31,
2009 and 2008, respectively.
For the years ended December 31, 2010, 2009 and 2008, 74,804 shares, 82,729 shares and 83,248
shares of common stock were issued under the Purchase Plan, respectively. The weighted-average fair
value of employee stock Purchase Plan purchases was $1.48, $1.85 and $1.84 per share for 2010, 2009
and 2008, respectively.
Shares Reserved for Issuance
Shares of common stock reserved for future issuance as of December 31, 2010 are as follows:
December 31, 2010 | ||||
Warrants |
2,944,234 | |||
Employee Stock Purchase Plan |
966,250 | |||
Stock options under the Companys Plans: |
||||
Granted and outstanding |
7,020,466 | |||
Reserved for future issuance |
2,061,283 | |||
9,081,749 | ||||
F-15
Table of Contents
ANADYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes
Significant components of the Companys deferred tax assets as of December 31, 2010 and 2009
are shown below. A valuation allowance of $35.4 million and $32.4 million has been established to
offset the deferred tax assets, as realization of such assets has not met the more likely than not
threshold, as of December 31, 2010 and 2009, respectively (in thousands).
As of December 31, | ||||||||
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Non-qualified stock options |
$ | 4,309 | $ | 4,914 | ||||
Capitalized research and development expense |
30,815 | 27,415 | ||||||
Accruals |
275 | 98 | ||||||
Other |
35 | 33 | ||||||
Total deferred tax assets |
35,434 | 32,460 | ||||||
Valuation allowance for deferred tax assets |
(35,434 | ) | (32,445 | ) | ||||
Net deferred taxes |
| 15 | ||||||
Deferred tax liabilities: |
||||||||
Unrealized loss on securities available-for-sale |
| (15 | ) | |||||
Total deferred tax liabilities |
| (15 | ) | |||||
Net deferred taxes |
$ | | $ | | ||||
Subject to the potential limitations discussed below, as of December 31, 2010 the Company had
generated federal and state tax net operating loss (NOL) carryforwards of approximately $137.2
million and $116.8 million, respectively. Approximately $4.2 million of the federal loss
carryforwards will begin expiring in 2011 and state loss carryforwards will begin expiring in 2017,
unless previously utilized. Also, as of December 31, 2010, the Company had generated federal and
state research tax credit (R&D credit) carryforwards of approximately $2.6 million and $5.1
million, respectively. Approximately $0.1 million of the federal research credits will begin
expiring in 2011 unless previously utilized. The state research credits currently do not expire.
The future utilization of the Companys NOL and R&D credit carryforwards to offset future
taxable income may be subject to an annual limitation, pursuant to Internal Revenue Code Sections
382 and 383, as a result of ownership changes (as defined in Internal Revenue Code Sections 382 and
383) that have occurred previously and/or that could occur in the future. The Company has
initiated an analysis of Section 382 and, based on this preliminary analysis, the Company believes
that sufficient changes of ownership have occurred such that NOL and R&D credit carryforwards and
other deferred tax assets will be subject to annual limitations in future periods. The Company has
not completed its Section 382 analysis and as such the Company has removed the deferred tax assets
for NOL and R&D credit carryforwards from its deferred tax asset schedule and has recorded a
corresponding decrease to its valuation allowance. When this analysis is finalized, the Company
plans to update its unrecognized tax benefits. Due to the existence of the valuation allowance,
future changes to the Companys unrecognized tax benefits will not impact the Companys effective
tax rate.
The provision for income taxes on earnings subject to income taxes differs from the statutory
federal rate at December 31, 2010, 2009 and 2008, due to the following (in thousands):
As of December 31, | |||||||||||||
2010 | 2009 | 2008 | |||||||||||
Federal income taxes at 35% |
$ | (5,724 | ) | $ | (9,547 | ) | $ | (11,341 | ) | ||||
State income taxes, net of federal benefit |
(849 | ) | (1,566 | ) | (1,748 | ) | |||||||
Tax effect on non-deductible expenses and credits |
(320 | ) | (978 | ) | (1,233 | ) | |||||||
Warrants |
(706 | ) | 42 | 18 | |||||||||
Expiration of net operating loss carryforwards |
1,424 | 1,426 | 703 | ||||||||||
Stock based compensation |
1,139 | (44 | ) | 647 | |||||||||
Removal of net operating losses and R&D credits |
2,060 | 58,547 | | ||||||||||
Change in valuation allowance |
2,976 | (48,080 | ) | 12,940 | |||||||||
Other |
| 200 | 14 | ||||||||||
$ | | $ | | $ | | ||||||||
F-16
Table of Contents
ANADYS PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2010 and 2009, the Company has not recorded any uncertain tax benefits.
The Companys practice is to recognize interest and/or penalties related to income tax matters
in income tax expense. As of December 31, 2010, the Company did not record any interest or
penalties.
The tax years 1994 to 2010 remain open to examination by the major taxing jurisdictions to
which the Company is subject, as tax authorities may have the right to examine prior periods where
net operating losses or tax credits were generated and carried forward.
12. Savings Plan
The Company has a retirement savings plan for all employees, subject to certain age
requirements, pursuant to Section 401(k) of the Internal Revenue Code. The Company matches 25% of
employee contributions up to 6% of eligible compensation. Employer contributions were $0.1 million
for each of the years ended December 31, 2010, 2009 and 2008.
13. Unaudited Quarterly Results of Operations
The following unaudited quarterly financial data, in the opinion of management, reflects all
adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of
results for the periods presented.
First | Second | Third | Fourth | |||||||||||||
Fiscal year 2010 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
(in thousands, except net loss per share) | ||||||||||||||||
Revenues |
$ | | $ | | $ | | $ | | ||||||||
Net loss |
(6,203 | ) | (2,977 | ) | (4,743 | ) | (2,426 | ) | ||||||||
Net loss per share, basic and diluted |
(0.17 | ) | (0.08 | ) | (0.11 | ) | (0.04 | ) |
First | Second | Third | Fourth | |||||||||||||
Fiscal year 2009 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
(in thousands, except net loss per share) | ||||||||||||||||
Revenues |
$ | | $ | | $ | | $ | | ||||||||
Net loss |
(8,759 | ) | (6,530 | ) | (7,732 | ) | (4,257 | ) | ||||||||
Net loss per share, basic and diluted |
(0.30 | ) | (0.21 | ) | (0.21 | ) | (0.11 | ) |
F-17