Expert Financial Analysis and Reporting

I had a telephone conversation with CEO Steve Worland to discuss the negatives and positives for Anadys over the next year or so.

Conclusion

There are no significant catalysts over the next year and the product development landscape for HCV drugs grows more complex and difficult to understand by the day. The potential role of Anadys’ lead drug ANA-598 in treating hepatitis C remains controversial despite promising phase IIa data. Investors are also concerned that a long expected partnering deal on ANA-598 has not happened. This is viewed by some investors that there is a lack of interest in partnering this drug. I am intrigued with the story, but it is just too early. A year from now, I might get very excited. The positives and negatives in the investment thesis ar as follows:

Negatives:

1. The biggest risk is that more data on the 200 mg cohort of the phase IIa trial that will be released in 4Q, 2010 could have some negative aspect. Given how positive the data reported so far has been, I think the data will be positive, but there are no guarantees
2. We are one year from the key data on the phase IIb trial. Not a lot of news over the next year.
3. Not finding a partner is troubling given the emphasis placed on it by management
4. The data from the phase IIa trial that has been reported has dealt with only 5 patients at the dose that has been chosen for phase IIb
5. Clearly, Anadys is doing the usual biotech thing of jumping quickly into a phase IIb trial with not enough data. They have little choice.
6. The company remains cash constrained. Even with this raise, there is only enough cash to last into 2H 2012.
7. Anadys could not possibly fund the phase III trial costs of $150 million.
8. The non-nucleoside polymerase inhibitor class of HCV treating drugs to which ANA-598 belongs is looked upon skeptically by investors and doctors who believe that resistance to this type of drug develops rapidly.

Positives:

1. The biggest positive is that Anadys could still announce a partnership in the next half year or so. This could increase the price by 100% or more depending on the partner and term.
2. Although the data generated by Anadys is limited to a small number of patients, it is impressive in terms of efficacy.
3. The data also suggests that the widely held belief that resistance will be a problem with non-nucleoside inhibitors such as ANA-598 may be wrong.
4. With this raise of capital, they will probably not need to raise more equity until the phase IIb results are released late next year.
5. I like the CEO, Steve Worland. I think he is a good manager and has credibility with Wall Street.

• The stockholders in this company include impressive firms such as Wellington. Jenison and Orbimed. I think, but do not know that they will be participating in the deal.

Overview

Anadys’ lead drug ANA-598 is for treating hepatitis C. This disease is now treated with a combination of interferon alpha and ribavirin. About 40% to 45% of patients treated with this regimen are cured. There are major drawbacks from this therapy in addition to the concern that less than half of the patients will be cured. Interferon is given as a weekly injection for 48 weeks. It causes flu-like symptoms for a day or so on each administration. Think of going 48 weeks with a case of the flu each week. Ribavirin can cause anemia. The limited efficacy of the interferon/ ribavirin combination, the long length of therapy and the onerous side effect profile has resulted in tremendous research efforts to find more effective and safer drugs. The potential is enormous.

The first two new drugs aimed at hepatitis C are telaprevir of Vertex and boceprevir of Merck. Both of these drugs can be given orally and have done well in phase III trials and should be approved in 2H, 2011. Both will initially be added to the interferon/ ribavirin combination. The excitement with these drugs is that they increase the cure rate from 40% to 45% to 70% to 75%. Also, in some patients, treatment can be shortened to 24 weeks from 48 weeks which shortens the exposure time to interferon and ribavirin. Of these two drugs, telepravir appears to be the winner and could get 80% of the market. Analysts are estimating that telepravir can achieve US sales of $1.5 billion to $2.0 billion in 2012. Boceprevir could do $300 million to $600 million.

After this spectacular first wave of new drug development for HCV, we are now moving on to the next stage of development. Following the scenario seen in HIV therapies we would expect to see new oral drugs developed to treat HCV. Initially, they will likely be added to the soon to be combinations of telepravir or boceprevir combined with interferon and ribavirin. The near term goal will be to increase the cure rate to perhaps 80% to 90% and to minimize the time that patients are exposed to interferon and ribavirin. The race is on to develop new such oral agents. The longer term goal will be to replace interferon and ribavirin altogether and treat HCV with a regimen of three orally active drugs that hopefully can be given as a single pill once a day.

Both telepravir and boceprevir belong to the class of protease inhibitors. The industry believes that another protease inhibitor added to these drugs would produce additive positive results. There are at least nine such drugs in development with Achillion’s ACH-1625, Boehrringer Ingleheims’ BI-201335 and Tibotec’s TMC-435 being the most promising.

The next class of agents is the nucleoside polymerase inhibitors. The two most promising agents in this class are Pharmasset’s R7128 which is partnered with Roche and Pharmasset’s PSI-7977. Wall Street is generally betting that the preferred three drug regimen will be telepravir, another protease inhibitor and one of Pharmasset’s nucleoside polymerase inhibitors. Phamasset’s products are probably two years from commercialization and yet it carries a $1 billion market capitalization.

The third class of drugs is the non-nucleoside polymerase inhibitors. Investors believe that Anadys’ ANA-598 and Vertex’ VCH-222 are best in class. However, there is concern that this class of drugs is susceptible to resistance developing and there is skepticism on the group. Even though Anadys’ ANA-598 is only one year behind Pharmasset’s two nucleoside polymerase inhibitors, it carries a market capitalization of only $90 million. This is because of skepticism on the non-nucleoside class and Anadys’s weak balance sheet.

Anadys has done a phase IIa trial that is encouraging in results. It hints that the efficacy of ANA-598 when added to interferon and ribavirin may be comparable to telepravir when it is added to interferon and ribavirin. It also suggests that like telepravir, ANA-598 can shorten the course of therapy for some patients. There is also no evidence of resistance developing, which has been the concern for investors. This sounds just great. However, there is only a limited amount of data. In fact, for the 200 mg dose given twice a day which will be studied in upcoming trials, we have meaningful data on only 5 patients.

Anadys had aggressively guided investors to expect a partnership with a bigger company by the end of 2011 and that there would be no need for a capital raise. Now, they are raising capital. Management says that negotiations for a deal are continuing, but at a slower pace than expected. The company did not want to put ANA-598 trials on hold awaiting a partnership and decided to raise money to go ahead with a phase IIb trial on its own. Whatever, this is a clear change in management’s expectations and a surprise for Wall Street.

The phase IIb trial could start in January of 2011 and end in April of 2011 with meaningful data on cure rates being available in 2H, 2011. The phase III trial could start in 1H, 2012. This will be the key data point for investors, but it is more than a year away. There will be meaningful data for the 200 mg dose of the ongoing phase IIa trial in 4Q, 2011. This is likely to be positive. Then we have to wait a year.