Expert Financial Analysis and Reporting

I met with Anadys’ CEO Steve Worland and IR contact Amy Conrad at their offices in San Diego for an update on ANA 598.

Company Update:

Anadys’ lead compound is ANA598, a small molecule non-nucleoside inhibitor of HCV RNA polymerase. To date, ANDS has completed one phase I study in healthy volunteers. A second phase Ib clinical trial in HCV infected patients has demonstrated high viral load reductions in genotype 1a and 1b infected patients in the 200 mg, 400 mg and 800 mg cohorts.

Anadys is involved in hepatitis C drug development. The standard of care for treating hepatitis C is a combination of interferon and ribavirin which achieves a cure of the infection about 40% of the time in the most common HCV mutation, genotype I. A number of companies are now developing drugs that have the potential to improve the cure rate. Specifically, there are two such classes of drugs in development that are named based on their mode of action, i.e. protease inhibitors and polymerase inhibitors. In turn, the polymerase inhibitors are broken down into nucleoside and non-nucleoside polymerase inhibitors. Anadys is focused on development of a non-nucleoside polymerase inhibitor, ANA 598.

The protease inhibitors are most advanced in the clinic and Vertex is in the lead in this category with its protease inhibitor telaprevir. When this drug is combined with interferon and ribavirin it increases the cure rate in genotype I HCV from 40% to 70% to 75%. Developers of HCV drugs see a lot of similarity between what occurred in the development of drugs for HIV. In HIV, protease inhibitors and polymerase inhibitors were combined to achieve higher efficacy rates. It is generally believed that adding a nucleoside and/or a non-nucleoside polymerase inhibitor to the combination of interferon, ribavirin and a protease inhibitor (of which telaprevir is the first) will increase the efficacy rate from 70% to 75% to 85% to 90%.

The commercial value of having a non-nucleoside polymerase inhibitor is illustrated by the recent acquisition of Viro Chem Pharmaceuticals by Vertex, which needed to acquire a polymerase inhibitor to combine with telaprevir. On March 12, 2009 Vertex paid $100 million of cash and stock then valued at $313 million for Viro Chem.

Vertex appears to have taken a hard look at Anadys before deciding on acquiring Viro Chem. However, there are a number of large pharmaceutical and biotechnology companies that are developing protease inhibitors and that need to acquire a polymerase inhibitor. Anadys may have been the bridesmaid to Viro Chem, but there appears to be an excellent opportunity for Anadys to partner ANA 598 or to sell the company outright. The company is running its cash balance at such a low level because it anticipates either a partnering deal that will bring in a lot of cash upfront and drive the stock price higher or an outright acquisition.

Clinical Update of 598:

In 2Q, 2010, ANDS completed a 12 week study of the 400 mg BID cohort. The study demonstrated a cEVR (complete early virologic response) rate of 75% for the 400 mg BID and a cEVR rate of 73% for the 200 mg BID cohort which was reported in 1Q, 2010. This compares to a cEVR rate of 63% for placebo. The full data including viral load and p-values are expected at a future meeting likely the AASLD which is held Dec 2-4, 2010.

Financials

ANDS ended 2Q10 with $22.1 million cash which includes $11.4 million net proceeds from direct offering of 5.8 million at $2.15 per share grossing $12.5 million. The Company agreed to pay the Placement Agents, Lazard Capital Markets LLC and Piper Jaffrey & Co., an aggregate fee equal to 6.38% of the gross proceeds from the offering of common stock and to provide reimbursement for legal and other expenses, not to exceed $75,000. Based on projected quarterly cash burn of $4-$5 million for 2010, the current cash of $22.1 million will carry ANDS to 1H, 2011.