Expert Financial Analysis and Reporting

I met with CEO Steve Worland and IR contact Amy Conrad at their offices in San Diego. This was my first meeting with Mr. Worland.

Company Overview

The company ended the second quarter with $25.4 million of cash. The quarterly burn rate for the first two quarters was about $9.0 million so that the company is running thin on cash. Anadys raised $16.2 million in June with a unit deal priced at $2.09 that included 8,358,000 shares and 2,925,300 warrants with five years life and an exercise price of $2.75. Gross proceeds were $17.5 million and net proceeds were $16.2 million so that underwriting discounts were about 7.4%.

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.

The company is awaiting meaningful data points in 1H, 2010 that if successful, will drive collaboration or with much less probability an outright acquisition. The company will not raise capital prior to that time. We will introduce the CEFF to them prior to this data being released. We wanted to make an impression that we are serious investors and for that reason chose not to bring up the CEFF.