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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2010

OR



| ̈ | 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
001-33095





ACHILLION PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 52-2113479                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|300 George Street, New Haven, CT                               |  | 06511                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(203)
624-7000

(Registrants telephone number, including area code)

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  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company. See definition of accelerated filer,
large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |                                                |  |                           |  |  
|----------------------- |  | ---------------------------------------------- |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                              |  | Accelerated filer         |  |  ̈
|                        |  |                                                | 
|Non-accelerated filer   |  |  ̈  (Do not check if smaller reporting company) |  | Smaller reporting company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

As of October 25, 2010, the registrant had 58,349,678 shares of Common Stock, $0.001 par value per share, outstanding.









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INDEX



|                              |  |                                                                                                       |  |            |    | 
|----------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ---------- | -- | 
|                              |  |                                                                                                       |  | PAGENUMBER |   
|PART I. FINANCIAL INFORMATION |  |                                                                                                       |  |           
|                              |  |                                                                                                      
|ITEM 1.                       |  | FINANCIAL STATEMENTS                                                                                  |  |            |    | 
|                              |  |                                                                                                      
|                              |  | Balance Sheets at September 30, 2010 and December 31, 2009 (unaudited)                                |  |            | 3  | 
|                              |  | Statements of Operations for the three and nine months ended September 
30, 2010 and 2009 (unaudited) |  |            | 4  | 
|                              |  | Statements of Cash Flows for the nine months ended September 30, 2010 and 2009
(unaudited)            |  |            | 5  | 
|                              |  | Notes to Financial Statements (unaudited)                                                             |  |            | 6  | 
|                              |  |                                                                                                      
|ITEM 2.                       |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS                 |  |            | 14 | 
|                              |  |                                                                                                      
|ITEM 3.                       |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                            |  |            | 22 | 
|                              |  |                                                                                                      
|ITEM 4.                       |  | CONTROLS AND PROCEDURES                                                                               |  |            | 22 | 
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                       |  |           
|                              |  |                                                                                                      
|ITEM 1A.                      |  | RISK FACTORS                                                                                          |  |            | 22 | 
|                              |  |                                                                                                      
|ITEM 2.                       |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                           |  |            | 38 | 
|                              |  |                                                                                                      
|ITEM 6.                       |  | EXHIBITS                                                                                              |  |            | 40 | 



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PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

Achillion Pharmaceuticals, Inc.

Balance Sheets

(in thousands, except per share data)

(Unaudited)



|                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                    |  | September 30, 2010 |          |   | December 31, 2009 |  
|Assets                                                                                                                                                              |  |                    |          |   |                   |   |          |  
|Current assets:                                                                                                                                                     |  |                    |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                           |  | $                  | 27,684   |   |                   | $ | 9,712    |  
|Marketable securities                                                                                                                                               |  |                    | 34,473   |   |                   |   |         |  
|Accounts receivable                                                                                                                                                 |  |                    | 91       |   |                   |   | 65       |  
|Prepaid expenses and other current assets                                                                                                                           |  |                    | 1,922    |   |                   |   | 768      |  
|                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total current assets                                                                                                                                                |  |                    | 64,170   |   |                   |   | 10,545   |  
|Fixed assets, net                                                                                                                                                   |  |                    | 519      |   |                   |   | 876      |  
|Deferred financing costs                                                                                                                                            |  |                    | 127      |   |                   |   | 149      |  
|Restricted cash                                                                                                                                                     |  |                    | 152      |   |                   |   | 100      |  
|                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total assets                                                                                                                                                        |  | $                  | 64,968   |   |                   | $ | 11,670   |  
|                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Liabilities and Stockholders Equity                                                                                                                                |  |                    |          |   |                   |   |          |  
|Current liabilities:                                                                                                                                                |  |                    |          |   |                   |   |          |  
|Accounts payable                                                                                                                                                    |  | $                  | 2,691    |   |                   | $ | 2,277    |  
|Accrued expenses                                                                                                                                                    |  |                    | 2,305    |   |                   |   | 2,598    |  
|Current portion of long-term debt                                                                                                                                   |  |                    | 1,641    |   |                   |   | 2,867    |  
|                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                           |  |                    | 6,637    |   |                   |   | 7,742    |  
|Deferred revenue                                                                                                                                                    |  |                    | 2,489    |   |                   |   | 2,489    |  
|Long term debt                                                                                                                                                      |  |                    |         |   |                   |   | 417      |  
|                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total liabilities                                                                                                                                                   |  |                    | 9,126    |   |                   |   | 10,648   |  
|                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Commitments and contingencies                                                                                                                                       |  |                    |          |   |                   |   |          |  
|Stockholders Equity:                                                                                                                                               |  |                    |          |   |                   |   |          |  
|Common Stock, $.001 par value; 100,000 shares authorized: 58,323 and 26,706 shares issued and outstanding at September 30,
2010 and December 31, 2009, respectively |  |                    | 58       |   |                   |   | 27       |  
|Additional paid-in capital                                                                                                                                          |  |                    | 280,942  |   |                   |   | 206,908  |  
|Accumulated deficit                                                                                                                                                 |  |                    | (225,150 | ) |                   |   | (205,913 | )
|Accumulated other comprehensive income                                                                                                                              |  |                    | (8       | ) |                   |   |         |  
|                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                          |  |                    | 55,842   |   |                   |   | 1,022    |  
|                                                                                                                                                                    |  |                    |          |   |                   |   |          |  
|Total liabilities and stockholders equity                                                                                                                          |  | $                  | 64,968   |   |                   | $ | 11,670   |  
|                                                                                                                                                                    |  |                    |          |   |                   |   |          |  

The accompanying notes are an integral part of these (unaudited) financial statements.



3



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Achillion Pharmaceuticals, Inc.

Statements of Operations

(in thousands, except per share amounts)

(Unaudited)



|                                                                               |  |                                          |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ---------------------------------------- | ------ | - | --------------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                               |  | For the Three Months Ended September 30, |        |   | For the Nine Months Ended September 30, |  
|                                                                               |  | 2010                                     |        |   | 2009                                    |   |        | 2010 |  |   | 2009    |  
|Revenue                                                                        |  | $                                        | 170    |   |                                         | $ | (54    | )    |  | $ | 431     |   |  | $ | (355    | )
|                                                                               |  |                                          |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  
|Operating expenses                                                             |  |                                          |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  
|Research and development                                                       |  |                                          | 5,657  |   |                                         |   | 4,443  |      |  |   | 14,431  |   |  |   | 13,578  |  
|General and administrative                                                     |  |                                          | 1,690  |   |                                         |   | 1,459  |      |  |   | 5,047   |   |  |   | 4,660   |  
|Restructuring charges                                                          |  |                                          |       |   |                                         |   | 332    |      |  |   |        |   |  |   | 332     |  
|                                                                               |  |                                          |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                       |  |                                          | 7,347  |   |                                         |   | 6,234  |      |  |   | 19,478  |   |  |   | 18,570  |  
|                                                                               |  |                                          |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations                                                           |  |                                          | (7,177 | ) |                                         |   | (6,288 | )    |  |   | (19,047 | ) |  |   | (18,925 | )
|Other income (expense)                                                         |  |                                          |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  
|Interest income                                                                |  |                                          | 27     |   |                                         |   | 21     |      |  |   | 53      |   |  |   | 170     |  
|Interest expense                                                               |  |                                          | (67    | ) |                                         |   | (124   | )    |  |   | (243    | ) |  |   | (451    | )
|                                                                               |  |                                          |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                                                       |  |                                          | (7,217 | ) |                                         |   | (6,391 | )    |  |   | (19,237 | ) |  |   | (19,206 | )
|                                                                               |  |                                          |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share (Note 5)                                  |  | $                                        | (0.15  | ) |                                         | $ | (0.24  | )    |  | $ | (0.47   | ) |  | $ | (0.73   | )
|                                                                               |  |                                          |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares used in computing basic and diluted net loss per share |  |                                          | 47,576 |   |                                         |   | 26,655 |      |  |   | 40,608  |   |  |   | 26,492  |  
|                                                                               |  |                                          |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  

The accompanying notes are an integral part of these (unaudited) financial statements.



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Achillion Pharmaceuticals, Inc.

Statements of Cash Flows

(in thousands)

(Unaudited)



|                                                                                  |  |                                 |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine Months Ended September 30, |        
|                                                                                  |  | 2010                            |         |   | 2009 |  
|Cash flows from operating activities                                              |  |                                 |         |   |      |   |         |  
|Net loss                                                                          |  | $                               | (19,237 | ) |      | $ | (19,206 | )
|Adjustments to reconcile net loss to net cash used in operating activities:       |  |                                 |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                                 | 539     |   |      |   | 611     |  
|Noncash stock-based compensation                                                  |  |                                 | 1,459   |   |      |   | 1,455   |  
|Noncash interest expense                                                          |  |                                 | 39      |   |      |   | 58      |  
|Loss on disposal of equipment                                                     |  |                                 | 6       |   |      |   |        |  
|Amortization of premium on marketable securities                                  |  |                                 | 169     |   |      |   | 121     |  
|Changes in operating assets and liabilities:                                      |  |                                 |         |   |      |   |         |  
|Accounts receivable                                                               |  |                                 | (26     | ) |      |   |        |  
|Prepaid expenses and other current assets                                         |  |                                 | (1,218  | ) |      |   | 614     |  
|Accounts payable                                                                  |  |                                 | 414     |   |      |   | (633    | )
|Accrued expenses                                                                  |  |                                 | (293    | ) |      |   | (328    | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash used in operating activities                                             |  |                                 | (18,148 | ) |      |   | (17,308 | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Cash flows from investing activities                                              |  |                                 |         |   |      |   |         |  
|Purchases of fixed assets                                                         |  |                                 | (154    | ) |      |   | (42     | )
|Purchases of available for sale marketable securities                             |  |                                 | (39,700 | ) |      |   | (7,339  | )
|Proceeds from maturities of marketable securities                                 |  |                                 | 5,050   |   |      |   | 25,496  |  
|Release of restriction on cash                                                    |  |                                 |        |   |      |   | 53      |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash (used in) provided by investing activities                               |  |                                 | (34,804 | ) |      |   | 18,168  |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Cash flows from financing activities                                              |  |                                 |         |   |      |   |         |  
|Proceeds from exercise of stock options                                           |  |                                 |        |   |      |   | 3       |  
|Proceeds from sale of common stock, net of issuance costs                         |  |                                 | 72,556  |   |      |   |        |  
|Proceeds from sale of common stock under the Employee Stock Purchase Plan         |  |                                 | 50      |   |      |   | 55      |  
|Repayments of debt                                                                |  |                                 | (1,682  | ) |      |   | (2,480  | )
|Payment of equity issuance costs                                                  |  |                                 |        |   |      |   | (111    | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                               |  |                                 | 70,924  |   |      |   | (2,533  | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                              |  |                                 | 17,972  |   |      |   | (1,673  | )
|Cash and cash equivalents, beginning of period                                    |  |                                 | 9,712   |   |      |   | 11,060  |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                               | 27,684  |   |      | $ | 9,387   |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Supplemental disclosure of cash flow information                                  |  |                                 |         |   |      |   |         |  
|Cash paid for interest                                                            |  | $                               | 184     |   |      | $ | 378     |  
|Cash received from tax credits                                                    |  |                                 |        |   |      | $ | 161     |  
|Supplemental disclosure of noncash financing activities                           |  |                                 |         |   |      |   |         |  
|Issuance of common stock for Standby Equity Distribution Agreement commitment fee |  |                                 |        |   |      | $ | 300     |  

The accompanying notes
are an integral part of these (unaudited) financial statements.



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Achillion Pharmaceuticals, Inc.

Notes to Financial Statements

(in thousands, except per share amounts)

(Unaudited)

1. Nature of the Business

Achillion Pharmaceuticals, Inc. (the
Company) was incorporated on August 17, 1998 in Delaware. The Company was established to discover, develop and commercialize innovative anti-infective drug therapies. The Company is devoting substantially all of its efforts towards
product research and development.

The Company incurred losses of $211,288 from inception through September 30, 2010 and
had an accumulated deficit of $225,150 at September 30, 2010, which includes preferred stock dividends recognized until the Companys initial public offering in 2006. The Company has funded its operations primarily through the sale of
equity securities, borrowings from debt facilities and the receipt of milestone and cost-sharing receipts from its collaboration partner, Gilead Sciences, Inc. (Gilead).

The Company believes that its existing cash, cash equivalents and marketable securities will be sufficient to support its current
operating plan through at least September 30, 2011. However, the Companys operating plan may change as a result of many factors, including:



| |  |  | the costs involved in the clinical development, manufacturing and formulation of ACH-1625;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | the costs associated with the required chemical manufacturing and control (CMC) work related to ACH-1095;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | the costs associated with the preclinical development, IND application preparation, manufacturing and clinical development of ACH-2684 and ACH-2928;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the partnership opportunities for elvucitabine or ACH-702 that the Company may pursue;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the Companys ability to enter into corporate collaborations and the terms and success of these collaborations; and
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | the Companys ability to raise incremental debt or equity capital, including any changes in the credit market that may impact its ability to
obtain capital in the future.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In August 2010, the Company issued 19,775 shares of its common stock and
warrants to purchase 6,921 shares of common stock in a private placement to institutional and other accredited investors. The Company received net proceeds of $49,928 (see Note 4).

In January 2010, the Company issued 10,275 shares of its common stock in an underwritten public offering. In February 2010, the
Company issued an additional 1,541 shares of common stock in connection with the underwriters exercise of an over-allotment option. The Company received net proceeds of $22,628.

Certain prior period amounts have been reclassified to conform to the current years presentation. State research and development
credit carryforwards that were exchanged for cash of $36 and $106 were reclassified from income tax benefit to a reduction of research and development expenditures for the three and nine months ended September 30, 2009, respectively.

2. Accounting Standards Updates

In October 2009, an update was made to ASC 605, Revenue Recognition,which provides accounting principles and application guidance on how revenue arrangements with multiple deliverables should be
separated and the consideration allocated. Assuming other criteria are met, this guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition. Allocation
of consideration is now based on managements estimate of the selling price for an undelivered item where there is no other means to determine the fair value of that undelivered item. This update is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption of this update is permitted; however, the Company will be required to apply the provisions of the amendment retrospectively to
the beginning of its fiscal year. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations.



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Achillion Pharmaceuticals, Inc.

Notes to Financial Statements(Continued)

(in thousands, except per share amounts)

(Unaudited)





In January 2010,
the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06 which amended guidance on fair value measurement and disclosures. The new guidance requires additional disclosures regarding
fair value measurements and provides clarification regarding the level of disaggregation of fair value disclosures by investment class. This guidance is effective for reporting periods beginning after December 15, 2009 except for the additional
level 3 requirements which is effective for reporting periods beginning after December 15, 2010. There was no impact to the Companys financial statements upon adoption.

In April 2010, the FASB issued Accounting Standard Update No. 2010-17,Milestone Method of Revenue Recognition, which
provides guidance on applying the milestone method to milestone payments for achieving specified performance measures when those payments are related to uncertain future events. However, the FASB clarified that, even if the requirements in this ASU
are met, entities would not be precluded from making an accounting policy election to apply another appropriate accounting policy that results in the deferral of some portion of the arrangement consideration. The ASU is effective for periods
beginning on or after June 15, 2010. Early application was permitted. Entities can apply this guidance retrospectively as well as prospectively to milestones achieved after adoption. There was no impact to the Companys financial
statements upon adoption.

3. Basis of Presentation

The accompanying unaudited financial statements of the Company should be read in conjunction with the audited financial statements and notes as of and for the year ended December 31, 2009 included in
the Companys Annual Report on Form 10-K which was filed with the SEC on March 11, 2010. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States
(U.S. GAAP) for interim financial information, in accordance with the instructions to Form 10-Q and the guidance in Article 10 of Regulation S-X. Accordingly, since they are interim financial statements, the accompanying
unaudited financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. The accompanying financial statements reflect all adjustments, consisting of normal recurring adjustments,
that are, in the opinion of management, necessary for a fair statement of the results of operations for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect
amounts reported in the financial statements and notes thereto. A discussion of the Companys critical accounting policies and management estimates is described in Managements Discussion and Analysis of Financial Condition and
Results of Operations included in Part I, Item II of this Quarterly Report on Form 10-Q.

4. Financing Activities

Private Placement

On August 18, 2010, the Company issued 19,775 shares of the Companys common stock at a price of $2.49 per share, as well as warrants to purchase 0.35 shares of common stock for each share
issued (the Common Warrants) of common stock underlying each Common Warrant in a private placement to institutional and other accredited investors (the Private Placement). The Common Warrants, which represent the right to
acquire an aggregate of 6,921 shares of common stock, expire on August 20, 2024, and are exercisable at a price of $3.1125. The warrants allow for a net share settlement. The Private Placement resulted in net proceeds to the Company of $49,928.
The Company intends to use the net proceeds for general corporate purposes, research and development expenses, including clinical trial costs, general and administrative expenses and products and technologies that complement its business. The
Company has invested the net proceeds in investment-grade, interest bearing securities. The fees associated with issuing the shares in the private placement are estimated to be approximately $177 and were recorded as a reduction of additional
paid-in capital.

The Common Warrants issued in the Private Placement meet the conditions necessary for equity classification
pursuant to ASC 815, Derivatives and Hedging.

No investor is permitted to exercise a Common Warrant, or part thereof,
if, upon such exercise, the number of shares of common stock beneficially owned by the investor would exceed 19.99% of the number of shares of common stock then issued and outstanding, unless and until such limitation is no longer required by
applicable NASDAQ Marketplace Rules.

Pursuant to the Companys obligations, on September 17, 2010, the Company
filed a registration statement with the Securities and Exchange Commission covering the resale of the 19,775 shares of common stock issued in the Private Placement and the 6,921 shares of common stock issuable upon the exercise of the Common
Warrants. This registration statement was declared effective by the Securities and Exchange Commission on September 30, 2010.

Public Offering

On January 22, 2010, the Company entered into
an underwriting agreement (the Underwriting Agreement) with Roth Capital Partners, LLC, Noble Financial Capital Markets and National Securities Corporation, as underwriters (the Underwriters), related to a public offering of
shares of the Companys common stock, par value $.001 per share, at a price of $2.08 per share less underwriting discounts and commissions (the Offering). The Company issued and sold 10,275 shares of common stock in connection with
the Offering on January 27, 2010.



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Achillion Pharmaceuticals, Inc.

Notes to Financial Statements(Continued)

(in thousands, except per share amounts)

(Unaudited)



On February 2, 2010, the Company issued and sold an additional 1,541 shares of
common stock in connection with the exercise of the over-allotment option that was granted to the underwriters in the Underwriting Agreement.

The Offering resulted in net proceeds to the Company of $22,628. The Company intends to use the net proceeds for general corporate purposes, research and development expenses, including clinical trial
costs, general and administrative expenses and products and technologies that complement its business. The Company has invested the net proceeds in investment-grade, interest bearing securities.

Standby Equity Distribution Agreement (SEDA)

On July 1, 2009, the Company entered into a SEDA with YA Global pursuant to which the Company may, at its sole and exclusive option,
periodically sell to YA Global shares of its common stock, $0.001 par value per share, for total proceeds of up to $15,000. Each advance under the SEDA shall not exceed the greater of $300 or the average daily trading volume of the Companys
common stock for the five consecutive trading days prior to the notice date. Advance notices may be given to YA Global once every five trading days. For each share of common stock purchased pursuant to an advance under the SEDA, YA Global will pay
to the Company ninety-five percent of the lowest volume-weighted average price of the common stock on the NASDAQ Global Market during the five consecutive trading days following delivery by the Company of an advance notice. Additionally, in no event
shall the number of shares of common stock issued under the SEDA cause YA Global to own more than 9.99% of the Companys common stock as of July 1, 2009 (5,292 shares), unless the Company obtains stockholder approval or obtains a written
opinion from counsel that such approval is not required. The Company is not obligated to utilize any of the $15,000 available under the SEDA and there are no minimum commitments or minimum use penalties. The Company issued YA Global 191 shares of
its common stock as a commitment fee in connection with the transaction and also paid a due diligence and structuring fee of $25. These shares of common stock, as well as any additional shares of common stock the Company may issue pursuant to the
SEDA in the future, have been registered on a registration statement that was declared effective on September 21, 2009. The SEDA has two year term and may be terminated by the Company at any time. The Company capitalized $105 of issuance costs
related to the SEDA. As of September 30, 2010, there were no advances under the SEDA.

5. Earnings (Loss) Per Share (EPS)

Basic EPS is calculated by dividing net income or loss attributable to common stockholders by the weighted average common
stock outstanding. Diluted EPS is calculated by adjusting weighted average common shares outstanding for the dilutive effect of common stock options and warrants. In periods in which a net loss is recorded, no effect is given to potentially dilutive
securities, since the effect would be antidilutive. Securities that could potentially dilute basic EPS in the future were not included in the computation of diluted EPS because to do so would have been antidilutive. Potentially dilutive securities
were as follows for the three and nine months ended September 30, 2010 and 2009 (prior to consideration of the treasury stock method):



|                                                  |  |                                           |        |  |      |  |       | 
|------------------------------------------------- |  | ----------------------------------------- | ------ |  | ---- |  | ----- | 
|                                                  |  | Three and Nine Months Ended September 30, |       
|                                                  |  | 2010                                      |        |  | 2009 | 
|Options                                           |  |                                           | 3,320  |  |      |  | 2,667 | 
|Warrants                                          |  |                                           | 9,706  |  |      |  | 2,933 | 
|                                                  |  |                                           |        |  |      |  |       | 
|Total potentially dilutive securities outstanding |  |                                           | 13,026 |  |      |  | 5,600 | 
|                                                  |  |                                           |        |  |      |  |       | 

In August 2010, the Company issued 6,921 common stock warrants in connection with its Private Placement (see
Note 4).



6. Collaboration Arrangements

Gilead Sciences, Inc.

In November 2004, the Company entered into a research collaboration and license agreement with Gilead Sciences, Inc. pursuant to which the Company agreed to collaborate exclusively with Gilead throughout
the world to develop and commercialize compounds for the treatment of chronic hepatitis C and which inhibit HCV replication through a novel mechanism of action targeting the HCV NS4A protein. In May 2009, Gilead informed the Company that they did
not intend to pursue development of its lead compound ACH-1095. The Company believes the compound should be advanced and therefore in September 2009, the Company and Gilead amended the collaboration arrangement so that the Company may continue to
develop ACH-1095 independently during an Interim Period, while Gilead may rejoin in the development of ACH-1095 at clinical proof-of-concept, as defined. The Company will bear all costs associated with ACH-1095 development during this
Interim Period. If Gilead elects to regain rights to ACH-1095, Gilead will reimburse the Company for all ACH-1095 development costs incurred during the Interim Period, and all original milestone and royalty payments described in the license
agreement will again apply to ACH-1095. Gilead is under no obligation to exercise any rights with respect to ACH-1095. If Gilead elects not to exercise its rights to ACH-1095 within forty-five (45) days after proof-of-concept, the Company shall
gain all rights to ACH-1095, and Gilead will then have the right to designate a new lead compound under the license agreement.



8



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##### Table of Contents

Achillion Pharmaceuticals, Inc.

Notes to Financial Statements(Continued)

(in thousands, except per share amounts)

(Unaudited)





Regardless of
Gileads election to exercise its rights with respect to ACH-1095, during the Interim Period the parties retain their rights to compounds which were identified under the collaboration prior to the effective date of the Amendment. The terms of
the original License Agreement, including milestone, royalty and cost-sharing provisions, shall apply to the development of such other compounds. New lead compounds under the collaboration can be identified by mutual agreement of the parties.

Gilead has the right to terminate the agreement without cause upon 30 days written notice to the Company. Upon termination of
the Gilead Arrangement for any reason, all cost share amounts due and payable through the date of termination shall be paid by the appropriate party and no previously paid amounts will be refundable. In addition to Gileads rights to
unilaterally terminate this agreement, each party has the right to terminate for material breach; however, the Company may terminate for Gileads breach only on a market-by-market basis, and, if applicable, a product-by-product basis.

If Gilead elects to exercise its rights with respect to development of ACH-1095 or if the Company and Gilead pursue a back-up
compound, research and development activities prior to proof-of-concept will be overseen by a research committee comprised of equal numbers of the Companys representatives and representatives from Gilead. The joint research committee assigns
research and development tasks, agrees upon a budget for the research program, and shares equally in the related costs. In addition, the parties may agree at any time to increase or decrease the research budget. Prior to proof-of-concept, any
disputes within the joint research committee that cannot be resolved between designated executives of each party will be resolved by Gilead.

The Company continues to be responsible for back-up activities, which includes preclinical assessment of a limited number of other NS4A antagonists until such time as proof-of-concept is achieved. Gilead
will otherwise be responsible for all manufacturing, formulation and commercialization activities associated with such compounds, if nominated, including all regulatory filings and clinical trials after proof-of-concept unless Gilead chooses not to
opt back in on ACH-1095 development. Gilead has agreed under the agreement to use reasonably diligent efforts to develop and commercialize at least one compound in each of the United States, Japan, Germany, France, Italy, Spain and the United
Kingdom.

The Company received $10,000 from Gilead upon the execution of the license agreement, consisting of license fees and
an equity investment, and could receive up to $157,500 in development, regulatory and sales milestone payments, assuming the successful simultaneous development of a lead and back-up compound, and annual sales in excess of $600,000. The Company may
also receive royalties on net sales of products if commercialization is achieved.

The up-front payment of $10,000, received in
2004, was first allocated to the fair value of the Series C-1, in which each share of the Series C-1 was determined to be worth $0.88 per share, or approximately $2,000 in aggregate. The remaining $8,000 balance of the $10,000 is being accounted for
as a non-refundable up-front license fee. Due to certain provisions contained within the Gilead Arrangement relating to services to be performed on both the primary and back-up compounds, as defined in the Gilead Arrangement, the non-refundable
up-front license fee of $8,000, as well as a $2,000 milestone achieved during the period prior to achievement of proof-of-concept (the Research Period), are being accounted for under the proportionate performance model. Future
milestones, if any, will occur after the Research Period, are not accounted for under the proportionate performance model and will be recognized when the milestone is achieved as the Company has no further research or development obligations after
the Research Period.

Under collaboration arrangements, payments received during the period of performance generally include
up-front payments, time-or performance-based milestones and reimbursement of internal and external costs. The proportion of actual performance to total expected performance is applied to these payments in determining periodic revenue. Revenue
recognized will be limited by the aggregate cash received or receivable to date by the Company.



9



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##### Table of Contents

Achillion Pharmaceuticals, Inc.

Notes to Financial Statements(Continued)

(in thousands, except per share amounts)

(Unaudited)





In the first
quarter of 2009, the Company and Gilead revised their joint research program to increase total estimated efforts under the collaboration and extended the estimated period over which the Companys remaining obligations under the arrangement
would be completed. At this time, the Company cannot accurately estimate its future obligations under the collaboration as it has not identified a new lead compound that will be developed jointly. Therefore, during the nine months ended
September 30, 2010 and 2009, the Company did not recognize revenue from upfront, milestone and full-time equivalent, or FTE fees previously received under the collaboration. The Company will determine its remaining obligations if
and when a new lead compound is identified.

During the three months ended September 30, 2010 and 2009, the Company
recognized revenue of $45 and $(54), respectively, under the Gilead Arrangement, all of which related to external costs billed by the Company to Gilead, net of Gilead billings to the Company of $0 and $95 for the three months ended
September 30, 2010 and 2009, respectively. Payments to Gilead under this collaboration are recognized as a reduction in revenue. Recognition of external costs incurred by Gilead exceeded amounts recognized under the proportionate performance
model, resulting in negative revenue for the three months ended September 30, 2009.

During the nine months ended
September 30, 2010 and 2009, the Company recognized revenue of $162 and $(355), respectively, under the Gilead Arrangement, all of which related to external costs billed by the Company to Gilead, net of Gilead billings to the Company of $0 and
$523 for the nine months ended September 30, 2010 and 2009, respectively. Payments to Gilead under this collaboration are recognized as a reduction in revenue. Recognition of external costs incurred by Gilead exceeded amounts recognized under
the proportionate performance model, resulting in negative revenue for the nine months ended September 30, 2009.

Included in the accompanying balance sheets as of September 30, 2010 and December 31, 2009 are $45 and $61 respectively, of
accounts receivable resulting from this collaboration agreement and $2,489 and $2,489, respectively, of deferred revenue resulting from the up-front fee, a milestone payment, and FTE costs.

GCA Therapeutics, Ltd.

On February 1, 2010, the Company entered into a license agreement (the Agreement) with GCA Therapeutics, Ltd. (GCAT) for elvucitabine, the Companys nucleoside reverse
transcriptase inhibitor for the treatment of both hepatitis B virus (HBV) infection and human immunodeficiency virus (HIV) infection. The Agreement was amended and restated on March 8, 2010. The exclusive license grants
GCAT the right, through a Chinese joint venture with Tianjing Institute of Pharmaceutical Research, to clinically develop and commercialize elvucitabine in mainland China, Hong Kong and Taiwan.

Under the terms of the Agreement, GCAT, through a sublicense agreement with a Chinese joint venture, T&T Pharma Co., Ltd., will
assume all development and regulatory responsibility and associated costs for elvucitabine. There was no financial impact upon the signing of the agreement. The Company will be eligible to receive development milestones and royalties on net sales in
those territories.

The Agreement may be terminated by either party based upon material breaches by the other party, effective
90 days after providing written notice to the breaching party, if the breaching party fails to cure its material breach.

The
Company may terminate the Agreement upon 30 days written notice in the event GCAT fails to meet any of the development or commercialization diligence milestones by the deadlines specified in the Agreement, or may terminate upon 90 days written
notice in the event of a change of corporate control. In the event of a change of control, as defined, the Company shall pay GCAT termination fees, in an amount determined based upon specified progress milestones.

7. Marketable Securities

The Company applies the provisions of ASC 820, Fair Value Measurements and Disclosures, for financial assets and liabilities
measured on a recurring basis which requires disclosure that establishes a framework for measuring fair value and expands disclosures in the financial statements. The statement requires that fair value measurements be classified and disclosed in one
of the three categories:

Level 1: Quoted prices in active markets for identical assets and liabilities that the reporting
entity has the ability to access at the measurement date;

Level 2: Inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly or indirectly; or



10



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##### Table of Contents

Achillion Pharmaceuticals, Inc.

Notes to Financial Statements(Continued)

(in thousands, except per share amounts)

(Unaudited)





Level 3:
Unobservable inputs.

The fair value of the Companys marketable securities of $34,473 and $0 as of September 30,
2010 and December 31, 2009, respectively, is valued based on level 2 inputs. The Companys investments consist mainly of U.S government and agency securities, government sponsored bond obligations and certain other corporate debt
securities. Fair value is determined based upon quoted market prices; however, due to lack of sufficiency of transactions and trading volume, the Company has assessed these as level 2 within the fair value hierarchy of ASC 820. The Company
classifies its entire investment portfolio as available for sale as defined in ASC 320, Debt and Equity Securities. The maturities of all marketable securities held at September 30, 2010 are less than one year. Securities are carried at
fair value with the unrealized gains (losses) reported as a separate component of stockholders equity.

The unrealized
gain (loss) from marketable securities was $(8) and $0 at September 30, 2010 and December 31, 2009, respectively.

As of September 30, 2010 and December 31, 2009, none of the Companys investments were determined to be other than
temporarily impaired.

8. Accrued Expenses

Accrued expenses consist of the following:



|                                          |  |                    |       |  |                   |   |       | 
|----------------------------------------- |  | ------------------ | ----- |  | ----------------- | - | ----- | 
|                                          |  | September 30, 2010 |       |  | December 31, 2009 |  
|Accrued compensation                      |  | $                  | 1,283 |  |                   | $ | 1,407 | 
|Accrued research and development expenses |  |                    | 579   |  |                   |   | 760   | 
|Accrued professional fees                 |  |                    | 327   |  |                   |   | 296   | 
|Other accrued expenses                    |  |                    | 116   |  |                   |   | 135   | 
|                                          |  |                    |       |  |                   |   |       | 
|Total                                     |  | $                  | 2,305 |  |                   | $ | 2,598 | 
|                                          |  |                    |       |  |                   |   |       | 

Accrued research and development expenses are comprised of amounts owed to third-party contract research
organizations (or CROs), clinical investigators, laboratories and data managers for research and development work performed on behalf of the Company.

9. Debt

Debt consists of the following:



|                                                                                                                                                                       |  |                    |        |   |                   |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | -
|                                                                                                                                                                       |  | September 30, 2010 |        |   | December 31, 2009 |  
|Connecticut Innovations Term Loan, payable in monthly installments of $13 through September 2010 with a final balloon payment of
$682, with interest at 7.5% per annum |  | $                  | 682    |   |                   | $ | 749    |  
|2003 Credit Facility, payable in monthly installments as the individual notes mature through December 2010, with interest ranging
from 7.75% to 9.06% per annum        |  |                    | 38     |   |                   |   | 148    |  
|2008 Credit Facility, payable in monthly installments as notes mature through March 2011, with interest of 9.97% to
11.58% per annum                                   |  |                    | 921    |   |                   |   | 2,387  |  
|                                                                                                                                                                       |  |                    |        |   |                   |   |        |  
|Total debt                                                                                                                                                             |  |                    | 1,641  |   |                   |   | 3,284  |  
|Less: current portion                                                                                                                                                  |  |                    | (1,641 | ) |                   |   | (2,867 | )
|                                                                                                                                                                       |  |                    |        |   |                   |   |        |  
|Total long-term debt, net of current portion                                                                                                                           |  | $                  |       |   |                   | $ | 417    |  
|                                                                                                                                                                       |  |                    |        |   |                   |   |        |  

The Connecticut Innovations Term Loan matured in September 2010. The final balloon payment of $682 was made
in October 2010.

The Company believes that the carrying value of its debt balances outstanding approximates fair value due to
the short term nature of each loan outstanding.

Each of the Companys debt agreements contains certain subjective
acceleration clauses, such that upon the occurrence of a material adverse change in the financial condition, business or operations of the Company in the view of the lenders, amounts outstanding under the agreement may become immediately due and
payable. At September 30, 2010, the Company believes the occurrence of a material adverse change is remote. The Company has no indication that it is in default of any such clauses, and none of the Companys lenders have accelerated
scheduled loan payments as a result of these provisions.



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##### Table of Contents

Achillion Pharmaceuticals, Inc.

Notes to Financial Statements(Continued)

(in thousands, except per share amounts)

(Unaudited)





10. Stock-Based Compensation

The Companys 2006 Stock Incentive Plan, or the 2006 Plan, is administered by the Companys Board of Directors
and provides for the grant of incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights and other stock-based awards. The Companys officers, employees, consultants, advisors and
directors are eligible to receive awards under the 2006 Plan; however, incentive stock options may only be granted to employees. Options granted are exercisable for a period determined by the Company, but in no event longer than ten years from the
date of the grant. Options generally vest ratably over four years. There were 3,690 shares available to be granted under the 2006 Plan as of September 30, 2010.

A summary of the status of the Companys stock option activity for the nine months ended September 30, 2010 is presented in the table and narrative below:



|                                                                 |  |         |       |   |                              |   |      | 
|---------------------------------------------------------------- |  | ------- | ----- | - | ---------------------------- | - | ---- | 
|                                                                 |  | Options |       |   | WeightedAverageExercisePrice |  
|Outstanding at January 1, 2010                                   |  |         | 3,320 |   |                              | $ | 4.10 | 
|Granted                                                          |  |         | 60    |   |                              |   | 2.72 | 
|Cancelled/Forfeited                                              |  |         | (9    | ) |                              |   | 1.20 | 
|                                                                 |  |         |       |   |                              |   |      | 
|Outstanding at September 30, 2010                                |  |         | 3,371 |   |                              | $ | 4.08 | 
|                                                                 |  |         |       |   |                              |   |      | 
|Options vested and exercisable at September 30, 2010             |  |         | 1,973 |   |                              | $ | 4.93 | 
|                                                                 |  |         |       |   |                              |   |      | 
|Weighted-average fair value of options granted during the period |  |         |       |   |                              | $ | 1.99 | 

The Company utilizes
the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of the stock-based awards. The assumptions used to value
options granted are as follows:



|                        |  |                           |             |   |                    |  |           |  
|----------------------- |  | ------------------------- | ----------- | - | ------------------ |  | --------- | -
|                        |  | For the Nine Months Ended |            
|                        |  | September 30, 2010        |             |   | September 30, 2009 | 
|Expected term of option |  |                           | 6.1 years   |   |                    |  | 6.1 years |  
|Expected volatility     |  |                           | 86 - 87     | % |                    |  | 79        | %
|Risk free interest rate |  |                           | 1.59 - 2.92 | % |                    |  | 1.97      | %
|Expected dividend yield |  |                           | 0           | % |                    |  | 0         | %

Total compensation expense
recorded in the accompanying statements of operations associated with option grants made to employees was $513 and $468 for the three months ended September 30, 2010 and 2009, respectively. Total compensation expense recorded in the
accompanying statements of operations associated with option grants made to employees was $1,426 and $1,418 for the nine months ended September 30, 2010 and 2009, respectively. The Company recorded no tax benefit related to these options since
the Company currently maintains a full valuation allowance on its deferred tax assets.

As of September 30, 2010, the
intrinsic value of the options outstanding was $2,395, of which $1,423 related to vested options and $972 related to unvested options. The intrinsic value of stock options is calculated based on the difference between the exercise prices of the
underlying awards and the quoted stock price of the Companys common stock as of the reporting date.

As of
September 30, 2010, the total compensation cost related to unvested options not yet recognized in the financial statements is approximately $2,136, net of estimated forfeitures, and the weighted average period over which this amount is expected
to be recognized is 1.4 years.

11. Comprehensive Loss

The Company reports and presents comprehensive loss in accordance with ASC 220, Comprehensive Income, which establishes standards for reporting and display of comprehensive loss and its components
in a full set of general purpose financial statements. The objective of the statement is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with
owners (comprehensive loss). The Companys other comprehensive loss arises from net unrealized gains (losses) on marketable securities.



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##### Table of Contents

Achillion Pharmaceuticals, Inc.

Notes to Financial Statements(Continued)

(in thousands, except per share amounts)

(Unaudited)



Details relating to unrealized gains and losses and other comprehensive loss are as
follows:



|                                                          |  |                                          |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------- |  | ---------------------------------------- | ------ | - | --------------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                          |  | For the Three Months Ended September 30, |        |   | For the Nine Months Ended September 30, |  
|                                                          |  | 2010                                     |        |   | 2009                                    |   |        | 2010 |  |   | 2009    |  
|Net loss                                                  |  | $                                        | (7,217 | ) |                                         | $ | (6,391 | )    |  | $ | (19,237 | ) |  | $ | (19,206 | )
|Change in unrealized gain (loss) on marketable securities |  |                                          | (2     | ) |                                         |   | (11    | )    |  |   | (8      | ) |  |   | (114    | )
|                                                          |  |                                          |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  
|Total comprehensive loss                                  |  | $                                        | (7,219 | ) |                                         | $ | (6,402 | )    |  | $ | (19,245 | ) |  | $ | (19,320 | )
|                                                          |  |                                          |        |   |                                         |   |        |      |  |   |         |   |  |   |         |  

12. Stockholders Equity

Changes in stockholders equity for the nine months ended September 30, 2010 and 2009 were as follows:



|                                                                |  |                                         |         |   |      |   |         |  
|--------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                |  | For the Nine Months Ended September 30, |        
|                                                                |  | 2010                                    |         |   | 2009 |  
|Balance at December 31, 2009 and 2008                           |  | $                                       | 1,022   |   |      | $ | 25,021  |  
|Net loss                                                        |  |                                         | (19,237 | ) |      |   | (19,206 | )
|Stock based compensation                                        |  |                                         | 1,459   |   |      |   | 1,454   |  
|Change in unrealized gain (loss) on marketable securities       |  |                                         | (8      | ) |      |   | (114    | )
|Issuance of common stock and warrants (see Note 4)              |  |                                         | 72,556  |   |      |   | 1       |  
|Issuance of common stock under the Employee Stock Purchase Plan |  |                                         | 50      |   |      |   | 55      |  
|Issuance of common stock upon exercise of stock options         |  |                                         |        |   |      |   | 3       |  
|                                                                |  |                                         |         |   |      |   |         |  
|Balance at September 30, 2010 and 2009                          |  | $                                       | 55,842  |   |      | $ | 7,214   |  
|                                                                |  |                                         |         |   |      |   |         |  



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##### Table of Contents



|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, that involve risks and uncertainties. All statements other than statements relating to historical matters including statements to the effect that we believe, expect, anticipate,
plan, target, intend and similar expressions should be considered forward-looking statements. Our actual results could differ materially from those discussed in the forward-looking statements as a result of a
number of important factors, including factors discussed in this section and elsewhere in this quarterly report on Form 10-Q, including those discussed in Item 1A of this report under the heading Risk Factors, and the risks
discussed in our other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect managements analysis, judgment, belief or expectation only as the
date hereof. We assume no obligation to update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Overview

We are a biopharmaceutical company focused on the
discovery, development and commercialization of innovative treatments for infectious diseases. Within the anti-infective market, we are currently concentrating on the development of antivirals for the treatment of chronic hepatitis C and the
development of antibacterials for the treatment of resistant bacterial infections. We are currently focusing our efforts on developing four HCV drug candidates in three distinct classes: ACH-1625, a protease inhibitor for the treatment of chronic
hepatitis C, which began dosing in a phase IIa clinical trial in September 2010, ACH-1095, a NS4A antagonist also for the treatment of chronic hepatitis C, to which Gilead Sciences, Inc., or Gilead, retains certain future development rights,
ACH-2684, a high-potency protease inhibitor currently in preclinical testing, and ACH-2928, a NS5A inhibitor currently in preclinical testing. In addition, we have established a pipeline of certain other product candidates for which we are currently
seeking additional appropriate collaborative partners, but to which we are not devoting significant resources at this time. These product candidates include ACH-702 for the treatment of dermatologic and opthalmic infections and elvucitabine for the
treatment of HIV infection.

We have devoted and are continuing to devote substantially all of our efforts toward product
research and development. We have incurred losses of $211 million from inception through September 30, 2010 and had an accumulated deficit of $225 at September 30, 2010, which includes preferred stock dividends recognized until our initial
public offering in 2006. Our net losses were $19.2 million for each of the nine months ended September 30, 2010 and 2009. We have funded our operations primarily through:



| |  |  | proceeds from the sale of equity securities, including our initial public offering in October 2006, private placements of our common stock in August
2008 and August 2010 and a public offering of our common stock in January 2010;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | borrowings from debt facilities; and
| | - |  | ------------------------------------



| |  |  | receipts from up-front and milestone payments, as well as cost-sharing receipts, from one of our collaboration partners, Gilead.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------

We expect to incur substantial and increasing losses for at least the next several years as we seek to:



| |  |  | continue clinical testing of ACH-1625;
| | - |  | --------------------------------------



| |  |  | complete IND-enabling preclinical testing of ACH-2684 and ACH-2928; and
| | - |  | -----------------------------------------------------------------------



| |  |  | identify and progress additional drug candidates.
| | - |  | -------------------------------------------------

We will need substantial additional financing to obtain regulatory approvals, fund operating losses, and, if deemed appropriate, establish manufacturing and sales and marketing capabilities, which we will
seek to raise through public or private equity or debt financings, collaborative or other arrangements with third parties or through other sources of financing. There can be no assurance that such funds will be available on terms favorable to us, if
at all.

In addition to the normal risks associated with early-stage companies, there can be no assurance that we will
successfully complete our research and development, obtain adequate patent protection for our technology, obtain necessary government regulatory approval for drug candidates we develop, find and maintain appropriate collaboration partners or that
any approved drug candidates will be commercially viable. In addition, we may not be profitable even if we succeed in commercializing any of our drug candidates.



14



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##### Table of Contents



Financial
Operations Overview

Revenue

To date, we have not generated revenue from the sale of any drugs. The majority of our revenue recognized to date has been derived from our collaboration with Gilead to develop compounds for use in
treating chronic hepatitis C. During the nine months ended September 30, 2010 and 2009, we recognized $162,000 and $(355,000), respectively, under this collaboration agreement.

Upon initiating our collaboration with Gilead, we received a payment of $10.0 million, which included an equity investment by Gilead
determined to be worth approximately $2.0 million. The remaining $8.0 million is being accounted for as a nonrefundable up-front fee recognized under the proportionate performance model. Revenue under the proportionate performance model is
recognized as our effort under the collaboration is incurred. Payments made by us to Gilead in connection with this collaboration are being recognized as a reduction of revenue. When our performance obligation is complete, we will recognize
milestone payments, if any, when the corresponding milestone is achieved. We will recognize royalty payments, if any, upon product sales.

We did not recognize any amortization of deferred revenue during the nine months ended September 30, 2010 and 2009, as we are currently unable to accurately estimate our total performance obligations
under the Gilead collaboration. We will determine if we are able to estimate our remaining total performance obligations when and if a new lead compound under the collaboration is identified.

Through the completion of our performance obligations under the collaboration with Gilead, we expect to recognize additional revenue of
approximately $2.5 million, offset by any payments we are obligated to make to Gilead in satisfaction of external costs paid by Gilead under our external cost-sharing arrangement. It is possible that we will recognize negative revenue in future
quarters based upon the timing of our performance under the collaboration and on the timing and magnitude of external costs borne by Gilead.

We have also recognized revenue under a Small Business Innovation Research, or SBIR, grant by the National Institutes of Health, or NIH, for the further study of a back-up series of compounds related to
ACH-702 for the treatment of tuberculosis infection. During the three months ended September 30, 2010 and 2009, we recognized $125,000 and $0, respectively under this grant. During the nine months ended September 30, 2010 and 2009, we
recognized $269,000 and $0, respectively, of revenue under this grant.

Research and Development

Our research and development expenses reflect costs incurred for our proprietary research and development projects as well as costs for
research and development projects conducted as part of collaborative arrangements. These costs consist primarily of salaries and benefits for our research and development personnel, costs of services by clinical research organizations, other
outsourced research, materials used during research and development activities, facility-related costs such as rent and utilities associated with our laboratory and clinical development space and operating supplies.

We have established our current drug candidate pipeline primarily through our internal discovery capabilities except for elvucitabine,
which we in-licensed. Through these efforts we have identified and are developing the following drug candidates and programs:



| |  |  | ACH-1625, a Protease Inhibitor for Chronic Hepatitis C Infection.We are evaluating ACH-1625, a protease inhibitor for the treatment of chronic
hepatitis C, in a phase IIa clinical trial to assess the compounds safety, tolerability, pharmacokinetic properties and efficacy in HCV-infected subjects. ACH-1625 has demonstrated strong potency, liver partitioning and a good safety profile
in preclinical studies. In phase Ia and two phase Ib clinical trials, ACH-1625 was demonstrated to be safe and well-tolerated at total daily doses ranging from 50mg to 2000mg. Further, ACH-1625 was demonstrated to significantly reduce viral load in
HCV patients by 3.07 log10 to 4.25 log10 at doses ranging from 200 to 600 mg twice daily and 400 to 600mg once daily. In order to proceed with phase IIa in the United States, we filed an IND for ACH-1625 in the third quarter of 2010.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | ACH-1095, a NS4A Antagonist for Chronic Hepatitis C Infection.We are evaluating ACH-1095 for the treatment of chronic hepatitis C. In
preclinical and clinical studies, NS4A antagonists demonstrate potent inhibition of the replication of HCV, by targeting a non-structural, or NS, viral protein called 4A. We believe these NS4A antagonists may offer several potential advantages
compared to currently available treatments, including greater potency, a novel mechanism of action, and lack of cross resistance. We believe these compounds could be used in combination with the current standard of care, or with other therapies in
development, to significantly improve treatment outcomes. Since November 2004, we have collaborated with Gilead under an exclusive license and collaboration agreement for the research, development and commercialization of compounds operating by this
mechanism of action. In May 2009, Gilead indicated that it did not intend to initiate clinical development of ACH-1095. We believe that the compound should be advanced. Therefore, in September 2009, we entered into an amendment to our license
and collaboration agreement with Gilead which allows us to continue to develop ACH-1095 independently and also provides that Gilead and Achillion will continue to advance additional compounds operating by the NS4A mechanism of action.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ACH-2684, a High-Potency Protease Inhibitor for Chronic Hepatitis C Infection.We are evaluating ACH-2684 for the treatment of chronic HCV
infection. In preclinical studies, ACH-2684 has demonstrated excellent potency in the low pico-molar range, as well as good pharmacokinetic and safety profiles. The potency and virology profiles of ACH-2684 demonstrate that it effectively suppresses
a broad range of natural variants of the hepatitis C virus, and may be effective in the prevention and treatment of emerging resistant variants. This compound also retains potent activity against all HCV genotypes. The very high potency of ACH-2684
was achieved by designing the compound to optimize the way in which it binds with NS3 protease. ACH-2684 can be used in combination with other HCV inhibitors, and in vitro is synergistic with NS5B nucleoside polymerase inhibitors. ACH-2684 is
currently undergoing IND-enabling preclinical testing.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ACH-2928, a NS5A Inhibitor for Chronic Hepatitis C Infection.We are evaluating ACH-2928 for the treatment of chronic HCV infection. In early
preclinical studies, ACH-2928 demonstrates excellent potency against HCV RNA replication, as well as good pharmacokinetic and safety profiles. The compound is highly active and retains potency against HCV genotypes 1a and 1b, as well as across other
genotypes. We believe its high potency, in the picomolar range, and its favorable pharmacokinetic properties, strongly suggest once-daily dosing. Importantly, ACH-2928 is highly effective in combination with NS3 protease inhibitors, NS5B polymerase
inhibitors, interferon and ribavirin. ACH-2928 is currently undergoing IND-enabling preclinical testing.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ACH-702 for Drug Resistant Bacterial Infections. ACH-702 is a preclinical candidate with potency against a broad spectrum of bacterial pathogens
including methicillin-resistant staphylococcus aureus, or MRSA. In a pre-IND consultation with the FDA, we determined that the compound is most suited for dermatologic and ophthalmic use and use in medical biofilms. Due to resource constraints, at
this time, we do not anticipate moving into clinical development of ACH-702 for these indications and we do not expect to invest significantly in the future development of this compound without a collaboration partner or other external funding
source. We continue our research on compounds similar to ACH-702 for systemic use against MRSA and were recently awarded an SBIR grant for the further study of these compounds for the treatment of drug resistant tuberculosis.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Elvucitabine for HIV Infection. Elvucitabine is an antiviral being developed for the treatment of HIV infection. We have evaluated elvucitabine
in phase II clinical trials to further explore its safety and efficacy in HIV-infected patients up to 96-weeks of treatment and the open-label extension. We have licensed rights to develop and commercialize elvucitabine in China to GCA Therapeutics,
Ltd (GCAT), and we will be eligible to receive development milestones and royalties on net sales in those territories. We retain development and marketing rights to elvucitabine in other territories, and we are currently seeking other collaboration
arrangements for development and commercialization of elvucitabine in South Africa and South America. We do not plan to clinically advance elvucitabine independently.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All costs associated with internal research and development, and research and development services for which we have externally
contracted, are expensed as incurred. The costs of obtaining patents for our candidates are expensed as incurred as indirect costs. Our research and development expenses are summarized in the table below.



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|                                          |  |                                 |        |   |      |   |        |  
|----------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                          |  | Nine Months 
EndedSeptember 30, |       
|                                          |  | 2010                            |        |   | 2009 |  
|                                          |  | (in thousands)                  |       
|Clinical candidate direct external costs: |  |                                 |        |   |      |   |        |  
|ACH-1625 (and related compounds)          |  | $                               | 4,065  |   |      | $ | 4,261  |  
|ACH-1095 (and related compounds)          |  |                                 | 353    |   |      |   | 283    |  
|ACH-2684                                  |  |                                 | 1,400  |   |      |   |       |  
|ACH-2928                                  |  |                                 | 380    |   |      |   |       |  
|ACH-702 (and related compounds)           |  |                                 | 394    |   |      |   | 95     |  
|Elvucitabine                              |  |                                 | 16     |   |      |   | 885    |  
|                                          |  |                                 |        |   |      |   |        |  
|                                          |  |                                 | 6,608  |   |      |   | 5,524  |  
|Direct internal personnel costs           |  |                                 | 5,013  |   |      |   | 4,868  |  
|                                          |  |                                 |        |   |      |   |        |  
|Sub-total direct costs                    |  |                                 | 11,621 |   |      |   | 10,392 |  
|Indirect costs and overhead               |  |                                 | 2,900  |   |      |   | 3,292  |  
|Research and development tax credit       |  |                                 | (90    | ) |      |   | (106   | )
|                                          |  |                                 |        |   |      |   |        |  
|Total research and development            |  | $                               | 14,431 |   |      | $ | 13,578 |  
|                                          |  |                                 |        |   |      |   |        |  

We recently initiated a phase IIa clinical trial of ACH-1625, and we are completing IND-enabling studies of
ACH-2684 and ACH-2928.

The successful development of our drug candidates is highly uncertain. At this time, we cannot
reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of our drug candidates. We are also unable to predict when, if ever, material net cash inflows will
commence from any of our compounds.

We expect expenses associated with the completion of these programs to be substantial and
to increase. We do not believe, however, that it is possible at this stage of development to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of
any of our drug candidates, including future trial design and various regulatory requirements. Additionally, future commercial and regulatory factors beyond our control will evolve and therefore impact our clinical development programs and plans
over time.

General and Administrative

Our general and administrative expenses consist primarily of salaries and benefits for management and administrative personnel, professional fees for legal, accounting and other services, travel costs and
facility-related costs such as rent, utilities and other general office expenses.

Critical Accounting Policies and
Estimates

Preparation of our financial statements requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses. A summary of our critical accounting estimates is included in Managements Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual
Report on Form 10-K for the year ended December 31, 2009. We continually review these estimates and their underlying assumptions to ensure they are appropriate for the circumstances. Changes in the estimates and assumptions we use could have a
significant impact on our financial results. During the first nine months of 2010, there were no significant changes in our estimates and critical accounting policies.

Results of Operations

Results of operations may vary from period to
period depending on numerous factors, including the timing of payments received under existing or future strategic alliances, joint ventures or financings, if any, the progress of our research and development projects, technological advances and
determinations as to the commercial potential of proposed products.

Comparison of Three and Nine Months Ended
September 30, 2010 and 2009

Revenue. Revenue was $170,000 and $(54,000) for the three months ended
September 30, 2010 and 2009, respectively, and $431,000 and $(355,000) for the nine months ended September 30, 2010 and 2009, respectively. The increase in revenue in 2010 was due to lower external costs incurred by Gilead, which under our
collaboration, are shared by us and recorded as a reduction in revenue. During the three and nine months ended September 30, 2009, external costs incurred by Gilead exceeded external costs incurred by us, resulting in a net payable from us to
Gilead and negative revenue for the period. In addition, in 2010 we recognized revenue related to our SBIR grant for the further study and characterization of our series of compounds related to ACH-702.



17



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Because we are currently unable to estimate our future performance obligations under our
collaboration with Gilead, we have ceased recognizing revenue related to upfront, milestone and FTE payments previously received until we can reasonably estimate our total future performance obligations under the collaboration. We will determine if
we are able to estimate our remaining future performance obligations when and if a new lead candidate under the collaboration is identified. Under the proportionate performance method, periodic revenue related to upfront license and milestone
payments is recognized as the percentage of actual effort expended in that period to total effort expected for all of our performance obligations under the arrangement. Additionally, under the collaboration arrangement, external costs are shared
equally by both parties and payments we make to Gilead are recognized as a reduction of revenue. Revenue for the three and nine months ended September 30, 2010 and 2009 is comprised as follows:



|                             |  |                                  |     |  |                                 |   |     |        |  |  |      |  |  |      |     |  |        |   |      |   |  |   |     | 
|---------------------------- |  | -------------------------------- | --- |  | ------------------------------- | - | --- | ------ |  |  | ---- |  |  | ---- | --- |  | ------ | - | ---- | - |  | - | --- | 
|                             |  | Three Months Ended September 30, |     |  | Nine Months Ended September 30, |  
|                             |  | 2010                             |     |  | 2009                            |   |     | Change |  |  | 2010 |  |  | 2009 |     |  | Change |  
|                             |  | (in thousands)                   |     |  | (in thousands)                  |  
|Gilead collaboration revenue |  | $                                | 45  |  |                                 | $ | (54 | )      |  |  | 99   |  |  | $    | 162 |  |        | $ | (355 | ) |  | $ | 517 | 
|Grant revenue                |  |                                  | 125 |  |                                 |   |    |        |  |  | 125  |  |  |      | 269 |  |        |   |     |   |  |   | 269 | 
|                             |  |                                  |     |  |                                 |   |     |        |  |  |      |  |  |      |     |  |        |   |      |   |  |   |     | 
|Total revenue                |  | $                                | 170 |  |                                 | $ | (54 | )      |  |  | 224  |  |  | $    | 431 |  |        | $ | (355 | ) |  | $ | 786 | 
|                             |  |                                  |     |  |                                 |   |     |        |  |  |      |  |  |      |     |  |        |   |      |   |  |   |     | 

Through the completion of our performance obligations under the collaboration with Gilead, we expect to
recognize additional revenue of approximately $2.5 million. It is possible that we will recognize negative revenue in future quarters based upon the timing of our performance under the collaboration and on the timing and magnitude of external costs
borne by Gilead.

Research and Development Expenses. Research and development expenses were $5.7 million and $4.4
million for the three months ended September 30, 2010 and 2009, respectively, and $14.4 million and $13.6 million for the nine months ended September 30, 2010 and 2009, respectively. The increase for the three months and nine months ended
September 30, 2010 was primarily due to increased expenses related to clinical testing of ACH-1625 and preclinical testing of ACH-2684 and ACH-2928, combined with increased clinical consulting and intellectual property fees. These increases
were offset by decreased clinical trial costs related to elvucitabine and decreased facilities costs related to our reduction of leased laboratory and office space. We expect research and development expenses to increase during the remainder of the
year as we continue clinical testing of ACH-1625, complete the necessary CMC activities for ACH-1095, and complete IND-enabling preclinical testing for ACH-2684 and ACH-2928. Research and development expenses for the three and nine months ended
September 30, 2010 and 2009 are comprised as follows:



|                                    |  |                                  |       |   |                                 |   |       |        |  |   |       |   |  |      |        |   |        |   |        |   |  |   |      |  
|----------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | - | ----- | ------ |  | - | ----- | - |  | ---- | ------ | - | ------ | - | ------ | - |  | - | ---- | -
|                                    |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|                                    |  | 2010                             |       |   | 2009                            |   |       | Change |  |   | 2010  |   |  | 2009 |        |   | Change |  
|Personnel costs                     |  | $                                | 1,531 |   |                                 | $ | 1,302 |        |  | $ | 229   |   |  | $    | 4,443  |   |        | $ | 4,307  |   |  | $ | 136  |  
|Stock based compensation            |  |                                  | 190   |   |                                 |   | 184   |        |  |   | 6     |   |  |      | 568    |   |        |   | 562    |   |  |   | 6    |  
|Outsourced research and supplies    |  |                                  | 2,993 |   |                                 |   | 2,148 |        |  |   | 845   |   |  |      | 6,608  |   |        |   | 5,724  |   |  |   | 884  |  
|Professional and consulting fees    |  |                                  | 425   |   |                                 |   | 198   |        |  |   | 227   |   |  |      | 1,134  |   |        |   | 999    |   |  |   | 135  |  
|Facilities costs                    |  |                                  | 503   |   |                                 |   | 616   |        |  |   | (113  | ) |  |      | 1,619  |   |        |   | 1,977  |   |  |   | (358 | )
|Travel and other costs              |  |                                  | 40    |   |                                 |   | 31    |        |  |   | 9     |   |  |      | 149    |   |        |   | 115    |   |  |   | 34   |  
|Research and development tax credit |  |                                  | (25   | ) |                                 |   | (36   | )      |  |   | 11    |   |  |      | (90    | ) |        |   | (106   | ) |  |   | 16   |  
|                                    |  |                                  |       |   |                                 |   |       |        |  |   |       |   |  |      |        |   |        |   |        |   |  |   |      |  
|Total                               |  | $                                | 5,657 |   |                                 | $ | 4,443 |        |  | $ | 1,214 |   |  | $    | 14,431 |   |        | $ | 13,578 |   |  | $ | 853  |  
|                                    |  |                                  |       |   |                                 |   |       |        |  |   |       |   |  |      |        |   |        |   |        |   |  |   |      |  



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We reclassified certain prior period amounts to conform to the current years
presentation. State research and development credit carryforwards that were exchanged for cash of $36,000 and $106,000 were reclassified from income tax benefit to a reduction of research and development expenditures for the three months and nine
months ended September 30, 2009, respectively.

General and Administrative Expenses. General and administrative
expenses were $1.7 million and $1.5 million for the three months ended September 30, 2010 and 2009, respectively, and $5.0 million and $4.7 million for the nine months ended September 30, 2010 and 2009, respectively. The increase for the
three months ended September 30, 2010 was primarily due to increased personnel costs related to the addition of business development personnel, combined with increased business development consulting fees and public relations costs. These
increases were offset by decreased facility costs related to our reduction of leased laboratory and office space. The increase for the nine months ended September 30, 2010 was primarily due to increased personnel and travel costs related to the
addition of business development personnel, combined with increased corporate fees, primarily related to the issuance of stock. These increases were offset primarily by decreased facilities costs related to our reduction of leased laboratory and
office space. We expect that general and administrative expenses will be consistent for the remainder of the year. General and administrative expenses for the three and nine months ended September 30, 2010 and 2009 are comprised as follows:



|                                 |  |                                  |       |  |                                 |   |       |        |  |   |      |   |  |      |       |  |        |   |       |  |  |   |      |  
|-------------------------------- |  | -------------------------------- | ----- |  | ------------------------------- | - | ----- | ------ |  | - | ---- | - |  | ---- | ----- |  | ------ | - | ----- |  |  | - | ---- | -
|                                 |  | Three Months Ended September 30, |       |  | Nine Months Ended September 30, |  
|                                 |  | 2010                             |       |  | 2009                            |   |       | Change |  |   | 2010 |   |  | 2009 |       |  | Change |  
|Personnel costs                  |  | $                                | 647   |  |                                 | $ | 513   |        |  | $ | 134  |   |  | $    | 1,887 |  |        | $ | 1,603 |  |  | $ | 284  |  
|Stock based compensation         |  |                                  | 331   |  |                                 |   | 295   |        |  |   | 36   |   |  |      | 891   |  |        |   | 893   |  |  |   | (2   | )
|Professional and consulting fees |  |                                  | 363   |  |                                 |   | 240   |        |  |   | 123  |   |  |      | 1,016 |  |        |   | 933   |  |  |   | 83   |  
|Facilities costs                 |  |                                  | 231   |  |                                 |   | 299   |        |  |   | (68  | ) |  |      | 750   |  |        |   | 872   |  |  |   | (122 | )
|Travel and other costs           |  |                                  | 118   |  |                                 |   | 112   |        |  |   | 6    |   |  |      | 503   |  |        |   | 359   |  |  |   | 144  |  
|                                 |  |                                  |       |  |                                 |   |       |        |  |   |      |   |  |      |       |  |        |   |       |  |  |   |      |  
|Total                            |  | $                                | 1,690 |  |                                 | $ | 1,459 |        |  | $ | 231  |   |  | $    | 5,047 |  |        | $ | 4,660 |  |  | $ | 387  |  
|                                 |  |                                  |       |  |                                 |   |       |        |  |   |      |   |  |      |       |  |        |   |       |  |  |   |      |  

Other Income (Expense). Interest income was $27,000 and $21,000 for the three months ended
September 30, 2010 and 2009, respectively. The increase was primarily due to increased average cash balances. Interest expense was $67,000 and $124,000 for the three months ended September 30, 2010 and 2009, respectively. The decrease was
primarily due to lower average debt facility balances outstanding in 2010.

Interest income was $53,000 and $170,000 for the
nine months ended September 30, 2010 and 2009, respectively. The increase was primarily due to increased average cash balances. Interest expense was $243,000 and $451,000 for the nine months ended September 30, 2010 and 2009, respectively.
The decrease was primarily due to lower average debt facility balances outstanding in 2010.

Liquidity and Capital
Resources

Since our inception in August 1998, we have financed our operations primarily through the issuance of stock
and borrowings under debt facilities, as well as through receipts from our collaboration with Gilead. Through September 30, 2010, we have received approximately $265.0 million in aggregate net proceeds from stock issuances, including
convertible preferred stock, our initial public offering, our 2010 and 2008 private placements and our 2010 public offering, $19.2 million from Gilead under our collaboration agreement and approximately $22.1 million under debt facilities. As of
September 30, 2010, amounts remain outstanding under the following debt facilities:



|                                     |  |      |               |  |                           |  |            |                 |  |   |                    |  |  |               |         |  |  |  |                    | 
|------------------------------------ |  | ---- | ------------- |  | ------------------------- |  | ---------- | --------------- |  | - | ------------------ |  |  | ------------- | ------- |  |  |  | ------------------ | 
|Lender                               |  | Date |               |  | Interest Rate(per 
annum) |  |            | PrincipalAmount |  |   | OutstandingBalance |  |  | Maturity Date |        
|Connecticut Innovations, Inc.        |  |      | November 2000 |  |                           |  | 7.50       | %               |  | $ | 1,400,000          |  |  | $             | 681,577 |  |  |  | September 2010     | 
|Webster Bank                         |  |      | May 2003      |  |                           |  | 6.72 -9.27 | %               |  |   | 1,386,883          |  |  |               | 38,157  |  |  |  | June 2006-Dec 2010 | 
|Oxford Finance Corporation           |  |      | February 2008 |  |                           |  | 9.97       | %               |  |   | 2,500,000          |  |  |               | 460,581 |  |  |  | March 2011         | 
|General Electric Capital Corporation |  |      | February 2008 |  |                           |  | 9.97       | %               |  |   | 2,500,000          |  |  |               | 460,581 |  |  |  | March 2011         | 



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The amounts reflected above represent original maturities under our debt agreements. As of
September 30, 2010, our debt balance was $1.6 million with a weighted average interest rate of 9.02%. The Connecticut Innovations Term Loan matured in September 2010. The final balloon payment of $682 was made in October 2010.

We had $62.2 million and $9.7 million in cash, cash equivalents and marketable securities as of September 30, 2010 and
December 31, 2009, respectively. We regularly review our investments and monitor the financial markets. The recent distress in the financial markets has not had a significant impact on our financial position or investments. As of
September 30, 2010, our cash, cash equivalents and marketable securities included high-quality financial instruments, primarily money market funds, government sponsored bond obligations and government-backed and certain other corporate debt
securities which we believe are subject to limited credit risk.

Cash used in operating activities was $18.1
million for the nine months ended September 30, 2010 and was primarily attributable to our $19.2 million net loss, combined with increased prepaid expenses and decreased accrued expenses, offset by non-cash charges related to depreciation,
amortization and non-cash stock-based compensation. Cash used in operating activities was $17.3 million for the nine months ended September 30, 2009 and was primarily attributable to our $19.2 million net loss and a decrease in accounts payable
and accrued expenses, offset primarily by non-cash charges related to depreciation, amortization and non-cash stock based compensation and a decrease in prepaid expenses.

Cash used in investing activities was $34.8 million for the nine months ended September 30, 2010 and was primarily attributable to the purchase of marketable securities. Cash provided by investing
activities was $18.2 million for the nine months ended September 30, 2009 and was primarily attributable to the proceeds from maturities of marketable securities partially offset by purchases of marketable securities.

Cash provided by financing activities was $70.9 million for the nine months ended September 30, 2010 and was primarily attributable
to $49.9 million in net proceeds from the sale of 19,775,101 shares of common stock and warrants to purchase an additional 6,921,286 shares of common stock in August 2010, combined with $22.6 million in net proceeds from the sale of 11,816,250
shares of common stock in January and February 2010. Cash used in financing activities was $2.5 million for the nine months ended September 30, 2009 and was primarily attributable to repayments of debt.

We expect to incur continuing and increasing losses from operations for at least the next several years as we seek to:



| |  |  | continue clinical testing of ACH-1625;
| | - |  | --------------------------------------



| |  |  | complete IND-enabling preclinical testing of ACH-2684 and ACH-2928; and
| | - |  | -----------------------------------------------------------------------



| |  |  | identify and progress additional drug candidates.
| | - |  | -------------------------------------------------

We do not expect our existing capital resources, together with the milestone payments and research and development funding we expect to receive, to be sufficient to fund the completion of the development
of any of our drug candidates. As a result, we will need to raise additional funds prior to, among other things, being able to market any drug candidates, to obtain regulatory approvals, fund operating losses, and, if deemed appropriate, establish
manufacturing and sales and marketing capabilities. We will seek to raise such additional financing through (i) public or private equity or debt financings, (ii) collaborative or other arrangements with third parties or (iii) other
sources of financing.

We believe that our existing cash and cash equivalents will be sufficient to meet our projected
operating requirements through at least September 30, 2011. However, our funding resources and requirements may change and will depend upon numerous factors, including but not limited to:



| |  |  | the costs involved in the clinical development, manufacturing and formulation of ACH-1625;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | the costs associated with the required CMC work related to ACH-1095;
| | - |  | --------------------------------------------------------------------



| |  |  | the costs associated with the preclinical development, IND application preparation, manufacturing and clinical development of ACH-2684 and ACH-2928;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



20



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| |  |  | the partnership opportunities for elvucitabine or ACH-702 that we may pursue;
| | - |  | -----------------------------------------------------------------------------



| |  |  | our ability to enter into corporate collaborations and the terms and success of these collaborations;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the costs involved in obtaining regulatory approvals for our drug candidates;
| | - |  | -----------------------------------------------------------------------------



| |  |  | the scope, prioritization and number of programs we pursue;
| | - |  | -----------------------------------------------------------



| |  |  | the costs involved in preparing, filing, prosecuting, maintaining, enforcing and defending patent and other intellectual property claims;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to raise incremental debt or equity capital, including any changes in the credit market that may impact our ability to obtain capital in
the future;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our acquisition and development of new technologies and drug candidates; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | competing technological and market developments currently unknown to us.
| | - |  | ------------------------------------------------------------------------

In August 2010, we issued 19,775,101 shares of our common stock at a price of $2.49 per share, as well as common stock warrants which
represent the right to acquire an aggregate of 6,921,286 shares of common stock in a private placement to institutional and other accredited investors. The warrants have a seven-year term and are exercisable at a price of $3.1125 per share. The
warrants allow for a net share settlement. We received net proceeds of $49.9 million from this private placement.

In
January 2010, we issued 10,275,000 shares of our common stock at a price of $2.08 per share in an underwritten public offering. In February 2010, we issued an additional 1,541,250 shares of common stock in connection with the underwriters
exercise of an over-allotment option. We received net proceeds of $22.6 million from these share issuances.

We intend to
augment our cash balance through financing transactions, including the issuance of debt or equity securities, and/or further corporate alliances. There can be no assurance that we will be able to obtain adequate levels of additional funding or
favorable terms, if at all. If adequate funds are not available, we will be required to:



| |  |  | delay, reduce the scope of or eliminate additional research and development programs;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | obtain funds through arrangements with collaborators or others on terms unfavorable to us or that may require us to relinquish rights to certain drug
candidates that we might otherwise seek to develop or commercialize independently; and/or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | pursue merger or acquisition strategies.
| | - |  | ----------------------------------------

Any future equity funding may dilute the ownership of our equity investors.

Additionally, each of our debt agreements contains certain subjective acceleration clauses, such that upon the occurrence of a material
adverse change in our financial condition, business or operations in the view of the lenders, amounts outstanding under the agreement may become immediately due and payable. We believe that the occurrence of a material change is remote and we have
no indication that it we are in default of any such clauses. Additionally, none of our lenders have accelerated scheduled loan payments as a result of these provisions.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet
arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

Recently Issued Accounting Standards

In October 2009, an update was
made to ASC 605,Revenue Recognition,which provides accounting principles and application guidance on how revenue arrangements with multiple deliverables should be separated and the consideration allocated. Assuming other criteria are met,
this guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition. Allocation of consideration is now based on managements estimate of the selling
price for an undelivered item where there is no other means to determine the fair value of that undelivered item. This update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Early adoption of this update is permitted; however, we will be required to apply the provisions of the amendment retrospectively to the beginning of our fiscal year. We are currently evaluating the potential impact of this
standard on our financial position and results of operations.



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In January 2010, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06 which amended guidance on fair value measurement and disclosures. The new guidance requires additional disclosures regarding fair
value measurements and provides clarification regarding the level of disaggregation of fair value disclosures by investment class. This guidance is effective for reporting periods beginning after December 15, 2009 except for the additional
level 3 requirements which is effective for reporting periods beginning after December 15, 2010. There was no impact to our financial statements upon adoption.

In April 2010, the FASB issued Accounting Standard Update No. 2010-17,Milestone Method of Revenue Recognition, which provides guidance on applying the milestone method to milestone payments
for achieving specified performance measures when those payments are related to uncertain future events. However, the FASB clarified that, even if the requirements in this ASU are met, entities would not be precluded from making an accounting policy
election to apply another appropriate accounting policy that results in the deferral of some portion of the arrangement consideration. The ASU is effective for periods beginning on or after June 15, 2010. Early application was permitted.
Entities can apply this guidance retrospectively as well as prospectively to milestones achieved after adoption. There was no impact to our financial statements upon adoption.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Interest Rate Risk. Our exposure to market risk is confined to our cash, cash equivalents and marketable securities. We regularly review our investments and monitor the financial markets. We do not
believe the recent distress in the financial markets has had a significant impact on our financial position. We invest in high-quality financial instruments, primarily money market funds, government sponsored bond obligations and government backed
corporate debt securities, with the effective duration of the portfolio less than six months and no security with an effective duration in excess of twelve months, which we believe are subject to limited credit risk. We currently do not hedge
interest rate exposure. Due to the short-term nature of our investments, we do not believe that we have any material exposure to interest rate risk or changes in credit ratings arising from our investments.

Capital Market Risk. We currently have no product revenues and depend on funds raised through other sources. One source of funding
is through future equity offerings. Our ability to raise funds in this manner depends upon capital market forces affecting our stock price.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our
disclosure controls and procedures as of September 30, 2010. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, means
controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2010, our chief executive officer and chief financial officer concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over
financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

PART II. OTHER INFORMATION



|ITEM 1A. | RISK FACTORS
|-------- | ------------

You
should carefully consider the risks described below in addition to the other information contained in this report, before making an investment decision. Our business, financial condition or results of operations could be harmed by any of these
risks. The risks and uncertainties described below are not the only ones we face. Additional risks not currently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business
operations.



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Risks Related to
Our Business

We depend on the success of our HCV drug candidates, which are still under development.

We have invested a significant portion of our efforts and financial resources in the development of our HCV candidates,
ACH-1625, ACH-1095, ACH-2684 and ACH-2928, for the treatment of chronic hepatitis C infection. Our ability to generate revenues will depend heavily on the successful development and commercialization of these drug candidates. The development and
commercial success of these drug candidates will depend on several factors, including the following:



| |  |  | our ability to provide acceptable evidence of the safety and efficacy of these drug candidates in current and future clinical trials;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to develop drug formulations that will deliver the appropriate drug exposures in longer term clinical trials;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | receipt of marketing approvals from the FDA and similar foreign regulatory authorities;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | establishing commercial manufacturing arrangements with third-party manufacturers;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | launching commercial sales of the drugs, whether alone or in collaboration with others;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | acceptance of the drug in the medical community and with third-party payors; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | our ability to identify, enter into and maintain collaboration agreements with appropriate strategic partners for our compounds.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------

We recently initiated a phase IIa clinical trial for ACH-1625 and are completing preclinical studies of
ACH-2684 and ACH-2928. Positive results from clinical trials or in preclinical studies of a drug candidate may not be predictive of similar results in human clinical trials, and promising results from early clinical trials of a drug candidate may
not be replicated in later clinical trials. Our most advanced HCV compound, ACH-1625, has been tested in human clinical trials for periods no longer than five days. A number of companies in the pharmaceutical and biotechnology industries have
suffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage development. Accordingly, the results from the preclinical studies of ACH-1625, ACH-2684 or ACH-2928 or the completed clinical trials
for ACH-1625 may not be predictive of the results we may obtain in later stage trials.

We do not expect any of our drug
candidates to be commercially available for at least several years, if at all.

We have a limited operating history and
have incurred a cumulative loss since inception. If we do not generate significant revenues, we will not be profitable.

We have incurred significant losses since our inception in August 1998. As of September 30, 2010, our accumulated deficit was
approximately $225 million. We have not generated any revenue from the sale of drug candidates to date. We expect that our annual operating losses will increase over the next several years as we expand our research, development and commercialization
efforts.

To become profitable, we must successfully develop and obtain regulatory approval for our drug candidates and
effectively manufacture, market and sell any drug candidates we develop. Accordingly, we may never generate significant revenues and, even if we do generate significant revenues, we may never achieve profitability.



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Our market is
subject to intense competition. If we are unable to compete effectively, our drug candidates may be rendered noncompetitive or obsolete.

We are engaged in segments of the pharmaceutical industry that are highly competitive and rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions, governmental
agencies and other public and private research organizations are pursuing the development of novel drugs that target infectious diseases. We face, and expect to continue to face, intense and increasing competition as new products enter the market
and advanced technologies become available. In addition to currently approved drugs, there are a significant number of drugs that are currently under development and may become available in the future for the treatment of chronic hepatitis C and
serious hospital-based bacterial infections. Additionally, there may be competitive drugs currently under development of which we are not aware. We would expect our drug candidates to compete with the following approved drugs and drug candidates
currently under development:



| |  |  | If approved, our protease inhibitors, ACH-1625 and ACH-2684, our NS4A antagonist, ACH-1095, and our NS5A inhibitor, ACH-2928, would compete with drugs
currently approved for the treatment of hepatitis C, i.e., the interferon-alpha-based products from Roche (Pegasys and Roferon-A) or Schering- Plough (Intron-A or Peg-Intron) and the ribavirin based products from Schering-Plough (Rebetrol), Roche
(Copegus) or generic versions sold by various companies. In addition, our HCV compounds may compete with the interferon and ribavirin-based drugs currently in development such as Valeants ribavirin analog (Viramidine) and Human Genome
Sciences Albuferon. Other products in multiple classes including protease inhibitors, polymerase inhibitors (nucleoside and non-nucleoside), NS5A inhibitors, toll-like receptors and cyclophilin inhibitors are also under development for the
treatment of hepatitis C by companies such as Abbott, Anadys, Astra-Zeneca, Avila Therapeutics, Boehringer Ingelheim, Bristol-Myers Squibb, Enanta, Gilead, GlaxoSmithKline, Human Genome Sciences, Idenix, Johnson & Johnson, Presidio,
Medivir, Merck, Novartis, Pfizer, Pharmasset, Roche, Valeant and Vertex.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ACH-702, and related compounds, if developed and approved, would compete with drugs currently marketed for the treatment of tuberculosis infections
including first-line drugs: Nydrazid (isoniazid) by Sandoz Pharmaceuticals, Rifadin (rifampin) by Sanofi-Aventis, Myambutol (ethambutol) by X-Gen Pharmaceuticals and Pyrazinamide (pyrazinamide) by Effcon Laboratories or second-line drugs: Avelox
(moxifloxacin) by Bayer, Amikacin (amikacin) by Teva Pharmaceuticals, Kantrex (kanamycin) by Bristol-Myers Squibb, Capastat (capreomycin) by Eli Lilly, Cipro (ciprofloxacin) by Bayer, Trecator (ethionamide) by Wyeth, Seromycin (cycloserine) by Eli
Lilly, and PASER (p-aminosalicylic acid) by Jacobus Pharmaceuticals. In addition, ACH-702 may compete with other drugs currently under development for the treatment of tuberculosis infections including: PA-824 by Chiron/Novartis and TMC207 by
Tibotec Pharmaceuticals. In addition, ACH-702 may compete with other drugs currently marketed or under development for the treatment of topical skin infections including Altabax by GlaxoSmithKline and XOMA-629 by Xoma Therapeutics Ltd. It may also
compete with drugs for serious ophthalmic infections including: Besivance by Bausch and Lomb, Vigamox by Alcon Pharmaceuticals and Zymar by Allergan. We may also compete with the following companies that have a strategic interest in the discovery,
development and marketing of drugs for the treatment of bacterial infections: Abbott, Astra-Zeneca, Aventis, Bristol-Myers Squibb, Cubist, Eli Lilly, GlaxoSmithKline, Merck, Novartis, Pfizer, Roche and Wyeth.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Elvucitabine, if developed and approved, elvucitabine would compete with the NRTIs currently marketed for treatment of HIV infection, including: Epivir
(lamivudine), Retrovir (AZT), Ziagen (abacavir), Combivir (lamivudine + AZT), Trizivir (lamivudine + AZT + abacavir) and Epzicom (lamivudine + abacavir) from GlaxoSmithKline, Hivid (ddC) from Hoffman-La Roche, Emtriva (FTC), Viread (tenofovir) and
Truvada (FTC + tenofovir) from Gilead and Videx EC, Videx (ddI) and Zerit (d4T) from Bristol-Myers Squibb. In addition, elvucitabine may compete with other NRTIs currently under development for HIV by companies such as Avexa, Medivir, and Koronis.
Other drugs in other classes recently approved for treatment of HIV infection include Selzentry (miraviroc, an entry inhibitor) from Pfizer and Isentress (raltegravir, an integrase inhibitor) from Merck. In addition, there are other classes of drugs
under development for the treatment of HIV infection by companies such as Abbott, Boehringer Ingelheim, GlaxoSmithKline, Johnson & Johnson, Myriad, Roche and Schering-Plough.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Many of our competitors have:



| |  |  | significantly greater financial, technical and human resources than we have and may be better equipped to discover, develop, manufacture and
commercialize drug candidates;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | more extensive experience in preclinical testing and clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical
products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | drug candidates that have been approved or are in late-stage clinical development; and/or
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | collaborative arrangements in our target markets with leading companies and research institutions.
| | - |  | --------------------------------------------------------------------------------------------------



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Competitive products
may render our products obsolete or noncompetitive before we can recover the expenses of developing and commercializing our drug candidates. Furthermore, the development of new treatment methods and/or the widespread adoption or increased
utilization of any vaccine for the diseases we are targeting could render our drug candidates noncompetitive, obsolete or uneconomical. If we successfully develop and obtain approval for our drug candidates, we will face competition based on the
safety and effectiveness of our drug candidates, the timing of their entry into the market in relation to competitive products in development, the availability and cost of supply, marketing and sales capabilities, reimbursement coverage, price,
patent position and other factors. If we successfully develop drug candidates but those drug candidates do not achieve and maintain market acceptance, our business will not be successful.

If we are not able to attract and retain key management, scientific personnel and advisors, we may not successfully develop our drug
candidates or achieve our other business objectives.

We depend upon our senior management and scientific staff for our
business success. Key members of our senior team include Michael Kishbauch, our president and chief executive officer, and Dr. Milind Deshpande, our president of research and development and chief scientific officer. All of our employment
agreements with our senior management employees are terminable without notice by the employee. The loss of the service of any of the key members of our senior management may significantly delay or prevent the achievement of drug development and
other business objectives. Our ability to attract and retain qualified personnel, consultants and advisors is critical to our success. We face intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies,
universities, governmental entities and other research institutions. We may be unable to attract and retain these individuals, and our failure to do so would adversely affect our business.

We will need substantial additional capital to fund our operations, including drug candidate development, manufacturing and
commercialization. If we do not have or cannot raise additional capital when needed, we will be unable to develop and commercialize our drug candidates successfully, and our ability to operate as a going concern may be adversely affected.

We believe that our existing cash and cash equivalents will be sufficient to support our current operating plan for at
least one year. Our operating plan may change as a result of many factors, including:



| |  |  | the costs involved in the clinical development, manufacturing and formulation of ACH-1625;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | the costs associated with the required CMC work related to ACH-1095;
| | - |  | --------------------------------------------------------------------



| |  |  | the costs associated with the preclinical development, IND application preparation, manufacturing and clinical development of ACH-2684 and ACH-2928;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the partnership opportunities we may pursue for elvucitabine or ACH-702;
| | - |  | ------------------------------------------------------------------------



| |  |  | our ability to enter into corporate collaborations and the terms and success of these collaborations;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the costs involved in obtaining regulatory approvals for our drug candidates;
| | - |  | -----------------------------------------------------------------------------



| |  |  | the scope, prioritization and number of programs we pursue;
| | - |  | -----------------------------------------------------------



| |  |  | the costs involved in preparing, filing, prosecuting, maintaining, enforcing and defending patent and other intellectual property claims;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to raise incremental debt or equity capital, including any changes in the credit market that may impact our ability to obtain capital in
the future;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our acquisition and development of new technologies and drug candidates; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | competing technological and market developments currently unknown to us.
| | - |  | ------------------------------------------------------------------------

If our operating plan changes, we may need additional funds sooner than planned. Such additional financing may not be available when we
need it or may not be available on terms that are favorable to us. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future
operating plans. If adequate funds are not available to us on a timely basis, or at all, we may be required to terminate or delay preclinical studies, clinical trials or other development activities for one or more of our drug candidates.



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We may seek additional
financing through a combination of private and public equity offerings, debt financings and collaboration, strategic alliance and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt
securities your ownership interest will be diluted, and the terms may include adverse liquidation or other preferences that adversely affect your rights as a stockholder. Since August 2008, we have issued an aggregate of 42,306,006 shares of our
common stock in two private placements and one public offering as well as warrants to purchase an aggregate of 9,599,950 shares of our common stock, all of which remain outstanding. These financings substantially diluted our existing stockholders.
Stockholders will be further diluted if, and to the extent, any warrants are exercised. Debt financing, if available, may involve covenants that limit or restrict our ability to take specific actions such as incurring additional debt, making capital
expenditures or declaring dividends, or may involve immediate repayment of the debt under certain circumstances. For example, each of our debt agreements contains certain subjective acceleration clauses, such that upon the occurrence of a material
adverse change in our financial condition, business or operations in the view of the lenders, amounts outstanding under the agreement may become immediately due and payable. If we raise additional funds through collaborations, strategic alliances
and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or drug candidates, or grant licenses on terms that are not favorable to us.

Our business has a substantial risk of product liability claims. If we are unable to obtain appropriate levels of insurance, a product
liability claim could adversely affect our business.

Our business exposes us to significant potential product liability
risks that are inherent in the development, manufacturing and sales and marketing of human therapeutic products. Although we do not currently commercialize any products, claims could be made against us based on the use of our drug candidates in
clinical trials. Product liability claims could delay or prevent completion of our clinical development programs. We currently have clinical trial insurance in an amount equal to up to $10.0 million in the aggregate and will seek to obtain product
liability insurance prior to the sales and marketing of any of our drug candidates. However, our insurance may not provide adequate coverage against potential liabilities. Furthermore, clinical trial and product liability insurance is becoming
increasingly expensive. As a result, we may be unable to maintain current amounts of insurance coverage or obtain additional or sufficient insurance at a reasonable cost to protect against losses that could have a material adverse effect on us. If a
claim is brought against us, we might be required to pay legal and other expenses to defend the claim, as well as uncovered damages awards resulting from a successful claim. Furthermore, whether or not we are ultimately successful in defending any
such claims, we might be required to direct significant financial and managerial resources to such defense, and adverse publicity is likely to result.

Risks Related to the Development of Our Drug Candidates

All of
our drug candidates are still in the early stages of development and remain subject to clinical testing and regulatory approval. If we are unable to successfully develop, test and commercialize our drug candidates, we will not be successful.

To date, we have not commercially marketed, distributed or sold any drug candidates. The success of our business depends
primarily upon our ability to develop and commercialize our drug candidates successfully. Our drug candidates must satisfy rigorous standards of safety and efficacy before they can be approved for sale. To satisfy these standards, we must engage in
expensive and lengthy testing and obtain regulatory approval of our drug candidates. Despite our efforts, our drug candidates may not:



| |  |  | offer therapeutic or other improvement over existing, comparable drugs;
| | - |  | -----------------------------------------------------------------------



| |  |  | be proven safe and effective in clinical trials;
| | - |  | ------------------------------------------------



| |  |  | have the desired effects, or may include undesirable effects or may have other unexpected characteristics;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | meet applicable regulatory standards;
| | - |  | -------------------------------------



| |  |  | be capable of being produced in commercial quantities at acceptable costs; or
| | - |  | -----------------------------------------------------------------------------



| |  |  | be successfully commercialized.
| | - |  | -------------------------------

In addition, we may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process that could delay or prevent our ability to receive regulatory
approval or commercialize our drug candidates, including:



| |  |  | regulators or Institutional Review Boards, or IRBs, may not authorize us to commence a clinical trial or conduct a clinical trial at a prospective
trial site;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our preclinical tests or clinical trials for our drug candidates may produce negative or inconclusive results, and we may decide, or regulators may
require us, to conduct additional preclinical testing or clinical trials, or we may abandon projects that we expect to be promising;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | enrollment in our clinical trials may be slower than we currently anticipate or participants may drop out of our clinical trials at a higher rate than
we currently anticipate, resulting in significant delays;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we might have to suspend or terminate our clinical trials if the participants are exposed to unacceptable health risks;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | IRBs or regulators, including the FDA, may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance
with regulatory requirements;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the FDA, in connection with future HCV development guidelines recently circulated for comment, may require us to carry out more extensive studies,
evaluate different treatment combinations or complete comparative effectiveness studies, resulting in significant delays; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the supply or quality of our drug candidates or other materials necessary to conduct our clinical trials may be insufficient or inadequate.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------

We, and a number of other companies in the pharmaceutical and biotechnology industries, have suffered
significant setbacks in later stage clinical trials even after achieving promising results in early-stage development. For example, in February 2007, we discontinued further clinical development of ACH-806, our first NS4A antagonist candidate, which
was determined to have positive antiviral effect in a proof-of-concept clinical trial in HCV infected patients, but also to elevate serum creatinine levels, a marker of kidney function. There can be no assurance that we have identified the source of
the serum creatinine elevation and that we will not see a similar outcome in human clinical trials with that programs successor compound, ACH-1095, or that observations in preclinical studies of ACH-1095 in one species may not limit or even
preclude its clinical use. Accordingly, there can be no assurance that this, or another type of toxicity, will not arise in future clinical trials. There can be no assurance that we will gain the agencys approval of the IND application for
ACH-1095, and if we are not able to advance ACH-1095, our business may be harmed. Even if we are successful in gaining FDA approval of our IND application for ACH-1095 and advance to human clinical trials, the clinical development timelines and
costs may be greater than anticipated. Further, there can be no assurance that planned long term toxicology studies in animals will indicate a safety and tolerability profile appropriate for continued dosing in human subjects. We do not expect any
of our drug candidates to be commercially available for several years.

If we are unable to obtain U.S. and/or foreign
regulatory approval, we will be unable to commercialize our drug candidates.

Our drug candidates are subject to extensive
governmental regulations relating to, among other things, research, testing, development, manufacturing, safety, efficacy, record keeping, labeling, marketing and distribution of drugs. Rigorous preclinical testing and clinical trials and an
extensive regulatory approval process are required in the United States and in many foreign jurisdictions prior to the commercial sale of our drug candidates. Satisfaction of these and other regulatory requirements is costly, time consuming,
uncertain and subject to unanticipated delays. It is possible that none of the drug candidates we are developing will obtain marketing approval. In connection with the clinical trials for elvucitabine, ACH-1095, ACH-702, ACH-1625 and any other drug
candidate we may seek to develop in the future, we face risks that:



| |  |  | the drug candidate may not prove to be efficacious;
| | - |  | ---------------------------------------------------



| |  |  | the drug may not prove to be safe;
| | - |  | ----------------------------------



| |  |  | the results may not confirm the positive results from earlier preclinical studies or clinical trials;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the results may not meet the level of statistical significance required by the FDA or other regulatory agencies; and
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | the FDA or other regulatory agencies may require us to carry out additional studies.
| | - |  | ------------------------------------------------------------------------------------

We have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approvals, including approval by
the FDA. The time required to complete clinical trials and for FDA and other countries regulatory review processes is uncertain and typically takes many years. Our analysis of data obtained from preclinical and clinical activities is subject
to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. We may also encounter unanticipated delays or increased costs due to government regulation from future legislation or
administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review.



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Any delay in obtaining
or failure to obtain required approvals could materially adversely affect our ability to progress the development of a drug candidate and to generate revenues from that drug candidate. For example, as a result of a pre-IND consultation with the FDA
on the most appropriate clinical development program for ACH-702, as well as the complexity of the mechanism of action of ACH-702, the complexity of the preclinical results noted with ACH-702, and the evolving regulatory climate for antibacterials,
we decided to pursue further discussions with the FDA before initiating human clinical studies, and we are currently not devoting significant resources to this compound. While the FDA provided guidance on an appropriate path toward regulatory
approval for topical administration for ACH-702, the Division of Anti-Infective and Ophthalmology Products referred our request for additional guidance on systemic administration of ACH-702 to the Division of Special Pathogen and Transplant Products
(the DSPTP.) We are currently assessing our strategic and development plans for ACH-702 for topical administration. Any regulatory approval to market a product may be subject to limitations on the indicated uses for which we may market
the product and affect reimbursement by third-party payors. These limitations may limit the size of the market for the product. We are also subject to numerous foreign regulatory requirements governing the conduct of clinical trials, manufacturing
and marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval process includes all of the risks associated with FDA approval described above as well as risks attributable to the satisfaction of foreign
regulations. Approval by the FDA does not ensure approval by regulatory authorities outside the United States. Foreign jurisdictions may have different approval procedures than those required by the FDA and may impose additional testing requirements
for our drug candidates

If clinical trials for our drug candidates are prolonged or delayed, we may be unable to
commercialize our drug candidates on a timely basis, which would require us to incur additional costs and delay our receipt of any product revenue.

We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical trials that will cause us or regulatory authorities to delay, suspend or terminate clinical
trials, or delay the analysis of data from our completed or ongoing clinical trials. Any of the following could delay the clinical development of our drug candidates:



| |  |  | ongoing discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | delays in receiving, or the inability to obtain, required approvals from institutional review boards or other reviewing entities at clinical sites
selected for participation in our clinical trials;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | delays in enrolling volunteers and patients into clinical trials;
| | - |  | -----------------------------------------------------------------



| |  |  | a lower than anticipated retention rate of volunteers and patients in clinical trials;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the need to repeat clinical trials as a result of inconclusive or negative results or unforeseen complications in testing;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | the requirement by the FDA, in connection with future HCV development guidelines recently circulated for comment, to carry out additional studies;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | delays in completing formulation development of our drug candidates, or delays in planning and executing the bridging studies required to use the new
formulations in subsequent clinical trials;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | inadequate supply or deficient quality of drug candidate materials or other materials necessary to conduct our clinical trials;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | unfavorable FDA inspection and review of a clinical trial site or records of any clinical or preclinical investigation;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | serious and unexpected drug-related side effects experienced by participants in our clinical trials; or
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | the placement by the FDA of a clinical hold on a trial.
| | - |  | -------------------------------------------------------

Our ability to enroll patients in our clinical trials in sufficient numbers and on a timely basis will be subject to a number of factors, including the size 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 and the eligibility criteria for the clinical trial. Delays in patient enrollment may result in increased costs and longer
development times. For example, in 2007, we experienced delays in patient enrollment in connection with our phase II trial of elvucitabine in HIV infected patients who have failed a HAART regimen which included Epivir (lamivudine) due to the
strict entry criteria for this trial. As a result, we expanded the number of sites at which the trial was conducted and changed the protocol of the trial to include additional treatment with elvucitabine after the initial 14 days of treatment. We
may also face competition for subjects to enroll in our ACH-1625 clinical trials and may have to expand the number of sites at which the trials are conducted. In addition, subjects may drop out of our clinical trials, and thereby impair the validity
or statistical significance of the trials.

We, the FDA or other applicable regulatory authorities may suspend clinical trials
of a drug candidate at any time if we or they believe the subjects or patients participating in such clinical trials are being exposed to unacceptable health risks or for other reasons. For example, as we advance ACH-1625 into longer term clinical
trials in Phase IIa, the FDA has required us to establish predetermined stopping rules, as well as a Data Safety Monitoring Board (DSMB) in order to monitor and ensure patient safety. Any interruption of the Phase IIa clinical trial
currently underway, whether a result of ACH-1625 or co-administration of the standard of care, could cause delays in our drug development.



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We cannot predict
whether any of our drug candidates will encounter problems during clinical trials which will cause us or regulatory authorities to delay or suspend these trials, or which will delay the analysis of data from these trials. In addition, it is
impossible to predict whether legislative changes will be enacted, or whether FDA regulations, guidance or interpretations will be changed, or what the impact of such changes, if any, may be. If we experience any such problems, we may not have the
financial resources to continue development of the drug candidate that is affected or the development of any of our other drug candidates.

In addition, we, along with our collaborators or subcontractors, may not employ, in any capacity, persons who have been debarred under the FDAs Application Integrity Policy. Employment of such a
debarred person (even if inadvertently) may result in delays in the FDAs review or approval of our products, or the rejection of data developed with the involvement of such persons.

Even if we obtain regulatory approvals, our drug candidates will be subject to ongoing regulatory review. If we fail to comply with
continuing U.S. and applicable foreign regulations, we could lose those approvals, and our business would be seriously harmed.

Even if we receive regulatory approval of any drugs we are developing or may develop, we will be subject to continuing regulatory review, including the review of clinical results which are reported after
our drug candidates become commercially available approved drugs. As greater numbers of patients use a drug following its approval, side effects and other problems may be observed after approval that were not seen or anticipated during pre-approval
clinical trials. In addition, the manufacturer, and the manufacturing facilities we use to make any approved drugs, will also be subject to periodic review and inspection by the FDA. The subsequent discovery of previously unknown problems with the
drug, manufacturer or facility may result in restrictions on the drug, manufacturer or facility, including withdrawal of the drug from the market. If we fail to comply with applicable continuing regulatory requirements, we may be subject to fines,
suspension or withdrawal of regulatory approval, product recalls and seizures, operating restrictions and criminal prosecutions.

Our product promotion and advertising is also subject to regulatory requirements and continuing regulatory review. In particular, the marketing claims we will be permitted to make in labeling or
advertising regarding our marketed products will be limited by the terms and conditions of the FDA-approved labeling. We must submit copies of our advertisements and promotional labeling to the FDA at the time of initial publication or
dissemination. If the FDA believes these materials or statements promote our products for unapproved indications, or with unsubstantiated claims, or if we fail to provide appropriate safety-related information, the FDA could allege that our
promotional activities misbrand our products. Specifically, the FDA could issue an untitled letter or warning letter, which may demand, among other things, that we cease such promotional activities and issue corrective advertisements and labeling.
The FDA also could take enforcement action including seizure of allegedly misbranded product, injunction or criminal prosecution against us and our officers or employees. If we repeatedly or deliberately fail to submit such advertisements and
labeling to the agency, the FDA could withdraw our approvals. Moreover, the Department of Justice can bring civil or criminal actions against companies that promote drugs or biologics for unapproved uses, based on the False Claims Act and other
federal laws governing reimbursement for such products under the Medicare, Medicaid and other federally supported healthcare programs. Monetary penalties in such cases have often been substantial, and civil penalties can include costly mandatory
compliance programs and exclusion from federal healthcare programs.

If we do not comply with laws regulating the
protection of the environment and health and human safety, our business could be adversely affected.

Our research and
development efforts involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although we believe that our safety procedures for the use, manufacture, storage, handling and disposing of these materials comply
with the standards prescribed by federal, state and local laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. If an accident occurs, we could be held liable for resulting damages, which
could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials.

Additional federal, state and local laws and regulations affecting our operations may be adopted in the future. Although we
maintain workers compensation insurance to cover us for costs we may incur due to injuries to our employees resulting from the use of these materials, this insurance may not provide adequate coverage against potential liabilities. In addition,
though we have environmental liability insurance, such coverage may not provide for all related losses. We may incur substantial costs to comply with, and substantial fines or penalties if we violate, any of these laws or regulations.



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Risks Relating
to Our Securities

We may be required to dilute our existing stockholders further in connection with capital raising
activities. Additionally, the market price of our common stock may fall due to the increased number of shares available in the public market.

In connection with capital raising activities, we may be required to dilute our existing stockholders substantially. For example, in August 2010, we issued an aggregate of 19,775,101 shares of our common
stock, plus common stock warrants to purchase a total of 6,921,286 additional shares of common stock in a private placement. In January and February 2010, we issued an aggregate of 11,816,250 shares of our common stock in an underwritten offering.
Additionally, in August 2008, we issued 10,714,655 shares of our common stock, plus common stock warrants to purchase a total of 2,678,664 additional shares of common stock in a private placement. Stockholders will be further diluted if, and to the
extent, any investors exercise their warrants. The issuance of these shares and warrants resulted in substantial dilution to stockholders who held our common stock prior to the issuance. All of the shares of common stock we issued, as well as those
shares issuable upon exercise of the warrants, are freely tradable pursuant to registration statements filed with the SEC that were declared effective by the SEC on September 30, 2010, October 16, 2009 and October 30, 2008,
making such shares available for immediate resale in the public market.

We also entered into a Standby Equity Distribution
Agreement with YA Global Master SPV Ltd. on July 1, 2009 whereby we have the option, at our sole discretion, to sell up to $15.0 million of common stock to YA Global. The sale of shares of our common stock pursuant to the SEDA will have a
dilutive impact on our stockholders and may cause the market price of our common stock to decline.

In addition, amounts
remain available for the future issuance of common stock, preferred stock and/or warrants that we may issue from time to time under the shelf registration statement on Form S-3 that we filed in October 2009. If we issue additional securities
pursuant to this shelf registration statement, these securities would be available for immediate resale in the public market.

The market price of our common stock could fall due to an increase in the number of shares available for sale in the public market.

Our executive officers, directors and principal stockholders own a large percentage of our voting common stock and could
limit our stockholders influence on corporate decisions or could delay or prevent a change in corporate control.

As
of October 25, 2010, our directors, executive officers and current holders of more than 5% of our outstanding common stock, together with their affiliates and related persons, beneficially own, in the aggregate, approximately 65% of our
outstanding common stock. As a result, these stockholders, if acting together, have the ability to determine the outcome of all matters submitted to our stockholders for approval, including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets and other extraordinary transactions. The interests of this group of stockholders may not always coincide with our corporate interests or the interest of other stockholders, and they
may act in a manner with which you may not agree or that may not be in the best interests of other stockholders. This concentration of ownership may have the effect of:



| |  |  | delaying, deferring or preventing a change in control of our company;
| | - |  | ---------------------------------------------------------------------



| |  |  | entrenching our management and/or board;
| | - |  | ----------------------------------------



| |  |  | impeding a merger, consolidation, takeover or other business combination involving our company; or
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.
| | - |  | ----------------------------------------------------------------------------------------------------------------------

Our stock price is likely to be volatile, and the market price of our common stock may decline in value in the future.

The market price of our common stock has fluctuated in the past and is likely to fluctuate in the future. During the period from
January 1, 2007 to October 25, 2010, our stock price has ranged from a low of $0.68 to a high of $19.61. Market prices for securities of early stage pharmaceutical, biotechnology and other life sciences companies have historically been
particularly volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:



| |  |  | the results of our planned clinical trials of ACH-1625;
| | - |  | -------------------------------------------------------



| |  |  | the results of the required CMC work related to ACH-1095;
| | - |  | ---------------------------------------------------------



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| |  |  | the results of our preclinical development, manufacturing and clinical development of ACH-2684 and ACH-2928;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | the entry into, modification of, or termination of key agreements, or any new collaboration agreement we may enter;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | the results of regulatory reviews relating to the approval of our drug candidates;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the initiation of, material developments in, or conclusion of litigation to enforce or defend any of our intellectual property rights;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure of any of our drug candidates, if approved, to achieve commercial success;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | general and industry-specific economic conditions that may affect our research and development expenditures;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | the results of clinical trials conducted by others on drugs that would compete with our drug candidates;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | the failure or discontinuation of any of our research programs;
| | - |  | ---------------------------------------------------------------



| |  |  | issues in manufacturing our drug candidates or any approved products;
| | - |  | ---------------------------------------------------------------------



| |  |  | the introduction of technological innovations or new commercial products by us or our competitors;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | changes in estimates or recommendations by securities analysts, if any, who cover our common stock;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | future sales of our common stock;
| | - |  | ---------------------------------



| |  |  | changes in the structure of health care payment systems;
| | - |  | --------------------------------------------------------



| |  |  | period-to-period fluctuations in our financial results; and
| | - |  | -----------------------------------------------------------



| |  |  | low trading volume of our common stock.
| | - |  | ---------------------------------------

In addition, if we fail to reach an important research, development or commercialization milestone or result by a publicly expected deadline, even if by only a small margin, there could be significant
impact on the market price of our common stock. Additionally, as we approach the announcement of important clinical data or other significant information and as we announce such results and information, we expect the price of our common stock to be
particularly volatile, and negative results would have a substantial negative impact on the price of our common stock.

The
stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may adversely affect the trading price of our common stock.

In the past, following periods of volatility in the market price of a companys securities, stockholders have often
instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our business operations and
reputation.

Unstable market and economic conditions may have serious adverse consequences on our business.

Our general business strategy may be adversely affected by the recent economic downturn and volatile business environment and continued
unpredictable and unstable market conditions. If the current equity and credit markets deteriorate further, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Failure to secure any
necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans. In addition, there
is a risk that one or more of our current service providers, manufacturers and other partners may not survive these difficult economic times, which would directly affect our ability to attain our operating goals on schedule and on budget.

Our management is required to devote substantial time and incur additional expense to comply with public company
regulations. Our failure to comply with such regulations could subject us to public investigations, fines, enforcement actions and other sanctions by regulatory agencies and authorities and, as a result, our stock price could decline in value.

Prior to our initial public offering in 2006, as a private company with limited resources, we maintained a small finance
and accounting staff. As a public company, the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, as well as the rules of the Nasdaq Global Market, have required us to implement additional corporate governance practices and
adhere to a variety of reporting requirements and complex accounting rules. Compliance with these public company obligations places significant additional demands on our limited number of finance and accounting staff and on our financial, accounting
and information systems.



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In particular, as a
public company, our management is required to conduct an annual evaluation of our internal controls over financial reporting and include a report of management on our internal controls in our annual reports on Form 10-K. If we are unable to continue
to conclude that we have effective internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock.

We do not anticipate paying cash dividends, and accordingly stockholders must rely on stock appreciation for any return on their
investment in us.

We anticipate that we will retain our earnings, if any, for future growth and therefore do not
anticipate paying cash dividends in the future. As a result, only appreciation of the price of our common stock will provide a return to stockholders.

Risks Related to Our Dependence on Third Parties

We may not be
able to execute our business strategy if we are unable to enter into alliances with other companies that can provide capabilities and funds for the development and commercialization of our drug candidates. If we are unsuccessful in forming or
maintaining these alliances on favorable terms, our business may not succeed.

We have entered into a collaboration
arrangement with Gilead for the development and commercialization of certain of our HCV compounds involving NS4A antagonism. We have also entered into a license agreement with GCA Therapeutics, Ltd., or GCAT, for elvucitabine for the treatment of
both HBV and HIV infection in mainland China, Hong Kong, and Taiwan. We may enter into additional collaborative arrangements in the future. We are continuing partnering efforts for elvucitabine with regional companies and institutions, including
those in South America, South Africa and elsewhere. We do not plan to clinically advance elvucitabine or ACH-702 independently. We also may enter into alliances with major biotechnology or pharmaceutical companies to jointly develop other specific
drug candidates and to jointly commercialize them if they are approved. In such alliances, we would expect our biotechnology or pharmaceutical collaborators to provide substantial funding, as well as significant capabilities in clinical development,
regulatory affairs, marketing and sales. We may not be successful in entering into any such alliances on favorable terms, if at all. Even if we do succeed in securing such alliances, we may not be able to maintain them if, for example, development
or approval of a drug candidate is delayed or sales of an approved drug are disappointing. Furthermore, any delay in entering into collaboration agreements could delay the development and commercialization of our drug candidates and reduce their
competitiveness even if they reach the market. Any such delay related to our collaborations could adversely affect our business.

If a collaborative partner terminates or fails to perform its obligations under agreements with us, the development and commercialization of our drug candidates could be delayed or terminated.

If Gilead, GCAT or another future collaborative partner does not devote sufficient time and resources to collaboration
arrangements with us, we may not realize the potential commercial benefits of the arrangement, and our results of operations may be adversely affected. For example, in May 2009, Gilead notified us that they do not intend to initiate clinical
development of ACH-1095, and we subsequently amended our collaboration so that we may continue to develop ACH-1095, subject to certain rights of Gilead. Had we not come to an agreed upon arrangement, the program would have been terminated, and
our business may have been significantly harmed. Additionally, pursuant to the terms of the amended agreement, if Gilead elects not to exercise their right to opt in to ACH-1095 development, we will then become responsible for the development and
commercialization of ACH-1095. Gilead maintains the right to terminate the continuing portions of the collaboration related to other NS4A antagonist compounds, and may exercise that right at any time with requisite notice to us.

In addition, if any existing or future collaboration partner were to breach or terminate its arrangements with us, the development and
commercialization of the affected drug candidate could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue development and commercialization of the drug candidate on our own. Under
our collaboration agreement with Gilead, Gilead may terminate the collaboration for any reason at any time upon 30 days notice. If Gilead were to exercise this right, the development and commercialization of our NS4A compounds for HCV infection
would be adversely affected.



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Much of the potential
revenue from our existing and future collaborations will consist of contingent payments, such as payments for achieving development milestones and royalties payable on sales of drugs developed. The milestone and royalty revenues that we may receive
under these collaborations will depend upon our collaborators ability to successfully develop, introduce, market and sell new products. In addition, our collaborators may decide to enter into arrangements with third parties to commercialize
products developed under our existing or future collaborations using our technologies, which could reduce the milestone and royalty revenue that we may receive, if any. In many cases we will not be involved in these processes and accordingly will
depend entirely on our collaborators. Our collaboration partners may fail to develop or effectively commercialize products using our products or technologies because they:



| |  |  | decide not to devote the necessary resources due to internal constraints, such as limited personnel with the requisite scientific expertise, limited
cash resources or specialized equipment limitations, or the belief that other drug development programs may have a higher likelihood of obtaining regulatory approval or may potentially generate a greater return on investment;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | do not have sufficient resources necessary to carry the drug candidate through clinical development, regulatory approval and commercialization; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | cannot obtain the necessary regulatory approvals.
| | - |  | -------------------------------------------------

In addition, a collaborator may decide to pursue a competitive drug candidate developed outside of the collaboration. In particular, Gilead is currently developing other products for the treatment of
chronic hepatitis C, and the results of its development efforts could affect its commitment to our drug candidates, including Gileads desire to rejoin us in the future development of ACH-1095. If a collaboration partner fails to develop or
effectively commercialize drug candidates or drugs for any of these reasons, we may not be able to replace the collaboration partner with another partner to develop and commercialize a drug candidate or drugs under the terms of the collaboration. We
may also be unable to obtain, on terms acceptable to us, a license from such collaboration partner to any of its intellectual property that may be necessary or useful for us to continue to develop and commercialize a drug candidate.

We rely on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to
meet established deadlines for the completion of such trials.

We do not have the ability to independently conduct
clinical trials for our drug candidates, and we rely on third parties such as contract research organizations, medical institutions and clinical investigators to enroll qualified patients and conduct our clinical trials. Our reliance on these third
parties for clinical development activities reduces our control over these activities. These third-party contractors may not complete activities on schedule, or may not conduct our clinical trials in accordance with regulatory requirements or our
trial design. To date, we believe our contract research organizations and other similar entities with which we are working have performed well. However, if these third parties do not successfully carry out their contractual duties or meet expected
deadlines, we may be required to replace them. Although we believe that there are a number of other third-party contractors we could engage to continue these activities, it may result in a delay of the affected trial. Accordingly, our efforts to
obtain regulatory approvals for and commercialize our drug candidates may be delayed.

We currently depend on third-party
manufacturers to produce our preclinical and clinical drug supplies and intend to rely upon third-party manufacturers to produce commercial supplies of any approved drug candidates. If, in the future, we manufacture any of our drug candidates, we
will be required to incur significant costs and devote significant efforts to establish and maintain these capabilities.

We rely upon third parties to produce material for preclinical and clinical testing purposes and intend to continue to do so in the
future. We also expect to rely upon third parties to produce materials required for the commercial production of our drug candidates if we succeed in obtaining necessary regulatory approvals. If we are unable to arrange for third-party
manufacturing, or to do so on commercially reasonable terms, we may not be able to complete development of our drug candidates or market them. Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured
drug candidates ourselves, including reliance on the third party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control and the possibility
of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or damaging to us. In addition, the FDA and other regulatory authorities require that our drug candidates be
manufactured according to current good manufacturing practice regulations. Any failure by us or our third-party manufacturers to comply with current good manufacturing practices and/or our failure to scale up our manufacturing processes could lead
to a delay in, or failure to obtain, regulatory approval of any of our drug candidates. In addition, such failure could be the basis for action by the FDA to withdraw approvals for drug candidates previously granted to us and for other regulatory
action.



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To date, our
third-party manufacturers have met our manufacturing requirements, but we cannot be assured that they will continue to do so. Any performance failure on the part of our existing or future manufacturers could delay clinical development or regulatory
approval of our drug candidates or commercialization of any approved products. If for some reason our current contract manufacturers cannot perform as agreed, we may be required to replace them. Although we believe that there are a number of
potential replacements given our manufacturing processes are not manufacturer specific, we may incur added costs and delays in identifying and qualifying any such replacements. Furthermore, although we generally do not begin a clinical trial unless
we believe we have a sufficient supply of a drug candidate to complete the trial, any significant delay in the supply of a drug candidate for an ongoing trial due to the need to replace a third-party manufacturer could delay completion of the trial.

We may in the future elect to manufacture certain of our drug candidates in our own manufacturing facilities. If we do so, we
will require substantial additional funds and need to recruit qualified personnel in order to build or lease and operate any manufacturing facilities.

Risks Related to Commercialization of Our Drug Candidates

If we
are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our drug candidates, we may not generate product revenue.

We have no commercial products, and we do not currently have an organization for the sales and marketing of pharmaceutical products. In
order to successfully commercialize any drugs that may be approved in the future by the FDA or comparable foreign regulatory authorities, we must build our sales and marketing capabilities or make arrangements with third parties to perform these
services. For certain drug candidates in selected indications where we believe that an approved product could be commercialized by a specialty North American sales force that calls on a limited but focused group of physicians, we intend to
commercialize these products ourselves. However, in therapeutic indications that require a large sales force selling to a large and diverse prescribing population and for markets outside of North America, we plan to enter into arrangements with
other companies for commercialization. For example, we have entered into an agreement with Gilead for the development and commercialization of certain of our HCV candidates involving NS4A antagonism. 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.

The development of directly acting antivirals (DAAs) to treat HCV, and the potential changes in market dynamics that may result from their introduction for HCV therapy, may present additional risks
beyond those inherent in drug development.

We are developing four DAA compounds, in three distinct classes, for treatment
of chronic HCV infection. Other companies are also developing DAAs in these classes, as well as other classes. The current standard of care for HCV infection includes immunomodulatory therapy with pegylated interferon and ribavirin. No DAAs are
currently approved for treatment of chronic HCV infection.

The development plans for our compounds include treatment regimens
with our inhibitors in combination with the current standard of care (pegylated interferon and ribavirin), our inhibitors with the current standard of care plus another DAA, or our inhibitors with one or more DAAs without concomitant interferon or
ribavirin therapy. These development programs carry all the risks inherent in drug development activities, including the risk that they will fail to show efficacy or acceptable safety. In addition, these development programs may also be subject to
additional regulatory, commercial and manufacturing risks that may be additional to the risks inherent in drug development activities.

Regulatory guidelines for approval of DAA drugs for the treatment of chronic HCV infection are evolving in the United States, Europe, and other countries. We anticipate that regulatory guidelines and
regulatory agency responses to our and our competitors development programs will continue to change, resulting in the risk that our activities may not meet unanticipated new standards or requirements, which could lead to delay, additional
expense, or potential failure of development activities.

Furthermore, even if we or our competitors successfully develop DAAs
whose use improves the current standard of care, current HCV-treating physicians, HCV patients, healthcare payers, and others may not readily accept or pay for such improvements or new treatments.



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In addition, because
development of DAAs is an emerging field, the delay or failure of a competitor attempting to develop therapeutics that could have been combined with our product candidates or that are perceived to be similar to our product candidates could have a
significant adverse effect on the commercial or regulatory environment for our product candidates or on the price of our stock. Other companies developing DAAs have more advanced development programs than we do. Their success or failure to
successfully conclude clinical development and obtain marketing approval could have a material adverse affect on our development and commercialization plans and activities.

If physicians and patients do not accept our future drugs, we may be unable to generate significant revenue, if any.

Even if ACH-1625, ACH-1095, ACH-2684, ACH-2928, ACH-702, elvucitabine or any other drug candidates we may develop or acquire in the future obtain regulatory approval, they may not gain market acceptance
among physicians, health care payors, patients and the medical community. Factors that we believe could materially affect market acceptance of our product candidates include:



| |  |  | the timing of market introduction of competitive drugs;
| | - |  | -------------------------------------------------------



| |  |  | the demonstrated clinical safety and efficacy of our product candidates compared to other drugs;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the cost-effectiveness of our product candidates;
| | - |  | -------------------------------------------------



| |  |  | the availability of reimbursement from managed care plans, the government and other third-party payors;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | the convenience and ease of administration of our product candidates;
| | - |  | ---------------------------------------------------------------------



| |  |  | the existence, prevalence and severity of adverse side effects;
| | - |  | ---------------------------------------------------------------



| |  |  | other potential advantages of alternative treatment methods; and
| | - |  | ----------------------------------------------------------------



| |  |  | the effectiveness of marketing and distribution support.
| | - |  | --------------------------------------------------------

If our approved drugs fail to achieve market acceptance, we would not be able to generate significant revenue.

If we are unable to meet the operational, legal and financial challenges that we encounter with international partnerships, we may not be able to grow our business.

We recently entered into an agreement with GCAT which grants GCAT, through its Chinese joint venture with Tianjing Institute of
Pharmaceutical Research, the right to clinically develop and commercialize elvucitabine in mainland China, Hong Kong and Taiwan. Conducting business in China exposes us to a variety of risks and uncertainties that are unique to China. The economy of
China has been transitioning from a planned economy to a market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state
ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues
to play a significant role in regulating industrial development. It also exercises significant control over Chinas economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting
monetary policy and providing preferential treatment to particular industries or companies. Efforts by the Chinese government to slow the pace of growth of the Chinese economy could result in interruptions of our development and commercialization
efforts in China. In addition, the Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In 1979, the Chinese government began to
promulgate a comprehensive system of laws and regulations governing economic matters in general. Accordingly, we cannot predict the effect of future developments in the Chinese legal system, including the promulgation of new laws, changes to
existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. Our development and commercialization efforts in China could be materially harmed by any changes in the political, legal or economic
climate in China or the inability to enforce applicable Chinese laws and regulations. If such commercialization efforts in China are materially harmed, our collaboration partner may not be able to develop and commercialize elvucitabine in China and
our elvucitabine business may not grow.

If third-party payors do not adequately reimburse patients for any of our drug
candidates that are approved for marketing, they might not be purchased or used, and our revenues and profits will not develop or increase.

Our revenues and profits will depend significantly upon the availability of adequate reimbursement for the use of any approved drug candidates from governmental and other third-party payors, both in the
United States and in foreign markets. Reimbursement by a third party may depend upon a number of factors, including the third-party payors determination that use of a product is:



| |  |  | a covered benefit under its health plan;
| | - |  | ----------------------------------------



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| |  |  | safe, effective and medically necessary;
| | - |  | ----------------------------------------



| |  |  | appropriate for the specific patient;
| | - |  | -------------------------------------



| |  |  | cost effective; and
| | - |  | -------------------



| |  |  | neither experimental nor investigational.
| | - |  | -----------------------------------------

Obtaining reimbursement approval for a product from each third-party and government payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and
cost-effectiveness data for the use of any approved drugs to each payor. We may not be able to provide data sufficient to gain acceptance with respect to reimbursement. There also exists substantial uncertainty concerning third-party reimbursement
for the use of any drug candidate incorporating new technology, and even if determined eligible, coverage may be more limited than the purposes for which the drug is approved by the FDA. Moreover, eligibility for coverage does not imply that any
drug will be reimbursed in all cases or at a rate that allows us to make a profit or even cover our costs. Interim payments for new products, if applicable, may also be insufficient to cover our costs and may not be made permanent. Reimbursement
rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on payments allowed for lower-cost products that are already reimbursed, may be incorporated into existing payments for other products or
services, and may reflect budgetary constraints and/or imperfections in Medicare or Medicaid data used to calculate these rates. Net prices for products may be reduced by mandatory discounts or rebates required by government health care programs or
by any future relaxation of laws that restrict imports of certain medical products from countries where they may be sold at lower prices than in the United States.

In the United States, at both the federal and state levels, the government regularly proposes legislation to reform health care and its cost, and such proposals have received increasing political
attention. Congress is considering legislation to reform the U.S. health care system by expanding health insurance coverage, reducing health care costs and making other changes. While health care reform may increase the number of patients who have
insurance coverage for the use of any approved drug candidate, it may also include changes that adversely affect reimbursement for approved drug candidates. In addition, there has been, and we expect that there will continue to be, federal and state
proposals to constrain expenditures for medical products and services, which may affect payments for any of our approved products. The Centers for Medicare and Medicaid Services frequently change product descriptors, coverage policies, product and
service codes, payment methodologies and reimbursement values. Third-party payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates and may have sufficient market power to demand significant price
reductions. As a result of actions by these third-party payors, the health care industry is experiencing a trend toward containing or reducing costs through various means, including lowering reimbursement rates, limiting therapeutic class coverage
and negotiating reduced payment schedules with service providers for drug products.

Our inability to promptly obtain coverage
and profitable reimbursement rates from government-funded and private payors for any approved products could have a material adverse effect on our operating results and our overall financial condition.

Healthcare reform measures, if implemented, could hinder or prevent our commercial success.

There have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels directed at
broadening the availability of healthcare and containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care
organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect:



| |  |  | the demand for any drug products for which we may obtain regulatory approval;
| | - |  | -----------------------------------------------------------------------------



| |  |  | our ability to set a price that we believe is fair for our products;
| | - |  | --------------------------------------------------------------------



| |  |  | our ability to generate revenues and achieve or maintain profitability;
| | - |  | -----------------------------------------------------------------------



| |  |  | the level of taxes that we are required to pay; and
| | - |  | ---------------------------------------------------



| |  |  | the availability of capital.
| | - |  | ----------------------------



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Risks Related to
Patents and Licenses

If we are unable to adequately protect our drug candidates, or if we infringe the rights of
others, our ability to successfully commercialize our drug candidates will be harmed.

We own or hold exclusive licenses
to several U.S. issued patents and U.S. pending provisional and non-provisional patent applications, as well as pending PCT applications and associated non-US patents and patent applications. Our success depends in part on our ability to obtain
patent protection both in the United States and in other countries for our drug candidates. Our ability to protect our drug candidates from unauthorized or infringing use by third parties depends in substantial part on our ability to obtain and
maintain valid and enforceable patents. 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
maintain, 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 our drug candidates or provide sufficient protection
to afford us a commercial advantage against competitive products or processes. We cannot guarantee that any patents will issue from any pending or future patent applications owned by or licensed to us. For example, our patent application for
ACH-2928 has not yet been published and there is risk that an as yet unpublished third party patent application could have been submitted with an earlier priority date. Even if patents have issued or will issue, we cannot guarantee that the claims
of these patents are or will be valid or enforceable or will provide us with any significant protection against competitive products or otherwise be commercially valuable to us. Patent applications in the United States are maintained in confidence
for up to 18 months after their filing. In some cases, however, patent applications remain confidential in the U.S. Patent and Trademark Office, which we refer to as the U.S. Patent Office, for the entire time prior to issuance as a U.S. patent.
Similarly, publication of discoveries in the scientific or patent literature often lag behind actual discoveries. Consequently, we cannot be certain that we or our licensors or co-owners were the first to invent, or the first to file patent
applications on, our drug candidates or their use as anti-infective drugs. In the event that a third party has also filed a U.S. patent application relating to our drug 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 loss of 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.

The laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as in the
United States and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties in protecting or are otherwise precluded from effectively protecting our
intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed.

We license
patent rights from third-party owners. If such owners do not properly maintain or enforce the patents underlying such licenses, our competitive position and business prospects will be harmed.

We are party to a number of licenses that give us rights to third-party intellectual property that is necessary or useful for our
business. In particular, we have obtained a sublicense from Vion Pharmaceuticals and a license from Emory University with respect to elvucitabine. We may enter into additional licenses for third-party intellectual property in the future. Our success
will depend in part on the ability of our licensors to obtain, maintain and enforce patent protection for their intellectual property, in particular, those patents to which we have secured exclusive rights. Our licensors may not successfully
prosecute the patent applications to which we are licensed. Even if patents issue in respect of these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are
infringing these patents, or may pursue such litigation less aggressively than we would. In addition, our licensors may terminate their agreements with us in the event we breach the applicable license agreement and fail to cure the breach within a
specified period of time. Without protection for the intellectual property we license, other companies might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our
business prospects.



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Litigation
regarding patents, patent applications and other proprietary rights may be expensive and time consuming. If we are involved in such litigation, it could cause delays in bringing drug candidates to market and harm our ability to operate.

Our success will depend in part on our ability to operate without infringing the proprietary rights of third parties.
Although we are not currently aware of any litigation or other proceedings or third-party claims of intellectual property infringement related to our drug candidates, the pharmaceutical industry is characterized by extensive litigation regarding
patents and other intellectual property rights. Other parties may obtain patents in the future and allege that the use of our technologies infringes these patent claims or that we are employing their proprietary technology without authorization.
Likewise, third parties may challenge or infringe upon our existing or future patents. Under our license agreements with Vion Pharmaceuticals we have the right, but not an obligation, to bring actions against an infringing third party. If we do not
bring an action within a specified number of days, the licensor may bring an action against the infringing party. Pursuant to our license agreement with Emory University and our research collaboration and license agreement with Gilead Sciences,
Emory and Gilead have the primary right, but not an obligation, to bring actions against an infringing third party. However, if Gilead or Emory elects not to bring an action, we may bring an action against the infringing party.

Proceedings involving our patents or patent applications or those of others could result in adverse decisions regarding:



| |  |  | the patentability of our inventions relating to our drug candidates; and/or
| | - |  | ---------------------------------------------------------------------------



| |  |  | the enforceability, validity or scope of protection offered by our patents relating to our drug candidates.
| | - |  | -----------------------------------------------------------------------------------------------------------

Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these
proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court.
Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not obtain a license, develop or obtain non-infringing technology, fail to defend an
infringement action successfully or have infringed patents declared invalid, we may:



| |  |  | incur substantial monetary damages;
| | - |  | -----------------------------------



| |  |  | encounter significant delays in bringing our drug candidates to market; and/or
| | - |  | ------------------------------------------------------------------------------



| |  |  | be precluded from participating in the manufacture, use or sale of our drug candidates or methods of treatment requiring licenses.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------

Because of the relative weakness of the Chinese legal system in general, and the intellectual property
rights in particular, we may not be able to enforce intellectual property rights in China.

The legal regime protecting
intellectual property rights in China is weak. Because the Chinese legal system in general, and the intellectual property regime in particular, are relatively weak, it is often difficult to create and enforce intellectual property rights in China.
Accordingly, we may not be able to effectively protect our intellectual property rights in China under the GCAT agreement.

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 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.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

On August 18, 2010, we completed a private placement in which we issued 19,775,101 shares of the Companys common stock to Domain Associates, Clarus Ventures, Quaker BioVentures and Pappas
Ventures, at a price of $2.49 per share, as well as warrants to purchase 0.35 shares of common stock for each share (the Common Warrants) at a price of $0.125 per share of common stock underlying each Common Warrant. The Common Warrants,
which represent the right to acquire an aggregate of 6,921,286 shares of common stock, expire on August 20, 2017, and are exercisable at a price of $3.1125 or by net exercise.



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We received aggregate
net proceeds of approximately $49.9 million, after deducting expenses of the offering of approximately $176,000, which consisted of legal and accounting fees.

The net proceeds are invested in short-term investment grade securities and money market accounts. We currently plan to use the net proceeds for general corporate purposes and to fund our research
operations including: (i) to continue clinical testing of ACH-1625, (ii) to continue preclinical testing of ACH-2684 and ACH-2928, and (iii) to progress additional drug candidates.

Based in part upon the representations of the investors in the purchase agreement, the shares and the Common Warrants were offered and
sold in a private placement to institutional accredited investors without registration under the Securities Act, or the securities laws of certain states, in reliance on the exemptions provided by Section 4(2) of the Securities Act and
Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws.

We filed a
registration statement (File number 333-169460) with the Securities and Exchange Commission covering the resale of the 19,775,101 shares of common stock issued in the private placement and the 6,921,286 shares of common stock issuable upon the
exercise of the Common Warrants. This registration statement was declared effective by the Securities and Exchange Commission on September 30, 2010.



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|ITEM 6. | EXHIBITS
|------- | --------



|     |  |                                                                                                                                                                                                                                                                          
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of President and Chief Executive Officer of Achillion Pharmaceuticals, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as
amended.                                                                                  
|     | 
|31.2 |  | Certification of Senior Vice President and Chief Financial Officer of Achillion Pharmaceuticals, Inc. pursuant toRule 13a-14(a) promulgated under the Securities Exchange
Act of 1934, as amended.                                                                       
|     | 
|32.1 |  | Certification of President and Chief Executive Officer of Achillion Pharmaceuticals, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as
amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.            
|     | 
|32.2 |  | Certification of Senior Vice president and Chief Financial Officer of Achillion Pharmaceuticals, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange
Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.



|                       |  |  |  |                                                                                               
|---------------------- |  |  |  | ----------------------------------------------------------------------------------------------
|                       |  |  |  | ACHILLION PHARMACEUTICALS, INC.                                                               
|                       |  | 
|Date: October 27, 2010 |  |  |  | /S/    MICHAEL D.
KISHBAUCH                                                                   
|                       |  |  |  | President and Chief Executive Officer
(Principal Executive Officer)                           
|                       |  | 
|Date: October 27, 2010 |  |  |  | /S/    MARY KAY
FENTON                                                                        
|                       |  |  |  | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
No. |  | Exhibit                                                                                                                                                                                                                                                                  
|            | 
|31.1        |  | Certification of President and Chief Executive Officer of Achillion Pharmaceuticals, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as
amended.                                                                                  
|            | 
|31.2        |  | Certification of Senior Vice President and Chief Financial Officer of Achillion Pharmaceuticals, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act
of 1934, as amended.                                                                      
|            | 
|32.1        |  | Certification of President and Chief Executive Officer of Achillion Pharmaceuticals, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as
amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.            
|            | 
|32.2        |  | Certification of Senior Vice President and Chief Financial Officer of Achillion Pharmaceuticals, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act
of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.



42