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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period fromto
 Commission File Number 0-50632
 
 ANADYS PHARMACEUTICALS, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    22-3193172
(I.R.S. Employer
Identification No.)
 5871 Oberlin Drive, Suite 200, San Diego, California
    
    92121(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: 858-530-3600
 Securities registered pursuant to Section 12(b) of the Act:
 Title of each class 
Common Stock, $0.001 par value
    
    Name of each exchange on which registered
Nasdaq Global Market
 Securities registered pursuant to Section 12(g) of the Act: None
 
 o þ
 o þ
 þ o
 o o
 þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



ANADYS PHARMACEUTICALS, INC.
ANNUAL REPORT ON FORM 10-K
 Table of Contents
 PagePART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    16Item 1B. Unresolved Staff Comments
    
    
    32Item 2. Properties
    
    
    32Item 3. Legal Proceedings
    
    
    32Item 4. Reserved
    
    
    32PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    33Item 6. Selected Financial Data
    
    
    35Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    36Item 7A. Quantitative and Qualitative Disclosure About Market Risk
    
    
    42Item 8. Financial Statements and Supplementary Data
    
    
    42Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    42Item 9A. Controls and Procedures
    
    
    43Item 9B. Other Information
    
    
    45PART IIIItem 10. Directors, and Executive Officers and Corporate Governance
    
    
    46Item 11. Executive Compensation
    
    
    46Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    46Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    47Item 14. Principal Accounting Fees and Services
    
    
    47PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    48EX-10.19EX-10.20EX-10.21EX-10.22EX-10.23EX-23.1EX-31.1EX-31.2EX-32.1




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INFORMATION RELATED TO FORWARD-LOOKING STATEMENTS
  
 PART I
 
 Item 1. Business
 Overview
      ANA598
   3




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c E V R R V R S V R
    ANA773
    4




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Industry Background
 HCV
       5




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Toll-Like Receptors
   TLR Agonists in Viral Diseases
    Our Strategy
  
    
    Advance the Development of ANA598 in HCV.We are developing ANA598, a DAA, as a
treatment for hepatitis C. During 2011 we intend to:
 
    
    Conduct a Phase IIb study of ANA598 with SOC;
    
    Obtain 8-week viral response data for treatment-naive patients from the ANA598 Phase IIb study;
    
    Obtain 12-week viral response data from the ANA598 Phase IIb study;
    
    Obtain 24-week viral response data from the ANA598 Phase IIb study; and
    
    Analyze final SVR data from the ANA598 Phase IIa study.
 
    
    Maintain flexible development avenues for ANA598.We are developing ANA598 with the
intention of maintaining flexibility to participate in a broad array of potential
treatment paradigms as the HCV landscape evolves. Among other things, this flexibility
encompasses:
 
    
    Building up the safety database by conducting the current Phase IIb
study, which will be relevant for all development avenues; and
    
    Setting the stage for utilizing ANA598 in combination with other DAAs.
 
    
    Advance the Development of ANA773 in HCV.We are also developing ANA773, a selective
TLR7 agonist, as a treatment for hepatitis C. During 2011 we intend to:
 
    
    Initiate a Phase IIa 28-day combination study of ANA773 and ribavirin; and
    
    Obtain 4 week viral load data for ANA773 with ribavirin.
 
    
    Opportunistically Explore Strategic Alliances around our product candidates.We
intend to continue to explore potential strategic alliances and other transactions
around ANA598 and ANA773.
 6




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Our Development Programs
 ANA598 for HCV
     7




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S V R
  Antiviral Response Through 12 Weeks
 Proportion of Patients (%) with Undetectable Levels of Virus (<15 IU/mL) by Week
 Week 1
    
    
    Week 2
    
    
    Week 3
    
    
    Week 4
    
    
    Week 6
    
    
    Week 8
    
    
    Week 10
    
    
    Week 12ANA598 + SOC
200 mg bid
    
    
    11
    
    
    
    22
    
    
    
    44
    
    
    
    56
    
    
    
    65
    
    
    
    69
    
    
    
    73
    
    
    
    73ANA598 + SOC 400 mg
bid
    
    
    9
    
    
    
    27
    
    
    
    30
    
    
    
    42
    
    
    
    56
    
    
    
    72
    
    
    
    75
    
    
    
    75Placebo + SOC
    
    
    0
    
    
    
    3
    
    
    
    9
    
    
    
    13
    
    
    
    19
    
    
    
    38
    
    
    
    48
    
    
    
    63
    8




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in vitro in
vitro data in vitro in vitro
 9




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ANA773 for HCV
     Manufacturing and Supply
  Intellectual Property
   
    
    Obtain and maintain patent and other proprietary protection for the technology,
inventions and improvements we consider important to our business;
    
    Defend and enforce our patents;
    
    Preserve the confidentiality of our trade secrets; and
    
    Operate without infringing the patents and proprietary rights of third parties.
 10




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Competition
  11




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HCV
 Treating HCV with Interferon-based Therapies
   Direct Antivirals in Development for Treating HCV
    12




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Immunological Agents in Development for Treating HCV
  Competitive Risks
    e.g.
 Government Regulations
  13




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
    
    Phase I: Studies are conducted on normal, healthy human volunteers or patients to
determine safety, dosage tolerance, absorption, metabolism, distribution and excretion. If
possible, Phase I studies may also be designed to gain early evidence of effectiveness.
    
    Phase II: Studies are conducted on small groups of patients afflicted with a specific
disease to gain preliminary evidence of efficacy, to determine the common short-term side
effects and risks associated with the substance being tested and to determine dosage
tolerance and optimal dosage.
    
    Phase III: Involves large-scale studies conducted on disease-afflicted patients to
provide statistical evidence of efficacy and safety and to provide an adequate basis for
physician labeling.
  Environmental and Safety Matters
   Research and Development Expenses
  14




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Employees
  Executive Officers of the Registrant
  Name
    
    Age
    
    PositionSteve Worland, Ph.D.
    
    
    53
    
    
    President and Chief Executive OfficerJames L. Freddo, M.D.
    
    
    56
    
    
    Senior Vice President, Drug Development and Chief Medical
OfficerKevin L. Eastwood
    
    
    47
    
    
    Senior Vice President, Corporate DevelopmentJames Appleman, Ph.D.
    
    
    54
    
    
    Senior Vice President, Research and Chief Scientific OfficerElizabeth E. Reed, J.D.
    
    
    40
    
    
    Senior Vice President, Legal Affairs and General CounselPeter T. Slover, CPA
    
    
    36
    
    
    Vice President, Finance and Operations
 Steve Worland, Ph.D.
 James L. Freddo, M.D ®
 Kevin L. Eastwood
 James Appleman, Ph.D.
 15




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Elizabeth E. Reed, J.D.
 Peter T. Slover
 Company Website
 http://www.anadyspharma.com
  
 Item 1A. Risk Factors
 You should consider carefully the following information about the risks described below,
together with the other information contained in this Annual Report and in our other public filings
before making any investment decisions regarding our stock. If any of the following risks actually
occurs, our business, financial condition, results of operations and future growth prospects would
likely be materially and adversely affected. In these circumstances, the market price of our common
stock would likely decline, and you may lose all or part of the money you paid to buy our common
stock.
 Risks Related to Our Business
 Any significant set-back regarding, or the failure of, ANA598 will have a large negative
impact on our business and stock price.
  We may be unable to enter into future strategic or collaborative transactions, and in
particular transactions around ANA598 or ANA773, on terms acceptable to us, or at all.
  16




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In order to advance ANA598 and ANA773 through later stage development, we will require
additional funds and we may not be able to obtain such funds.
  We will need additional funding and may be unable to raise capital when needed, which would
force us to delay, reduce or eliminate our development programs.
   
    
    fund our development programs;
    
    acquire rights to products or product candidates, technologies or businesses;
    
    establish and maintain manufacturing, sales and marketing operations; and
    
    commercialize our product candidates, if any, that receive regulatory approval.
  
    
    the progress of our clinical trials;
    
    the progress of our nonclinical development activities;
    
    our ability to establish and maintain strategic alliances;
    
    the costs involved in enforcing or defending patent claims and other intellectual property rights;
    
    the pace and timing of development activities conducted under joint development arrangements we may establish;
    
    the cost and timing of regulatory approvals;
    
    the costs of establishing or expanding manufacturing, sales and distribution capabilities;
    
    the costs related to development and manufacture of pre-clinical, clinical and validation lots for regulatory
and commercialization of drug supply;
    
    the commercialization of ANA598, ANA773 and any additional products; and
    
    the extent to which we acquire or invest in other products technologies and businesses.
 17




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Raising additional funds by issuing securities or through debt or project financing or
strategic alliances and licensing arrangements may cause dilution to existing stockholders,
restrict our operations or require us to relinquish proprietary rights.
  We are at an early stage of development, and we may never attain product sales.
  We expect our net losses to continue for at least several years, and we are unable to predict
the extent of future losses and when we will become profitable in our business operations, if ever.
  The technologies on which we rely are unproven and may not result in the development of
commercially viable products.
  18




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Because the results of preclinical studies and early clinical trials are not necessarily
predictive of future results, we can provide no assurances that ANA598 or ANA773 will have
favorable results in on-going or future clinical trials, or receive regulatory approval.
  Future results of our ongoing ANA598 Phase II combination studies and results of future trials
may not be as favorable as results we have seen to date.
   We intend to develop ANA598 and ANA773 as components of combination treatments, which presents
additional challenges to the drug development process.
  19




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There is no guarantee that in future studies of ANA598, in which ANA598 will be dosed for
longer duration in combination with other agents, that we will be able to identify safe and
tolerable doses that result in clinical benefit, as measured by clearance of virus and durability
of that clearance.
 in vitro
 Our projected development timelines for ANA598 and ANA773 are contingent, among other things,
on our anticipated interactions with ex-US regulatory authorities for both programs. There is no
guarantee that the ex-US regulatory authorities will allow the studies to proceed or that they will
not impose requirements which could result in unexpected cost increases and/or delays to our
desired timelines for the studies.
  The FDA could impose additional requirements on the development of ANA598 which could result
in unexpected cost increases and/or delays to our development timelines.
  20




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Fast track designation does not guarantee approval, or expedited approval, of ANA598 and there
is no guarantee that ANA598 will maintain fast track designation.
  We have recently decided to resume clinical investigation of ANA773 for HCV. There is no
guarantee that development of the program will be continued beyond the upcoming Phase IIa study.
  In 2007 we terminated our ANA975 development program due to challenges seen in animal
toxicology studies. To the extent that the ANA975 toxicology observations are mechanism related,
our ANA773 program could be negatively impacted, causing our stock price to decline.
  Delays in the commencement of clinical testing of our current and potential product candidates
could result in increased costs to us and delay our ability to generate revenues.
  21




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
    
    demonstrating sufficient safety and efficacy to obtain regulatory approval to commence a clinical trial;
    
    reaching agreement on acceptable terms with prospective contract research organizations and trial sites;
    
    manufacturing sufficient quantities or producing drug meeting our quality standards for a product candidate;
    
    obtaining approval of an IND application or proposed trial design from the FDA; and
    
    obtaining institutional review board approval to conduct a clinical trial at a prospective site.
  Delays in the completion of, or the termination of, clinical testing of our current and
potential product candidates could result in increased costs to us and delay or prevent us from
generating revenues.
  
    
    ongoing discussions with the FDA or other regulatory authorities regarding the scope or design of our clinical trials;
    
    failure to conduct clinical trials in accordance with regulatory requirements;
    
    lower than anticipated enrollment or retention rate of patients in clinical trials;
    
    inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in
the imposition of a clinical hold;
    
    lack of adequate funding to continue clinical trials;
    
    negative results of clinical trials;
    
    negative or potentially problematic results of ongoing and concurrent non-clinical toxicology studies;
    
    requests by the FDA for supplemental information on, or clarification of, the results of clinical trials conducted in
other countries;
    
    insufficient supply or deficient quality of drug candidates or other materials necessary for the conduct of our
clinical trials; or
    
    serious adverse events or other undesirable drug-related side effects experienced by participants.
  Even if we successfully complete clinical trials of ANA598, ANA773 or any future product
candidate, there are no assurances that we will be able to submit, or obtain FDA approval of, a new
drug application.
  22




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If we successfully develop products but those products do not achieve and maintain market
acceptance, our business will not be profitable.
  
    
    our ability to provide acceptable evidence of safety and efficacy;
    
    relative convenience and ease of administration;
    
    the prevalence and severity of any adverse side effects;
    
    availability of alternative treatments;
    
    pricing and cost effectiveness;
    
    effectiveness of our or our collaborators sales and marketing strategy;
    
    our ability to obtain sufficient third-party insurance coverage or reimbursement; and
    
    our ability to establish or maintain an attractive price for ANA598 when used in combination with other agents.
   
    
    new products or technologies are introduced that are more favorably received than our products, are more
cost effective or render our products obsolete; or
    
    complications, such as long-term toxicities and viral resistance, arise with respect to use of our products.
 We depend on outside parties to conduct our clinical trials, which may result in costs and
delays that prevent us from obtaining regulatory approval or successfully commercializing product
candidates.
  We do not have internal manufacturing capabilities, and if we fail to develop and maintain
supply relationships with future collaborators or other outside manufacturers, we may be unable to
develop or commercialize any of our products.
  23




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If we are unable to establish sales and marketing capabilities or enter into agreements with
third parties to sell and market any products we may develop, we may not be able to generate
product revenue.
  If we are unable to retain key management and scientific staff, we may be unable to
successfully develop or commercialize our product candidates.
   Earthquake or wildfire damage to our facilities could delay our research and development
efforts and adversely affect our business.
  Our securities available-for-sale held in the form of marketable securities are subject to
market, interest and credit risk that may reduce their value.
  24




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Risks Related to Our Industry
 Because our product candidates and development and collaboration efforts depend on our
intellectual property rights, adverse events affecting our intellectual property rights will harm
our ability to commercialize products.
    
    
    we might not have been the first to make, conceive, or reduce to practice the inventions covered by all
or any of our pending patent applications and issued patents;
    
    we might not have been the first to file patent applications for these inventions;
    
    others may independently develop similar or alternative technologies or duplicate any of our technologies;
    
    it is possible that none of our pending patent applications will result in issued patents;
    
    our issued or acquired patents may not provide a basis for commercially viable products, may not provide
us with any competitive advantages, or may be challenged by third parties;
    
    our issued patents may not be valid or enforceable;
    
    we may not develop additional proprietary technologies that are patentable; or
    
    the patents of others may have an adverse effect on our business.
   25




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If we are sued for infringing intellectual property rights of others, it will be costly and
time-consuming, and an unfavorable outcome in that litigation would have a material adverse effect
on our business.
   
    
    cease selling, incorporating or using any of our product
candidates or technologies that incorporate the challenged
intellectual property;
    
    obtain a license from the holder of the infringed
intellectual property right, which license may be costly or
may not be available on reasonable terms, it at all; or
    
    redesign our processes or technologies so that they do not
infringe, which could be costly and time consuming and may
not be possible.
   We may be involved in lawsuits or proceedings to protect or enforce our patent rights, trade
secrets or know-how, which could be expensive and time-consuming.
  26




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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.
  Many competitors have significantly more resources and experience, which may harm our
commercial opportunity.
  
    
    research and development;
    
    preclinical testing;
    
    clinical trials;
    
    regulatory approvals;
    
    manufacturing; and
    
    sales and marketing of approved products.
  27




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If our competitors develop treatments for HCV that are approved faster, marketed better or
demonstrated to be more effective than ANA598, ANA773, or any other products that we may develop,
our commercial opportunity will be reduced or eliminated.
    If we cannot establish pricing of our product candidates acceptable to the government,
insurance companies, managed care organizations and other payors, any product sales will be
severely hindered.
  
    
    our ability to set a price we believe is fair for any products we or our collaborators may develop;
    
    our ability to generate adequate revenues and gross margins; and
    
    the availability of capital.
  28




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If we cannot arrange for reimbursement policies favorable to our product candidates, their
sales will be severely hindered.
  Product liability claims may damage our reputation and, if insurance proves inadequate, the
product liability claims may harm our results of operations.
  
    
    decreased demand for our product candidates;
    
    injury to our reputation;
    
    withdrawal of clinical trial participants;
    
    the inability to establish new collaborations with potential collaborators;
    
    substantial costs of related litigation;
    
    substantial monetary awards to patients; and
    
    the inability to commercialize our product candidates.
  Any claims relating to our improper handling, storage or disposal of biological, hazardous and
radioactive materials could be time-consuming and costly.
  29




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Our business and operations would suffer in the event of system failures.
  Risks Related to Our Common Stock
 Future sales of our common stock may cause our stock price to decline.
  Our stock price may be volatile.
  
    
    changes in the regulatory status of our product candidates, including the status and results of our clinical trials of
ANA598 and ANA773;
    
    significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments;
    
    disputes or other developments relating to proprietary rights, including patents, trade secrets, litigation matters,
and our ability to patent or otherwise protect our product candidates and technologies;
    
    conditions or trends in the pharmaceutical and biotechnology industries;
    
    fluctuations in stock market prices and trading volumes of similar companies, of our competitors or of the markets
generally;
    
    variations in our quarterly operating results;
    
    changes in securities analysts estimates of our financial performance;
    
    failure to meet or exceed securities analysts or investors expectations of our quarterly financial results, clinical
results or our achievement of milestones;
    
    sales of large blocks of our common stock, or the expectation that such sales may occur, including sales by our
executive officers, directors and significant stockholders;
    
    additions or departures of key personnel;
    
    discussion of our business, products, financial performance, prospects or our stock price by the financial and
scientific press and online investor communities such as chat rooms;
    
    regulatory developments in the United States and foreign countries;
    
    economic and political factors, including wars, terrorism and political unrest; and
    
    technological advances by our competitors.
 30




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Our quarterly results may fluctuate significantly, resulting in fluctuations in our stock
price.
  
    
    the status of development of ANA598, ANA773 and our other
product candidates, including results of preclinical studies
and clinical trials and changes in regulatory status;
    
    our execution of collaborative, licensing or other
arrangements and the timing and accounting treatment of
payments we make or receive under these arrangements;
    
    whether or not we achieve specified research or
commercialization milestones under any agreement that we
enter into with collaborators and the timely payment by
commercial collaborators of any amounts payable to us;
    
    variations in the level of expenses related to our product
candidates or potential product candidates during any given
period; and
    
    the effect of competing technological and market developments.
  Our largest stockholders may take actions that are contrary to your interests, including
selling their stock.
  Anti-takeover provisions in our organizational documents and Delaware law may discourage or
prevent a change in control, even if an acquisition would be beneficial to our stockholders, which
could affect our stock price adversely and prevent attempts by our stockholders to replace or
remove our current management.
  
    
    dividing our board of directors into three classes serving staggered three-year terms;
    
    prohibiting our stockholders from calling a special meeting of stockholders;
    
    permitting the issuance of additional shares of our common stock or preferred stock without stockholder approval;
    
    prohibiting our stockholders from making certain changes to our amended and restated certificate of
incorporation or amended and restated bylaws except with 66 2/3% stockholder approval; and
    
    requiring advance notice for raising matters of business or making nominations at stockholders meetings.
  31




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We have never paid cash dividends on our capital stock and we do not anticipate paying
dividends in the foreseeable future.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. Reserved
  32




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Part II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchase of
Equity Securities
 Market Information
  2010
    
    High
    
    
    LowFirst Quarter
    
    $
    2.65
    
    
    $
    1.83Second Quarter
    
    
    3.24
    
    
    
    1.92Third Quarter
    
    
    2.42
    
    
    
    1.67Fourth Quarter
    
    
    2.38
    
    
    
    0.90
 2009
    
    High
    
    
    LowFirst Quarter
    
    $
    8.43
    
    
    $
    1.61Second Quarter
    
    
    6.90
    
    
    
    1.68Third Quarter
    
    
    3.32
    
    
    
    1.44Fourth Quarter
    
    
    3.02
    
    
    
    1.79
 Holders
  Dividend Policy
  33




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Performance Measurement Comparison (1)
   
 December 31, 2005
    
    
    December 31, 2006
    
    
    December 31, 2007
    
    
    December 31, 2008
    
    
    December 31, 2009
    
    
    December 31, 2010Anadys Pharmaceuticals,
Inc.
    
    $
    100.00
    
    
    $
    55.91
    
    
    $
    18.30
    
    
    $
    17.84
    
    
    $
    23.98
    
    
    $
    16.14NASDAQ
Composite Index
    
    
    100.00
    
    
    
    109.52
    
    
    
    120.27
    
    
    
    71.51
    
    
    
    102.89
    
    
    
    120.29NASDAQ Biotechnology Index
    
    
    100.00
    
    
    
    101.02
    
    
    
    105.65
    
    
    
    92.31
    
    
    
    106.74
    
    
    
    122.76
 
 (1)
    
    This section is not soliciting material, is not deemed filed with the SEC and
is not to be incorporated by reference in any filing of the Company under the 1933 Act or the
1934 Act whether made before or after the date hereof and irrespective of any general
incorporation language in any such filing. 34




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Item 6. Selected Financial Data
 
 For the year ended December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(In thousands, except net loss per share)Consolidated Statements of Operations Data:Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    24,118
    
    
    $
    5,420Operating expenses:Research and development
    
    
    12,026
    
    
    
    19,494
    
    
    
    25,993
    
    
    
    28,192
    
    
    
    25,419General and administrative
    
    
    6,478
    
    
    
    8,243
    
    
    
    8,109
    
    
    
    8,692
    
    
    
    11,308Total operating expenses
    
    
    18,504
    
    
    
    27,737
    
    
    
    34,102
    
    
    
    36,884
    
    
    
    36,727Loss from operations
    
    
    (18,504
    )
    
    
    (27,737
    )
    
    
    (34,102
    )
    
    
    (12,766
    )
    
    
    (31,307
    )Other income (expense):Interest income
    
    
    106
    
    
    
    478
    
    
    
    1,482
    
    
    
    3,611
    
    
    
    4,727Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69
    )Gain (loss) from valuation of common
stock warrant liability
    
    
    2,016
    
    
    
    (151
    )
    
    
    
    
    
    
    
    
    
    
    Other, net
    
    
    33
    
    
    
    132
    
    
    
    218
    
    
    
    (17
    )
    
    
    (111
    )Total other income (expense), net
    
    
    2,155
    
    
    
    459
    
    
    
    1,700
    
    
    
    3,594
    
    
    
    4,547Net loss
    
    $
    (16,349
    )
    
    $
    (27,278
    )
    
    $
    (32,402
    )
    
    $
    (9,172
    )
    
    $
    (26,760
    )Net loss per share, basic and diluted:
    
    $
    (0.38
    )
    
    $
    (0.81
    )
    
    $
    (1.13
    )
    
    $
    (0.32
    )
    
    $
    (0.94
    )Shares used in calculating net loss per
share, basic and diluted:
    
    
    43,570
    
    
    
    33,775
    
    
    
    28,750
    
    
    
    28,646
    
    
    
    28,512
 As of December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(In thousands)Consolidated Balance Sheet Data:Cash, cash equivalents and securities available-for-sale
    
    $
    37,984
    
    
    $
    20,490
    
    
    $
    27,936
    
    
    $
    56,495
    
    
    $
    82,149Working capital
    
    
    34,452
    
    
    
    13,769
    
    
    
    24,325
    
    
    
    52,084
    
    
    
    75,054Total assets
    
    
    39,537
    
    
    
    21,735
    
    
    
    31,674
    
    
    
    61,526
    
    
    
    89,401Long-term debt, net of current portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated deficit
    
    
    (299,681
    )
    
    
    (283,332
    )
    
    
    (256,054
    )
    
    
    (223,652
    )
    
    
    (214,480
    )Total stockholders equity
    
    
    34,673
    
    
    
    14,429
    
    
    
    25,825
    
    
    
    55,679
    
    
    
    60,325
 35




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Overview
      
    
    continue the development of ANA598 for the treatment of HCV;
    
    optimize methods for and scale-up manufacturing of ANA598 for clinical trials and
potential commercialization;
    
    commercialize any product candidates that receive regulatory approval; and
    
    potentially in-license technology and acquire or invest in businesses, products or
technologies that are synergistic with our own.
 36




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##### Table of Contents



Research and Development
    For the year ended December 31,2010
    
    
    2009
    
    
    2008ANA598
    
    $
    8,808
    
    
    $
    10,355
    
    
    $
    11,044ANA773
    
    
    264
    
    
    
    3,103
    
    
    
    8,177Infrastructure, support personnel and other
    
    
    2,718
    
    
    
    4,052
    
    
    
    5,501Section 48D grant
    
    
    (489
    )
    
    
    
    
    
    
    Severance related to 2009 strategic restructuring
    
    
    
    
    
    
    630
    
    
    
    Non-cash
employee and non-employee share-based compensation
    
    
    725
    
    
    
    1,354
    
    
    
    1,271Total research and development expense
    
    $
    12,026
    
    
    $
    19,494
    
    
    $
    25,993
  General and Administrative
  Critical Accounting Policies
  Drug Development Costs.
 37




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##### Table of Contents



Common Stock Warrant Liability.
 Share-Based Compensation.
 Results of Operations
 Comparison of the Years Ended December 31, 2010, 2009 and 2008
 Research and Development Expenses
  General and Administrative Expenses.
 38




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##### Table of Contents



Interest Income.
 Valuation of Common Stock Warrant Liability.
 Liquidity and Capital Resources
 Overview
    Future Cash Requirements
  39




---



##### Table of Contents




    
    the progress of our clinical trials;
    
    the progress of our nonclinical development activities;
    
    our ability to establish and maintain strategic alliances;
    
    the costs involved in enforcing or defending patent claims and other intellectual
property rights;
    
    the costs and timing of regulatory approvals;
    
    the costs of establishing or expanding manufacturing, sales and distribution
capabilities;
    
    the costs related to development and manufacture of non-clinical, clinical and
validation lots for regulatory and commercialization of drug supply;
    
    the success of the commercialization of ANA598, ANA773 or any other product candidates
we may develop; and
    
    the extent to which we acquire or invest in other products, technologies and businesses.
 Investment Portfolio
   Cash Flows from Operating Activities and Investing Activities
  For the year ended December 31,2010
    
    
    2009
    
    
    2008Net cash used in operating activities
    
    $
    (16,988
    )
    
    $
    (24,229
    )
    
    $
    (28,288
    )Cash (used in) provided by investing activitiesPurchase of securities available-for-sale
    
    $
    (38,934
    )
    
    $
    (24,657
    )
    
    $
    (8,806
    )Proceeds from sale of securities available-for-sale
    
    
    24,191
    
    
    
    26,484
    
    
    
    12,463Purchase of property and equipment
    
    
    (7
    )
    
    
    (88
    )
    
    
    (213
    )Proceeds from disposal of property and equipment
    
    
    6
    
    
    
    111
    
    
    
    392Net cash (used in) provided by investing activities
    
    $
    (14,744
    )
    
    $
    1,850
    
    
    $
    3,836
 40




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##### Table of Contents



Cash Flows from Financing Activities
  For the year ended December 31,2010
    
    
    2009
    
    
    2008Cash provided by financing activitiesProceeds from exercise of stock options and employee stock purchase plan
    
    $
    158
    
    
    $
    385
    
    
    $
    259Proceeds from equity financing, net of issuance costs
    
    
    34,694
    
    
    
    16,015
    
    
    
    Net cash provided by financing activities
    
    $
    34,852
    
    
    $
    16,400
    
    
    $
    259
  Aggregate Contractual Obligations
  Lessthan 1
    
    
    20012 to
    
    
    2014 toContractual Obligations
    
    Total
    
    
    Year
    
    
    2013
    
    
    2015
    
    
    ThereafterOperating leases1
    
    $
    324
    
    
    $
    296
    
    
    $
    28
    
    
    $
    
    
    
    $
    Minimum royalty commitment
    
    
    600
    
    
    
    100
    
    
    
    200
    
    
    
    200
    
    
    
    100$
    924
    
    
    $
    396
    
    
    $
    228
    
    
    $
    200
    
    
    $
    100
 
 1
    
    On February 28, 2011, we entered into a lease agreement with
ARE-SD Region No. 31, LLC for the lease of 13,674 square feet of office and laboratory space in
which the Company will continue to use for our headquarters and research and development facility. The lease replaces our expired
sublease with Phenomix Corporation for the same space located in San Diego, California. Obligations associated with
this lease are included in the table above.  41




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##### Table of Contents



Fair Value Inputs
   Off-Balance Sheet Arrangements
  
 Item 7A. Quantitative and Qualitative Disclosure About Market Risk
  
 Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  42




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##### Table of Contents



Item 9A. Controls and Procedures
 Managements Report on Internal Control Over Financial Reporting
 Evaluation of Disclosure Controls and Procedures:
 Managements Annual Report on Internal Control over Financial Reporting
 Internal Control  Integrated Framework Internal Control  Integrated
Framework
  Changes in Internal Control Over Financial Reporting:
 43




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
        /s/ Ernst & Young LLP 
 44




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##### Table of Contents



Item 9B. Other Information
  45




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##### Table of Contents



Part III
  
 Item 10. Directors, Executive Officers and Corporate Governance
   http://www.anadyspharma.com
 
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
   (c)Number of securitiesremaining available for(a)
    
    
    (b)
    
    
    future issuance under equityNumber of securities to
    
    
    Weighted-average
    
    
    compensation plansbe issued upon exercise
    
    
    exercise price of
    
    
    (excluding securitiesPlan Category
    
    of outstanding options
    
    
    outstanding options
    
    
    reflected in column (a))Equity
compensation plans
approved by
security holders
    
    
    6,820,466
    
    
    $
    3.25
    
    
    
    3,027,533Equity compensation
plans not approved
by security holders
    
    
    200,000
    
    
    $
    3.00
    
    
    
    Total
    
    
    7,020,466
    
    
    
    
    
    
    
    3,027,533
 46




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accounting Fees and Services
  47




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##### Table of Contents



Part IV
 
 Item 15. Exhibits and Financial Statement Schedules
  (1)
    
    Financial Statements. See index to consolidated financial statements on page F-1.(2)
    
    Financial Statement Schedules. All financial statements schedules for which provision
is made in Regulation S-X are omitted because they are not required under the related
instructions, are inapplicable, or the required information is given in the financial
statements, including the notes thereto.(3)
    
    Exhibits.
 ExhibitNumber
    
    Exhibit Description
    
    Incorporated by Reference or Attached Hereto3.1
    
    Form of Amended and Restated Certificate of
Incorporation of the Registrant
    
    Incorporated by reference to the
Registrants Quarterly Report on Form 10-Q
(SEC File No. 000-50632) filed on May 14,
2004.3.2
    
    Amended and Restated Bylaws of the Registrant
    
    Incorporated by reference to the
Registrants Current Report on Form 8-K
(SEC File No. 000-50632) filed on December
5, 2007.4.1
    
    Form of Specimen Common Stock Certificate
    
    Incorporated by reference to the
Registrants Registration Statement on Form
S-1 (SEC File No. 333-110528) filed on
March 18, 2004.4.2
    
    Form of Warrant
    
    Incorporated by reference to the
Registrants Current Report on Form 8-K
(SEC File No. 000-50632) filed on June 4,
2009.10.1#
    
    2002 Equity Incentive Plan
    
    Incorporated by reference to Exhibit 10.3
in the Registrants Registration Statement
on Form S-1 (SEC File No. 333-110528) filed
on November 14, 2003.10.2#
    
    Form of Stock Option Agreement under 2002
Equity Incentive Plan
    
    Incorporated by reference to Exhibit 10.4
in the Registrants Registration Statement
on Form S-1 (SEC File No. 333-110528) filed
on November 14, 2003.10.3#
    
    2004 Equity Incentive Plan
    
    Incorporated by reference to Exhibit 10.5
in the Registrants Registration Statement
on Form S-1 (SEC File No. 333-110528) filed
on March 18, 2004.10.4#
    
    Form of Stock Option Agreement under 2004
Equity Incentive Plan
    
    Incorporated by reference to Exhibit 10.6
in the Registrants Registration Statement
on Form S-1 (SEC File No. 333-110528) filed
on March 18, 2004.10.5#
    
    Form of Amendment to Stock Option Agreement
Under 2004 Equity Incentive Plan, applicable
to Non-Employee Director grants
    
    Incorporated by reference to Exhibit 10.5
in the Registrants Annual Report on Form
10-K (SEC File No. 000-50632) filed on
March 3, 2009.10.6#
    
    2004 Employee Stock Purchase Plan
    
    Incorporated by reference to Exhibit 10.7
in the Registrants Registration Statement
on Form S-1 (SEC File No. 333-110528) filed
on March 18, 2004.10.7#
    
    Form of Offering Document under the 2004
Employee Stock Purchase Plan
    
    Incorporated by reference to Exhibit 10.8
in the Registrants Registration Statement
on Form S-1 (SEC File No. 333-110528) filed
on March 18, 2004.10.8#
    
    Form of Indemnification Agreement by and
between the Registrant and each of its
directors and officers
    
    Incorporated by reference to Exhibit 10.11
in the Registrants Registration Statement
on Form S-1 (SEC File No. 333-110528) filed
on November 14, 2003.
 48




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description
    
    Incorporated by Reference or Attached Hereto10.9#
    
    Form of Stock Option Agreement Under 2004
Non-Employee Directors Stock Option Plan
    
    Incorporated by reference to Exhibit 10.10
in the Registrants Registration Statement
on Form S-1 (SEC File No. 333-110528) filed
on March 18, 2004.10.10#
    
    Terms of Employment dated February 1, 2001
by and between the Registrant and Steve
Worland, Ph.D.
    
    Incorporated by reference to Exhibit 10.27
in the Registrants Registration Statement
on Form S-1 (SEC File No. 333-110528) filed
on November 14, 2003.10.11#
    
    Terms of Employment dated October 2, 2001 by
and between the Registrant and Elizabeth E.
Reed
    
    Incorporated by reference to Exhibit 10.30
in the Registrants Registration Statement
on Form S-1 (SEC File No. 333-110528) filed
on March 18, 2004.10.12#
    
    Form of Inducement Stock Option Agreement
    
    Incorporated by reference to Exhibit 10.42
in the Registrants Current Report on Form
8-K (SEC File No. 000-50632) filed on
September 25, 2006.10.13#
    
    Terms of Employment dated June 21, 2006 by
and between the registrant and James L.
Freddo, M.D.
    
    Incorporated by reference to Exhibit 10.21
in the Registrants Annual Report on Form
10-K (SEC File No. 000-50632) filed on
March 5, 2008.10.14#
    
    Amended and Restated 2004 Non-Employee
Directors Stock Option Plan
    
    Incorporated by reference to Exhibit 10.24
in the Registrants Quarterly Report on
Form 10-Q (SEC File No. 000-50632) filed on
May 1, 2008.10.15
    
    Sub-lease agreement dated June 18, 2009 by
and between the Registrant and Phenomix
Corporation
    
    Incorporated by reference to Exhibit 10.24
in the Registrants Quarterly Report on
Form 10-Q (SEC File No. 000-50632) filed on
July 31, 2009.10.16#
    
    Terms of Employment dated July 1, 2009 for
Peter T. Slover
    
    Incorporated by reference to Exhibit 10.26
in the Registrants Quarterly Report on
Form 10-Q (SEC File No. 000-50632) filed on
July 31, 2009.10.17#
    
    Anadys Pharmaceuticals, Inc. Executive
Officer Bonus Plan
    
    Incorporated by reference to Exhibit 10.29
in the Registrants Quarterly Report on
Form 10-Q (SEC File No. 000-50632) filed on
October 30, 2009.10.18#
    
    Amended and Restated Severance and Change in
Control Agreement dated January 24, 2011 by and between the
Registrant and James L. Freddo, M.D.
    
    Incorporated by reference to Exhibit 10.27
in the Registrants Current Report on Form
8-K (SEC File No. 000-50632) filed on
January 24, 2011.10.19#
    
    Amended and Restated Severance and Change in
Control Agreement dated February 6, 2011 by and between the
Registrant and Stephen T. Worland, Ph.D.
    
    Attached Hereto.10.20#
    
    Amended and Restated Severance and Change in
Control Agreement dated January 24, 2011 by and between the
Registrant and Elizabeth E. Reed
    
    Attached Hereto.10.21#
    
    Amended and Restated Severance and Change in
Control Agreement dated January 24, 2011 by and between the
Registrant and Peter T. Slover
    
    Attached Hereto.10.22
    
    First Amendment to Lease dated December 20,
2010 by and between the Registrant, ARE-SD
Region No. 31, LLC, and Phenomix Corporation
    
    Attached Hereto.10.23
    
    Lease dated February 28, 2011 by and
between the Registrant and ARE-SD Region No.
31, LLC.
    
    Attached Hereto.21.1
    
    List of Subsidiaries of the Registrant
    
    Incorporated by reference to Exhibit 21.1
in the Registrants Registration Statement
on Form S-1 (SEC File No. 333-110528) filed
on November 14, 2003.23.1
    
    Consent of Independent Registered Public
Accounting Firm
    
    Attached Hereto.
 49




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description
    
    Incorporated by Reference or Attached Hereto31.1
    
    Certification of President and Chief
Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under
the Securities Act of 1934, as amended
    
    Attached Hereto.31.2
    
    Certification of Vice President, Finance and
Operations pursuant to Rules 13a-14(a) and
15d-14(a) promulgated under the Securities
Act of 1934, as amended
    
    Attached Hereto.32.1
    
    Certifications of President and Chief
Executive Officer and Vice President,
Finance and Operations pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
    
    Attached Hereto.
 
 #
    
    Indicates management contract or compensatory plan. 50




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##### Table of Contents



SIGNATURES
 th
 ANADYS PHARMACEUTICALS, INC.By:
    /s/ STEPHEN T. WORLAND, PH.D.Stephen T. Worland, Ph.D.President and Chief Executive Officer POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ STEPHEN T. WORLAND, PH.D.

Stephen T. Worland, Ph.D.
    
    President, Chief Executive Officer and Director (Principal
Executive Officer)
    
    March 4, 2011/s/ PETER T. SLOVER

Peter T. Slover
    
    Vice President, Finance and Operations(Principal Financial and Accounting Officer)
    
    March 4, 2011/s/ STELIOS PAPADOPOULOS, PH.D.

Stelios Papadopoulos, Ph.D.
    
    Chairman of the Board
    
    March 4, 2011/s/ MARK G. FOLETTA

Mark G. Foletta
    
    Director
    
    March 4, 2011/s/ MARIOS FOTIADIS

Marios Fotiadis
    
    Director
    
    March 4, 2011/s/ JAMES L. FREDDO

James L. Freddo
    
    Director
    
    March 4, 2011/s/ KLEANTHIS G. XANTHOPOULOS, PH.D.

Kleanthis G. Xanthopoulos, Ph.D.
    
    Director
    
    March 4, 2011
 51




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2010 and 2009
    
    F-3Consolidated Statements of Operations for each of the years ended December 31, 2010, 2009 and 2008
    
    F-4Consolidated Statements of Stockholders Equity for each of the years ended December 31, 2010,
2009 and 2008
    
    F-5Consolidated Statements of Cash Flows for each of the years ended December 31, 2010, 2009 and 2008
    
    F-6Notes to Consolidated Financial Statements
    
    F-7
 F-1




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Report of Independent Registered Public Accounting Firm
      /s/ Ernst & Young LLP
 
 F-2




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 
 CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 December 31,
    
    
    December 31,2010
    
    
    2009AssetsCurrent assets:Cash and cash equivalents
    
    $
    7,617
    
    
    $
    4,497Securities available-for-sale
    
    
    30,367
    
    
    
    15,993Prepaid expenses and other current assets
    
    
    1,319
    
    
    
    559Total current assets
    
    
    39,303
    
    
    
    21,049Property and equipment, net
    
    
    234
    
    
    
    626Other assets
    
    
    
    
    
    
    60Total assets
    
    $
    39,537
    
    
    $
    21,735Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    251
    
    
    $
    740Accrued expenses
    
    
    2,719
    
    
    
    2,643Common stock warrant liability
    
    
    1,881
    
    
    
    3,897Total current liabilities
    
    
    4,851
    
    
    
    7,280Other long-term liabilities
    
    
    13
    
    
    
    26Commitments and contingenciesStockholders equity:Preferred stock, $0.001 par value; 10,000,000 shares authorized at December 31, 2010 and
December 31, 2009; no shares issued and outstanding at December 31, 2010 and
December 31, 2009
    
    
    
    
    
    
    Common stock, $0.001 par value; 90,000,000 shares authorized at December 31, 2010 and
December 31, 2009; 57,141,223 and 37,341,957 shares issued and outstanding at
December 31, 2010 and December 31, 2009, respectively
    
    
    57
    
    
    
    37Additional paid-in capital
    
    
    334,298
    
    
    
    297,687Accumulated other comprehensive (loss) gain
    
    
    (1
    )
    
    
    37Accumulated deficit
    
    
    (299,681
    )
    
    
    (283,332
    )Total stockholders equity
    
    
    34,673
    
    
    
    14,429Total liabilities and stockholders equity
    
    $
    39,537
    
    
    $
    21,735
  F-3




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ANADYS PHARMACEUTICALS, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except net loss per share)
 For the year ended December 31,2010
    
    
    2009
    
    
    2008Operating Expenses:Research and development
    
    $
    12,026
    
    
    $
    19,494
    
    
    $
    25,993General and administrative
    
    
    6,478
    
    
    
    8,243
    
    
    
    8,109Total operating expenses
    
    
    18,504
    
    
    
    27,737
    
    
    
    34,102Loss from operations
    
    
    (18,504
    )
    
    
    (27,737
    )
    
    
    (34,102
    )Other income (expense):Interest income
    
    
    106
    
    
    
    478
    
    
    
    1,482Gain (loss) from valuation of common stock warrant liability
    
    
    2,016
    
    
    
    (151
    )
    
    
    Other, net
    
    
    33
    
    
    
    132
    
    
    
    218Total other income (expense), net
    
    
    2,155
    
    
    
    459
    
    
    
    1,700Net loss
    
    $
    (16,349
    )
    
    $
    (27,278
    )
    
    $
    (32,402
    )Net loss per share, basic and diluted
    
    $
    (0.38
    )
    
    $
    (0.81
    )
    
    $
    (1.13
    )Shares used in calculating net loss per share, basic and diluted
    
    
    43,570
    
    
    
    33,775
    
    
    
    28,750
  F-4




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ANADYS PHARMACEUTICALS, INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share data)
 AccumulatedotherAdditional
    
    
    comprehensive
    
    
    
    
    
    
    TotalPreferred stock
    
    
    Common stock
    
    
    paid-in
    
    
    gain
    
    
    Accumulated
    
    
    stockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    (loss)
    
    
    deficit
    
    
    equityBalance at December 31, 2007
    
    
    
    
    
    $
    
    
    
    
    28,696,948
    
    
    $
    29
    
    
    $
    279,221
    
    
    $
    81
    
    
    $
    (223,652
    )
    
    $
    55,679Issuance of common stock pursuant to the exercise of stock options and
warrants
    
    
    
    
    
    
    
    
    
    
    36,567
    
    
    
    
    
    
    
    106
    
    
    
    
    
    
    
    
    
    
    
    106Issuance of common stock pursuant to the employee stock purchase plan
    
    
    
    
    
    
    
    
    
    
    83,248
    
    
    
    
    
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    153Compensation related to stock options and warrants issued to non-employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    66Share-based compensation expense including forfeitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,751
    
    
    
    
    
    
    
    
    
    
    
    2,751Comprehensive loss:Unrealized loss on securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (528
    )
    
    
    
    
    
    
    (528
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,402
    )
    
    
    (32,402
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,930
    )Balance at December 31, 2008
    
    
    
    
    
    $
    
    
    
    
    28,816,763
    
    
    $
    29
    
    
    $
    282,297
    
    
    $
    (447
    )
    
    $
    (256,054
    )
    
    $
    25,825Issuance of common stock pursuant to the exercise of stock options and
warrants
    
    
    
    
    
    
    
    
    
    
    84,465
    
    
    
    
    
    
    
    232
    
    
    
    
    
    
    
    
    
    
    
    232Issuance of common stock pursuant to the employee stock purchase plan
    
    
    
    
    
    
    
    
    
    
    82,729
    
    
    
    
    
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    153Issuance of common stock associated with equity financing, net of issuance
costs
    
    
    
    
    
    
    
    
    
    
    8,358,000
    
    
    
    8
    
    
    
    16,007
    
    
    
    
    
    
    
    
    
    
    
    16,015Fair value of common stock warrants issued in connection with equity
financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,746
    )
    
    
    
    
    
    
    
    
    
    
    (3,746
    )Compensation related to stock options and warrants issued to non-employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    125Share-based compensation expense including forfeitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,619
    
    
    
    
    
    
    
    
    
    
    
    2,619Comprehensive loss:Unrealized gain on securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    484
    
    
    
    
    
    
    
    484Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,278
    )
    
    
    (27,278
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,794
    )Balance at December 31, 2009
    
    
    
    
    
    $
    
    
    
    
    37,341,957
    
    
    $
    37
    
    
    $
    297,687
    
    
    $
    37
    
    
    $
    (283,332
    )
    
    $
    14,429Issuance of common stock pursuant to the exercise of stock options
    
    
    
    
    
    
    
    
    
    
    21,619
    
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    47Issuance of common stock pursuant to the employee stock purchase plan
    
    
    
    
    
    
    
    
    
    
    74,804
    
    
    
    
    
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    111Issuance of common stock associated with equity financings, net of issuance
costs
    
    
    
    
    
    
    
    
    
    
    19,702,843
    
    
    
    20
    
    
    
    34,674
    
    
    
    
    
    
    
    
    
    
    
    34,694Compensation related to stock options and warrants issued to non-employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    18Share-based compensation expense including forfeitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,761
    
    
    
    
    
    
    
    
    
    
    
    1,761Comprehensive loss:Unrealized loss on securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    
    
    
    
    (38
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,349
    )
    
    
    (16,349
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,387
    )Balance at December 31, 2010
    
    
    
    
    
    $
    
    
    
    
    57,141,223
    
    
    $
    57
    
    
    $
    334,298
    
    
    $
    (1
    )
    
    $
    (299,681
    )
    
    $
    34,673
  F-5




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 For the year ended December 31,2010
    
    
    2009
    
    
    2008Cash Flows from Operating Activities:Net loss
    
    $
    (16,349
    )
    
    $
    (27,278
    )
    
    $
    (32,402
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    397
    
    
    
    853
    
    
    
    1,141Share-based compensation
    
    
    1,761
    
    
    
    2,619
    
    
    
    2,751Amortization of premium/discount on securities available-for-sale
    
    
    331
    
    
    
    155
    
    
    
    157(Gain) loss on the sale of available-for-sale securities
    
    
    
    
    
    
    (31
    )
    
    
    24Compensation related to stock option issuances to non-employees
    
    
    18
    
    
    
    96
    
    
    
    16(Gain) loss on valuation of common stock warrant liability
    
    
    (2,016
    )
    
    
    151
    
    
    
    Rent expense related to warrants issued in connection with operating
lease of the Companys former facility
    
    
    
    
    
    
    29
    
    
    
    50Gain from disposal of property and equipment
    
    
    (4
    )
    
    
    (26
    )
    
    
    (149
    )Changes in operating assets and liabilities:Prepaid expenses and other current assets
    
    
    (760
    )
    
    
    1,643
    
    
    
    (1,198
    )Other assets
    
    
    60
    
    
    
    
    
    
    
    1,320Accounts payable
    
    
    (489
    )
    
    
    182
    
    
    
    (526
    )Accrued expenses
    
    
    76
    
    
    
    (2,180
    )
    
    
    1,057Deferred rent
    
    
    
    
    
    
    (348
    )
    
    
    (584
    )Other liabilities
    
    
    (13
    )
    
    
    (94
    )
    
    
    55Net cash used in operating activities
    
    
    (16,988
    )
    
    
    (24,229
    )
    
    
    (28,288
    )Cash Flows from Investing Activities:Purchase of securities available-for-sale
    
    
    (38,934
    )
    
    
    (24,657
    )
    
    
    (8,806
    )Proceeds from sale and maturity of securities available-for-sale
    
    
    24,191
    
    
    
    26,484
    
    
    
    12,463Purchase of property and equipment
    
    
    (7
    )
    
    
    (88
    )
    
    
    (213
    )Proceeds from the sale of property and equipment
    
    
    6
    
    
    
    111
    
    
    
    392Net cash (used in) provided by investing activities
    
    
    (14,744
    )
    
    
    1,850
    
    
    
    3,836Cash Flows from Financing Activities:Proceeds from exercise of stock options and employee stock purchase plan
    
    
    158
    
    
    
    385
    
    
    
    259Proceeds from equity financings, net of issuance costs
    
    
    34,694
    
    
    
    16,015
    
    
    
    Net cash provided by financing activities
    
    
    34,852
    
    
    
    16,400
    
    
    
    259Net increase (decrease) in cash and cash equivalents
    
    
    3,120
    
    
    
    (5,979
    )
    
    
    (24,193
    )Cash and cash equivalents at beginning of year
    
    
    4,497
    
    
    
    10,476
    
    
    
    34,669Cash and cash equivalents at end of year
    
    $
    7,617
    
    
    $
    4,497
    
    
    $
    10,476Supplemental Disclosure of Non-Cash Investing and Financing Activities:Initial recognition of the fair value of common stock warrant liability
upon issuance of warrants
    
    $
    
    
    
    $
    3,746
    
    
    $
    Unrealized (loss) gain on securities available-for-sale
    
    $
    (38
    )
    
    $
    484
    
    
    $
    (528
    )
  F-6




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Organization and Summary of Significant Accounting Policies
 Organization and Business
   Principles of Consolidation
  Use of Estimates
  Cash and Cash Equivalents
  Securities Available-for-Sale
  Fair Value of Financial Instruments
  Concentration of Credit Risk
  F-7




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Property and Equipment
  Impairment of Long-Lived Assets
  Research and Development
  Accumulated Other Comprehensive Gain (Loss)
  Share-Based Compensation
  Net Loss Per Share
   Subsequent Events
  F-8




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2. Securities Available-for-Sale
  December 31, 2010Amortized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gain
    
    
    Loss
    
    
    ValueCommercial paper
    
    $
    10,018
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    10,017Municipal bonds
    
    
    1,654
    
    
    
    
    
    
    
    
    
    
    
    1,654U.S. government
sponsored enterprise
securities
    
    
    15,983
    
    
    
    7
    
    
    
    (5
    )
    
    
    15,985Corporate debt securities
    
    
    2,713
    
    
    
    
    
    
    
    (2
    )
    
    
    2,711$
    30,368
    
    
    $
    7
    
    
    $
    (8
    )
    
    $
    30,367
 December 31, 2009Amortized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gain
    
    
    Loss
    
    
    ValueCommercial paper
    
    $
    2,199
    
    
    $
    
    
    
    $
    
    
    
    $
    2,199Municipal bonds
    
    
    1,026
    
    
    
    
    
    
    
    
    
    
    
    1,026U.S. treasury notes
    
    
    2,048
    
    
    
    
    
    
    
    (1
    )
    
    
    2,047U.S. government
sponsored enterprise
securities
    
    
    9,127
    
    
    
    8
    
    
    
    (5
    )
    
    
    9,130Corporate debt securities
    
    
    1,556
    
    
    
    35
    
    
    
    
    
    
    
    1,591$
    15,956
    
    
    $
    43
    
    
    $
    (6
    )
    
    $
    15,993
  December 31, 2010Amortized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gain
    
    
    Loss
    
    
    ValueWithin one year
    
    $
    23,731
    
    
    $
    2
    
    
    $
    (5
    )
    
    $
    23,728After one year
    
    
    6,637
    
    
    
    5
    
    
    
    (3
    )
    
    
    6,639$
    30,368
    
    
    $
    7
    
    
    $
    (8
    )
    
    $
    30,367
 December 31, 2009Amortized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gain
    
    
    Loss
    
    
    ValueWithin one year
    
    $
    15,956
    
    
    $
    43
    
    
    $
    (6
    )
    
    $
    15,993After one year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    15,956
    
    
    $
    43
    
    
    $
    (6
    )
    
    $
    15,993
  3. Fair Value Measurements
  F-9




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Fair Value Measurements at Reporting Date UsingQuoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsDecember 31, 2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)DescriptionAssets:Money market funds
    
    $
    475
    
    
    $
    475
    
    
    $
    
    
    
    $
    Commercial paper
    
    
    16,916
    
    
    
    
    
    
    
    16,916
    
    
    
    Municipal bonds
    
    
    1,654
    
    
    
    
    
    
    
    1,654
    
    
    
    U.S. government sponsored enterprise securities
    
    
    15,985
    
    
    
    
    
    
    
    15,985
    
    
    
    Corporate debt securities
    
    
    2,711
    
    
    
    
    
    
    
    2,711
    
    
    
    Total financial assets
    
    $
    37,741
    
    
    $
    475
    
    
    $
    37,266
    
    
    $
    Liabilities:Common stock warrants
    
    $
    1,881
    
    
    $
    
    
    
    $
    
    
    
    $
    1,881Total financial liabilities
    
    $
    1,881
    
    
    $
    
    
    
    $
    
    
    
    $
    1,881
  For the year endedDecember 31,2010
    
    
    2009Risk-free interest rate
    
    
    1.02
    %
    
    
    2.69
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Volatility factors of the expected market price
of the Companys common stock
    
    
    92.99
    %
    
    
    93.82
    %Weighted-average expected life of warrant (years)
    
    
    3.42
    
    
    
    4.42
  F-10




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  For
the year ended December 31,2010
    
    
    2009Beginning balance
    
    $
    3,897
    
    
    $
    Purchases, issuances, and settlements
    
    
    
    
    
    
    3,746Realized gain (loss) included in net
loss
    
    
    2,016
    
    
    
    (151
    )Ending balance
    
    $
    1,881
    
    
    $
    3,897
 4. Property and Equipment
  As of December 31,2010
    
    
    2009Furniture and fixtures
    
    $
    41
    
    
    $
    41Equipment
    
    
    3,885
    
    
    
    3,914Computers and software
    
    
    1,392
    
    
    
    1,399Leasehold improvements
    
    
    30
    
    
    
    305,348
    
    
    
    5,384Less accumulated depreciation and amortization
    
    
    (5,114
    )
    
    
    (4,758
    )$
    234
    
    
    $
    626
  5. Equity Financings
   6. Restructuring
  7. Qualifying Therapeutic Discovery Project
  F-11




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 8. Other Balance Sheet Captions
 As of December 31,2010
    
    
    2009Prepaid expenses and other current assets consist of the following (in thousands):Prepaid insurance
    
    $
    181
    
    
    $
    208Interest receivable
    
    
    150
    
    
    
    138Section 48D grant
    
    
    489
    
    
    
    Tenant deposit
    
    
    30
    
    
    
    Other prepaid expenses
    
    
    469
    
    
    
    213$
    1,319
    
    
    $
    559
 As of December 31,2010
    
    
    2009Other assets consist of the following (in thousands):Note receivable
    
    $
    
    
    
    $
    30Tenant deposit
    
    
    
    
    
    
    30$
    
    
    
    $
    60
 As of December 31,2010
    
    
    2009Accrued expenses consist of the following (in thousands):Accrued personnel costs
    
    $
    322
    
    
    $
    320Accrued employee bonus
    
    
    1,076
    
    
    
    988Accrued drug development
    
    
    680
    
    
    
    708Accrued legal and patent costs
    
    
    98
    
    
    
    243Accrued facility costs
    
    
    14
    
    
    
    20Accrued severance costs associated with the 2009 strategic restructuring
    
    
    
    
    
    
    52Other accrued expenses
    
    
    529
    
    
    
    312$
    2,719
    
    
    $
    2,643
 9. Commitments and Contingencies
   2011
    
    $
    2962012
    
    
    28$
    324
 10. Stockholders Equity
 Warrants
  F-12




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Stock Options
      Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    Number
    
    
    Remaining
    
    
    Exercise
    
    
    Number
    
    
    ExercisePrice
    
    Outstanding
    
    
    Contractual Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$1.02-$1.99
    
    
    1,666,068
    
    
    
    8.66
    
    
    $
    1.51
    
    
    
    491,773
    
    
    $
    1.88$2.00-$2.32
    
    
    1,646,402
    
    
    
    7.22
    
    
    $
    2.23
    
    
    
    1,240,188
    
    
    $
    2.23$2.40-$2.95
    
    
    1,827,639
    
    
    
    5.51
    
    
    $
    2.70
    
    
    
    1,225,570
    
    
    $
    2.83$3.00-$8.16
    
    
    1,719,832
    
    
    
    4.87
    
    
    $
    5.71
    
    
    
    1,712,287
    
    
    $
    5.72$8.37-$15.61
    
    
    160,525
    
    
    
    4.50
    
    
    $
    11.51
    
    
    
    160,525
    
    
    $
    11.517,020,466
    
    
    
    
    
    
    
    
    
    
    
    4,830,343
 F-13




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Weighted
    
    
    Weighted-Average
    
    
    Aggregate IntrinsicOptions
    
    
    Average
    
    
    Remaining
    
    
    ValueOutstanding
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    (in thousands)Balance at December 31, 2007
    
    
    5,547,827
    
    
    $
    4.44Granted
    
    
    1,508,493
    
    
    
    2.07Exercised
    
    
    (36,567
    )
    
    
    2.90Cancelled
    
    
    (474,387
    )
    
    
    5.47Balance at December 31, 2008
    
    
    6,545,366
    
    
    $
    3.83Granted
    
    
    1,359,736
    
    
    
    2.34Exercised
    
    
    (84,465
    )
    
    
    2.74Cancelled
    
    
    (660,626
    )
    
    
    4.34Balance at December 31, 2009
    
    
    7,160,011
    
    
    $
    3.57Granted
    
    
    889,188
    
    
    
    1.22Exercised
    
    
    (21,619
    )
    
    
    2.16Cancelled
    
    
    (1,007,114
    )
    
    
    3.77Balance at December 31, 2010
    
    
    7,020,466
    
    
    $
    3.25
    
    
    
    6.48
    
    
    $
    345Exercisable at December 31, 2010
    
    
    4,830,343
    
    
    $
    3.89
    
    
    
    5.40
    
    
    $
    
   Share-Based Compensation
  For the year ended December 31,2010
    
    
    2009
    
    
    2008Research and development expense
    
    $
    725
    
    
    $
    1,354
    
    
    $
    1,271General and administrative expense
    
    
    1,054
    
    
    
    1,361
    
    
    
    1,492Total share-based compensation expense
    
    $
    1,779
    
    
    $
    2,715
    
    
    $
    2,763Net share-based compensation expense, per common share
basic and diluted
    
    $
    0.04
    
    
    $
    0.08
    
    
    $
    0.10
    F-14




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the year ended December 31,2010
    
    
    2009
    
    
    2008Risk-free interest rate
    
    
    2.16
    %
    
    
    2.20
    %
    
    
    2.45
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Volatility factors of the expected market price
of the Companys common stock
    
    
    84.68
    %
    
    
    80.14
    %
    
    
    71.43
    %Weighted-average expected life of option (years)
    
    
    6.31
    
    
    
    5.94
    
    
    
    5.76
       Employee Stock Purchase Plan
   Shares Reserved for Issuance
  December 31, 2010Warrants
    
    
    2,944,234Employee Stock Purchase Plan
    
    
    966,250Stock options under the Companys Plans:Granted and outstanding
    
    
    7,020,466Reserved for future issuance
    
    
    2,061,2839,081,749
 F-15




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 11. Income Taxes
  As of December 31,2010
    
    
    2009Deferred tax assets:Non-qualified stock options
    
    $
    4,309
    
    
    $
    4,914Capitalized research and development expense
    
    
    30,815
    
    
    
    27,415Accruals
    
    
    275
    
    
    
    98Other
    
    
    35
    
    
    
    33Total deferred tax assets
    
    
    35,434
    
    
    
    32,460Valuation allowance for deferred tax assets
    
    
    (35,434
    )
    
    
    (32,445
    )Net deferred taxes
    
    
    
    
    
    
    15Deferred tax liabilities:Unrealized loss on securities available-for-sale
    
    
    
    
    
    
    (15
    )Total deferred tax liabilities
    
    
    
    
    
    
    (15
    )Net deferred taxes
    
    $
    
    
    
    $
    
    As of December 31,2010
    
    
    2009
    
    
    2008Federal income taxes at 35%
    
    $
    (5,724
    )
    
    $
    (9,547
    )
    
    $
    (11,341
    )State income taxes, net of federal benefit
    
    
    (849
    )
    
    
    (1,566
    )
    
    
    (1,748
    )Tax effect on non-deductible expenses and credits
    
    
    (320
    )
    
    
    (978
    )
    
    
    (1,233
    )Warrants
    
    
    (706
    )
    
    
    42
    
    
    
    18Expiration of net operating loss carryforwards
    
    
    1,424
    
    
    
    1,426
    
    
    
    703Stock based compensation
    
    
    1,139
    
    
    
    (44
    )
    
    
    647Removal of net operating losses and R&D credits
    
    
    2,060
    
    
    
    58,547
    
    
    
    Change in valuation allowance
    
    
    2,976
    
    
    
    (48,080
    )
    
    
    12,940Other
    
    
    
    
    
    
    200
    
    
    
    14$
    
    
    
    $
    
    
    
    $
    
 F-16




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    12. Savings Plan
  13. Unaudited Quarterly Results of Operations
  First
    
    
    Second
    
    
    Third
    
    
    FourthFiscal year 2010
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(in thousands, except net loss per share)Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Net loss
    
    
    (6,203
    )
    
    
    (2,977
    )
    
    
    (4,743
    )
    
    
    (2,426
    )Net loss per share, basic and diluted
    
    
    (0.17
    )
    
    
    (0.08
    )
    
    
    (0.11
    )
    
    
    (0.04
    )
 First
    
    
    Second
    
    
    Third
    
    
    FourthFiscal year 2009
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(in thousands, except net loss per share)Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Net loss
    
    
    (8,759
    )
    
    
    (6,530
    )
    
    
    (7,732
    )
    
    
    (4,257
    )Net loss per share, basic and diluted
    
    
    (0.30
    )
    
    
    (0.21
    )
    
    
    (0.21
    )
    
    
    (0.11
    )
 F-17