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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, 2007
 OR
 o
    
    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 0-50632
 
 ANADYS PHARMACEUTICALS, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    22-3193172(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)3115 Merryfield Row, 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
    Name of each exchange on which registeredCommon Stock, $0.001 par value
    
    Nasdaq Global Market
 Securities registered pursuant to Section 12(g) of the Act: None
 
 o þ
 o þ
 þ 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
    
    
    30Item 2.
    
    Properties
    
    
    30Item 3.
    
    Legal Proceedings
    
    
    30Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    30PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    31Item 6.
    
    Selected Financial Data
    
    
    33Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    35Item 7A.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    44Item 8.
    
    Financial Statements and Supplementary Data
    
    
    44Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    44Item 9A.
    
    Controls and Procedures
    
    
    45Item 9B.
    
    Other Information
    
    
    47PART IIIItem 10.
    
    Directors, and Executive Officers and Corporate Governance
    
    
    49Item 11.
    
    Executive Compensation
    
    
    49Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
    
    
    49Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    49Item 14.
    
    Principal Accounting Fees and Services
    
    
    49PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    50EXHIBIT 10.16EXHIBIT 10.17EXHIBIT 10.18EXHIBIT 10.19EXHIBIT 10.20EXHIBIT 10.21EXHIBIT 10.22EXHIBIT 10.23EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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INFORMATION RELATED TO FORWARD-LOOKING STATEMENTS
  
 PART I
 
 Item 1. Business
 Overview
    AN598
   3




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ANA773
  Ò
   Industry Background
 HCV
     4




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Cancer
  Cancer Treatment Today
   TLR Agonists in Cancer
 Ò
 5




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Our Strategy
  
    
    Pursue the development of novel, high quality product candidates in major disease areas.
We select our product candidates based on demonstrated properties that suggest the
potential to change treatment paradigms and become important products in time. Our strategy
is to couple high quality candidates with a disciplined investment approach, pursuing time-
and cost-efficient paths to obtaining clinical data. As part of this strategy, during 2007
we engaged in a strategic restructuring enabling us to focus our current efforts toward the
development of ANA773 and ANA598
    
    Advance the Development of a ANA773 in Cancer.We are currently conducting a Phase I
clinical trial of ANA773 in cancer patients. During 2008 we intend to:
 
    
    Explore the pharmacodynamic response in cancer patients
    
    Select the tumor types for Phase II evaluation
    
    Select the dose and schedule for Phase II clinical trials
 
    
    Advance the Development of ANA598 in HCV.We are developing ANA598, a non-nucleoside
inhibitor of the HCV NS5B polymerase. During 2008 we intend to:
 
    
    File an IND application for ANA598
    
    Conduct a Phase I clinical trial in healthy volunteers
    
    Initiate a Phase Ib clinical trial in HCV infected patients, with the
objective of obtaining clinical proof of concept reflected in viral load data in
early 2009
 
    
    Opportunisticly Expand Our Product Candidate Portfolio.We intend to continue our focus
over time on finding and developing new product candidates that offer the potential to make
a genuine difference in how patients with serious disease are treated
    
    Establish select strategic alliances to support our drug development programs while
preserving significant development and commercial rights.In the future we intend to evaluate
the potential benefits of selectively entering into strategic alliances to support our drug
development programs to obtain financial support and potentially accelerate the development of
our product candidates
 Strategic Restructuring
  6




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Collaboration Agreements Concluded During 2007
 Novartis International Pharmaceuticals Ltd.
  LG Life Sciences, Ltd.
  Aphoenix, Inc.
   Our Development Programs
 ANA598
   7




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10
 10 10
  Cancer Program
 ANA773
    8




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®
  in vivo in vitro in vivo
   9




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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
  HCV
 Treating HCV with Interferon-based Therapies
   Direct Antivirals in Development for Treating HCV
   11




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Cancer
    Competitive Risks
    e.g.
 12




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Government Regulations
    
    
    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
   13




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Employees
  Executive Officers of the Registrant
  Name
    
    Age
    
    PositionSteve Worland, Ph.D.
    
    
    50
    
    
    President and Chief Executive OfficerJames T. Glover
    
    
    58
    
    
    Senior Vice President, Operations and Chief Financial OfficerJames L. Freddo, M.D.
    
    
    53
    
    
    Chief Medical OfficerMary Yaroshevsky-Glanville
    
    
    43
    
    
    Vice President, Human CapitalElizabeth E. Reed, J.D.
    
    
    37
    
    
    Vice President, Legal Affairs and Corporate Secretary
 Steve Worland, Ph.D.
 James T. Glover
 James L. Freddo, M.D ®
 Mary Yaroshevsky-Glanville
 14




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Elizabeth E. Reed, J.D. cum laude
 Company Website
 http://www.anadyspharma.com
  15




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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
 We are at an early stage of development, and we may never attain product sales.
  We expect our net operating 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.
  16




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Any set-back or failure of ANA598 or ANA773 will have a large negative impact on our business
and stock price.
  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 for cancer could be negatively impacted, causing our stock price to decline.
  We have recently initiated a Phase 1 clinical trial of ANA773 and are currently recruiting
cancer patients. If patient enrollment does not move as quickly as we would like, our development
timelines for ANA773 could be delayed, which could cause our stock price to decline.
 .
 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;
    
    commercialize our product candidates, if any, that receive regulatory approval.
  
    
    the progress of our clinical trials;
    
    the progress of our preclinical development activities;
 17




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
    
    our ability to establish and maintain strategic collaborations;
    
    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 success of the commercialization of ANA598, ANA773 and any additional products; and
    
    the extent to which we acquire or invest in other products technologies and businesses.
  Raising additional funds by issuing securities or through debt or project financing or
collaboration and licensing arrangements may cause dilution to existing stockholders, restrict our
operations or require us to relinquish proprietary rights.
  If we fail to establish new collaborations, we may be unable to advance our programs, which
could cause our stock price to decline.
  18




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Our operating results may be harmed if our restructuring plans do not achieve the anticipated
results or cause undesirable consequences.
  Because the results of preclinical studies and initial clinical trials are not necessarily
predictive of future results, we can provide no assurances that ANA598 or ANA773 will have
favorable results in clinical trials, or receive regulatory approval.
  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.
   
    
    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 of 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.
 .
 19




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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 pre-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.
  If our efforts to obtain rights to new products or product candidates from third parties do
not yield product candidates for clinical development or are not otherwise successful, we may not
generate product revenues or achieve profitability.
  
    
    we may be unable to purchase or license products or product candidates on terms that
would allow us to make an appropriate return from resulting products;
    
    competitors may be unwilling to assign or license product or product candidate rights to
us; or
    
    we may be unable to identify suitable products or product candidates.
  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.
  20




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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; and
    
    our ability to obtain sufficient third-party insurance coverage or reimbursement.
   
    
    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.
  21




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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.
  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 attract and retain key management and scientific staff, we may be unable
to successfully develop or commercialize our product candidates.
  Our quarterly results and stock price may fluctuate significantly.
  
    
    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.
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If we engage in any acquisition, we will incur a variety of costs, and we may never realize
the anticipated benefits of the acquisition.
  
    
    exposure to unknown liabilities;
    
    disruption of our business and diversion of our managements time and attention to
acquiring and developing acquired products or technologies;
    
    incurrence of substantial debt or dilutive issuances of securities to pay for
acquisitions;
    
    higher than expected acquisition and integration costs;
    
    increased amortization expenses;
    
    negative effect on our earnings (or loss) per share;
    
    difficulty and cost in combining and integrating the operations and personnel of any
acquired businesses with our operations and personnel;
    
    impairment of relationships with key suppliers, contractors or customers of any acquired
businesses due to changes in management and ownership; and
    
    inability to retain key employees of any acquired businesses.
  Earthquake or wildfire damage to our facilities could delay our research and development
efforts and adversely affect our business.
  23




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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.
   24




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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.
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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.
   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.
 26




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If our competitors develop treatments for HCV or cancer 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.
  27




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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.
  28




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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 for 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 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 U.S. and foreign countries;
    
    economic and political factors, including wars, terrorism and political unrest; and
    
    technological advances by our competitors.
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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.
  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. Submission of Matters to a Vote of Security Holders
  30




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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
  2007
    
    High
    
    LowFirst Quarter
    
    $
    5.30
    
    
    $
    3.15Second Quarter
    
    
    4.90
    
    
    
    3.68Third Quarter
    
    
    3.88
    
    
    
    1.90Fourth Quarter
    
    
    2.27
    
    
    
    1.58
 2006
    
    High
    
    LowFirst Quarter
    
    $
    16.60
    
    
    $
    8.39Second Quarter
    
    
    16.10
    
    
    
    2.92Third Quarter
    
    
    4.25
    
    
    
    2.64Fourth Quarter
    
    
    5.65
    
    
    
    2.81
 Holders
  Dividend Policy
  Securities Authorized for Issuance Under Equity Compensation Plans
   (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 securitiesof outstanding options
    
    outstanding options
    
    reflected in column (a))Equity compensation
plans approved by
security holders
    
    
    5,054,077
    
    
    $
    4.55
    
    
    
    1,265,328Equity compensation
plans not approved
by security holders
    
    
    493,750
    
    
    $
    3.32
    
    
    
    
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Performance Measurement Comparison (1)
   
 March 26, 2004
    
    December 31, 2004
    
    December 31, 2005
    
    December 31, 2006
    
    December 31, 2007Anadys Pharmaceuticals, Inc.
    
    $
    100.00
    
    
    $
    106.09
    
    
    $
    124.65
    
    
    $
    69.69
    
    
    $
    22.80NASDAQ Composite Index
    
    
    100.00
    
    
    
    110.99
    
    
    
    112.52
    
    
    
    123.23
    
    
    
    135.32NASDAQ Biotechnology Index
    
    
    100.00
    
    
    
    102.33
    
    
    
    105.23
    
    
    
    106.31
    
    
    
    111.18
 
 (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. 32




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Item 6. Selected Financial Data
  For the years ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(In thousands, except net loss per share)Consolidated Statements of Operations Data:Revenues
    
    $
    24,118
    
    
    $
    5,420
    
    
    $
    4,887
    
    
    $
    1,762
    
    
    $
    2,286Operating expenses:Research and development(1)
    
    
    28,192
    
    
    
    25,419
    
    
    
    20,901
    
    
    
    26,711
    
    
    
    18,819General and administrative(1)
    
    
    8,692
    
    
    
    11,308
    
    
    
    7,705
    
    
    
    8,260
    
    
    
    7,156Total operating expenses(1)
    
    
    36,884
    
    
    
    36,727
    
    
    
    28,606
    
    
    
    34,971
    
    
    
    25,975Loss from operations
    
    
    (12,766
    )
    
    
    (31,307
    )
    
    
    (23,719
    )
    
    
    (33,209
    )
    
    
    (23,689
    )Other income (expense):Interest income
    
    
    3,611
    
    
    
    4,727
    
    
    
    2,103
    
    
    
    525
    
    
    
    229Interest expense
    
    
    
    
    
    
    (69
    )
    
    
    (189
    )
    
    
    (228
    )
    
    
    (266
    )Other, net
    
    
    (17
    )
    
    
    (111
    )
    
    
    (118
    )
    
    
    (67
    )
    
    
    (272
    )Total other income, (expense) net
    
    
    3,594
    
    
    
    4,547
    
    
    
    1,796
    
    
    
    230
    
    
    
    (309
    )Net loss
    
    
    (9,172
    )
    
    
    (26,760
    )
    
    
    (21,923
    )
    
    
    (32,979
    )
    
    
    (23,998
    )Accretion to redemption value of redeemable
convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (175
    )
    
    
    (674
    )Deemed dividend-beneficial conversion feature for
Series C preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,942
    )Net loss applicable to common stockholders
    
    $
    (9,172
    )
    
    $
    (26,760
    )
    
    $
    (21,923
    )
    
    $
    (33,154
    )
    
    $
    (31,614
    )Basic and diluted net loss per share(2):
    
    $
    (0.32
    )
    
    $
    (0.94
    )
    
    $
    (0.89
    )
    
    $
    (1.92
    )
    
    $
    (21.58
    )Shares used to compute basic and diluted net loss
per share(2):
    
    
    28,646
    
    
    
    28,512
    
    
    
    24,756
    
    
    
    17,233
    
    
    
    1,465
 
 (1)
    
    As a result of the adoption of Statement of Accounting Standards 123R,
Share-Based Payment on January 1, 2006, there is a lack of comparability in our research and
development expense and our general and administrative expense for the periods presented prior
to January 1, 2006. Please reference Note 8 in our consolidated financial statements for
additional information related to the impact of SFAS 123R on our research and development
expenses and our general and administrative expenses.(2)
    
    As a result of the conversion of our preferred stock into 13,330,000 shares of our
common stock upon completion of our initial public offering on March 31, 2004, there is a lack
of comparability in the basic and diluted net loss per share amounts for the periods presented
prior to the completion of our initial public offering. 33




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##### Table of Contents



As of December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003(In thousands)Consolidated Balance Sheet Data:Cash, cash equivalents and securities available-for-sale
    
    $
    56,495
    
    
    $
    82,149
    
    
    $
    104,851
    
    
    $
    33,674
    
    
    $
    14,499Working capital
    
    
    52,084
    
    
    
    75,054
    
    
    
    98,682
    
    
    
    28,001
    
    
    
    12,304Total assets
    
    
    61,526
    
    
    
    89,401
    
    
    
    116,976
    
    
    
    40,949
    
    
    
    20,242Long-term debt, net of current portion
    
    
    
    
    
    
    
    
    
    
    682
    
    
    
    1,193
    
    
    
    1,401Redeemable convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,012Accumulated deficit
    
    
    (223,652
    )
    
    
    (214,480
    )
    
    
    (187,720
    )
    
    
    (165,797
    )
    
    
    (132,643
    )Total stockholders equity (deficit)
    
    
    55,679
    
    
    
    60,325
    
    
    
    78,936
    
    
    
    31,285
    
    
    
    (30,059
    )
 34




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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;
    
    continue the development of ANA773 for the treatment of cancer;
    
    develop methods for and scale-up manufacturing of ANA598 and ANA773 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.
 35




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##### Table of Contents



Research and Development
     36




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##### Table of Contents



For the years ended December 31,2007
    
    
    2006ANA975
    
    $
    1,038
    
    
    $
    4,495ANA773
    
    
    6,136
    
    
    
    3,944ANA598
    
    
    8,390
    
    
    
    4,328ANA380
    
    
    700
    
    
    
    935Discovery stage programs
    
    
    1,936
    
    
    
    5,041Infrastructure and support personnel
    
    
    7,194
    
    
    
    7,464Severance related to reduction in force
    
    
    813
    
    
    
    Non-cash
employee and non-employee share-based compensation
    
    
    2,463
    
    
    
    2,889Reimbursement of ANA975 costs by Novartis
    
    
    (478
    )
    
    
    (3,677
    )Total research and development expense
    
    $
    28,192
    
    
    $
    25,419
   Direct external costs:Isatoribine family of compounds, excluding ANA975
    
    $
    558ANA975
    
    
    8,613ANA380
    
    
    417ANA773
    
    
    110Other
    
    
    Unallocated direct internal costs
    
    
    3,535Unallocated indirect internal costs and overhead
    
    
    12,534Reimbursement of ANA975 costs by Novartis
    
    
    (5,790
    )Deferred compensation
    
    
    924Total research and development
    
    $
    20,901
 General and Administrative
  Critical Accounting Policies
  37




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##### Table of Contents



Revenue Recognition. Revenue Recognition, Revenue Arrangements with Multiple Deliverables.
 
    
    Revenue from milestones is recognized when earned, as evidenced by written
acknowledgment from the collaborator or other persuasive evidence that the milestone has
been achieved, provided that (i) the milestone event is substantive and its achievability
was not reasonably assured at the inception of the agreement, (ii) our performance
obligations after the milestone achievement will continue to be funded by the collaborator
at the comparable level and (iii) the milestone is not refundable or creditable. If all of
these criteria are not met, the milestone payment is recognized over the remaining minimum
period of our performance obligations under the agreement. Upfront fees under our
collaborations, such as technology access fees, are recognized over the period the related
services are provided. Non-refundable upfront fees not associated with our future
performance are recognized when received.
    
    Fees that we receive for research services are generally recognized as the services are
provided, as long as the amounts received are not refundable regardless of the results of
the research project. Research services may include activities in which we deploy our
internal capabilities such as our medicinal chemistry and screening capabilities to assist
a collaborator in advancing their drug discovery effort.
 Drug Development Costs.
 Share-based
Compensation. Share-Based Payment
 Adoption of Statement of Financial Accounting Standard No. 123R, Share-Based Payment
  Recent Accounting Pronouncements
 Accounting for Collaborative Arrangements Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendors Products)
 38




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##### Table of Contents



Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research
and Development Activities
 The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
 Fair Value Measurements
 Results of Operations
 Comparison of the Years Ended December 31, 2007, 2006 and 2005
 Revenue.
  Research and Development Expenses Accounting for Stock Issued to Employees
 39




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##### Table of Contents



General and Administrative Expenses.
 Interest Income.
 Interest Expense
 Liquidity and Capital Resources
  40




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##### Table of Contents



Cash Flows from Operating Activities and Investing Activities
  For the years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Net cash (used in) provided by operating activities
    
    $
    (25,658
    )
    
    $
    (20,585
    )
    
    $
    5,999Cash provided by (used in) investing activitiesPurchase of securities available-for-sale
    
    $
    (15,131
    )
    
    $
    (14,310
    )
    
    $
    (11,886
    )Proceeds from sale of securities available-for-sale
    
    
    13,170
    
    
    
    5,750
    
    
    
    28,416Purchase of property and equipment
    
    
    (356
    )
    
    
    (1,522
    )
    
    
    (1,338
    )Proceeds from disposal of property and equipment
    
    
    
    
    
    
    
    
    
    
    2Net cash (used in) provided by investing activities
    
    $
    (2,317
    )
    
    $
    (10,082
    )
    
    $
    15,194
   41




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##### Table of Contents



Cash Flows from Financing Activities
  For the years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Cash provided by (used in) financing activitiesProceeds from exercise of stock options and employee stock purchase plan
    
    $
    257
    
    
    $
    954
    
    
    $
    1,057Proceeds from sale of common stock, net of issuance costs
    
    
    
    
    
    
    
    
    
    
    66,437Proceeds from long-term debt
    
    
    
    
    
    
    
    
    
    
    393Principal payments on long-term debt
    
    
    
    
    
    
    (1,559
    )
    
    
    (1,409
    )Net cash provided by (used in) financing activities
    
    $
    257
    
    
    $
    (605
    )
    
    $
    66,478
   Aggregate Contractual Obligations
  Lessthan 1
    
    
    2009 to
    
    
    2011 toContractual Obligations
    
    Total
    
    
    year
    
    
    2010
    
    
    2012
    
    
    ThereafterOperating leases
    
    $
    3,463
    
    
    $
    2,160
    
    
    $
    1,303
    
    
    $
    
    
    
    $
    Minimum royalty commitment
    
    
    900
    
    
    
    100
    
    
    
    200
    
    
    
    200
    
    
    
    400$
    4,363
    
    
    $
    2,260
    
    
    $
    1,503
    
    
    $
    200
    
    
    $
    400
  42




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##### Table of Contents



Future Cash Requirements
   
    
    the progress of our preclinical development activities;
    
    the progress of our clinical trials;
    
    our ability to establish and maintain strategic collaborations;
    
    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 pre-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.
   Off-Balance Sheet Arrangements
  43




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##### Table of Contents



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
  44




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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:
 45




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##### Table of Contents



Report of Independent Registered Public Accounting Fir m
        /s/ Ernst & Young LLP 
 46




---



##### Table of Contents



Item 9B. Other Information
 Bonus Plan
   Amended and Restated Severance and Change in Control Benefits
  47




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##### Table of Contents



Severance Benefits
  Change in Control Benefits
   48




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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
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accounting Fees and Services
  49




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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, 2004.10.1#
    
    
    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#
    
    
    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, 2004.10.6#
    
    
    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, 2004.10.7#
    
    
    2004 Non-Employee Directors Stock Option Plan
    
    Incorporated by
reference to Exhibit
10.9 in the Registrants
Registration Statement
on Form S-1 (SEC File
No. 333-110528) filed on
March 18, 2004.10.8#
    
    
    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, 2004.10.9#
    
    
    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
 50




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description
    

Incorporated
by Reference or Attached HeretoFile
No. 333-110528) filed on
November 14, 2003.10.10#
    
    
    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
    
    
    Sub-lease agreement dated February 23, 2004
by and between the Registrant and Torrey Mesa
Research Institute.
    
    Incorporated by
reference to Exhibit
10.33 in the
Registrants
Registration Statement
on Form S-1 (SEC File
No. 333-110528) filed on
March 18, 2004.10.13#
    
    
    Consulting Agreement dated May 25, 2005 by
and between Marios Fotiadis and Anadys
Pharmaceuticals, Inc.
    
    Incorporated by
reference to Exhibit
10.37 in the
Registrants Quarterly
Report on Form 10-Q (SEC
File No. 000-50632)
filed on August 12,
2005.10.14#
    
    
    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,
2006.10.15#
    
    

Terms
of Employment dated September 11, 2006 by and between the
registrant and James T. Glover.
    
    Incorporated by
reference to Exhibit
10.43 in the
Registrants Current
Report on Form 8-K (SEC
File No. 000-50632)
filed on September 25,
2006.10.16#
    
    
    Amended and Restated Severance and Change in
Control Agreement dated March 3, 2008 by and
between the Registrant and Stephen T.
Worland, Ph.D.
    
    Attached Hereto.10.17#
    
    
    Amended and Restated Severance and Change in
Control Agreement dated March 3, 2008 by and
between the Registrant and James T. Glover,
CPA.
    
    Attached Hereto.10.18#
    
    
    Amended and Restated Severance and Change in
Control Agreement dated March 3, 2008 by and
between the Registrant and James L. Freddo,
M.D.
    
    Attached Hereto.10.19#
    
    
    Amended and Restated Severance and Change in
Control Agreement dated March 3, 2008 by and
between the Registrant and Elizabeth E. Reed.
    
    Attached Hereto.10.20#
    
    
    Amended and Restated Severance and Change in
Control Agreement dated March 3, 2008 by and
between the Registrant and Mary
Yaroshevsky-Glanville.
    
    Attached Hereto.10.21#
    
    

Terms
of Employment dated June 21, 2006 by and between the
registrant and James L. Freddo, M.D.
    
    Attached Hereto.10.22#
    
    

Terms
of Employment dated March 6, 2001 by and between the registrant and Mary
Yaroshevsky-Glanville.
    
    Attached Hereto.10.23#
    
    
    Executive Officer Bonus Plan
    
    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.
 51




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description
    

Incorporated
by Reference or Attached Hereto23.1
    
    
    Consent of Independent Registered Public
Accounting Firm
    
    Attached Hereto.31.1
    
    
    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 Senior Vice President,
Operations and Chief Financial Officer
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 Senior Vice President,
Operations and Chief Financial Officer
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. 52




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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 5, 2008/s/ JAMES T. GLOVER

James T. Glover.
    
    Senior Vice President, Operations and Chief 
Financial Officer (Principal Financial and 
Accounting Officer)
    
    March 5, 2008/s/ GEORGE A. SCANGOS, PH.D.
 George A. Scangos, Ph.D.
    
    Chairman of the Board
    
    March 5, 2008/s/ MARK G. FOLETTA
Mark G. Foletta
    
    Director
    
    March 5, 2008/s/ MARIOS FOTIADISMarios Fotiadis
    
    Director
    
    March 5, 2008/s/ STEVEN H. HOLTZMAN
Steven H. Holtzman
    
    Director
    
    March 5, 2008/s/ STELIOS PAPADOPOULOS, PH.D.
Stelios Papadopoulos, Ph.D.
    
    Director
    
    March 5, 2008/s/ DOUGLAS E. WILLIAMS, PH.D.
Douglas E. Williams, Ph.D.
    
    Director
    
    March 5, 2008/s/ KLEANTHIS G. XANTHOPOULOS, PH.D.
Kleanthis G. Xanthopoulos, Ph.D.
    
    Director
    
    March 5, 2008
 53




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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, 2007 and 2006
    
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005
    
    
    F-4Consolidated Statements of Stockholders Equity for the years ended December 31, 2007,
2006 and 2005
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
 F-1




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Report of Independent Registered Public Accounting Firm
       
 
 F-2




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 December 31,
    
    
    December 31,2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    34,669
    
    
    $
    62,387Securities available-for-sale
    
    
    21,826
    
    
    
    19,762Accounts receivable
    
    
    
    
    
    
    1,175Prepaid expenses and other current assets
    
    
    1,004
    
    
    
    941Total current assets
    
    
    57,499
    
    
    
    84,265Property and equipment, net
    
    
    2,647
    
    
    
    3,749Other assets, net
    
    
    1,380
    
    
    
    1,387Total assets
    
    $
    61,526
    
    
    $
    89,401Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    1,084
    
    
    $
    794Accrued expenses
    
    
    3,766
    
    
    
    3,317Current portion of deferred rent
    
    
    565
    
    
    
    467Current potion of deferred revenue
    
    
    
    
    
    
    4,633Total current liabilities
    
    
    5,415
    
    
    
    9,211Long-term portion of deferred rent
    
    
    367
    
    
    
    931Long-term portion of deferred revenue
    
    
    
    
    
    
    18,934Other long-term liabilities
    
    
    65
    
    
    
    Commitments and contingenciesStockholders equity:Preferred stock, $0.001 par value; 10,000,000 shares authorized at December 31, 2007 and
December 31, 2006; no shares issued and outstanding at December 31, 2007 and
December 31, 2006
    
    
    
    
    
    
    Common stock, $0.001 par value; 90,000,000 shares authorized at December 31, 2007 and
December 31, 2006; 28,696,948 and 28,596,198 shares issued and outstanding at
December 31, 2007 and December 31, 2006, respectively
    
    
    29
    
    
    
    29Additional paid-in capital
    
    
    279,221
    
    
    
    274,798Accumulated other comprehensive gain (loss)
    
    
    81
    
    
    
    (22
    )Accumulated deficit
    
    
    (223,652
    )
    
    
    (214,480
    )Total stockholders equity
    
    
    55,679
    
    
    
    60,325Total liabilities and stockholders equity
    
    $
    61,526
    
    
    $
    89,401
  F-3




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ANADYS PHARMACEUTICALS, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except net loss per share)
 For the Years Ended December 31,2007
    
    
    2006
    
    
    2005Revenues:Collaborative agreements
    
    $
    24,118
    
    
    $
    5,354
    
    
    $
    4,408Grants
    
    
    
    
    
    
    66
    
    
    
    479Total revenues
    
    
    24,118
    
    
    
    5,420
    
    
    
    4,887Operating Expenses:Research and development
    
    
    28,192
    
    
    
    25,419
    
    
    
    20,901General and administrative
    
    
    8,692
    
    
    
    11,308
    
    
    
    7,705Total operating expenses
    
    
    36,884
    
    
    
    36,727
    
    
    
    28,606Loss from operations
    
    
    (12,766
    )
    
    
    (31,307
    )
    
    
    (23,719
    )Other income (expense):Interest income
    
    
    3,611
    
    
    
    4,727
    
    
    
    2,103Interest expense
    
    
    
    
    
    
    (69
    )
    
    
    (189
    )Other, net
    
    
    (17
    )
    
    
    (111
    )
    
    
    (118
    )Total other income (expense)
    
    
    3,594
    
    
    
    4,547
    
    
    
    1,796Net loss
    
    $
    (9,172
    )
    
    $
    (26,760
    )
    
    $
    (21,923
    )Net loss per share, basic and diluted
    
    $
    (0.32
    )
    
    $
    (0.94
    )
    
    $
    (0.89
    )Shares used in calculating net loss per share, basic and diluted
    
    
    28,646
    
    
    
    28,512
    
    
    
    24,756
  F-4




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share data)
 AccumulatedotherConvertible
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    comprehensive
    
    
    
    
    
    
    Totalpreferred stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    income
    
    
    Accumulated
    
    
    stockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    compensation
    
    
    (loss)
    
    
    deficit
    
    
    equityBalance at December 31, 2004
    
    
    
    
    
    $
    
    
    
    
    22,334,521
    
    
    $
    22
    
    
    $
    199,990
    
    
    $
    (2,862
    )
    
    $
    (68
    )
    
    $
    (165,797
    )
    
    $
    31,285Issuance of common stock from a follow-on public common stock offering, net
of underwriters discount and offering expenses
    
    
    
    
    
    
    
    
    
    
    5,750,000
    
    
    
    5
    
    
    
    66,432
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,437Issuance of common stock pursuant to the exercise of stock options
    
    
    
    
    
    
    
    
    
    
    222,593
    
    
    
    1
    
    
    
    702
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    703Issuance of common stock pursuant to the Companys Employee Stock Purchase
Plan
    
    
    
    
    
    
    
    
    
    
    67,022
    
    
    
    
    
    
    
    354
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    354Compensation related to stock options and warrants issued to non-employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,711
    
    
    
    
    
    
    
    
    
    
    
    1,711Reversal of deferred compensation associated with cancelled stock options
to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (312
    )
    
    
    312
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss:Unrealized gain on short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    36Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,923
    )
    
    
    (21,923
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,887
    )Balance at December 31, 2005
    
    
    
    
    
    
    
    
    
    
    28,374,136
    
    
    
    28
    
    
    
    267,499
    
    
    
    (839
    )
    
    
    (32
    )
    
    
    (187,720
    )
    
    
    78,936Issuance of common stock pursuant to the exercise of stock options and
warrants
    
    
    
    
    
    
    
    
    
    
    143,335
    
    
    
    1
    
    
    
    562
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    563Issuance of common stock pursuant to the Employee Stock Purchase Plan
    
    
    
    
    
    
    
    
    
    
    78,727
    
    
    
    
    
    
    
    391
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    391Compensation related to stock options and warrants issued to non-employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    326
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    326SFAS 123R stock-based compensation expense including forfeitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,859
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,859Reversal of deferred compensation upon the adoption of SFAS 123R
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (839
    )
    
    
    839
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss:Unrealized gain on short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,760
    )
    
    
    (26,760
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,750
    )
  F-5




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY-(Continued)
(In thousands, except share data)
 AccumulatedotherConvertible
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    comprehensive
    
    
    
    
    
    
    Totalpreferred stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    income
    
    
    Accumulated
    
    
    stockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    compensation
    
    
    (loss)
    
    
    deficit
    
    
    equityBalance at December 31, 2006
    
    
    
    
    
    $
    
    
    
    
    28,596,198
    
    
    $
    29
    
    
    $
    274,798
    
    
    $
    
    
    
    $
    (22
    )
    
    $
    (214,480
    )
    
    $
    60,325Issuance of common stock pursuant to the exercise of stock options
and warrants
    
    
    
    
    
    
    
    
    
    
    30,192
    
    
    
    
    
    
    
    89
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89Issuance of common stock pursuant to the Employee Stock Purchase Plan
    
    
    
    
    
    
    
    
    
    
    70,558
    
    
    
    
    
    
    
    168
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168Compensation related to stock options and warrants issued to
non-employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101SFAS 123R stock-based compensation expense including forfeitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,065
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,065Comprehensive loss:Unrealized gain on short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    103Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,172
    )
    
    
    (9,172
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,069
    )Balance at December 31, 2007
    
    
    
    
    
    $
    
    
    
    
    28,696,948
    
    
    $
    29
    
    
    $
    279,221
    
    
    $
    
    
    
    $
    81
    
    
    $
    (223,652
    )
    
    $
    55,679
  F-6




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
 For the years ended December 31,2007
    
    
    2006
    
    
    2005Operating Activities:Net loss
    
    $
    (9,172
    )
    
    $
    (26,760
    )
    
    $
    (21,923
    )Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:Depreciation and amortization
    
    
    1,431
    
    
    
    1,509
    
    
    
    1,468Stock-based compensation
    
    
    4,065
    
    
    
    6,859
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    1,711Compensation related to stock option issuances to non-employees
    
    
    52
    
    
    
    276
    
    
    
    280Interest expense related to warrants issued in connection with debt
    
    
    
    
    
    
    23
    
    
    
    49Rent expense related to warrants issued in connection with lease
    
    
    49
    
    
    
    50
    
    
    
    53Loss from disposal of property and equipment
    
    
    27
    
    
    
    73
    
    
    
    89Changes in operating assets and liabilities:Accounts receivable
    
    
    1,175
    
    
    
    4,850
    
    
    
    (5,839
    )Prepaid expenses and other current assets
    
    
    (63
    )
    
    
    (290
    )
    
    
    487Other assets, net
    
    
    7
    
    
    
    253
    
    
    
    281Accounts payable
    
    
    290
    
    
    
    (222
    )
    
    
    (104
    )Accrued expenses
    
    
    449
    
    
    
    (546
    )
    
    
    256Deferred rent
    
    
    (466
    )
    
    
    (405
    )
    
    
    (31
    )Deferred revenue
    
    
    (23,567
    )
    
    
    (6,255
    )
    
    
    29,222Other long-term liabilities
    
    
    65
    
    
    
    
    
    
    
    Net cash (used in) provided by operating activities
    
    
    (25,658
    )
    
    
    (20,585
    )
    
    
    5,999Investing Activities:Purchase of securities available-for-sale
    
    
    (15,131
    )
    
    
    (14,310
    )
    
    
    (11,886
    )Proceeds from sale and maturity of securities available-for-sale
    
    
    13,170
    
    
    
    5,750
    
    
    
    28,416Purchase of property and equipment
    
    
    (356
    )
    
    
    (1,522
    )
    
    
    (1,338
    )Proceeds from the sale of property and equipment
    
    
    
    
    
    
    
    
    
    
    2Net cash provided by (used in) investing activities
    
    
    (2,317
    )
    
    
    (10,082
    )
    
    
    15,194Financing Activities:Proceeds from exercise of stock options and employee stock purchase plan
    
    
    257
    
    
    
    954
    
    
    
    1,057Proceeds from the sale of common stock, net of issuance costs
    
    
    
    
    
    
    
    
    
    
    66,437Proceeds from issuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    393Principal payments on long-term debt
    
    
    
    
    
    
    (1,559
    )
    
    
    (1,409
    )Net cash provided by (used in) financing activities
    
    
    257
    
    
    
    (605
    )
    
    
    66,478Net (decrease) increase in cash and cash equivalents
    
    
    (27,718
    )
    
    
    (31,272
    )
    
    
    87,671Cash and cash equivalents at beginning of year
    
    
    62,387
    
    
    
    93,659
    
    
    
    5,988Cash and cash equivalents at end of year
    
    $
    34,669
    
    
    $
    62,387
    
    
    $
    93,659Supplemental Disclosure of Cash Flow Information:Cash paid during the year for interest
    
    $
    
    
    
    $
    69
    
    
    $
    189Supplemental Disclosure of Non-Cash Investing and Financing Activities:Reversal of deferred compensation upon the adoption of SFAS 123R
    
    $
    
    
    
    $
    839
    
    
    $
    Unrealized gain on securities available-for-sale
    
    $
    103
    
    
    $
    10
    
    
    $
    36
  F-7




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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-8




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Property and Equipment
  Impairment of Long-Lived Assets
 Accounting for the Impairment or Disposal of Long-Lived
Assets
 Research and Development
   Accumulated Other Comprehensive Income (Loss)
 Reporting Comprehensive Income
 Deferred Rent
  F-9




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Stock-Based Compensation
 Accounting for Stock Issued to Employees Share-Based Payment,
 Accounting for Stock-Based Compensation Accounting for Equity Instruments that are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling Goods or Services
  Net Loss Per Share
 Earnings Per Share
  Revenue Recognition
 Revenue Recognition, Revenue Arrangements with Multiple Deliverables.
 
    
    Revenue from milestones is recognized when earned, as evidenced by written
acknowledgment from the collaborator or other persuasive evidence that the milestone has
been achieved, provided that (i) the milestone event is substantive and its achievability
was not reasonably assured at the inception of the agreement, (ii) the Companys
performance obligations after the milestone achievement will continue to be funded by the
collaborator at the comparable level and (iii) the milestone is not refundable or
creditable. If all of these criteria are not met, the milestone payment is recognized over
the remaining minimum period of the Companys performance obligations under the agreement.
Upfront fees under collaborations, such as technology access fees, are recognized over the
period the related services are provided. Non-refundable upfront fees not associated with
the Companys future performance are recognized when received.
    
    Fees that the Company receives for research services are generally recognized as the
services are provided, as long as the amounts received are not refundable regardless of the
results of the research project. Research services may include activities in which the
Company deploys its internal capabilities such as its medicinal chemistry and screening
capabilities to assist a collaborator in advancing their drug discovery effort.
 F-10




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Recent Accounting Pronouncements
 Accounting for Collaborative Arrangements Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendors Products)
 Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research
and Development Activities
 The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
 Fair Value Measurements
 2. Investments
  December 31, 2007UnrealizedAmortized
    
    
    
    
    
    
    
    
    MarketCost
    
    
    Gain
    
    
    Loss
    
    
    ValueU.S. Government
sponsored enterprise
securities
    
    $
    3,492
    
    
    $
    5
    
    
    $
    
    
    
    $
    3,497Corporate debt securities
    
    
    18,253
    
    
    
    96
    
    
    
    (20
    )
    
    
    18,329$
    21,745
    
    
    $
    101
    
    
    $
    (20
    )
    
    $
    21,826
 December 31, 2006UnrealizedAmortized
    
    
    
    
    
    
    
    
    MarketCost
    
    
    Gain
    
    
    Loss
    
    
    ValueU.S. Government
sponsored enterprise
securities
    
    $
    8,944
    
    
    $
    
    
    
    $
    (20
    )
    
    $
    8,924Corporate debt securities
    
    
    10,840
    
    
    
    
    
    
    
    (2
    )
    
    
    10,838$
    19,784
    
    
    $
    
    
    
    $
    (22
    )
    
    $
    19,762
 F-11




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31, 2007UnrealizedAmortized
    
    
    
    
    
    
    
    
    MarketCost
    
    
    Gain
    
    
    Loss
    
    
    ValueWithin one year
    
    $
    12,487
    
    
    $
    27
    
    
    $
    (6
    )
    
    $
    12,508After one year through three years
    
    
    9,258
    
    
    
    74
    
    
    
    (14
    )
    
    
    9,318$
    21,745
    
    
    $
    101
    
    
    $
    (20
    )
    
    $
    21,826
 December 31, 2006UnrealizedAmortized
    
    
    
    
    
    
    
    
    MarketCost
    
    
    Gain
    
    
    Loss
    
    
    ValueWithin one year
    
    $
    9,950
    
    
    $
    
    
    
    $
    (20
    )
    
    $
    9,930After one year through three years
    
    
    9,834
    
    
    
    
    
    
    
    (2
    )
    
    
    9,832$
    19,784
    
    
    $
    
    
    
    $
    (22
    )
    
    $
    19,762
 3. Property and Equipment
  As of December 31,2007
    
    
    2006Furniture and fixtures
    
    $
    72
    
    
    $
    68Equipment
    
    
    6,406
    
    
    
    7,012Computers and software
    
    
    2,220
    
    
    
    2,141Leasehold improvements
    
    
    1,833
    
    
    
    1,82910,531
    
    
    
    11,050Less accumulated depreciation and amortization
    
    
    (7,884
    )
    
    
    (7,301
    )$
    2,647
    
    
    $
    3,749
  F-12




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 4. Other Balance Sheet Captions
 As of December 31,2007
    
    
    2006(in thousands)Prepaid expenses and other current assets consisted of the following:Prepaid expenses
    
    $
    436
    
    
    $
    475Prepaid insurance
    
    
    227
    
    
    
    195Interest receivable
    
    
    341
    
    
    
    271$
    1,004
    
    
    $
    941Other assets consisted of the following:Lab compounds, net
    
    $
    
    
    
    $
    127Note receivable
    
    
    120
    
    
    
    Deposits
    
    
    1,260
    
    
    
    1,260$
    1,380
    
    
    $
    1,387Accrued expenses consisted of the following:Accrued personnel costs
    
    $
    345
    
    
    $
    509Accrued employee bonus
    
    
    907
    
    
    
    905Accrued drug development
    
    
    1,523
    
    
    
    1,325Accrued legal and patent costs
    
    
    150
    
    
    
    100Accrued facility costs
    
    
    191
    
    
    
    106Accrued severance costs
    
    
    205
    
    
    
    Other accrued expenses
    
    
    445
    
    
    
    372$
    3,766
    
    
    $
    3,317
 5. Restructuring
  F-13




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 6. Commitments and Contingencies
   2008
    
    
    2,1602009
    
    
    1,303Total
    
    $
    3,463
  7. Collaboration and License Agreements
 Hoffman-La Roche, Inc.
  Aphoenix, Inc.
  Novartis International Pharmaceutical Ltd.
    F-14




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 LG Life Sciences, Ltd.
   Valeant Pharmaceuticals International
  Grants
  8. Stockholders Equity
 Warrants
  Stock Options
   F-15




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ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageExercise
    
    Number
    
    Remaining
    
    Exercise
    
    Number
    
    ExercisePrice
    
    Outstanding
    
    Contractual Life
    
    Price
    
    Exercisable
    
    Price$2.00-$2.32
    
    
    1,564,250
    
    
    
    9.8
    
    
    $
    2.20
    
    
    
    2,710
    
    
    $
    2.25$2.40-$2.99
    
    
    1,220,816
    
    
    
    5.9
    
    
    $
    2.94
    
    
    
    1,009,080
    
    
    $
    2.95$3.00-$4.88
    
    
    1,200,142
    
    
    
    7.7
    
    
    $
    4.14
    
    
    
    454,888
    
    
    $
    4.23$5.00-$8.16
    
    
    1,215,251
    
    
    
    6.8
    
    
    $
    7.03
    
    
    
    1,019,944
    
    
    $
    6.91$8.37-$15.91
    
    
    347,368
    
    
    
    6.9
    
    
    $
    11.73
    
    
    
    227,267
    
    
    $
    11.725,547,827
    
    
    
    
    
    
    
    
    
    
    
    2,713,889
 F-16




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ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Weighted-Weighted
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicOptions
    
    
    Exercise
    
    
    Contractual
    
    
    ValueOutstanding
    
    
    Price
    
    
    Term
    
    
    (in thousands)Balance at December 31, 2004
    
    
    2,365,154
    
    
    $
    4.12Granted
    
    
    1,178,351
    
    
    
    9.13Exercised
    
    
    (222,593
    )
    
    
    3.16Cancelled
    
    
    (231,641
    )
    
    
    4.65Balance at December 31, 2005
    
    
    3,089,271
    
    
    
    6.06Granted
    
    
    2,220,900
    
    
    
    5.37Exercised
    
    
    (140,225
    )
    
    
    4.01Cancelled
    
    
    (122,766
    )
    
    
    8.14Balance at December 31, 2006
    
    
    5,047,180
    
    
    
    5.77Granted
    
    
    2,005,875
    
    
    
    2.59Exercised
    
    
    (30,192
    )
    
    
    2.95Cancelled
    
    
    (1,475,036
    )
    
    
    6.52Balance at December 31, 2007
    
    
    5,547,827
    
    
    $
    4.44
    
    
    
    7.62
    
    
    $
    Exercisable at December 31, 2007
    
    
    2,713,889
    
    
    $
    5.39
    
    
    
    6.00
    
    
    $
    
    Adoption of SFAS No. 123R, Share-Based Payment
  Year ended
    
    
    Year endedDecember 31, 2007
    
    
    December 31, 2006Research and development expense
    
    $
    2,463
    
    
    $
    2,889General and administrative expense
    
    
    1,650
    
    
    
    4,241Total share-based compensation expense
    
    $
    4,113
    
    
    $
    7,130Net share-based compensation expense, per common share
basic and diluted
    
    $
    0.14
    
    
    $
    0.25
  F-17




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   For the years ended December 31,2007
    
    2006
    
    2005(1)Risk-free interest rate
    
    
    4.20
    %
    
    
    4.66
    %
    
    
    4.27
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility factors of the expected market price
of the Companys common stock
    
    
    70
    %
    
    
    67
    %
    
    
    67
    %Weighted-average expected life of option (years)
    
    
    6
    
    
    
    6
    
    
    
    6
 
 (1)
    
    Assumptions relate to pro-forma disclosures under SFAS No. 123.       Pro Forma Information under SFAS No. 123 for Periods Prior to January 1, 2006
 Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans
 F-18




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  For the year endedDecember 31,2005Net loss applicable to common shareholders, as reported
    
    $
    (21,923
    )Add: Stock-based employee compensation included in
reported net loss
    
    
    1,711Deduct: Total stock-based employee compensation
determined under fair value based method for all
awards
    
    
    (4,205
    )Adjusted pro forma net loss
    
    $
    (24,417
    )Adjusted pro forma basic and diluted net loss per share
    
    $
    (0.99
    )
 Employee Stock Purchase Plan
   Shares Reserved for Issuance
  December 31, 2007Warrants
    
    
    71,366Employee Stock Purchase Plan
    
    
    775,390Stock options under the Companys Plans:Granted and outstanding
    
    
    5,547,827Reserved for future grant
    
    
    489,9386,884,521
 F-19




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 9. Income Taxes
 Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
 Accounting for Income Taxes
 As of December 31,2007
    
    
    2006(in thousands)Deferred tax assets:Net operating loss carryforwards
    
    $
    38,784
    
    
    $
    40,853Research and development credits
    
    
    3,430
    
    
    
    7,256Depreciation and amortization
    
    
    
    
    
    
    1,497Non-qualified stock options
    
    
    3,474
    
    
    
    2,793Capitalized research and development expense
    
    
    21,396
    
    
    
    16,227Accruals
    
    
    475
    
    
    
    376Deferred Revenue
    
    
    
    
    
    
    9,603Other
    
    
    24
    
    
    
    11Total deferred tax assets
    
    
    67,583
    
    
    
    78,616Valuation allowance for deferred tax assets
    
    
    (67,583
    )
    
    
    (78,616
    )Net deferred taxes
    
    $
    
    
    
    $
    
    F-20




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##### Table of Contents



ANADYS PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  10. Savings Plan
  11. Unaudited Quarterly Results of Operations
  First
    
    
    Second
    
    
    Third
    
    
    FourthFiscal year 2007
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(in thousands, except net loss per share)Revenues
    
    $
    1,102
    
    
    $
    1,302
    
    
    $
    21,489
    
    
    $
    225Net income (loss)
    
    
    (6,683
    )
    
    
    (6,996
    )
    
    
    12,307
    
    
    
    (7,800
    )Basic and diluted net income (loss) per share
    
    
    (0.23
    )
    
    
    (0.24
    )
    
    
    0.43
    
    
    
    (0.27
    )
 First
    
    
    Second
    
    
    Third
    
    
    FourthFiscal year 2006
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(in thousands, except net loss per share)Revenues
    
    $
    1,542
    
    
    $
    1,582
    
    
    $
    1,145
    
    
    $
    1,151Net loss
    
    
    (5,805
    )
    
    
    (7,078
    )
    
    
    (6,259
    )
    
    
    (7,618
    )Basic and diluted net loss per share
    
    
    (0.20
    )
    
    
    (0.25
    )
    
    
    (0.22
    )
    
    
    (0.27
    )
 F-21