<PAGE>

                                                                   EXHIBIT 10.39

                        CONFIDENTIAL SEPARATION AGREEMENT
                        AND GENERAL RELEASE OF ALL CLAIMS

      This Confidential Separation Agreement and Release of All Claims
("Separation Agreement") is made by and between Anadys Pharmaceuticals, Inc.
("Anadys" or "the Company") and Michael J. Kamdar ("Mr. Kamdar") with respect to
the following facts:

      A. Mr. Kamdar currently is employed by Anadys as Senior Vice President
Corporate Development and Finance;

      B. Mr. Kamdar resigns his employment effective May 2, 2005 (the
"Separation Date"). As of the Separation Date, all payments and benefits from
the Company will cease, except as provided in this Agreement. On execution of
this Separation Agreement, Mr. Kamdar will have resigned for all internal and
external purposes.

      C. Anadys wishes to resolve all claims and issues that have, or could have
been raised, in relation to Mr. Kamdar's employment with Anadys and arising out
of or in any way related to the acts, transactions or occurrences between Mr.
Kamdar and Anadys to date, including, but not limited to, Mr. Kamdar's
employment with Anadys or the conclusion of that employment, on the terms set
forth below.

      THEREFORE, in consideration of the promises and mutual agreements set
forth in this Separation Agreement, it is agreed by and between the undersigned
as follows:

      1. Final Wages. Within three (3) days of his Separation Date, the Company
shall provide Mr. Kamdar with a final paycheck which includes accrued and unused
vacation pay, less all applicable federal, state and local income, social
security and other payroll taxes. Within fourteen (14) days of the Separation
Date, the Company shall provide Mr. Kamdar with election forms for medical
insurance continuation as provided by the Consolidated Omnibus Budget
Reconciliation Act (COBRA).

      2. Consideration from Anadys. Anadys provides the following consideration
in exchange for Mr. Kamdar's agreement to the terms of this Separation
Agreement.

            2.1 In the event Employee elects to continue coverage pursuant to
the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA"), Anadys
agrees to reimburse Mr. Kamdar for continued health insurance coverage for
himself and his family for the same portion of his COBRA health insurance
premium that it paid during his employment or until the earlier of (i) nine (9)
months from the Separation Date; or (ii) the date on which Mr. Kamdar begins
full-time employment with another company or business entity which provides him
with similar benefits.

            2.2 Additional Consideration. As additional consideration, Anadys
agrees to pay Mr. Kamdar Forty-Five Thousand Dollars ($45,000), less all
applicable Federal, state and

                                       1

<PAGE>

local income and employment taxes and other deductions required by law. This sum
will be paid in two equal payments, one paid within three (3) days of execution
of the Separation Agreement and the second made June 2, 2005.

      3. General Release.

            3.1 In exchange for the consideration described in Section 2 above,
except for claims under the Workers' Compensation Act and Unemployment
Insurance, Mr. Kamdar unconditionally, irrevocably and absolutely releases and
discharges Anadys, and any parent and subsidiary corporations, divisions and
affiliated corporations, partnerships or other affiliated entities of Anadys,
past and present, as well as Anadys's employees, officers, directors, agents,
attorneys, successors and assigns (collectively, "Released Parties"), from all
claims related in any way to the transactions or occurrences between them to
date, to the fullest extent permitted by law, including, but not limited to, Mr.
Kamdar's employment with Anadys, the termination of Mr. Kamdar's employment, and
all other losses, liabilities, claims, charges, demands and causes of action,
known or unknown, suspected or unsuspected, arising directly or indirectly out
of or in any way connected with Mr. Kamdar's employment with Anadys. This
release is intended to have the broadest possible application and includes, but
is not limited to, any tort, contract, common law, constitutional or other
statutory claims, including, but not limited to, alleged violations of the
California Labor Code, the federal Fair Labor Standards Act, Title VII of the
Civil Rights Act of 1964, the California Fair Employment and Housing Act, the
Americans with Disabilities Act, the federal Family and Medical Leave Act, the
California Family Rights Act, and all claims for attorneys' fees, costs and
expenses;

            3.2 The parties declare and represent that they intend this
Separation Agreement to be complete and not subject to any claim of mistake, and
that the release herein expresses a full and complete release and, regardless of
the adequacy or inadequacy of the consideration, they intend the release herein
to be final and complete. The parties execute this release with the full
knowledge that this release covers all possible claims against the Released
Parties, to the fullest extent permitted by law.

      4. California Civil Code Section 1542 Waiver. By executing this Agreement,
Mr. Kamdar acknowledges that he has read the document and has had the
opportunity to receive independent legal advice with respect to executing this
Agreement. Mr. Kamdar expressly acknowledges and agrees that all rights under
Section 1542 of the California Civil Code are waived. That section provides:

            A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
            NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING
            THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
            SETTLEMENT WITH THE DEBTOR.

      5. Representation Concerning Filing of Legal Actions. Mr. Kamdar and
Anadys represent that, as of the date of this Separation Agreement, neither has
filed any lawsuits, charges, complaints, petitions, claims or other accusatory
pleadings against the other, or any of the other Released Parties in any court
or with any governmental agency. Mr. Kamdar agrees

                                       2

<PAGE>

that, to the fullest extent permitted by law, he will not prosecute, nor allow
to be prosecuted on his behalf, in any administrative agency, whether state or
federal, or in any court, whether state or federal, any claim or demand of any
type related to the matters released above, it being the intention of the
parties that with the execution of this release, the Released Parties will be
absolutely, unconditionally and forever discharged of and from all obligations
to or on behalf of Mr. Kamdar related in any way to the matters discharged
herein.

      6. Non-disparagement. Mr. Kamdar agrees that he will not make any
voluntary statements, written or oral, or cause or encourage others to make any
such statements that defame or disparage the personal and/or business
reputations, practices or conduct of Anadys or any of the other Released
Parties. Anadys agrees that its Senior Executives, including members of the
Anadys Board of Directors, will not make any voluntary statements, written or
oral, or cause or encourage others to make any such statements that defame or
disparage the personal and/or business reputations, practices or conduct of Mr.
Kamdar.

      7. Confidential Information.

            7.1 Mr. Kamdar acknowledges and agrees that he has a continuing
obligation to keep confidential and not to disclose Anadys' confidential and
proprietary information known or learned as a consequence of his employment with
the Company, including information that has been created, discovered or
developed by, or assigned or entrusted to, the Company or to Mr. Kamdar in the
course of his employment by the Company. This confidential and proprietary
information includes, but is not limited to, information which has commercial
value, formulas, structures, cloning vectors, nucleic acid sequences, proteins,
protein domains, organisms, cell lines and other biological materials, data,
processes, laboratory notebooks, know-how, improvements, techniques, marketing
plans, strategies, forecasts, business plans, financial information, graphs,
photographs, drawings, models, prototypes, computer media and customer lists,
research and development, or other technical or business information related to
the conduct of Anadys's business proprietary information and materials related
to investors or customers, the current, future or proposed business of Anadys,
customer accounts, consultants, vendors or others with whom Anadys does
business, personnel information respecting any employee of Anadys or the
proprietary information of any third party who may have disclosed such
information to Anadys or to Mr. Kamdar in the course of business;

            7.2 Mr. Kamdar agrees that he has a continuing obligation under the
terms of the Confidentiality Agreement which he signed on August 1, 2001, and
that the relevant terms of that agreement will continue in full force and
effect;

            7.3 Mr. Kamdar agrees that the terms and conditions of this
Separation Agreement, as well as the discussions that led to the terms and
conditions of this Separation Agreement, are confidential, and may be disclosed
only pursuant to a subpoena duly issued by a court of law or a government agency
having jurisdiction or power to compel such disclosure, or to retained attorneys
or to his immediate family (spouse, parents, children). When releasing this
information to any such person, Mr. Kamdar shall advise the person receiving the
information of its confidential nature.

                                       3

<PAGE>

      8. Property of Anadys. Within three (3) days of the Separation Date, Mr.
Kamdar will deliver to a Company representative, at a location to be determined,
all Company property which he has in his possession, including all equipment and
accessories, office equipment, financial information, account lists or client
contact lists, credit cards, keys, and documents, including copies of documents.

      9. Injunctive Relief. Mr. Kamdar acknowledges that his obligations as
outlined in Sections 7 and 8 of this Separation Agreement are of a special,
unique and extraordinary character, and that it would be difficult or impossible
to compensate Anadys in money damages for a breach of such provisions of this
Separation Agreement. Accordingly, Mr. Kamdar agrees and consents that if he
violates any such provisions of this Separation Agreement, Anadys, in addition
to all other rights and remedies available under this Separation Agreement or
otherwise, shall be entitled to injunctive relief without the necessity of
proving actual damages.

      10. No Admissions. Anadys expressly denies liability of any kind to Mr.
Kamdar and nothing contained in this Separation Agreement may be construed or
used as an admission of any liability in any legal or administrative proceeding.

      11. Applicable Law. The validity, interpretation and performance of this
Separation Agreement shall be construed and interpreted according to the laws of
California.

      12. Binding on Successors. This Separation Agreement shall be binding on,
and inure to the benefit of, their successors, heirs and/or assigns.

      13. Interpretation; Construction. The headings contained in this
Separation Agreement are for reference purposes only and shall not be used in
interpreting this Separation Agreement.

      14. Entire Agreement. This Separation Agreement, including the surviving
provisions of any agreement protecting the confidentiality of Anadys's
proprietary information is the only agreement and understanding between the
parties pertaining to the subject matter of this Separation Agreement and
supersedes all prior or simultaneous representations, discussions, negotiations
and agreements, whether written or oral. It is agreed that there are no
collateral

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       4

<PAGE>

agreements-or representations, written or oral, regarding the terms and
conditions of Mr. Kamdar's separation of employment with Anadys and settlement
of all claims between them other than those set forth in this Separation
Agreement.

     By: /s/ Michael J. Kamdar                                Date: 05/02/2005
         ---------------------
         Michael J. Kamdar

     Anadys Pharmaceuticals, Inc.

     By: /s/ Kleanthis G. Xanthopoulos, Ph.D.                 Date: 05/02/2005
         ------------------------------------
         Kleanthis G. Xanthopoulos, Ph.D.
         Anadys President and Chief Executive
         Officer

                                       5