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  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 8/31/07  Anacor Pharmaceuticals Inc        S-1                   20:288                                    Merrill Corp/New/- FA

Document/Exhibit                   Description                      Pages   Size 

 1: S-1         Registration Statement (General Form)               HTML    964K 
 2: EX-3.1      Articles of Incorporation/Organization or By-Laws   HTML     74K 
 3: EX-3.3      Articles of Incorporation/Organization or By-Laws   HTML     76K 
 4: EX-4.2      Instrument Defining the Rights of Security Holders  HTML    138K 
 5: EX-10.1     Material Contract                                   HTML     77K 
 6: EX-10.5     Material Contract                                   HTML     33K 
 7: EX-10.6     Material Contract                                   HTML     37K 
 8: EX-10.7     Material Contract                                   HTML     19K 
 9: EX-10.8     Material Contract                                   HTML     11K 
10: EX-10.9     Material Contract                                   HTML     18K 
11: EX-10.10    Material Contract                                   HTML     25K 
12: EX-10.11    Material Contract                                   HTML     21K 
13: EX-10.13    Material Contract                                   HTML     11K 
14: EX-10.14    Material Contract                                   HTML     11K 
15: EX-10.15    Material Contract                                   HTML    159K 
16: EX-10.16    Material Contract                                   HTML     53K 
17: EX-10.17    Material Contract                                   HTML    129K 
18: EX-10.18    Material Contract                                   HTML    213K 
19: EX-10.19    Material Contract                                   HTML     26K 
20: EX-23.1     Consent of Experts or Counsel                       HTML      8K 

As filed with the Securities and Exchange Commission on August 31, 2007.

Registration No. 333-            

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

ANACOR PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

David P. Perry
President and Chief Executive Officer
Anacor Pharmaceuticals, Inc.
1060 East Meadow Circle
Palo Alto, CA 94303-4230
(650) 739-0700
(Name, address, including zip code, and telephone number, including area code, of agent for service)

        Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

        If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

        If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

CALCULATION OF REGISTRATION FEE

(1)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933.

        The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

PROSPECTUS (Subject to Completion)
Issued August 31, 2007

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

                              Shares

COMMON STOCK

Anacor Pharmaceuticals, Inc. is offering                              shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $               and $               per share.

We have applied to have our common stock approved for listing on the Nasdaq Global Market under the symbol "ANAC."

Investing in our common stock involves risks. See "Risk Factors" beginning on page 8.

PRICE $          A SHARE

We have granted the underwriters the right to purchase up to an additional                            shares of common stock to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete.    Any representation to the contrary is a criminal offense.

Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on                        , 2007.

                        , 2007

   
TABLE OF CONTENTS

        You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, or other date stated in this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

        Until                       , 2007 (25 days after commencement of this offering), all dealers that buy, sell, or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

        For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

   
PROSPECTUS SUMMARY

        This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read this summary together with the more detailed information, including our financial statements and the related notes, elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in "Risk Factors."

   
ANACOR PHARMACEUTICALS, INC.

Corporate Overview

        We are a biopharmaceutical company developing novel small-molecule therapeutics derived from our boron chemistry platform. We believe that our expertise in creating new boron-based compounds enables us to develop proprietary product candidates rapidly and cost-effectively that address unmet medical needs across many therapeutic areas. We have focused initially on developing topical applications of our compounds to treat fungal, bacterial and inflammatory diseases. We believe topical therapeutics generally have lower development costs, reduced risk of side effects and faster time to market than systemic therapeutics. Our most advanced product candidate is AN2690, a novel topical antifungal in development for the treatment of toenail onychomycosis, a fungal infection of the nail and nail bed. In February 2007, we entered into a worldwide license, development and commercialization agreement with Schering Corporation, or Schering-Plough, for AN2690 for all indications including the treatment of onychomycosis. Pending discussions with the FDA, we anticipate that Schering-Plough will initiate Phase 3 clinical trials for AN2690 in onychomycosis in 2008. In addition, we have a portfolio of other topical product candidates in development for the treatment of psoriasis, gingivitis, acne, vaginal candidiasis and tinea pedis.

        Our core technology platform is based on the use of boron to develop novel product candidates, which we believe confers a number of advantages in our drug development efforts. Boron-based compounds interact with biological targets in novel ways, and can address targets not amenable to intervention by traditional, carbon-based compounds. We have demonstrated that our boron-based compounds have antibiotic, anti-inflammatory, antiparasitic and antifungal properties, giving them broad utility across multiple disease areas. Technological advances in the synthesis of boron-based compounds have allowed us to rapidly create large families of compounds with drug-like properties. Finally, we believe the intellectual property landscape for boron-based pharmaceutical products is relatively unencumbered compared to that for carbon-based products, providing an attractive opportunity for us to build our intellectual property portfolio.

        By exploiting these advantages of our boron chemistry platform, we have discovered and advanced into clinical development several novel and proprietary boron-based product candidates that address attractive market opportunities.

Our Product Candidates

        Our objective is to discover, develop and commercialize proprietary boron-based drug compounds with superior efficacy, safety and convenience for the treatment of a variety of diseases. Our current product candidates include the following:

•

AN2690 is our product candidate for the topical treatment of onychomycosis, a fungal infection of the nail and nail bed. AN2690 is a potent antifungal that, according to our preclinical studies, penetrates the human nail plate 250 times more effectively than Penlac, the only currently approved topical therapy. We believe this enhanced penetration will allow AN2690 to more effectively treat onychomycosis. According to Podiatry Today, onychomycosis affects 35 to 36 million people in the United States; however, 47% of those affected are not receiving treatment according to the manufacturer of Lamisil, the leading prescription treatment for onychomycosis. While Lamisil, a systemic antifungal, is effective for many patients, it carries the risk of liver failure. Despite this

2

potential toxicity, worldwide sales of Lamisil peaked at $1.2 billion in 2004 and totaled $978 million in 2006. Phase 2 clinical trials suggest AN2690 is effective in the treatment of onychomycosis but with lowered risk of systemic side effects due to its topical administration. Pending discussions with the FDA, we expect Schering-Plough to initiate Phase 3 clinical trials for AN2690 in 2008.

•

AN2728 is our topical anti-inflammatory product candidate for the treatment of psoriasis. AN2728 is designed to inhibit the production of TNF-alpha, a known mediator of the inflammation associated with psoriasis and a validated target, as well as other cytokines, which are proteins produced by the immune system that are involved in the inflammation process. Psoriasis is an inflammation of the skin caused by a reaction of the immune system that affects approximately 10 million people worldwide, according to Decision Resources. Patients with psoriasis can be categorized as having mild, moderate or severe forms of the disease, with approximately 80% of patients having mild to moderate forms according to Decision Resources. Although current treatments attempt to decrease the severity of the disease, none of them cures the disease. Currently available treatments include topical, oral and injectable therapies. According to IMS Health, 87% of all prescriptions for psoriasis in the United States in 2006 were for topical treatments. For patients with moderate to severe psoriasis, oral and injectable biologic therapies are available that provide significant efficacy. However, these treatments involve systemic exposure, which can lead to serious side effects. We believe that AN2728 has the potential to combine the effect of injectable biologics with a better safety profile than existing therapies. AN2728 has demonstrated efficacy in psoriasis patients in a Phase 1b clinical trial. We intend to begin an additional Phase 1b clinical trial and a Phase 2 clinical trial in parallel in 2007 to better characterize the safety profile of AN2728 and evaluate the appropriate efficacious dose for treating psoriasis.



•

AN0128 is our product candidate that has both antibiotic and anti-inflammatory properties. We have demonstrated in preclinical studies and an initial clinical trial that AN0128 can be effective at killing types of bacteria most frequently found on the skin and in the mouth, and also bacteria resistant to other drugs. We are evaluating the use of AN0128 in diseases that have components of both infection and inflammation. We are exploring opportunities with leading manufacturers of oral care products to evaluate development of AN0128 for gingivitis. We may also choose to develop AN0128 for the treatment of acne. In a Phase 1b clinical trial, AN0128 showed activity similar to clindamyacin, the most commonly prescribed antibiotic for acne, in eliminating bacteria from pores in the skin.



•

AN2718 is our product candidate in preclinical development for the topical treatment of vaginal candidiasis, or yeast infections, and tinea pedis, or athlete's foot. In preclinical studies, AN2718 has been shown to be effective against yeasts associated with vaginal candidiasis, including those resistant to current treatments, which are becoming more prevalent. Additionally, AN2718 has been shown in preclinical studies to be effective against fungal strains that cause tinea pedis. We have engineered AN2718 to penetrate the thick skin of the foot, which we believe is important to treat tinea pedis effectively. If our planned preclinical studies are successful, we expect to file investigational new drug applications for both of these indications in 2008. We also may develop AN2718 for treatment of other fungal skin infections.

Our Development and Commercialization Strategy

        We believe topical therapeutics generally have lower development costs, reduced risks of side effects and a faster time to market than systemic products. We intend to develop our topical compounds ourselves through proof of concept or pivotal trials and commercialize them ourselves or through our partners. Initially, we plan to partner programs for potential systemic product candidates at an early stage of development and may undertake preclinical and initial clinical development of resulting product candidates in conjunction with our partners. We intend to commercialize our products in specialty markets

3

in the United States, and will seek commercialization partners for international markets and for non-specialty U.S. markets.

Our Agreement with Schering-Plough

        In February 2007, we entered into an exclusive license, development and commercialization agreement with Schering-Plough for the development and worldwide commercialization of AN2690, including for the treatment of onychomycosis. Pursuant to the agreement, Schering-Plough paid us a $40 million up-front fee and we have the right to require Schering-Plough to purchase up to $10 million of our capital stock. In addition to assuming sole responsibility for the costs of development and commercialization of AN2690, Schering-Plough has also agreed to pay us double digit royalties on sales of AN2690 and up to an additional $505 million if certain development, regulatory and commercial milestones for onychomycosis are achieved. Schering-Plough is also obligated to pay us additional fees for each additional indication for which Schering-Plough develops AN2690 treatments if certain milestones are achieved. We retained the option to co-promote AN2690 for the treatment of onychomycosis to dermatologists in the United States, subject to certain conditions. Schering-Plough did not acquire any rights to any of our other product candidates under this agreement.

Risk Related to Our Business

        In executing our business strategy, we face significant risks and uncertainties, as more fully described in the section entitled "Risk Factors." These risks include, among others, the incurrence of substantial and increasing net losses for the foreseeable future because we have no products approved for sale and we have not generated any revenue from sales of our products, and the need to obtain substantial additional funding for our clinical trials. In addition, to receive regulatory approval for any of our product candidates, we or our partners, such as Schering-Plough in the case of AN2690, must conduct adequate and well-controlled clinical trials to demonstrate safety and efficacy in humans. If clinical trials for AN2690 or our other product candidates do not produce results necessary to support regulatory approval, we or our partners will be unable to commercialize these products.

Corporate Information

        We were incorporated in Delaware in December 2000 as AnaMax, Inc. We began operations in March 2002 and changed our name to Anacor Pharmaceuticals, Inc. in October 2002. Our principal executive offices are located at 1060 East Meadow Circle, Palo Alto, CA 94303-4230, and our telephone number is (650) 739-0700. Our website address is www.anacor.com. The information on, or accessible through, our website is not part of this prospectus.

        Anacor™ and Anacor Pharmaceuticals™ are our trademarks. This prospectus also contains trademarks and trade names of other companies.

4

   
THE OFFERING

        The number of shares of common stock to be outstanding immediately after this offering is based on 47,627,080 shares of common stock outstanding as of June 30, 2007 and excludes:

•

4,676,003 shares of common stock issuable upon the exercise of options outstanding at a weighted average exercise price of $0.49 per share;



•

shares of our common stock reserved for future issuance under our 2007 Equity Incentive Plan and our 2007 Employee Stock Purchase Plan, which will become effective on the completion of this offering (including                         shares of common stock reserved for future grant or issuance under our 2001 Equity Incentive Plan, which shares will be added to the shares to be reserved under our 2007 Equity Incentive Plan upon the effectiveness of the 2007 Equity Incentive Plan); and



•

300,578 shares of common stock issuable upon the exercise of a warrant outstanding at an exercise price of $1.73 per share.

Except as otherwise indicated, all information in this prospectus assumes:

•

the conversion of all outstanding shares of our convertible preferred stock into 40,842,356 shares of common stock;



•

no exercise of the underwriters' over-allotment option; and



•

the filing of our amended and restated certificate of incorporation, which will occur immediately prior to the completion of this offering.

Share numbers in this prospectus do not reflect a reverse stock split that we expect to effect prior to completion of this offering.

5

   
SUMMARY FINANCIAL DATA

        The following summary financial data should be read together with our financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. The summary financial data in this section is not intended to replace our financial statements and the accompanying notes. Our historical results are not necessarily indicative of our future results.

        We derived the statements of operations data for 2004, 2005 and 2006 from our audited financial statements appearing elsewhere in this prospectus. The statements of operations data for the six months ended June 30, 2006 and 2007 and the balance sheet data as of June 30, 2007 is derived from our unaudited condensed financial statements appearing elsewhere in this prospectus.

(1)

Please see Note 2 to our financial statements appearing elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted net loss per common share, the pro forma basic and diluted net loss per common share and the number of shares used in the computation of the per share amounts.

6

        The pro forma as adjusted balance sheet data reflects the (i) conversion of all of our outstanding shares of convertible preferred stock into 40,842,356 shares of common stock and (ii) sale of                         shares of common stock in this offering at the initial public offering price of $            per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

        A $1.00 increase (decrease) in the assumed initial public offering price of $    per share would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders' equity by approximately $     million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and any estimated offering expenses payable by us.

7

   
RISK FACTORS

        Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following adverse developments described in the following risk factors could harm our business, financial condition, results of operations or prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Relating to the Development, Regulatory Approval and Commercialization of Our Product Candidates

        We are largely dependent on the regulatory approval of our most advanced product candidates, especially AN2690, and we cannot be certain that these product candidates will receive regulatory approval.

        We have invested a significant portion of our efforts and financial resources in the development of our most advanced product candidates, especially AN2690, which is currently in clinical trials for the treatment of onychomycosis. Our ability to generate revenue related to product sales, which we do not expect will occur for at least the next several years, if ever, will depend on the successful development and regulatory approval of our product candidates. We entered into a license, development and commercialization agreement with Schering-Plough in February 2007, pursuant to which Schering-Plough is responsible for Phase 3 clinical trials, regulatory approval and commercialization of AN2690. If Schering-Plough is not able to obtain regulatory approval for AN2690 or the milestones set forth in the agreement are not achieved or if Schering-Plough terminates our agreement, we may not be able to commercialize AN2690. In addition, our clinical development programs for our other product candidates may not lead to regulatory approval from the FDA and similar foreign regulatory agencies and we may therefore fail to commercialize those product candidates. Any failure to obtain regulatory approvals would have a material and adverse effect on our business.

        We currently have no approved products for sale and we cannot guarantee that we will ever have marketable products. The research, testing, manufacturing, labeling, approval, selling, marketing and distribution of products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, with regulations differing from country to country. We are not permitted to market our product candidates in the United States until we receive approval of a new drug application, or NDA, from the FDA. We have not submitted an NDA for any of our product candidates. Obtaining approval of an NDA is a lengthy, expensive and uncertain process.

        Delays in the commencement, enrollment and completion of clinical trials could result in increased costs to us and delay or limit our ability to obtain regulatory approval for our product candidates.

        Delays in the commencement, enrollment and completion of clinical trials could increase our product development costs and hinder our ability to commence marketing our product candidates. We do not know whether Schering-Plough will commence Phase 3 clinical trials for AN2690 as planned or whether these trials will be completed on schedule, if at all. In addition, we do not know whether planned clinical trials for our other most advanced product candidates will begin on time or will be completed on schedule or at all. The commencement and completion of clinical trials requires us or our partners to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs for the same indication as our product candidates. Clinical trial sites may also be required to withdraw from a clinical trial as a result of changing standards of care or may otherwise become ineligible

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to participate in our clinical trials. The commencement, enrollment and completion of clinical trials can be delayed for a variety of other reasons, including delays related to:

•

inability to reach agreements on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;



•

regulatory objections to commencing a clinical trial;



•

inability to obtain institutional review board, or IRB, approval to conduct a clinical trial at prospective sites;



•

difficulty recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including meeting the enrollment criteria for our study and competition from other clinical trial programs for the same indication as our product candidates; and



•

inability to retain patients in clinical trials due to the treatment protocol, personal issues, side effects from the therapy or lack of efficacy, particularly for those patients receiving a placebo.

        In addition, a clinical trial may be suspended or terminated by us, our partners, the FDA or other regulatory authorities due to a number of factors, including:

•

failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;



•

inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;



•

unforeseen safety issues or any determination that a clinical trial presents unacceptable health risks; or



•

lack of adequate funding to continue the clinical trial due to unforeseen costs resulting from enrollment delays, requirements to conduct additional trials and studies, increased expenses associated with the services of our CROs and other third parties or other reasons.

        If we or our partners are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, we may be delayed in obtaining, or may not be able to obtain, marketing approval for these product candidates. In addition, our partners may suspend or terminate their development and commercialization efforts, including clinical trials for our product candidates, at any time.

        Changes in regulatory requirements and guidance may occur and we or our partners may need to amend clinical trial protocols to reflect these changes with appropriate regulatory authorities. Amendments may require us or our partners to resubmit our clinical trial protocols to IRBs for re-examination, which may impact the costs, timing or successful completion of a clinical trial. If we or our partners experience delays in the completion of, or if we or our partners terminate, our clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to generate revenue from sales of our products will be delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate.

        Clinical failure can occur at any stage of clinical development. Because the results of earlier clinical trials are not necessarily predictive of future results, any product candidate we or our partners advance through clinical trials may not have favorable results in later clinical trials or receive regulatory approval.

        Clinical failure can occur at any stage of our clinical development. Clinical trials may produce negative or inconclusive results, and we or our partners may decide, or regulators may require us, to conduct additional clinical or non-clinical testing. Success in preclinical testing and early clinical trials does not

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ensure that later clinical trials will generate adequate data to demonstrate the efficacy and safety of a product candidate. If the results of ongoing or future clinical trials of AN2690 do not demonstrate expected safety or efficacy, including over a longer treatment period, the prospects for commercialization of AN2690 would be adversely affected. A number of companies in the pharmaceutical industry, including those with greater resources and experience than us, have suffered significant setbacks in Phase 3 clinical trials, even after seeing promising results in earlier clinical trials.

        Pending discussions with the FDA, we anticipate that Schering-Plough will initiate Phase 3 clinical trials for AN2690 in 2008. The data collected from our previous clinical trials is not adequate to support regulatory approval of AN2690 or any of our other product candidates. Despite the results reported in earlier clinical trials for our product candidates, we do not know whether any Phase 2, Phase 3 or other clinical trials we or our partners may conduct will demonstrate adequate efficacy and safety to obtain regulatory approval to market our product candidates. In particular, changes in study protocols from Phase 2 clinical trials to Phase 3 clinical trials, such as an expected increase in the period of treatment for AN2690 or differences in study populations, could result in side effects or changes in efficacy that were not seen in earlier trials, as well as a higher rate of drop-out among clinical trial participants.

        Furthermore, additional safety studies are required for AN2690 and our other product candidates prior to submission of an NDA. If AN2690 or our other product candidates are found unsafe, they will not be commercialized and our business would be harmed.

        Our product candidates may have undesirable side effects which may delay or prevent marketing approval or, if approval is received, require them to be taken off the market or otherwise limit their sales.

        The results of clinical trials may show that our product candidates may cause undesirable side effects, which could interrupt, delay or halt clinical trials, resulting in delay of, or failure to obtain, marketing approval from the FDA and other regulatory authorities. If any of our product candidates receives marketing approval and we or others later identify undesirable side effects caused by such products:

•

regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and pharmacies;



•

we may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product;



•

we may have limitations on how we promote our drugs;



•

sales of our products may decrease significantly;



•

regulatory authorities may require us to take our approved drug off the market;



•

we may be subject to litigation or product liability claims; and



•

our reputation may suffer.

        Any of these events could prevent us or our partners from achieving or maintaining market acceptance of the affected product or could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenues from the sale of our product candidates.

        Increased scrutiny of clinical trials by regulatory agencies may delay or prevent marketing approval of our product candidates.

        In light of widely publicized events concerning the safety risk of certain drug products, regulatory authorities, members of Congress, the Government Accounting Office, medical professionals and the general public have raised concerns about potential drug safety issues. These events have resulted in the withdrawal of drug products, revisions to drug labeling that further limit use of the drug products and establishment of risk management programs that may, for instance, restrict distribution of drug products.

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The increased attention to drug safety issues may result in a more cautious approach by the FDA to clinical trials. Data from clinical trials may receive greater scrutiny with respect to safety, which may make the FDA or other regulatory authorities more likely to terminate clinical trials before completion, or require longer or additional clinical trials that may result in substantial additional expense and a delay or failure in obtaining approval or result in approval for a more limited indication than originally sought. Failure to adequately demonstrate the efficacy and safety of AN2690 or any of our other product candidates would prevent regulatory approval and, ultimately, the commercialization of that product candidate.

        All of our products in development require regulatory review and approval prior to commercialization. Any delay in the regulatory review or approval of any of our products in development will harm our business.

        All of our products in development require regulatory review and approval prior to commercialization. Any delays in the regulatory review or approval of our products in development would delay market launch, increase our cash requirements, increase the volatility of our stock price and result in additional operating losses.

        The process of obtaining FDA and other required regulatory approvals, including foreign approvals, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. Furthermore, this approval process is extremely complex, expensive and uncertain. We or our partners may be unable to submit any NDA in the United States or any marketing approval application or other foreign applications for any of our products. If we or our partners submit any NDA, including any amended NDA or supplemental NDA, to the FDA seeking marketing approval for any of our product candidates, the FDA must decide whether to either accept or reject the submission for filing. We cannot be certain that any of these submissions will be accepted for filing and reviewed by the FDA, or that the marketing approval application submissions to any other regulatory authorities will be accepted for filing and review by those authorities. We cannot be certain that we or our partners will be able to respond to any regulatory requests during the review period in a timely manner without delaying potential regulatory action. We also cannot be certain that any of our products will receive favorable recommendation from any FDA advisory committee or foreign regulatory bodies or be approved for marketing by the FDA or foreign regulatory authorities. In addition, delays in approvals or rejections of marketing applications may be based upon many factors, including regulatory requests for additional analyses, reports, data and studies, regulatory questions regarding data and results, changes in regulatory policy during the period of product development and the emergence of new information regarding our product candidates or other products.

        Data obtained from preclinical studies and clinical trials are subject to different interpretations, which could delay, limit or prevent regulatory review or approval of any of our product candidates. In addition, as a routine part of the evaluation of any potential drug, clinical trials are generally conducted to assess the potential for drug-to-drug interactions that could impact potential product safety. To date, we and our partners have not been requested to perform drug-to-drug interaction studies on our product candidates, but any such request may delay any potential product approval and will increase the expenses associated with clinical programs. Furthermore, regulatory attitudes towards the data and results required to demonstrate safety and efficacy can change over time and can be affected by many factors, such as the emergence of new information, including on other products, policy changes and agency funding, staffing and leadership. We do not know whether future changes to the regulatory environment will be favorable or unfavorable to our business prospects.

        In addition, the environment in which our regulatory submissions may be reviewed changes over time. For example, average review times at the FDA for marketing approval applications have fluctuated over the last ten years, and we cannot predict the review time for any of our submissions with any regulatory authorities. In addition, review times can be affected by a variety of factors, including budget and funding levels and statutory, regulatory and policy changes.

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        Our use of boron chemistry to develop pharmaceutical product candidates is novel and may not prove successful in producing approved drug candidates. Undesirable side effects of any of our product candidates, or of boron-based drugs developed by others, could prevent us from obtaining regulatory approval for our product candidates, extend the time period required to obtain regulatory approval or harm market acceptance of our product candidates, if approved.

        All of our product development activities are centered around compounds containing boron. The use of boron chemistry to develop new drugs is largely unproven. The only FDA-approved boron-containing pharmaceutical product, Velcade, is an anticancer chemotherapy agent that has significant adverse side effects. We believe that the adverse side effects associated with Velcade are due to its unique mechanism of action. None of our product candidates or research activities employs the same mechanism of action as Velcade. Nonetheless, if potential patients, regulatory authorities, third-party payors or medical providers associate the adverse side effects of Velcade or other boron-containing therapeutics that may be developed with all potential boron-based therapies, the market for our products could be adversely affected.

        Additionally, there can be no assurance that our product candidates will be free of adverse side effects. For example, a small number of our patients who received AN2690 treatment experienced reversible skin irritation around their toe nails during clinical trials of AN2690 for onychomycosis. If boron-containing drug treatments result in significant adverse side effects, they may not be useful as therapeutic agents. If we are unable to develop product candidates that are safe and effective using our boron chemistry platform, our business will be materially and adversely affected.

        Regulatory authorities may also require additional safety testing of boron-based compounds, which could delay the timing of and increase the cost for regulatory approvals of our product candidates. Additionally, even if our boron-containing compounds do not have adverse side effects but boron-containing drugs developed by others do, it could affect the willingness of regulatory authorities, third-party payors and medical providers to approve, provide reimbursement for or use our boron-containing drugs. If boron-containing compounds prove unsuitable as therapeutic agents, our business will be significantly harmed.

        If any of our product candidates for which we receive regulatory approval do not achieve broad market acceptance, the revenues that we generate from their sales will be limited.

        The commercial success of AN2690 or our other product candidates will depend upon the acceptance of these products among physicians, patients and the medical community. The degree of market acceptance of AN2690 or any of our other product candidates will depend on a number of factors, including:

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limitations or warnings contained in a product's FDA-approved labeling;



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changes in the standard of care for the targeted indications for any of our product candidates;



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limitations in the approved indications for our product candidates;



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lower demonstrated clinical safety and efficacy compared to other products;



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prevalence and severity of adverse side effects;



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ineffective sales, marketing and distribution support;



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lack of availability of reimbursement from managed care plans and other third-party payors;



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lack of cost-effectiveness;



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timing of market introduction and perceived effectiveness of competitive products;



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availability of alternative therapies at similar or lower cost, including generics and over-the-counter products;

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•

adverse publicity about our product candidates or favorable publicity about competitive products;



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patients' potential preferences to utilize oral medications over topical medications; and



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potential product liability claims.

        If our product candidates are approved, but do not achieve an adequate level of acceptance by physicians, health care payors and patients, we may not generate sufficient revenue from these products, and we may not become or remain profitable. In addition, our efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful. If our product candidates fail to achieve market acceptance after regulatory approval, we will not be able to generate significant revenue, if any.

        We have never marketed a drug before, and if we are unable to establish an effective sales force and marketing infrastructure, we may not be able to commercialize our product candidates successfully.

        We plan to market or co-promote our products in certain U.S. specialty markets. We currently do not have any internal sales, distribution and marketing capabilities. The development of a sales and marketing infrastructure for U.S. specialty markets will require substantial resources, will be expensive and time consuming and could negatively impact our commercialization efforts, including delay of any product launch. These costs may be incurred in advance of any approval of our product candidates. In addition, we may not be able to hire a sales force in the United States that is sufficient in size or has adequate expertise in the medical markets that we intend to target. If we are unable to establish our sales force and marketing capability, our operating results may be adversely affected.

        We expect that our existing and future product candidates will face competition and some of our competitors have significantly greater resources than us.

        The pharmaceutical industry is highly competitive, with a number of established, large pharmaceutical companies, as well as many smaller companies. Most of these companies have greater financial resources, marketing capabilities and experience in obtaining regulatory approvals for product candidates than us. There are many pharmaceutical companies, biotechnology companies, public and private universities, government agencies and research organizations actively engaged in research and development of products that may target the same markets as our product candidates. We expect any future products we develop to compete on the basis of, among other things, product efficacy, price, extent of adverse side effects experienced and convenience of treatment procedures. One or more of our competitors may develop products based upon the principles underlying our proprietary technologies earlier than us, obtain approvals for such products from the FDA more rapidly than us or develop alternative products or therapies that are safer, more effective or more cost effective than any future products developed by us.

        The commercial opportunity for our product candidates could be significantly harmed if competitors are able to develop alternative formulations that compete with our product candidates. Compared to us, many of our potential competitors have substantially greater:

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development resources, including personnel and technology;



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clinical trial experience;



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regulatory experience;



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intellectual property portfolios;



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expertise in prosecution of intellectual property rights;



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manufacturing and distribution experience; and



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sales and marketing experience.

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        As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than we are able to or may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates. Our competitors may also develop drugs that are more effective, more widely-used and less costly than ours and may also be more successful than us in manufacturing and marketing their products.

        The dermatology market is competitive, which may adversely affect our ability to commercialize our product candidates.

        If approved for the treatment of onychomycosis, we anticipate that AN2690 would compete with other marketed nail fungal therapeutics including Lamisil, Sporanox, Penlac and generic versions of those compounds. AN2690 will also compete against over-the-counter products. If approved for the treatment of psoriasis, AN2728 will compete against Tazorac, vitamin D analogues and corticosteroids, as well as over-the-counter therapies. Certain of our other product candidates will, if they receive regulatory approval, compete against branded prescription drugs, generics or over-the-counter products. Even if a generic product or an over-the-counter product is less effective than our product candidates, a less effective generic or over-the-counter product may be more quickly adopted by health insurers and consumers than our competing product candidates based upon cost or convenience. In addition, each of our product candidates may compete against product candidates currently under development by other companies.

        Reimbursement decisions by third-party payors may have an adverse effect on pricing and market acceptance. If patients seek coverage or sufficient reimbursement for our products and are unable to obtain it, it is less likely that our products will be widely used.

        Successful commercialization of pharmaceutical products usually depends on the availability of adequate coverage and reimbursement from third-party payors. Patients or healthcare providers who purchase drugs generally rely on third-party payors to reimburse all or part of the costs associated with such products. Adequate coverage and reimbursement from governmental payors, such as Medicare and Medicaid, and commercial payors, such as HMOs and insurance companies, can be central to new product acceptance.

        Current treatments for onychomycosis are often not reimbursed by third-party payors. We do not know the extent to which AN2690 will be reimbursed. Reimbursement decisions by third-party payors may have an effect on pricing and market acceptance. Our other leading product candidates, such as AN2728 for the treatment of psoriasis, are also subject to uncertain reimbursement decisions by third-party payors. Patients are less likely to use products if they do not receive adequate reimbursement.

        The market for our product candidates may depend on access to third-party payors' drug formularies, or lists of medications for which third-party payors provide coverage and reimbursement. Industry competition to be included in such formularies results in downward pricing pressures on pharmaceutical companies. Third-party payors may refuse to include a particular branded drug in their formularies when a competing generic product is available.

        All third-party payors, whether governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for medicines exists among all these payors. Therefore, coverage of and reimbursement for drugs can differ significantly from payor to payor and can be difficult and costly to obtain.

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        We expect that a substantial portion of the market for our product candidates will be outside the United States. Even if our product candidates receive regulatory approval in the United States, we or our partners may never receive approval or commercialize our products outside of the United States.

        To market and commercialize any products outside of the United States, we or our partners must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the United States as well as other risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above regarding FDA approval in the United States. As described above, such effects include the risks that our product candidates may not be approved for all indications requested, or at all, which could limit the uses of our product candidates and have an adverse effect on product sales and potential royalties, and that such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies.

        Even if our product candidates receive regulatory approval, we may still face future development and regulatory difficulties.

        Even if regulatory approval is obtained for any of our product candidates, regulatory authorities may still impose significant restrictions on a product's indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies. Given the number of recent high profile adverse safety events with certain drug products, regulatory authorities may require, as a condition of approval, costly risk management programs which may include safety surveillance, restricted distribution and use, patient education, enhanced labeling, expedited reporting of certain adverse events, pre-approval of promotional materials and restrictions on direct-to-consumer advertising. For example, any labeling approved for any of our product candidates may include a restriction on the term of its use, or it may not include one or more of our intended indications. Furthermore, in the United States, heightened Congressional scrutiny on the adequacy of the FDA's drug approval process and the agency's efforts to assure the safety of marketed drugs has resulted in the proposal of new legislation addressing drug safety issues. If enacted, any new legislation could result in delays or increased costs during the period of product development, clinical trials and regulatory review and approval, as well as increased costs to assure compliance with any new post-approval regulatory requirements. Any of these restrictions or requirements could force us or our partners to conduct costly studies.

        Our product candidates will also be subject to ongoing regulatory requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information on the drug. In addition, approved products, manufacturers and manufacturers' facilities are subject to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If our product candidates fail to comply with applicable regulatory requirements, such as current Good Manufacturing Practices, or cGMPs, a regulatory agency may:

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issue warning letters;



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require us or our partners to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;



•

impose other civil or criminal penalties;

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•

suspend regulatory approval;



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suspend any ongoing clinical trials;



•

refuse to approve pending applications or supplements to approved applications filed by us or our partners;



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impose restrictions on operations, including costly new manufacturing requirements; or



•

seize or detain products or require a product recall.

        We have limited experience in regulatory affairs.

        We have limited experience in preparing, submitting and prosecuting regulatory filings including NDAs and other applications necessary to gain regulatory approvals. As a result, in comparison to our competitors, we may require more time, incur greater costs and may not succeed in obtaining regulatory approvals of products that we develop, license or acquire.

        Guidelines and recommendations published by various organizations may affect the use of our products.

        Government agencies may issue regulations and guidelines directly applicable to us, our partners and our product candidates. In addition, professional societies, practice management groups, private health/science foundations, and organizations involved in various diseases from time to time publish guidelines or recommendations to the health care and patient communities. These various sorts of recommendations may relate to such matters as product usage, dosage, route of administration and use of related or competing therapies. Changes to these recommendations or other guidelines advocating alternative therapies could result in decreased use of our products, which may adversely affect our results of operations.

        We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.

        The use of our product candidates in clinical trials and the sale of any products for which we may obtain marketing approval expose us to the risk of product liability claims. Product liability claims may be brought against us or our partners by participants enrolled in our clinical trials, patients, health care providers or others using, administering or selling our products. If we cannot successfully defend ourselves against any such claims, we would incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:

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withdrawal of clinical trial participants;



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termination of clinical trial sites or entire trial programs;



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costs of related litigation;



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substantial monetary awards to patients or other claimants;



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decreased demand for our product candidates and loss of revenues;



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impairment of our business reputation;



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diversion of management and scientific resources from our business operations; and



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the inability to commercialize our product candidates.

        We have obtained limited product liability insurance coverage for our clinical trials domestically and in selected foreign countries where we are conducting clinical trials. However, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due

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to product liability. We intend to expand our insurance coverage for products to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

        Our operations involve hazardous materials, which could subject us to significant liabilities.

        Our research and development processes involve the controlled use of hazardous materials, including chemicals. Our operations produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge or injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages in the event of exposure of individuals to hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use of these materials and our liability may exceed our total assets. We maintain insurance for the use of hazardous materials, but it may not be adequate to cover any claims. Compliance with environmental and other laws and regulations may be expensive and current or future regulations may impair our research, development or production efforts.

        Our insurance policies are expensive and protect us only from some business risks, which will leave us exposed to significant uninsured liabilities.

        We do not carry insurance for all categories of risk that our business may encounter. For example, we do not carry earthquake insurance. In the event of a major earthquake in our region, our business could suffer significant and uninsured damage and loss. Some of the policies we currently maintain include general liability, employment practices liability, property, auto, workers' compensation, products liability and directors' and officers' insurance. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations.

Risks Relating to Our Financial Position and Need for Additional Capital

        We have never been profitable. Currently, we have no products approved for commercial sale, and to date we have not generated any revenue from product sales. As a result, our ability to curtail our losses and reach profitability is unproven, and we may never achieve or sustain profitability.

        Our ability to reach profitability depends upon many factors including successful e