SEC Info

Home

Search

My Interests

Help

Sign In

Please Sign In

  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

8

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

9

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.

10

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.

11

        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:

•

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



•

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



•

limitations in the approved indications for our product candidates;



•

lower demonstrated clinical safety and efficacy compared to other products;



•

prevalence and severity of adverse side effects;



•

ineffective sales, marketing and distribution support;



•

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



•

lack of cost-effectiveness;



•

timing of market introduction and perceived effectiveness of competitive products;



•

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

12

•

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



•

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



•

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:

•

development resources, including personnel and technology;



•

clinical trial experience;



•

regulatory experience;



•

intellectual property portfolios;



•

expertise in prosecution of intellectual property rights;



•

manufacturing and distribution experience; and



•

sales and marketing experience.

13

        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.

14

        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:

•

issue warning letters;



•

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;

15

•

suspend regulatory approval;



•

suspend any ongoing clinical trials;



•

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



•

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:

•

withdrawal of clinical trial participants;



•

termination of clinical trial sites or entire trial programs;



•

costs of related litigation;



•

substantial monetary awards to patients or other claimants;



•

decreased demand for our product candidates and loss of revenues;



•

impairment of our business reputation;



•

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



•

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

16

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 execution of our partnering strategy, continuing participation by Schering-Plough in the development and commercialization of AN2690 and our ability to meet timing and cost targets. We have incurred significant net losses in each year since our inception, including net losses of approximately $5.2 million, $16.4 million and $19.6 million for 2004, 2005 and 2006, respectively. For the six months ended June 30, 2007, we incurred a net loss of $5.4 million, and as of June 30, 2007, we had an accumulated deficit of approximately $48.4 million. We have devoted most of our financial resources to research and development, including our preclinical development activities and clinical trials. None of our product candidates have been commercialized and we have therefore not generated any revenues from product sales. We expect to continue to incur significant expenses as we continue our research and development programs and advance our product candidates. We also expect an increase in our expenses associated with preparing for commercialization of our product candidates and creating additional infrastructure to support operations as a public company. If our partnership with Schering-Plough is unsuccessful or if we are unable to generate revenue from additional collaborations, then we will incur substantial losses and negative cash flows. These losses and negative cash flows have had, and as long as they continue, will have, an adverse effect on our financial condition.

17

        Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability. In addition, our expenses could increase beyond expectations if we are required by the FDA to perform studies in addition to those that we currently anticipate. To date, we have financed our operations primarily through the sale of equity securities, debt arrangements, government contracts and grants and the up-front payment under our agreement with Schering-Plough. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenues. Revenues from our strategic partnership with Schering-Plough are uncertain because agreed-upon milestones may not be achieved, AN2690 may not receive regulatory approval, or if approved, be accepted in the market. In addition, we may not be able to enter into other partnerships and collaborations. If our product candidates are not successfully developed or commercialized, or if revenues from any product candidate that receives marketing approval are insufficient, we will not achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability.

        We have a limited operating history and we expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.

        Our operations to date have been primarily limited to organizing and staffing our company, developing our technology and undertaking preclinical studies and clinical trials of our product candidates. We have not yet obtained regulatory approvals for any of our product candidates. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history. Our financial condition and operating results have varied significantly in the past and will continue to fluctuate from quarter-to-quarter or year-to-year due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the risk factors set forth in this section, as well as other factors described elsewhere in this prospectus. Due to these various factors, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance.

        If we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate our product development programs.

        Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. We expect our research and development expenses to increase in connection with our ongoing activities, particularly as we advance the preclinical and clinical programs of our product candidates. In addition, if the FDA requires that we perform additional studies to those that we currently anticipate, our expenses could increase beyond our current expectations and the timing of any potential product approval may be delayed. We currently have no commitments or arrangements for any additional financing to fund the research and development of our product candidates other than contingent milestone or royalty payments from Schering-Plough, which we may not receive. We believe that the net proceeds from this offering, existing cash and cash equivalents and interest thereon will be sufficient to fund our projected operating requirements for at least twelve months. However, we may need to raise substantial additional capital in the future to complete the development and commercialization of our product candidates.

        Until we can generate a sufficient amount of revenue from our products, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs or our commercialization efforts. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional dilution, and debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies or our product candidates or grant licenses on terms that may not be favorable to us. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.

18

          Our future funding requirements will depend on many factors, including, but not limited to:

•

the scope, rate of progress and cost of our clinical trials and other research and development activities;



•

the success of our partnership with Schering-Plough and the attainment of milestones and royalty payments, if any, under our agreement with Schering-Plough;



•

the terms and timing of any future collaboration, licensing or other arrangements that we may establish;



•

the cost and timing of regulatory approvals;



•

the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;



•

the effect of competing technological and market developments;



•

the cost and timing of completion of commercial-scale outsourced manufacturing activities; and



•

the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval.

Risks Related to Our Dependence on Third Parties

        We are dependent upon Schering-Plough to develop, manufacture and commercialize our lead product candidate, AN2690.

        In February 2007, we entered into an exclusive license, development and commercialization agreement with Schering-Plough for the development and worldwide commercialization of our lead product candidate, AN2690. Under the agreement, Schering-Plough assumed sole responsibility for development, regulatory approval and commercialization of AN2690. Although we retained the option, subject to certain conditions, to co-promote AN2690 to dermatologists in the United States for the treatment of onychomycosis, Schering-Plough retains control over commercialization decisions, including pricing, marketing, strategy and sales. Any future payments from Schering-Plough, including milestone and royalty payments to us, will depend on the extent to which AN2690 advances through development, regulatory approval and commercialization.

        With respect to control over decisions and responsibilities, the agreement provides for a joint steering committee and a joint commercialization committee, consisting of representatives of Schering-Plough and us. Ultimate decision-making authority as to matters within the collaboration, however, is vested in Schering-Plough. For example, we expect Schering-Plough to initiate Phase 3 clinical trials of AN2690 in onychomycosis in 2008. However, Schering-Plough is not obligated to do so, and may delay such trials for a variety of reasons. Schering-Plough retains the right to terminate the agreement on a country-by-country basis on 180-days prior written notice to us, provided that termination with respect to the United States will terminate the license in its entirety and termination in certain countries may terminate the license with respect to an entire region.

        Our ability to receive any significant milestone and royalty revenue from AN2690 depends on the efforts of Schering-Plough. If AN2690 receives regulatory approval we will be largely dependent on Schering-Plough to market it. If Schering-Plough does not devote sufficient resources to market AN2690 or is ineffective in doing so, our operating results will be materially and adversely affected. We cannot assure you that Schering-Plough will fulfill its obligations under this agreement or develop and commercialize AN2690. If Schering-Plough fails to fulfill its obligations under this agreement or terminates the agreement, we would need to obtain the capital necessary to fund the development and commercialization of AN2690 or enter into alternative arrangements with a third party. We could also become involved in disputes with Schering-Plough, which could lead to delays in or termination of

19

development and commercialization of AN2690 and time-consuming and expensive litigation or arbitration. If Schering-Plough terminates or breaches the agreement with us or otherwise does not advance AN2690, the chances of successfully developing or commercializing AN2690 would be materially and adversely affected.

        We may not be successful in maintaining or establishing development and commercialization collaborations, which could adversely affect our ability to develop certain of our product candidates and our financial condition and operating results.

        Developing pharmaceutical products, conducting clinical trials, obtaining regulatory approval, establishing manufacturing capabilities and marketing approved products is expensive. Consequently, we have entered into an agreement with Schering-Plough for the development and commercialization of AN2690, and we plan to establish partnerships for development and commercialization of other product candidates and research programs. We expect to face competition in seeking appropriate collaborators. Moreover, collaboration arrangements are complex and time consuming to negotiate, document and implement and they may require substantial resources to maintain. We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements for the development of our product candidates. When we partner with a third party for development and commercialization of a product candidate, we can expect to relinquish some or all of the control over the future success of that product candidate to the third party. The terms of any collaboration or other arrangement that we establish may not be favorable to us. In addition, any collaboration that we enter into may be unsuccessful in the development and commercialization of our product candidates. In some cases, we may be responsible for continuing preclinical and initial clinical development of a partnered product candidate or research program, and the payment we receive from our collaboration partner may be insufficient to cover the cost of this development. If we are unable to reach agreements with suitable collaborators for our product candidates we would face increased costs, we may be forced to limit the number of our product candidates we can commercially develop and we might fail to commercialize particular products or programs for which a suitable collaborator cannot be found. If we fail to achieve successful collaborations, our operating results and financial condition will be materially and adversely affected.

        Our strategy is to develop a marketing and sales force targeting dermatologists and other specialty markets in the United States. We expect that the collaborations we intend to establish with third parties for development and commercialization of our product candidates will include partnering for marketing and sales into primary care markets and for sales outside the United States. Our collaboration partner may not devote sufficient resources to the commercialization of our product candidates or may otherwise fail in their commercialization. If we are unable to establish effective collaborations to enable the sale of our product candidates to physicians and in geographical regions that will not be covered by our own marketing and sales force, or if our collaboration partners do not successfully commercialize our product candidates, then our ability to achieve revenues from product sales outside of U.S. dermatology and other specialty markets will be adversely affected.

        We are dependent on third-party contractors for a substantial portion of our operations.

        Part of our strategy is to achieve operational efficiencies by outsourcing substantial portions of our operations to third-party service providers. We currently outsource certain of functions including chemical synthesis, biological screening and manufacturing. As a result, our internal capacity to perform these functions is limited. Outsourcing these functions involves risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at all. In addition, the use of third-party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated. There are a limited number of third-party service providers that specialize or have the expertise required to achieve our business objectives. Identifying, qualifying and managing performance of third-party service providers can be difficult and time consuming. We currently have a small number of employees, which limits the internal resources we have

20

available to identify and monitor our third-party providers. To the extent we are unable to identify, retain and successfully manage the performance of third-party service providers in the future, our business may be adversely affected.

        We have no experience manufacturing our product candidates on a large clinical-scale or commercial-scale and have no manufacturing facility. As a result, we are dependent on numerous third parties for the manufacture of our product candidates and our supply chain, and if we experience problems with any of these suppliers, the manufacturing of our products could be delayed.

        We do not own or operate facilities for the manufacture of our product candidates, which includes the drug substance and vehicle used to deliver the drug. We have limited personnel with experience in drug manufacturing. We currently outsource all manufacturing and packaging of our preclinical and clinical product candidates to third parties and intend to continue to do so. In addition, we do not currently have any agreements with third-party manufacturers for the long-term commercial supply of our product candidates. We may be unable to enter agreements for commercial supply with third-party manufacturers, or may be unable to do so on acceptable terms. We may not be able to establish additional sources of supply for our products. Such suppliers are subject to regulatory requirements, covering manufacturing, testing, quality control and record keeping relating to our product candidates, and subject to ongoing inspections by the regulatory agencies. Failure by any of our suppliers to comply with applicable regulations may result in long delays and interruptions to our product candidate supply while we seek to secure another supplier that meets all regulatory requirements.

        Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured the product candidates ourselves, including:

•

the possible breach of the manufacturing agreements by the third parties because of factors beyond our control; and



•

the possibility of termination or nonrenewal of the agreements by the third parties because of our breach of the manufacturing agreement or based on their own business priorities.

        Any of these factors could cause the delay of clinical trials, regulatory submissions, required approvals or commercialization of our products, cause us to incur higher costs and prevent us from commercializing our product candidates successfully. Furthermore, if our contract manufacturers fail to deliver the required commercial quantities of finished product on a timely basis and at commercially reasonable prices and we are unable to find one or more replacement manufacturers capable of production at a substantially equivalent cost, in substantially equivalent volumes and quality and on a timely basis, we would likely be unable to meet demand for our products and clinical trials may be delayed or we could lose potential revenue. It may take several years to establish an alternative source of supply for our product candidates and to have any such new source approved by the FDA.

        Schering-Plough will either manufacture AN2690 or will contract to have AN2690 manufactured by a third party. The transition of AN2690 production or the inability to manufacture or obtain sufficient supplies of the drug product or formulation could adversely effect clinical trial enrollment or timing or, if AN2690 is approved, product commercialization.

        If we lose our relationships with contract research organizations, our drug development efforts could be delayed.

        We are substantially dependent on third-party vendors and contract research organizations for preclinical studies and clinical trials related to our drug discovery and development efforts. If we lose our relationship with any one or more of these providers, we could experience a significant delay in both identifying another comparable provider and then contracting for its services, which could adversely affect our development efforts. We may be unable to retain an alternative provider on reasonable terms, if at all. Even if we locate an alternative provider, it is likely that this provider will need additional time to respond

21

to our needs and may not provide the same type or level of services as the original provider. In addition, any contract research organization that we retain will be subject to the FDA's regulatory requirements and similar foreign standards and we do not have control over compliance with these regulations by these providers. Consequently, if these practices and standards are not adhered to by these providers, the development and commercialization of our product candidates could be delayed, which could severely harm our business and financial condition.

Risks Relating to Our Intellectual Property

        It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection.

        Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our current and future product candidates and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges. Our ability to stop third parties from making, using, selling, offering to sell or importing our products is dependent upon the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities. In addition, while our patent applications covering AN2690 include claims for all relevant pharmaceutical uses of the compound, they do not include a claim for composition of matter for the AN2690 molecule due to the existence of prior art relating to a non-pharmaceutical use of the molecule. We currently own one issued patent, which were issued outside of the United States, and there can be no assurance that our pending patent applications will result in issued patents. Unless and until such patents are issued, we may be unable to preclude others from working in the area in which we seek intellectual property protection pursuant to these patent applications.

        The patent positions of pharmaceutical and biopharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in biopharmaceutical patents has emerged to date in the United States. The pharmaceutical patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in the patents that may be issued from the applications we currently or may in the future own or license from third-parties. Further, if any patents we obtain or license are deemed invalid and unenforceable, it could impact our ability to commercialize or license our technology.

        The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

•

others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of our patents;



•

we might not have been the first to make the inventions covered by our pending patent applications;



•

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;



•

any patents that we obtain may not provide us with any competitive advantages;



•

we may not develop additional proprietary technologies that are patentable; or



•

the patents of others may have an adverse effect on our business.

        We also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although we use

22

reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States, are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Our patent applications would not prevent others from taking advantage of the chemical properties of boron to discover and develop new therapies, including therapies for the indications we are targeting. If others seek to develop boron-based therapies, their research and development efforts may inhibit our ability to conduct research in certain areas and expand our intellectual property portfolio.

        We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights to, or use, our technology.

        If we choose to go to court to stop another party from using the inventions claimed in any patents we obtain, that individual or company has the right to ask the court to rule that such patents are invalid or should not be enforced against that third party. These lawsuits are expensive and would consume time and resources and divert the attention of managerial and scientific personnel even if we were successful in stopping the infringement of such patents. In addition, there is a risk that the court will decide that such patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of such patents is upheld, the court will refuse to stop the other party on the ground that such other party's activities do not infringe our rights to such patents. In addition, the U.S. Supreme Court has recently modified some tests used by the U.S. Patent Office in granting patents over the past 20 years, which may decrease the likelihood that we will be able to obtain patents and increase the likelihood of challenge of any patents we obtain or license.

        Furthermore, a third party may claim that we or our manufacturing or commercialization partners are using inventions covered by the third party's patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and scientific personnel. There is a risk that a court would decide that we or our commercialization partners are infringing the third party's patents and would order us or our partners to stop the activities covered by the patents. In that event, we or our commercialization partners may not have a viable way around the patent and may need to halt commercialization of the relevant product with it. In addition, there is a risk that a court will order us or our partners to pay the other party damages for having violated the other party's patents. Under our agreement with Schering-Plough, we may be required to share in any license fees or royalty payments that Schering-Plough must pay arising from third-party claims of intellectual property infringement. In the future, we may agree to indemnify our commercial partners against certain intellectual property infringement claims brought by third parties. The pharmaceutical and biotechnology industries have produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid, and we may not be able to do this. Proving invalidity is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.

        Because some patent applications in the United States may be maintained in secrecy until the patents are issued, because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing, and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our pending applications, or that we were the first to invent the technology. Our competitors may have filed, and may in the future file, patent applications covering technology similar to

23

ours. Any such patent application may have priority over our patent applications, which could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the U.S. Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful if unbeknownst to us, the other party had independently arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions.

        Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

        We do not have exclusive rights to intellectual property we developed under U.S. federally funded research grants, and we could ultimately lose the rights we do have under certain circumstances.

        Some of our intellectual property rights, including those covering AN0128, were developed in the course of research funded by the U.S. government. As a result, the U.S. government may have certain rights to intellectual property embodied in our current or future products. Government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive licenses to any of these inventions to a third party if they determine that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations. The U.S. government also has the right to take title to these inventions if we fail to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. In addition, the U.S. government may acquire title in any country in which a patent application is not filed within specified time limits. Federal law requires any licensor of an invention that was partially funded by the federal government to obtain a covenant from any exclusive licensee to manufacture products using the invention substantially in the United States. The U.S. government also has the right to use and disclose, without limitation, scientific data relating to licensed technology that was developed in whole or in part at government expense.

Risks Related to Employee Matters and Managing Growth

        We will need to expand our operations and increase the size of our company, and we may experience difficulties in managing growth.

        As we increase the number of product development programs we have underway and advance our product candidates through preclinical studies and clinical trials, we will need to increase our product development, scientific and administrative headcount to manage these programs. Managing these expanding development programs will require additional personnel for coordinating and overseeing our third-party service providers. In addition, to meet our obligations as a public company, we will need to increase our general and administrative headcount. To support this growth in our operations, we expect to hire additional employees within the next twelve months. Our management, personnel and systems currently in place may not be adequate to support this future growth. We also expect to move into larger facilities in 2008. Our need to effectively manage our operations, growth and various projects requires that we:

•

successfully attract and recruit new employees with the expertise and experience we will require;

24

•

manage our clinical programs effectively, which we anticipate being conducted at numerous clinical sites; and



•

continue to improve our operational, financial and management controls, reporting systems and procedures.

        If we are unable to successfully manage this growth, our business may be adversely affected.

        We may not be able to manage our business effectively if we are unable to attract and retain key personnel or advisors.

        We may not be able to attract or retain qualified management, finance, scientific and clinical personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in Northern California. If we are not able to attract and retain necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.

        Our industry has experienced a high rate of turnover of management personnel in recent years. We are highly dependent on the development, regulatory, commercialization and business development expertise of our senior management. If we lose one or more of these key employees, our ability to implement our business strategy successfully could be seriously harmed. Replacing key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key personnel. Our failure to retain key personnel could materially harm our business.

        In addition, we have scientific and clinical advisors who assist us in our product development and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us, or may have arrangements with other companies to assist in the development of products that may compete with ours. Because our business depends on certain key advisors, the loss of such advisors could weaken or harm our ability to develop and commercialize our product candidates, and we may experience difficulty in attracting and retaining qualified advisors.

        Failure to effectively integrate our new executive officers into our organization could interfere with our management of our business and impair our ability to execute on our business strategy.

        Our Chief Business Officer and our Chief Financial Officer joined Anacor in May and June 2007, respectively. As a result, key members of our executive team have not worked together as a group for a significant period of time. Our future performance will depend, in part on our ability to successfully integrate our newly hired executive officers into our management team and our ability to develop an effective working relationship among senior management. Our failure to integrate these individuals and create effective working relationships among them and other members of management could result in inefficiencies in the management of our business, harming our ability to execute our business strategy.

        We currently are in the process of building our finance infrastructure and improving our accounting systems and controls.

        We recently hired a Chief Financial Officer and are in the process of hiring additional finance personnel and building our financial infrastructure because we currently rely on consultants to perform certain of our accounting and financial reporting functions. To build this infrastructure, we will need to hire

25

additional accounting and finance personnel and improve our accounting disclosure policies, procedures and controls. We are currently in the process of:

•

adapting to our recently upgraded financial accounting computer systems;



•

establishing written policies and procedures; and



•

enhancing internal controls and our financial statement review process.

        As a public company, we will operate in an increasingly demanding regulatory environment which requires us to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the Securities and Exchange Commission, expanded disclosure requirements, accelerated reporting requirements and more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing corporate oversight and adequate internal control. As a result of our limited financial and administrative staffing and the need to establish basic financial infrastructure, we have only recently begun to prepare for the need to comply with Section 404 of the Sarbanes-Oxley Act, and we may be unable to do so on a timely basis. Because of the aforementioned factors, until we are able to expand our finance or administrative headcount or implement comprehensive accounting policies and procedures, we may not be able to prepare and disclose, in a timely manner, our financial statements and other required disclosures or comply with the Sarbanes-Oxley Act or existing or new reporting requirements.

        We may encounter unforeseen difficulties in the planned 2008 relocation of our facilities, which could disrupt our business operations or result in additional expenses.

        We currently lease approximately 15,300 square feet of laboratory and office space under a lease that terminates in December 2008. We may terminate the lease by providing four months' written notice to the landlord. We are currently seeking a larger facility for occupancy beginning in 2008, and anticipate negotiating terms for a new facilities lease in 2007. Suitable facilities may not be available or may be considerably more expensive than we expect. Also, the move to new facilities will involve the moving and installation of our laboratory and business equipment and the new facility may require more substantial upgrades than we anticipate. We will also have to ensure that the facility we plan to vacate is safely cleaned and any hazardous materials are either safely moved or properly disposed of. Accordingly, the relocation could result in a temporary disruption to our business or cause us to incur unforeseen costs.

Risks Relating to Owning Our Common Stock

        After this offering, our executive officers, directors and principal stockholders will have the ability to control all matters submitted to our stockholders for approval.

        When this offering is completed, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock before this offering will, in the aggregate, beneficially own shares representing            % of our common stock assuming such persons do not purchase any shares of our common stock in this offering. As a result, if these stockholders were to choose to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, will control the election of directors and approval of any merger, consolidation, sale of all or substantially all of our assets or other business combination or reorganization. This concentration of voting power could delay or prevent an acquisition of us on terms that other stockholders may desire. The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.

        Our share price may be volatile and you may be unable to sell your shares at or above the offering price.

        The initial public offering price for our shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading

26

market. The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:

•

results of our clinical trials;



•

results of clinical trials of our competitors' products;



•

regulatory actions with respect to our products or our competitors' products;



•

actual or anticipated fluctuations in our financial condition and operating results;



•

actual or anticipated changes in our growth rate relative to our competitors;



•

actual or anticipated fluctuations in our competitors' operating results or changes in their growth rate;



•

competition from existing products or new products that may emerge;



•

issuance of new or updated research or reports by securities analysts;



•

fluctuations in the valuation of companies perceived by investors to be comparable to us;



•

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;



•

market conditions for biopharmaceutical stocks in general; and



•

general economic and market conditions.

        Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of shares of our common stock. If the market price of shares of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment.

        We may be subject to securities litigation, which is expensive and could divert management attention.

        In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management's attention from other business concerns, which could seriously harm our business.

        No public market for our common stock currently exists and an active trading market may not develop or be sustained following this offering.

        Prior to this offering, there has been no public market for our common stock. An active trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

        If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price and trading volume could decline.

        The trading market for our common stock will depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There

27

can be no assurance that analysts will cover us. If one or more of the analysts who cover us downgrade our stock or change their opinion of our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

        A significant portion of our total outstanding shares of common stock is restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

        Sales of a substantial number of shares of our common stock in the public market could occur in the future. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. After this offering, we will have                        outstanding shares of common stock based on the number of shares outstanding as of June 30, 2007. Of these shares,                        may be resold in the public market immediately and the remaining                         shares are currently restricted under securities laws or as a result of lock-up agreements but will be able to be resold after the offering as described in the "Shares Eligible for Future Sale" section of this prospectus. Moreover, after this offering, holders of an aggregate of                        shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all                         shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance and once vested, subject to the 180 day lock-up periods under the lock-up agreements described in the "Underwriting" section of this prospectus.

        Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

        The initial public offering price will be substantially higher than the tangible book value per share of shares of our common stock based on the total value of our tangible assets less our total liabilities immediately following this offering. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution of approximately $            per share in the price you pay for shares of our common stock as compared to its tangible book value, assuming an initial public offering price of $            per share. To the extent outstanding options to purchase shares of common stock are exercised, there will be further dilution. For further information on this calculation, see "Dilution" elsewhere in this prospectus.

        We have broad discretion in the use of net proceeds from this offering and may not use them effectively.

        Although we currently intend to use the net proceeds from this offering in the manner described in "Use of Proceeds" elsewhere in this prospectus, we will have broad discretion in the application of the net proceeds. Our failure to apply these funds effectively could affect our ability to continue to develop and eventually to manufacture and sell our products.

        Being a public company will increase our expenses and administrative burden.

        As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, our administrative staff will be required to perform additional tasks. For example, in anticipation of becoming a public company, we will need to adopt additional internal controls and disclosure controls and procedures, retain a transfer agent, adopt an insider trading policy and bear all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under the securities laws.

        In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related regulations implemented by the Securities and Exchange Commission and the Nasdaq Global Market, are creating uncertainty for public

28

companies, increasing legal and financial compliance costs and making some activities more time consuming. We are currently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative expenses and may divert management's time and attention from product development activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. In connection with this offering, we are increasing our directors' and officers' insurance coverage which will increase our insurance cost. In the future, it may be more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

        Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

        Provisions in our amended and restated certificate of incorporation and our bylaws, both of which will become effective upon the completion of this offering, may delay or prevent an acquisition of us. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management team. In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits, with some exceptions, stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Finally, our charter documents establish advanced notice requirements for nominations for election to our board of directors and for proposing matters that can be acted upon at stockholder meetings. Although we believe these provisions together provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders.

29

   
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements, including statements regarding the progress and timing of clinical trials, the safety and efficacy of our product candidates, actions to be taken by our partner, Schering-Plough, our ability to enter into additional partnerships, our ability to scale and support commercial activities, the goals of our development activities, estimates of the potential markets for our product candidates, availability of drug product, availability of facilities to support our growth, our expected future revenues, operations and expenditures and projected cash needs. The forward-looking statements are contained principally in the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward-looking statements.

        Forward-looking statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or the negative of those terms, and similar expressions and comparable terminology intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this prospectus and, except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus. The forward-looking statements contained in this prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended, or the Securities Act.

        This prospectus contains market data and industry forecasts that were obtained from industry publications. We have not independently verified any of this information.

30

   
USE OF PROCEEDS

        We estimate that we will receive net proceeds of approximately $             million from the sale of the shares of common stock offered in this offering, based on an assumed initial public offering price of $            per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters' over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $             million. A $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) the net proceeds to us from this offering by $             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 the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

        The principal purposes of this offering are to fund our research and development activities, including preclinical studies and clinical trials for our development programs, to increase our working capital and to provide funds for general corporate purposes. We may also use a portion of the proceeds for the acquisition of, or investment in, technologies, products or companies that complement our business, although we have no current understandings, commitments or agreements to do so. Additionally, we may use a portion of the proceeds to pay down some or all of the principal outstanding on our existing debt instrument.

        The expected use of net proceeds of this offering represents our current intentions based upon our present plan and business conditions. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. Accordingly, we will have broad discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the application of the net proceeds of this offering.

        The amounts and timing of our actual expenditures will depend on numerous factors, including the progress in, and costs of, our clinical development programs, especially AN2728, AN2718 and AN0128, and the amount and timing of revenues, if any, from our collaboration with Schering-Plough and any other collaborations.

        Until we use the net proceeds of this offering, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities. We cannot predict whether the proceeds invested will yield a favorable return.

   
DIVIDEND POLICY

        We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. Subject to the foregoing, the payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our board of directors. In addition, under the terms of our loan agreement, we may not pay dividends on our common stock without the consent of the lender.

31

   
CAPITALIZATION

        The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2007:

•

on an actual basis;



•

on a pro forma as adjusted basis to reflect:



•

the filing of an amended and restated certificate of incorporation to authorize                        shares of common stock and                        shares of undesignated preferred stock;



•

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



•

our receipt of the estimated net proceeds from this offering, based on an assumed initial public offering price of $            per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

        The pro forma as adjusted information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price. You should read this table together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes appearing elsewhere in this prospectus.

        The number of pro forma as adjusted shares of common stock shown as issued and outstanding in the table is based on the number of shares of our 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;

32

•

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 exercise of a warrant outstanding at an exercise price of $1.73 per share.

        A $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) each of cash and cash equivalents, total stockholders' equity and total capitalization 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 estimated offering expenses payable by us.

33

   
DILUTION

        Our pro forma net tangible book value as of June 30, 2007, was $             million, or $            per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding as of June 30, 2007, after giving effect to the conversion of all our convertible preferred stock into shares of our common stock.

        After giving effect to the sale by us of                        shares of common stock in this offering at an assumed initial public offering price of $            per share, the midpoint of the range on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2007, would have been approximately $             million, or approximately $            per share. This amount represents an immediate increase in net tangible book value of $            per share to our existing stockholders and an immediate dilution in net tangible book value of approximately $            per share to new investors purchasing shares of common stock in this offering at the assumed initial public offering price. The following table illustrates this dilution on a per share basis:

        A $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) our pro forma as adjusted net tangible book value as of June 30, 2007 by approximately $             million, the pro forma as adjusted net tangible book value per share after this offering by $            and the dilution in net tangible book value to new investors in this offering by $            per share, assuming 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 estimated offering expenses payable by us.

        In addition, the above discussion and table assume no exercise of stock options after June 30, 2007. As of June 30, 2007 we had outstanding options to purchase a total of 4,676,003 shares of common stock at a weighted average exercise price of $0.49 per share. If all such options had been exercised as of June 30, 2007, pro forma as adjusted net tangible book value would be $            per share and dilution to new investors would be $            per share.

        The following table summarizes, as of June 30, 2007, the differences between the number of shares purchased from us, the total consideration paid to us and the average price per share that existing stockholders and new investors paid. The table gives effect to the conversion of all of our convertible preferred stock into shares of our common stock. The calculation below is based on an assumed initial public offering price of $            per share, the midpoint of the range on the cover page of this prospectus, and before deducting estimated underwriting discounts and commissions and estimated offering expenses that we must pay.

34

        A $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by $             million, $             million and $            per share, respectively, 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 the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

        If the underwriters exercise their over-allotment option in full, our existing stockholders would own    % and our new investors would own    % of the total number of shares of our common stock outstanding after this offering.

        The above information assumes no exercise of stock options or the warrant outstanding as of June 30, 2007. As of June 30, 2007, there were:

•

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;



•

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



•

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 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).

35

   
SELECTED FINANCIAL DATA

        The following selected 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 selected 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.

        The statements of operations data for 2002 and 2003 and the balance sheet data as of December 31, 2002, 2003 and 2004 were derived from our audited financial statements not included in this prospectus. The statements of operations data for 2004, 2005 and 2006 and the balance sheet data as of December 31, 2005 and 2006 were derived 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 have been derived from our unaudited condensed financial statements appearing elsewhere in this prospectus. The unaudited interim condensed financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments necessary to fairly state our financial position as of June 30, 2007 and results of operations for the six months ended June 30, 2006 and 2007.

(1)

Please see Note 2 to our audited financial statements for an explanation of the method used to calculate basic and diluted net loss per common share attributable to common stockholders, 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.

36

37

   
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

        You should read the following discussion and analysis together with our financial statements and the notes to those statements included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under "Risk Factors" and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.

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 onychomycosis, a fungal infection of the nail and nail bed. In addition, we have a portfolio of other topical product candidates in development for the treatment of psoriasis, gingivitis, acne, vaginal candidiasis, or yeast infections, and tinea pedis, or athlete's foot.

        In February 2007, we entered into an exclusive license, development and commercialization agreement with Schering-Plough for the development and worldwide commercialization of AN2690 for all indications, including the treatment of onychomycosis. Pursuant to the agreement, Schering-Plough paid us a $40.0 million non-refundable, non-creditable up-front fee and assumed sole responsibility for development and commercialization of AN2690, including obtaining regulatory approvals. Schering-Plough will pay all of the remaining costs for development and commercialization of AN2690 in all indications, including paying us for our development-related transition activities, which we estimate will be performed through June 2009. Pending discussions with the FDA, we anticipate that Schering-Plough will initiate Phase 3 clinical trials for AN2690 in onychomycosis in 2008.

        If certain development, regulatory and commercial milestones for onychomycosis are met, Schering-Plough is obligated to pay us up to $505.0 million. 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. Schering-Plough is further obligated to pay us double-digit royalties on annual net sales of AN2690 for all indications in jurisdictions where there is a valid patent claim covering the product and lesser royalties for AN2690 sales in jurisdictions where there is no valid patent claim. We retained the option to co-promote AN2690 for the treatment of onychomycosis to dermatologists in the United States, subject to certain conditions. In addition, we have the right to require Schering-Plough to purchase up to $10.0 million of our capital stock. Schering-Plough may terminate this agreement without cause at any time and we are allowed to terminate the agreement in the event that Schering-Plough materially breaches its obligations to use commercially reasonable efforts to develop and commercialize AN2690.

        We began business operations in March 2002. To date, we have not generated any revenue from product sales and have never been profitable. As of June 30, 2007, we have an accumulated deficit of $48.4 million. We have funded our operations primarily through the sale of equity securities, government contracts and grants, borrowings under debt arrangements and the up-front payment under our agreement with Schering-Plough. We expect to incur losses in future periods. The size of our future losses will depend, in part, on the rate of growth of our expenses, our ability to enter into additional licensing, research and development agreements and receipt of future payments under our agreement with Schering-Plough. Our intent is to enter into licensing and development agreements with additional partners for certain of our other product candidates and research and development programs. If this does not occur, the milestones

38

for AN2690 in the Schering-Plough agreement are not achieved or Schering-Plough terminates our agreement, we may incur additional operating losses and our ability to expand our research and development activities and move our product candidates into later stages of development may be limited.

        Prior to 2007, we operated as a development stage company as defined in Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. As a result of our progress in establishing our operations to date and the execution of and revenues from our agreement with Schering-Plough, we are no longer considered a development stage company.

Revenues

        We have generated approximately $26.4 million in revenue from inception through June 30, 2007. Through 2004, we had earned $16.1 million through our contract with the U.S. Department of Defense, or DOD, for the development of antibiotics against infective anthrax. In September 2005, we were awarded a $1.0 million National Institutes of Health, or NIH, grant for the identification of targets for certain antifungal compounds, which included work on the mechanism of action of AN2690. By February 2007 we had earned and received the total amount available under the grant. In March 2007, we received a $40.0 million up-front fee that is being recognized ratably over the estimated period during which we will be performing development-related activities to transition AN2690 to Schering-Plough. Additionally, we are being paid for these development-related activities, which include certain preclinical and clinical projects. We estimate these activities will continue through June 2009. During the six months ended June 30, 2007, we recognized revenue of $9.3 million under the agreement, which was comprised of $5.1 million of amortization of the up-front fee and $4.2 million for development-related transition activities. In the future, revenue under our agreement with Schering-Plough may also include development, regulatory and sales milestones and product royalties.

Research and Development Expenses

        Research and development expenses consist primarily of costs associated with research activities, as well as costs associated with our product development efforts, including preclinical studies and clinical trials. Research and development expenses, including those paid to third parties, are recognized as incurred. Research and development expenses include:

•

external research and development expenses incurred pursuant to agreements with third-party manufacturing organizations, contract research organizations and investigational sites;



•

employee and consultant-related expenses, which include salaries, benefits and stock-based compensation;



•

third-party supplier expenses; and



•

facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements, equipment and laboratory supplies and other expenses.

        Our expenses associated with preclinical studies and clinical trials are based upon the terms of the service contracts, the amount of the services provided and the status of the related activities. We expect that research and development expenses will increase significantly in the future as we progress our product candidates through clinical development, advance our discovery research projects into the preclinical stage, continue our early stage research, file for regulatory approvals, hire more employees and lease a larger facility.

        The table below sets forth our research and development expenses since January 1, 2004 for our three clinical-stage product candidates, our contract with the DOD and other programs including AN2718. A

39

portion of our costs, including indirect costs relating to our product candidates, are not tracked on a project basis and are allocated based on management's estimate.

        We expect our research and development expenses to increase through the rest of 2007 and during 2008. However, we expect costs associated with AN2690 to decrease in the future as we transition development to Schering-Plough. We expect costs associated with AN2728 to increase as we expand the clinical activities for this program. We expect spending on AN0128 to decrease through the rest of 2007 and during 2008 due to a change in focus of the program from atopic dermatitis clinical stage activities to acne and gingivitis earlier stage activities. In addition, we expect spending to increase for AN2718 and other research programs as we advance their development.

        The process of conducting preclinical studies and clinical trials necessary to obtain FDA approval is costly and time consuming. We or our partners may never succeed in achieving marketing approval for any of our product candidates. The probability of success for each product candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability. Schering-Plough is solely responsible for development and commercialization of AN2690, including obtaining regulatory approvals, and therefore the progress of AN2690 is not under our control. We are responsible for development-related activities during the transition of AN2690 to Schering-Plough. Our strategy includes entering into additional partnerships with third parties for the development and commercialization of some of our product candidates. To the extent that third parties have control over preclinical development or clinical trials for some of our product candidates, then we will be dependent upon their efforts for the progress of such product candidates. We cannot forecast with any degree of certainty which of our product candidates, if any, will be subject to future partnerships or how such arrangements would affect our development plans or capital requirements.

        As a result of the uncertainties discussed above, the uncertainty associated with clinical trial enrollments and the risks inherent in the development process, we are unable to determine the duration and completion costs of the current or future clinical trials of our product candidates or if, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates. We anticipate that we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate, as well as ongoing assessment as to the product candidate's commercial potential.

General and Administrative Expenses

        General and administrative expenses consist primarily of salaries and related costs for our personnel, including stock-based compensation and travel expenses, in executive, finance, business and commercial development and other administrative functions. Other general and administrative expenses include facility-related costs not otherwise included in research and development expenses, consulting costs associated with accounting and marketing research services, professional fees for legal services, including patent-related expenses, and auditing and tax services. We expect that general and administrative expenses

40

will increase in the future as we expand our operating activities, move to a larger corporate facility and incur additional costs associated with being a public company.

Critical Accounting Policies and Significant Judgments and Estimates

        Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances and review our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

        While our significant accounting policies are described in more detail in Note 2 of our financial statements included in this prospectus, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

        We recognize revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition and Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21).

        Our contract revenues are generated primarily through research and development collaboration agreements which typically include nonrefundable up-front license fees when licensing our intellectual property, the funding of research and development efforts and milestone payments. Up-front payments generally are not separable from the activity of providing research and development services because the license does not have stand-alone value separate from the research and development services provided. Accordingly, revenue from up-front payments is recognized on a straight-line basis over the contractual or estimated performance period, which is consistent with the term of the research and development obligations contained in the research and development collaboration agreement. We regularly review the basis for our estimates, and we may change the estimates if circumstances change. These changes can significantly increase or decrease the amount of revenue recognized.

        Payments resulting from our research and development efforts under license agreements or government grants are recognized as the activities are performed and are presented on a gross basis in accordance with the provisions of EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus net as an Agent. Revenue is recorded gross pursuant to the criteria established by this EITF Issue because we act as a principal, with discretion to choose suppliers, bear credit risk and perform part of the services. The costs associated with these activities are reflected as a component of research and development expense in the statements of operations.

        Substantive, at-risk milestone payments will be recognized as revenue when the milestone is achieved and collectibility is assured. When payments are not for substantive and at-risk milestones revenue will be recognized on a straight-line basis over the estimated remaining term of the service period. To date, we have not received any milestone payments.

        Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectibility is reasonably assured.

41

Preclinical Study and Clinical Trial Accruals

        We estimate our preclinical study and clinical trial expenses based on the services received pursuant to contracts with research institutions and clinical research organizations that conduct these activities on our behalf. In accruing these fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly.

Stock-Based Compensation

        Prior to January 1, 2006, we accounted for stock-based employee compensation arrangements using the intrinsic value method in accordance with the recognition and measurement provisions of Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations, including the Financial Accounting Standards Board Interpretation (FIN) No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25 as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). In accordance with APB 25, stock-based compensation was calculated using the intrinsic value method and represented the difference between the deemed per share market price of the stock and the per share exercise price of the stock option, if any. Any resulting stock-based compensation was deferred and amortized to expense over the grant's vesting period. For variable awards, compensation expense is measured each period as the incremental difference between the fair value of the shares and the exercise price of the stock options.

        Effective January 1, 2006, we adopted SFAS No. 123R, Share-Based Payment (SFAS 123R). SFAS 123R establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee's requisite service period. We elected to adopt SFAS 123R under the modified prospective method and calculate the fair value of the stock option grants using the Black-Scholes option pricing model. Under the modified prospective method, the fair values of new and previously granted but unvested stock options are recognized as compensation expense in the statement of operations over the related vesting periods, and prior period results are not restated. For options granted prior to January 1, 2006 and valued in accordance with SFAS 123, we use the graded-vested (multiple option) method for expense attribution and, prior to January 1, 2006, recognized option forfeitures as they occurred. For options granted after January 1, 2006 and valued in accordance with SFAS 123R, we use the straight-line (single option) method for expense attribution and now estimate forfeitures and only recognize expense for those shares expected to vest.

        We account for equity instruments issued to non-employees in accordance with EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods, or Services (EITF 96-18), which requires that these equity instruments be recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instruments vest. As a result, the non-cash charge to operations for non-employee options with vesting criteria is affected each reporting period by changes in the fair value of our common stock.

        We recorded non-cash stock-based compensation expense under SFAS 123R and EITF 96-18 for employee and non-employee stock option grants of $291,000 during 2006 and $215,000 during the six months ended June 30, 2007. Based on stock options outstanding as of June 30, 2007, we had unrecognized stock-based compensation of $1.3 million, determined in accordance with SFAS 123R and EITF 96-18, of which we expect to recognize a total of approximately $333,000 and $367,000 during the remainder of 2007 and 2008, respectively. We expect to continue to grant stock options in the future, and to the extent that we do, our actual stock-based compensation expense recognized in future periods will likely increase.

        As of June 30, 2007, we had outstanding vested options to purchase 2,082,101 shares of our common stock and unvested options to purchase 2,593,902 shares of our common stock with an intrinsic value of

42

approximately $         million and $         million, respectively, based on an assumed initial public offering price of $            per share, the midpoint of the range on the cover of this prospectus.

Significant Factors, Assumptions and Methodologies Used in Determining Fair Value

        The fair value of the shares of common stock that underlie the stock options we have granted has historically been determined by our board of directors based upon information available to it at the time of grant. Because, prior to this offering, there has been no public market for our common stock, our board of directors has determined the fair value of our common stock by considering a number of objective and subjective factors, including progress of research and development efforts and milestones attained in our business, sales of our convertible preferred stock to arms-length investors, comparative rights and preferences of our common stock compared to the rights and preferences of our other outstanding equity securities, perspective provided by valuation analyses of our stock, the expected valuation we would obtain in an initial public offering or sale of the company and the likelihood of achieving a liquidity event given prevailing market conditions. Although it is reasonable to expect that the completion of our initial public offering will increase the value of our common stock as a result of increased liquidity and marketability and the elimination of the liquidation preference of our convertible preferred stock, the amount of additional value cannot be measured with precision or certainty.

Common Stock Valuations

        Information on stock options granted after July 1, 2006, is summarized as follows:

        On August 15, 2006, we granted stock options with an exercise price of $0.38 per share. The board of directors determined the fair value of our common stock on the date of grant based upon a number of the significant factors, assumptions and methodologies mentioned above and in particular our financial condition at the time. In June 2006, we had raised $5.0 million by selling shares of our Series D convertible preferred stock to existing investors and entered into a loan agreement providing for borrowings of up to $8.0 million. In the six months ended June 30, 2006, we had used net cash of $8.5 million in operations and, after giving effect to the preferred stock financing, we had cash and cash equivalents at June 30, 2006 of only $7.0 million. In July 2006, we borrowed $5.0 million under our loan agreement. As a result, by the time of our August 2006 option grants, the total of our outstanding debt and the aggregate liquidation preference of our convertible preferred stock was $42.9 million. In light of these considerations, the board determined that the fair value of our common stock as of August 15, 2006 was $0.38 per share. Subsequently, a retrospective valuation reconfirmed the fair value of our common stock to be $0.38 per share on the date of grant.

        On September 28, 2006, we granted stock options with an exercise price of $1.66 per share. In determining the fair value of our common stock, the board considered the same factors it had considered in connection with the August 2006 option grants. In particular, the board considered the fact that our financial condition had deteriorated since the August 2006 option grants as we continued to use cash in our operations. As of September 30, 2006, after giving effect to our borrowing of $5.0 million in July 2006, we had cash and cash equivalents of approximately $6.7 million. At the same time, our board had begun to consider strategic alternatives for the company. In September 2006, the board engaged a financial advisor

43

and was in active discussions both with potential acquirors and with potential partners for the development and commercialization of AN2690. By the end of September, the board was considering a number of preliminary term sheets that had been delivered by potential partners. Based on these factors, the risk that none of these transactions would be consummated and our financial condition at the end of September 2006, the board determined that the fair value of our common stock as of September 28, 2006 was $1.66 per share.

        Although no options were granted, a contemporaneous valuation as of December 31, 2006 determined that the fair value of our common stock at that date was $1.65 per share. The valuation was performed in accordance with applicable elements of the technical practice aid issued by the American Institute of Certified Public Accountants entitled Valuation of Privately Held Company Equity Securities Issued as Compensation. In estimating the fair value of our common stock, the valuation utilized the income approach to estimate our enterprise value and then the value of each class of equity was estimated using the option-pricing method. A marketability discount of 22% was applied to the value of our common stock reflecting the lack of liquidity for our common stock. The market comparable and market transaction methods of determining fair value were not used because it was not possible to calculate a meaningful revenue or EBIT multiple for our company. We believe the results of this valuation supports the fair value determination of the board in connection with the September 28, 2006 option grants.

        On June 5, 2007, we granted stock options with an exercise price of $2.55 per share. In determining the fair value of our common stock, the board considered a contemporaneous valuation of our common stock as of March 31, 2007, which determined that the fair value of our common stock was $2.55 per share. This valuation was prepared using the same methodology described above, but applied a marketability discount of 15%, which reflected the improvement in our business and the increased likelihood of a liquidity event for our stockholders since December 31, 2006. In particular, the valuation analysis took account of our improved prospects as a result of our agreement with Schering-Plough and the payment of the up-front fee of $40.0 million by Schering-Plough in March 2007. As of March 31, 2007, we had cash and cash equivalents of $40.1 million, and Schering-Plough had agreed to pay for all future costs associated with the development of AN2690. The board also considered our progress in developing AN2690 and our other product candidates since March 31, 2007, including a clinical setback in the development of AN0128 for atopic dermatitis. As a result of the setback for AN0128 and our continued use of cash since March 31, 2007, the board determined that as of June 5, 2007, the fair value of our common stock had not changed from the $2.55 per share value at March 31, 2007.

        On July 26, 2007, we granted stock options with an exercise price of $3.00 per share. In determining the fair value of our common stock, the board considered the same factors it had considered in early June 2007, as well as a contemporaneous valuation report as of June 30, 2007 that estimated that the fair value of our common stock was $3.00 per share. The valuation report used the same methodology described above, and applied a marketability discount of 10%, reflecting continuing improvement in our prospects and the increased likelihood of a liquidity event for our stockholders. As of June 30, 2007, we had cash and cash equivalents of $34.9 million, and we continued to use cash in our operations. However, in late June we had begun discussions with investment banks for purposes of considering an initial public offering of our common stock. In light of these considerations, the board determined that the fair value of our common stock as of July 26, 2007 was $3.00 per share.

        On August 28, 2007, we granted stock options with an exercise price of $3.60 per share. In determining the fair value of our common stock, the board considered the factors described above, as well as our continued use of cash in our operations. The board also considered the fact that we had selected underwriters for our initial public offering and on August 1, 2007 had held the organizational meeting for the offering. The board further considered the fact that, as of the date of grant, the filing of the registration statement for the offering was imminent, and the estimated valuation ranges for our company that were provided by the underwriters in connection with the offering. The board also considered the uncertainties over whether the offering would be completed, and our anticipated cash requirements for the future.

44

Based on these considerations, the board determined that the fair value of our common stock as of August 28, 2007 was $3.60 per share.

Fair Value of Preferred Stock Warrant

        We account for our outstanding warrant under the provisions of Financial Accounting Standards Board Staff Position (FSP) No. 150-5, Issuer's Accounting under Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable (FSP 150-5), an interpretation of SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. Pursuant to FSP No. 150-5, freestanding warrants for shares that are puttable or redeemable are classified as liabilities on the balance sheet at fair value. At the end of each reporting period, changes in fair value during the period are recorded as a component of other expense. The fair value of the warrant is computed using the fair value of the convertible preferred stock and the Black-Scholes model. The fair value of the convertible preferred stock is estimated by us using valuation analyses consistent with the common stock valuation discussed above giving consideration to the preferences and other terms of the convertible preferred stock.

        We recorded the fair value of the warrant to purchase shares of our convertible preferred stock as a liability in accordance with FSP 150-5 and we will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the preferred stock warrant or the conversion of the warrant into a warrant to purchase common stock, at which time the liability will be reclassified to stockholders' equity (deficit).

Results of Operations

Comparison of Six Months Ended June 30, 2006 and 2007

(1)

Includes the following stock-based compensation

        Revenues.    During the six months ended June 30, 2007, we recognized $5.1 million of the $40.0 million non-refundable, non-creditable, up-front fee received in March 2007 from Schering-Plough and $4.2 million of revenue from development-related transition activities provided by us. During the six months ended June 30, 2006 and 2007, we recognized $308,000 and $51,000, respectively, of revenues for work performed under our NIH grant.

        Research and development.    The increase in research and development expenses for the first six months of 2007 compared to the same period in 2006 was primarily due to an increase of $2.7 million for our other programs and increases of $144,000 and $68,000 for the AN2690 and AN0128 programs, respectively, offset partially by a decrease of $502,000 in the AN2728 program resulting from the

45

completion of initial preclinical studies and a clinical trial and the timing of initiation of larger clinical trials.

        General and administrative.    The increase in general and administrative expenses for the first six months of 2007 compared to the same period in 2006 was primarily due to $2.0 million for financial advisory, consulting and legal fees related to the completion of the Schering-Plough agreement, an increase of $256,000 in professional services fees to support the growth of our operations and an increase of $231,000 in personnel costs resulting from increased headcount.

        Interest income.    The increase in interest income was attributable to higher average cash balances maintained during the six months ended June 30, 2007 due to the $40.0 million up-front fee received from Schering-Plough in March 2007.

        Interest and other expense.    The increase in interest expense was primarily due to the $8.0 million borrowed in the second half of 2006. In addition, we recorded $301,000 of other expense to reflect the increase in fair value of the preferred stock warrant during the six months ended June 30, 2007.

Comparison of Years Ended December 31, 2005 and 2006

(1)

Includes the following stock-based compensation

        Revenues.    In September 2005, we were awarded a $1.0 million NIH grant for research on targets for antifungal agents. The amount of revenues earned under the grant increased by $754,000 in 2006 when compared with 2005.

        Research and development.    The increase in research and development expenses in 2006 as compared to 2005 was primarily due to an increase of $6.0 million in expenses in the AN2690 development program and the incurrence of $1.4 million in expenses for the AN2728 development program. The increase was partially offset by a decrease of $2.6 million for the AN0128 development program and a decrease of $2.2 million for other programs.

        General and administrative.    The increase in general and administrative expenses in 2006 as compared to 2005 was primarily due to increased professional services fees and travel costs related to increased business development activities.

        Interest income.    The decrease in interest income in 2006 as compared to 2005 was due primarily to lower cash balances during 2006 than in the previous year.

        Interest and other expense.    The increase in interest expense in 2006 as compared to 2005 was primarily due to interest expense on the $8.0 million borrowed in the second half of 2006. We recorded $136,000 of other expense to reflect the increase in fair value of the preferred stock warrant during 2006.

46

Comparison of Years Ended December 31, 2004 and 2005

(1)

Includes the following stock-based compensation

        Revenues.    During 2005, we recorded $107,000 of revenue related to the NIH grant, which was awarded in 2005. During 2004, we recorded $7.1 million of DOD contract revenue. This contract was terminated during 2004 by the DOD.

        Research and development.    The increase in research and development expenses in 2005 as compared to 2004 was primarily due to an increase of $5.0 million in expenses for the AN2690 program, an increase of $1.4 million in expenses for the AN0128 program and an increase of $1.8 million for other programs. These increases were offset partially by a $4.8 million decrease in expenses for the DOD program that was terminated during 2004.

        General and administrative.    The increase in general and administrative expenses in 2005 as compared to 2004 was primarily due to an increase of $535,000 for professional services fees, which was primarily related to patent-related expenses, an increase of $481,000 in personnel costs and an increase of $165,000 for other administrative expenses incurred to support our growth.

        Interest income.    The increase in interest income in 2005 as compared to 2004 was due to higher cash balances resulting from our $24.8 million Series C convertible preferred stock financing which occurred in April 2005.

        Interest expense.    Interest expense recorded during 2005 was generated from a $714,000 equipment capital lease that was outstanding from May 2003 through September 2005 plus a $3.0 million bridge loan with our existing investors that was outstanding from February 2005 to April 2005 and was converted into equity in conjunction with completion of our Series C convertible preferred stock financing. Interest expense recorded during 2004 was generated from the capital lease.

Income Taxes

        At December 31, 2006, we had net operating loss carryforwards for federal income tax purposes of $40.0 million and federal research and development tax credit carryforwards of $338,000. Our utilization of the net operating loss and tax credit carryforwards may be subject to annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits prior to utilization. We recorded a valuation allowance to offset in full the benefit related to the deferred tax assets because realization of this benefit was uncertain.

47

Liquidity and Capital Resources

        Since our inception, we have financed our operations through the private placement of equity securities, government contracts and grants, debt and funding from our agreement with Schering-Plough. Through June 30, 2007, we have received aggregate net proceeds of $37.6 million from the issuance of convertible preferred stock and the issuance of convertible promissory notes that were converted into convertible preferred stock in April 2005. We also have received $17.1 million in government contract and grant revenues and borrowed $8.0 million under a loan agreement. In March 2007, we received a $40.0 million non-refundable, non-creditable up-front fee from Schering-Plough. We have also earned interest on our cash and cash equivalents.

        As of June 30, 2007, we had approximately $34.9 million in cash and cash equivalents. We believe that our existing cash and cash equivalents as of June 30, 2007, along with the estimated proceeds from this offering and interest thereon, will be sufficient to meet our anticipated cash requirements for at least the next twelve months. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

        Our future capital requirements are difficult to forecast and will depend on many factors, including:

•

the achievement of milestones under our agreement with Schering-Plough;



•

the terms and timing of any other collaborative, licensing and other arrangements that we may establish;



•

the initiation, progress, timing and completion of preclinical studies and clinical trials for our product candidates and potential product candidates;



•

the number and characteristics of product candidates that we pursue;



•

the progress, costs and results of our clinical trials;



•

the outcome, timing and cost of regulatory approvals;



•

delays that may be caused by changing regulatory requirements;



•

the costs associated with our move to a new facility;



•

the cost and timing of hiring new employees to support our continued growth;



•

the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims;



•

the costs and timing of procuring clinical and commercial supplies of our product candidates;



•

the costs and timing of establishing sales, marketing and distribution capabilities; and



•

the extent to which we acquire or invest in businesses, products or technologies.

48

Contractual Obligations

        The following table summarizes our contractual obligations at June 30, 2007 and the effect such obligations are expected to have on our liquidity and cash flow in future years.

Operating Lease

        We lease a 15,300 square-foot building consisting of office and laboratory space in Palo Alto, California, which expires in December 2008 and is cancelable on 4 months' notice. We anticipate moving into larger corporate facilities in the first half of 2008, which will require higher monthly rental payments that are not reflected in the table above.

Notes Payable

        In June 2006, we entered into a loan agreement for $8.0 million, of which $5.0 million was borrowed in July 2006 and $3.0 million was borrowed in December 2006. The notes are secured by all of our assets except for our intellectual property.

        The interest rate on the notes is currently 10.25% per annum, excluding the final payment. The notes have an interest-only period through December 31, 2007, followed by 30 monthly payments of principal and interest. A $760,000 final payment is due at the end of the payment term and is being accrued over the term of the loan into interest expense.

        We enter into contracts in the normal course of business with clinical research organizations for clinical trials and clinical supply manufacturing and with vendors for preclinical research studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore we believe that our noncancelable obligations under these agreements are not material.

Off-Balance Sheet Arrangements

        Since inception, we have not engaged in the use of off-balance sheet arrangements, such as structured finance, special purpose entities or variable interest entities.

Quantitative and Qualitative Disclosures about Market Risk

        The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short-term investments in a variety of high credit quality securities, including U.S. government instruments, commercial paper, money market funds and corporate debt securities. Due to the short-term nature of our investments, we believe that there is no material exposure to interest rate risk.

49

Recent Accounting Pronouncements

        In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 does not apply to the measurement of share-based payments. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. We have not yet determined the impact that SFAS 157 will have on our financial statements.

        In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to choose to measure eligible financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. We have not yet determined the impact that SFAS 159 will have on our financial statements.

        In June 2007, the EITF reached a consensus on EITF Issue No. 07-03, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities (EITF 07-3). Under EITF 07-03, nonrefundable advance payments for goods or services to be received in the future for use in research and development activities should be deferred and capitalized. Such amounts should be expensed as the related goods are delivered or services are performed. If our expectations change such that we do not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. EITF 07-03 is effective for new contracts entered into beginning January 1, 2008. We have not yet determined the impact that EITF 07-03 will have on our financial statements.

50

   
BUSINESS

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-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-inflamatory, 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, allowing us to build our intellectual property portfolio.

        By exploiting the 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 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 potential toxicity, worldwide sales of Lamisil peaked at $1.2 billion 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.

51

Currently available treatments can be classified as topical, oral or injectable. 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, or IND, applications for both of these indications in 2008. We also may develop AN2718 for treatment of other fungal skin infections.

        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. Under the agreement, Schering-Plough assumed sole responsibility for development and commercialization of AN2690, including obtaining regulatory approvals. Schering-Plough will pay all of the remaining costs for development and commercialization of AN2690 in onychomycosis and other indications.

        Pursuant to the agreement, Schering-Plough paid us a $40 million non-refundable, non-creditable 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 is obligated to pay us up to $505 million if certain development, regulatory and commercial milestones for onychomycosis are met. 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. Schering-Plough is further obligated to pay us double-digit royalties on annual net sales of AN2690 for all indications in jurisdictions where there is a valid patent claim covering the product and lesser royalties for AN2690 sales in jurisdictions where there is no valid patent claim. 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 may terminate this agreement without cause at any time.

52

Our Strategy

        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. The key elements of our strategy to achieve this objective are to:

•

Drive rapid, efficient discovery of novel boron-based compounds.    We believe the unique characteristics of boron allow us to engineer novel product candidates that target a broad range of diseases and drive a rapid and efficient drug development process. We have discovered and advanced three compounds into clinical development, and we have one compound in preclinical development and an active research program. We intend to continue to leverage our R&D resources to drive time- and cost-efficient compound discovery.



•

Focus development activities on topical applications.    We believe topical treatments generally have lower development costs, reduced risk 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.



•

Commercialize our products in specialty markets in the United States.    We intend to create a specialty sales force to market our products to dermatologists and other specialists in the United States. We plan to retain sales and marketing control or co-promotion rights over products in these markets, and we will seek commercialization partners for non-specialty and international markets.



•

Leverage our core competencies by using partners.    We intend to leverage our core competencies in boron chemistry and topical product candidate development by using partners. We utilize third parties to outsource non-core functions including clinical trial operations and certain basic research activities. We also intend to seek development and commercialization partners for our product candidates. By using partners for non-core activities, we plan to leverage our core competencies in our efforts to discover and develop novel boron-based product candidates in a rapid and cost-effective manner.



•

Expand and protect our intellectual property.    We intend to expand and aggressively prosecute our intellectual property in the area of boron chemistry and boron-based compounds. Since a relatively limited amount of research has been done in the area of boron-based drug development, we believe that we can establish a defensible and valuable intellectual property portfolio. To date, we own 119 patent applications worldwide, including 17 in the United States, and we have 1 issued patent outside of the United States.

Boron Chemistry Platform

        Our core technology platform is based on the use of boron chemistry to develop novel therapies. Boron is a naturally occurring element that is ingested frequently through consumption of fruits, vegetables, milk and coffee. Boron has two attributes that we believe provide compounds with drug-like properties. First, boron-based compounds have a unique geometry that allows them to have two distinct shapes, giving boron-based drugs the ability to interact with biological targets in novel ways and to address targets not amenable to intervention by traditional, carbon-based compounds. Second, boron's reactivity allows boron-based compounds to interact with a biological target to create a change that is specific to a particular disease or condition.

        Despite the ubiquity of boron in the environment, a limited amount of research has been done to evaluate the therapeutic promise of boron-based compounds. This lack of research activity was due to the availability of carbon-based natural products and proteins as the starting points for small-molecule drug

53

discovery. In addition, the evaluation of boron-based compounds as drug candidates has been hampered by an insufficient understanding of the physical properties necessary to provide boron-based compounds with the chemical and biological attributes required of pharmaceutical therapies. Boron-based compounds have also been historically difficult to synthesize.

        Significant advances have recently been made in the science and practice of boron-based drug discovery. Advanced computational techniques have been developed to improve the understanding of boron-based compounds and their interaction with key biological targets relevant to treating human disease. Additionally, new methods and tools for the rapid synthesis of boron-based compounds have been developed to facilitate the creation of new compound families. These new compound families expand the universe of biological targets that can be addressed by small-molecule, boron-based compounds.

        We believe our focus on boron-based chemistry provides us with multiple advantages in the small-molecule drug discovery process. These advantages include:

•

Novel access to biological targets.    Due to the unique geometry and reactivity of boron-based molecules, our boron-based compounds are able to modulate existing biological targets and can address targets not amenable to intervention by traditional carbon-based compounds. This may enable us to treat conditions that have been difficult to treat effectively with carbon-based compounds and develop antibiotic or antifungal therapies that treat infections that have become resistant to other drugs.



•

Broad utility across multiple disease areas.    Our compounds have exhibited antibiotic, antiparasitic, antifungal and anti-inflammatory properties and have generated extensive in vitro and in vivo activity in a number of different disease models. In addition, our compounds have exhibited antiviral and anticancer properties in in vitro disease models.



•

Rapid and efficient synthesis of drug-like compounds.    Our recent proprietary technological advances in the synthesis of boron-based compounds coupled with our rational drug design practices have enabled us to rapidly create large families of boron-based compounds with drug-like properties. In addition, these advances have made manufacturing of boron-based compounds feasible on a commercial scale.



•

Unencumbered intellectual property landscape.    We believe the intellectual property landscape for boron-based pharmaceutical products is relatively unencumbered compared to that of carbon-based products, providing an attractive opportunity for us to build our intellectual property portfolio.

Our Product Candidates

        We are currently focused on developing topical applications of our compounds to treat fungal, bacterial and inflammatory diseases. We focus our development activities on treating diseases where there is a logical match between the biological activity of our boron compounds and the unmet medical needs for a specific disease. We have three clinical programs underway for topical treatments of fungal, inflammatory and bacterial diseases in addition to preclinical programs in the same areas. We also have an

54

active research program in the area of systemic antibiotics. The following table summarizes our current product candidates: