Anadys Pharma Restructuring

Cash strain forces ANDS to restructure

Early this morning, Anadys Pharmaceuticals, Inc. (ANDS - Snapshot Report) announced a strategic restructuring to focus its operations on the development of ANA598, its lead anti-hepatitis C drug candidate. In particular, the company will focus its resources on a proposed phase II study in hepatitis C patients of ANA598 in combination with pegylated interferon-alpha and ribavirin.

As part of this restructuring, the company intends to suspend further development of its hepatitis C and oncology programs of ANA773 and is reducing its workforce by approximately 40%. ANA773 is under phase I trials for hepatitis C and solid tumors. The company intends to out-license the programs after the outcome and analysis of data from current cohorts in ongoing phase I studies in hepatitis C and oncology. As a reminder, these are the only two clinical programs ANDS has.

The company recently reported positive phase Ib data for ANA598. In the study (n=35), ANA598 treatment resulted in rapid and sustained reductions in HCV RNA with median reductions at end of treatment (day 4) exceeding 2 log10 (>99%) at all dose levels. At 200 mg bid, the median viral load reduction was 2.4 log10 (range of 0.4 to 3.4); at 400 mg bid, 2.3 log10 (range of 1.6 to 3.5); and at 800 mg bid, 2.9 log10 (range of 2.2 to 3.4). Genotype 1a patients demonstrated median reductions of 1.4 log10, 1.8 log10, and 2.5 log10 at 200, 400 and 800 mg bid, respectively.

In 10 of the 12 genotype 1a patients who received ANA598, viral load was still declining at the end of the three days of treatment. Genotype 1b patients demonstrated median reductions of 2.6 log10, 2.5 log10 and 3.2 log10, at 200, 400 and 800 mg bid, respectively. Genotype 1b is the most common subtype of hepatitis C found in North America and Europe.

No patient showed evidence of viral rebound while on ANA598. The drug was well-tolerated in this short-term study, and there were no serious adverse events.

The efficacy data was very encouraging, which is approaching the efficacy of Vertex Pharmaceuticals' (VRTX - Analyst Report) Telaprevir, which is under phase III studies. Following the release of the data, the company's shares shot up dramatically and more than doubled. But we expressed our concern then. Firstly, the data were from small number of subjects in early phase I study, and we would like to see consistent results in advanced clinical studies. Secondly, the company is under great pressure to raise additional fund to advance this program. The situation has not changed since the company released the phase data early this year.

Anadys meant to use the phase I data to attract one of the larger drug companies involved in hepatitis C for a partnership or outright acquisition, even though it owns full rights regarding ANA598. However, with the limited phase I data, we doubt big pharma/biotech companies are willing to take the risks. That's the major reason that the company failed to achieve this goal so far. With only $21 million in cash, which will last only two to three quarters, the company desperately needs additional funds to advance both ANA598 and ANA773.

As a result, the company announced the restructuring plan to focus its resources to develop the more-promising ANA598. At the same time, the company announced a stock offering this morning to sell about 8.4 million shares and additional warrants to raise roughly $16 million proceeds. The reduction in work force is anticipated to generate annual cash expense savings of between approximately $4.0 million and $5.0 million.

Phase II trial of ANA598 is proposed, competition is fierce

Anadys is preparing for the first phase II trial in hepatitis C patients of ANA598 in combination with interferon-alpha and ribavirin (current standard of care, or SOC) and intends to submit a protocol to the FDA in July 2009. Anadys intends to initiate the trial during the third quarter of 2009. The proposed phase II study is expected to provide important data at the end of this year and in the first two quarters of 2010.

Even if ANA598 can navigate the clinical and regulatory hurdles smoothly, it still faces tough competition in the anti-hepatitis C market. This market is dominated by two players: Roche, which commands a majority of the U.S. and global pegylated interferon market through the sale of Pegasys/Copegus, and Schering-Plough (SGP) through the sale of Peg-Intron / Rebetrol. The current standard of care is a combination of pegylated interferon and ribavirin.

In addition, Vertex has set a new benchmark for the treatment of HCV with its HCV candidate, Telaprevir, which demonstrated significant reduction in viral load with 4.4-log reduction in viral load compared to 1-2 log reduction seen in other standard of care interferon therapy. We believe that this data sets the bar very high, and we are unsure whether Anadys can reach it. Currently, Telaprevir is undergoing phase III studies. Valeant's (VRX - Snapshot Report) Taribavirin is in advanced clinical development.

Meanwhile, Schering's Boceprevir is in phase III. Hence, they are already ahead of Anadys in terms of development. So we believe competition will remain a challenge for Anadys in the years to come.

We remain neutral on Anadys until we gain more visibility about the ANA598 program.