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ANAC > SEC Filings for ANAC > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Annual Report


You should read the following discussion and analysis together with our financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. We use words such as "may," "will," "expect," "anticipate," "estimate," "intend," "plan," "predict," "potential," "believe," "should" and similar expressions to identify forward-looking statements. These statements appearing throughout this Annual Report on Form 10-K are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Annual Report on Form 10-K. As a result of many factors, such as those set forth under "Risk Factors" and elsewhere in this Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements.


We are a biopharmaceutical company focused on discovering, developing and commercializing novel small-molecule therapeutics derived from our boron chemistry platform. The productivity of our internal discovery capability has enabled us to generate a pipeline of both topical and systemic boron-based compounds. We have discovered, synthesized and developed eight molecules that are currently in development.

Our lead product candidates include two topically administered dermatologic compounds-tavaborole (formerly referred to as AN2690), an antifungal for the treatment of onychomycosis, and AN2728, an anti-inflammatory for the treatment of atopic dermatitis and psoriasis. In addition, we have three wholly-owned clinical product candidates-AN2718 and AN2898, which are backup compounds to tavaborole and AN2728, respectively, and AN3365 (formerly referred to as GSK2251052, or GSK '052), an antibiotic for the treatment of infections caused by Gram-negative bacteria, which previously was licensed to GlaxoSmithKline LLC, or GSK. In October 2012, GSK advised us that it had discontinued further development of AN3365; accordingly, all rights to this compound reverted to us. We are considering our options for further development, if any, of this compound. We have also discovered three other compounds that we have out-licensed for further development-two are licensed to Eli Lilly and Company, or Lilly, for the treatment of animal health indications and the third compound, AN5568, also referred to as SCYX-7158, is licensed to Drugs for Neglected Diseases initiative, or DNDi, for human African trypanosomiasis (HAT, or sleeping sickness). We also have a pipeline of other internally discovered topical and systemic boron-based compounds in development.

Our most advanced product candidate is tavaborole. We initiated our Phase 3 clinical trials for tavaborole in the fourth quarter of 2010 and completed enrollment for these trials in the fourth quarter of 2011. In the first quarter of 2013, we reported positive results from both Phase 3 trials conducted under a Special Protocol Assessment, or SPA, with the United States Food and Drug Administration, or FDA. Tavaborole achieved a high degree of statistical significance on all primary and secondary endpoints. In the first trial, 6.5% of patients treated with tavaborole met the primary endpoint of "complete cure," compared with 0.5% of patients treated with vehicle (p=0.001) at week 52. In the second trial, 9.1% of patients treated with tavaborole met the primary endpoint of "complete cure," compared with 1.5% of patients treated with vehicle (p<0.001) at week 52. "Complete cure" is a composite endpoint that requires both a mycological cure and a completely clear nail. In addition, we completed a cardiac safety study and a repeat insult patch test, or RIPT, study in November 2012. We are currently in the process of preparing to file a New Drug Application, or NDA, in mid-2013.

For AN2728, we completed a Phase 2 dose-ranging trial in psoriasis in the second quarter of 2010, a second Phase 2 clinical trial in psoriasis in the second quarter of 2011 and a Phase 1 absorption trial in the third quarter of 2011. We also completed a Phase 2 trial of AN2728 and AN2898, our second topical anti-inflammatory product candidate, in mild-to-moderate atopic dermatitis in the fourth quarter

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of 2011. In early 2012, we completed two safety studies of AN2728. Given the positive outcome from our atopic dermatitis trial, the safety profile exhibited by AN2728 and the large unmet need in atopic dermatitis relative to psoriasis, we intend to focus our AN2728 development efforts on atopic dermatitis in the near future and defer the start of the Phase 3 trial for psoriasis. As such, we initiated a Phase 2 safety, pharmacokinetics, or PK, and efficacy trial for mild-to-moderate atopic dermatitis in adolescents in July 2012 and a Phase 2 dose-ranging study in mild-to-moderate atopic dermatitis in adolescents in August 2012. We completed the Phase 2 safety, PK and efficacy trial in December 2012 and expect results from our Phase 2 dose-ranging study in March 2013. Our future development plans for AN2728 will be determined following the results of our Phase 2 dose-ranging study.

In October 2007, we entered into a research and development collaboration, option and license agreement with GSK for the discovery, development and worldwide commercialization of boron-based systemic anti-infectives. In September 2011, we amended and expanded the GSK agreement to, among other things, provide GSK the option to extend its rights around the bacterial enzyme target leucyl-tRNA synthetase, or LeuRS, as well as to add a new research program using our boron chemistry platform for tuberculosis, or TB, and GSK is currently funding our TB research activities. The amendment also gives GSK options to initiate an additional collaborative research program directed towards LeuRS and to acquire rights to certain specified compounds from Anacor's malaria program, which is currently being conducted through a collaboration with Medicines for Malaria Venture, or MMV. None of the compounds currently being evaluated as potential lead candidates under this program are subject to GSK's option.

In August 2010, we entered into a research, license and commercialization agreement with Lilly, under which we are collaborating to discover products for a variety of animal health applications. Pursuant to this agreement, Lilly selected the first development compound for an animal health indication in August 2011, and in December 2012, they selected a second development compound for another animal health indication. Lilly will be responsible for all further development and commercialization of these compounds.

In February 2011, we entered into a research and development collaboration with Medicis Pharmaceutical Corporation, or Medicis, to discover and develop compounds directed against a target for the potential treatment of acne. On November 28, 2012, we filed for arbitration with JAMS for breach of contract by Medicis seeking damages in the form of payment for the achievement of certain preclinical milestones under the collaboration. On December 11, 2012, Medicis filed a complaint for breach of the collaboration and a motion for preliminary injunction in the Delaware Court of Chancery seeking to enjoin us from prosecuting our claims through arbitration and to require us to continue to use diligent efforts to conduct research and development under the agreement. On January 16, 2013, we filed a motion requesting that the Delaware Court of Chancery dismiss the Medicis suit and send the dispute back to arbitration. On February 15, 2013, Medicis filed a brief in opposition to our motion to dismiss in favor of arbitration. On March 4, 2013, we filed a reply brief in support of our motion to dismiss. We intend to vigorously enforce our rights under the collaboration and believe that we have meritorious defenses against Medicis' filed complaint and motion. Medicis was acquired by Valeant in December 2012.

We also have several collaborations with organizations that fund research leveraging our boron chemistry to discover new treatments for neglected diseases. In addition to potentially developing new therapies for such diseases, these collaborations provide us the potential benefits of expanding the chemical diversity of our boron compounds, understanding new properties of our boron compounds, receiving future incentives, such as the potential grant of a priority review voucher by the FDA and, if a drug is ultimately approved, potential revenue in some regions. Our collaboration partners include DNDi to develop new therapeutics for HAT, visceral leishmaniasis and Chagas disease, MMV to develop compounds for the treatment of malaria, the Sandler Center for Drug Discovery at the University of California at San Francisco to discover new drug therapies for the treatment of river blindness, the Global Alliance for Livestock Veterinary Medicines, or GALVMed, for the treatment of

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animal African trypanosomiasis and the University of California at San Francisco to develop compounds for the treatment of malaria under a National Institutes of Health grant. In 2011, DNDi completed pre-clinical studies of AN5568 for HAT and, in March 2012, AN5568 became the first compound from our neglected diseases initiatives to enter human clinical trials.

In February 2012, we issued and sold 3,250,000 shares of our common stock in connection with an underwriting agreement, or the Canaccord Underwriting Agreement, with Canaccord Genuity Inc., or Canaccord. The price to the public in this offering was $6.60 per share, for gross proceeds of approximately $21.5 million, and Canaccord purchased the shares from us pursuant to the Canaccord Underwriting Agreement at a price of $6.25 per share. Our net proceeds from this offering were approximately $19.9 million, after deducting the underwriting discount and other offering costs.

In October 2012, we issued and sold 4,000,000 shares of our common stock pursuant to an underwriting agreement, or the Cowen Underwriting Agreement, with Cowen & Company, LLC, or Cowen. The price to the public in this offering was $6.00 per share for gross proceeds of $24.0 million, and Cowen purchased the shares from us pursuant to the Cowen Underwriting Agreement at a price of $5.76 per share. The net proceeds to us from this offering were approximately $22.6 million, after deducting the underwriting discount and other offering costs.

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 December 31, 2012, we have an accumulated deficit of $215.2 million. We have funded our operations primarily through the sale of equity securities, payments received under our agreements with Schering Corporation, or Schering, GSK, Lilly and Medicis, government contracts and grants, contracts with not-for-profit organizations for neglected diseases and borrowings under debt arrangements. 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 future payments earned under our agreements with GSK, Lilly, Medicis or any such future collaboration partners. Our intent is to enter into additional licensing and development agreements to further develop certain of our product candidates and to fund other areas of our research. If the GSK, Lilly and/or Medicis agreements are terminated or we are unable to enter into other collaboration agreements, we may incur additional operating losses and our ability to expand and continue our research and development activities and move our product candidates into later stages of development may be limited. While management believes that we currently have sufficient resources to fund our operations until the filing of our NDA, additional capital will be needed to complete the development and potential commercialization of tavaborole, fund the other research and development activities and meet our operating requirements through 2013 and beyond. To fund our future operations, including research, development and commercialization of our product candidates, we will need to seek additional capital through research and development collaborations; a possible license, collaboration or other similar arrangement with respect to commercialization rights to tavaborole or our other product candidates; equity offerings or debt financings; or a combination of these sources.

Financial Operations Overview


Our recent revenues are comprised primarily of collaboration agreement-related revenues and government grants, while historically we also had government contract revenues. Collaboration agreement-related revenues have included license fees, development reimbursements and development milestone fees. In addition, we received an amendment fee in 2011 in connection with the modification of our research and development collaboration with GSK, or the Amendment Fee, and a termination and release payment in 2010 with respect to our previous agreement with Schering. Government grant revenues have consisted of grant funding received from government entities and government contract revenues have included cost and cost plus fixed fee reimbursements for allowable costs.

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We have generated approximately $141.0 million in revenue from inception through December 31, 2012. Through 2004, we had recognized cumulative revenues of $16.1 million through our contract with the U.S. Department of Defense 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 tavaborole. In March 2007, we received from Schering a $40.0 million upfront fee that was recognized ratably over the estimated period during which we performed development-related activities to transition tavaborole to Schering. The estimated period was based on the research transition plan jointly developed by Schering and us. In addition to the upfront fee, we were paid for our development-related activities, which included certain preclinical and clinical activities. Inception-to-date, we have recognized revenue of $49.5 million under the Schering agreement, which was comprised of the full recognition of the $40.0 million upfront fee and $9.5 million for our development-related transition activities. In November 2009, Schering merged with Merck & Co., Inc., or Merck, and in May 2010, upon termination of the 2007 agreement, we regained the exclusive worldwide rights to tavaborole and received a $5.8 million payment from Merck, which was recognized as revenue during 2010.

In October 2007, we received a $12.0 million upfront fee under our agreement with GSK, which was being recognized ratably over the six-year research term. In September 2011, the remaining $4.2 million of deferred revenue was recognized upon the amendment of the contract, as was the $5.0 million Amendment Fee we received that month. Through December 31, 2012, we recognized $44.7 million under this agreement, which was comprised of $12.0 million related to the upfront fee, $25.1 million for achievement of performance milestones, $5.0 million for the Amendment Fee, $1.6 million related to reimbursement for the TB program and $1.0 million in reimbursement for patent costs, procurement of drug material and performance of certain clinical studies for AN3365. In October 2012, GSK discontinued further development of AN3365; accordingly, all rights to this compound reverted to us. We are considering our options for further development, if any, of this compound. In the future, revenue under our agreement with GSK may include fees for our GSK product candidates achieving specified development, regulatory and sales goals and product royalties.

In September 2010, we received a non-creditable, non-refundable upfront fee of $3.5 million under our agreement with Lilly, which we are recognizing ratably over the four-year research term on a straight-line basis. Under this agreement, we have received $7.1 million in research funding through December 31, 2012 with the potential to receive up to a total of $12.0 million in research funding, if neither party cancels the agreement prior to the completion of the research term. Through December 31, 2012, we have recognized $11.6 million under this agreement, which was comprised of $2.1 million related to the upfront fee, $7.5 million in research funding and $2.0 million in milestone fees for the selection of development compounds.

In October 2010, we were awarded $1.5 million from the United States Department of the Treasury under the Qualifying Therapeutic Discovery Project Program to support research for six projects with the potential to produce new therapies. The full amount was recognized as government grant revenue in 2010.

In February 2011, we received a non-creditable, non-refundable upfront fee of $7.0 million under our agreement with Medicis, which we are recognizing ratably over the six-year research term on a straight-line basis. Through December 31, 2012, we have recognized $2.2 million of the upfront fee.

From inception through December 31, 2012, we have recognized $8.6 million of revenue for research relating to animal health indications and for research performed under our agreements with not-for-profit organizations for neglected diseases.

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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, stock-based compensation and consulting fees;

third-party supplier expenses; and

facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, amortization or 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 remain comparable in the future as we progress our product candidates through clinical development, conduct our research and development activities under our agreements with GSK, Lilly, Medicis and various current and potential collaborations, including those related to our neglected diseases initiatives, advance our discovery research projects into the preclinical stage and continue our early-stage research.

The table below sets forth our research and development expenses for 2012, 2011 and 2010, and for the period from January 1, 2004 through December 31, 2012, for four of our clinical-stage product candidates, other work conducted under the GSK agreement, work on our Lilly and Medicis collaborations and work on neglected diseases and other programs, including programs that are currently inactive. Prior to January 1, 2004, we did not separately track expenses for tavaborole or any other product candidates due to the early stage of their development. A portion of our research and development costs, including indirect costs relating to our product candidates, are not tracked on a program-by-program basis and are allocated based on the personnel resources assigned to each program.

                                                                              Total from
                                                                              January 1,
                                                                               2004 to
                                              Year Ended December 31,        December 31,
                                             2012       2011       2010          2012
                                                           (in thousands)
Tavaborole, including NIH grant expenses   $ 25,912   $ 22,111   $  4,824    $      80,196
AN2728                                       12,415     14,715      6,839           47,922
AN2898                                          171      3,559        670            8,589
AN3365 (previously GSK '052)                    543        149      2,156           14,040
GSK programs                                  1,427        744      5,237           38,894
Lilly programs                                3,591      3,048      1,200            7,839
Medicis program                               1,969      4,798          -            6,767
Neglected diseases                            4,418      5,138      2,502           13,874
Other programs                                1,872      1,835      6,438           56,266

Total research and development expenses    $ 52,318   $ 56,097   $ 29,866    $     274,387

We expect our research and development expenses for tavaborole to decrease in the near future due to the completion of our tavaborole clinical activities and the filing of our NDA in mid-2013. We

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expect costs associated with AN2728 to increase as we expand the clinical and preclinical activities for this program. In October 2012, GSK advised us that it had discontinued further development of AN3365 and all rights to this compound reverted to us. We are considering our options for further development, if any, of this compound. We also expect costs associated with our early stage research activities on our Lilly collaborations to increase in future periods. We expect our spending associated with the Medicis program to be limited until our current dispute with them is resolved. In addition, spending for our early-stage research programs, including our GSK TB program and other potential GSK programs, will be dependent upon our success in developing and advancing new product candidates for these programs.

We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates or if, when or to what extent we will generate revenues from the commercialization and sale of any of our product candidates. We or our collaboration partners may never succeed in achieving marketing approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rates and significant and changing government regulation and whether our current or future collaborators are committed to, and make progress in, programs licensed to them. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. Consequently, we are unable to provide a meaningful estimate of the period in which material cash inflows will be received. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate's commercial potential.

Our strategy includes entering into additional collaborations with third parties for the development and commercialization of some of our product candidates. To the extent that such third parties have control over preclinical development or clinical trials for some of our product candidates, 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 collaborations or how such arrangements would affect our development plans or capital requirements.

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 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 financial services, professional fees for legal services, including patent-related services, and auditing and tax services. We expect that general and administrative expenses will increase in the future as we expand our operating activities, hire additional staff and incur additional costs associated with operating as 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. On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition, preclinical study and clinical trial accruals, deferred advance payments and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances and

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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 Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

Our contract revenues are generated primarily through research and development collaboration agreements, which typically may include non-refundable, non-creditable upfront fees, funding for research and development efforts, payments for achievement of specified development, regulatory and sales goals and royalties on product sales of licensed products.

We recognize revenue when persuasive evidence of an arrangement exists; transfer of technology has been completed, services are performed or products have been delivered; the fee is fixed or determinable; and collection is reasonably assured.

For arrangements with multiple deliverables, we evaluate each deliverable to determine whether it qualifies as a separate unit of accounting. This determination is generally based on whether the deliverable has stand-alone . . .

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