1128495--3/15/2007--ANADYS_PHARMACEUTICALS

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{property, intellectual, protect}

{stock, price, operating}

{cost, operation, labor}

{control, financial, internal}

{acquisition, growth, future}

{cost, regulation, environmental}

{personnel, key, retain}

{system, service, information}

{competitive, industry, competition}

{stock, price, share}

We may not realize the anticipated benefits of the development and potential commercialization of ANA380 for HBV. We are continuing to evaluate the animal toxicology observations that led to the suspension of dosing in our ANA975 HCV clinical trial. To the extent that the toxicology observations are mechanism related and if we are unable to identify levels of immune stimulation that provide sufficient therapeutic benefit with an acceptable safety profile, our ANA773 program for cancer and our other earlier stage TLR7 programs could be negatively impacted, causing our stock price to decline. The FDA may not allow us to proceed with dosing humans with ANA773 unless and until the outcome of our toxicology studies with ANA975 are more fully understood. Any delay to or cancellation of our ANA773 program could adversely affect our business and cause our stock price to decline. We will need additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our research and development programs or commercialization efforts. Raising additional funds by issuing securities or through collaboration and licensing arrangements may cause dilution to existing stockholders, restrict our operations or require us to relinquish proprietary rights. If we fail to establish new collaborations, we may not generate sufficient revenue to attain profitability. We are at an early stage of development, and we may never attain product sales. We expect our net operating losses to continue for at least several years, and we are unable to predict the extent of future losses and when we will become profitable, if ever. The technologies on which we rely are unproven and may not result in the discovery or development of commercially viable products. Novartis has the right under certain circumstances to market and sell products that compete with the product candidates and products that we license to it, and any competition by Novartis could have a material adverse effect on our business. We are dependent on the commercial success of ANA975 or another oral prodrug of isatoribine or other TLR-7 agonists and we cannot be certain that ANA975 or any other oral prodrug of isatoribine or other TLR-7 agonists will be commercialized. Because the results of preclinical studies and initial clinical trials of isatoribine, ANA975 and ANA380 are not necessarily predictive of future results, we can provide no assurances that ANA975 or ANA380 will have favorable results in later clinical trials, or receive regulatory approval. We will need to file an additional IND application to conduct trials of ANA975 for HBV in the U.S. and will need to continue our dialogue with the FDA as we and/or Novartis conduct additional trials of ANA975 in the U.S. for either HCV or HBV. Delays in the commencement of clinical testing of our current and potential product candidates could result in increased costs to us and delay our ability to generate revenues. Delays in the completion of, or the termination of, clinical testing of our current and potential product candidates could result in increased costs to us and delay or prevent us from generating revenues. The success of the clinical development program of ANA380 will depend, at least in part, on our or our collaborators ability to maintain a positive working relationship with the FDA and other regulatory authorities, and the failure to do so may harm or delay our ability to commercialize ANA380 in the U.S. or other countries. If our efforts to discover new products or product candidates and to obtain rights to new products or product candidates from third parties do not yield product candidates for clinical development or are not otherwise successful, we may not generate product revenues or achieve profitability. Because we acquired isatoribine from Valeant Pharmaceuticals International (formerly known as ICN Pharmaceuticals, Inc.) any dispute with Valeant Pharmaceuticals International may adversely affect our ability to commercialize isatoribine or prodrugs of isatoribine. Even if we successfully complete clinical trials of ANA975, ANA380 or any future product candidate, there are no assurances that we will be able to submit, or obtain FDA approval of, a new drug application. If we successfully develop products but those products do not achieve and maintain market acceptance, our business will not be profitable. If we fail to maintain our existing and future collaborations, we may not generate sufficient revenue to attain profitability. We are dependent on collaborators allocating adequate resources to our collaborations, and actions taken by collaborators could prevent us from commercializing products and earning milestone and other contingent payments, royalties or other revenue. If any conflicts arise between us and any of our collaborators, our reputation, revenues and cash position could be significantly harmed. We depend on outside parties to conduct our clinical trials, which may result in costs and delays that prevent us from obtaining regulatory approval or successfully commercializing product candidates. We do not have internal manufacturing capabilities, and if we fail to develop and maintain supply relationships with collaborators or other outside manufacturers, we may be unable to develop or commercialize any of our products. If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market any products we may develop, we may not be able to generate product revenue. We will need to increase the size of our organization, and we may encounter difficulties managing our growth, which could adversely affect our results of operations. If we are unable to attract and retain key management and scientific staff, we may be unable to successfully develop or commercialize our product candidates. Our quarterly results and stock price may fluctuate significantly. If we engage in any acquisition, we will incur a variety of costs, and we may never realize the anticipated benefits of the acquisition. Earthquake damage to our facilities could delay our research and development efforts and adversely affect our business. Risks Related to Our Industry Because our product candidates and development and collaboration efforts depend on our intellectual property rights, adverse events affecting our intellectual property rights will harm our ability to commercialize products. If we are sued for infringing intellectual property rights of others, it will be costly and time- consuming, and an unfavorable outcome in that litigation would have a material adverse effect on our business. We may be involved in lawsuits or proceedings to protect or enforce our patent rights, trade secrets or know-how, which could be expensive and time- consuming. Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information and may not adequately protect our intellectual property. Many competitors have significantly more resources and experience, which may harm our commercial opportunity. If our competitors develop treatments for HCV, HBV, cancer or in the other fields in which we are developing products that are approved faster, marketed better or demonstrated to be more effective than ANA975, ANA380, ANA773 or ANA59X or any other products that we may develop, our commercial opportunity will be reduced or eliminated. If we cannot establish pricing of our product candidates acceptable to the government, insurance companies, managed care organizations and other payors, any product sales will be severely hindered. If we cannot arrange for reimbursement policies favorable to our product candidates, their sales will be severely hindered. Product liability claims may damage our reputation and, if insurance proves inadequate, the product liability claims may harm our results of operations. Any claims relating to our improper handling, storage or disposal of biological, hazardous and radioactive materials could be time-consuming and costly. Our business and operations would suffer in the event of system failures. Risks Related to Our Common Stock Future sales of our common stock may cause our stock price to decline. Our stock price may be volatile. Our largest stockholders may take actions that are contrary to your interests, including selling their stock.

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1128495--3/15/2007--ANADYS_PHARMACEUTICALS_INC