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. 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 particular, the timing of commencement of Phase 3 clinical trials for AN2690 is subject to satisfactory completion of certain non-clinical testing of the product candidate. The outcome of such testing could delay commencement of the Phase 3 clinical trials beyond the end of 2008. 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, Schering-Plough, GSK or our potential future partners to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs for the same indication as our product candidates. Clinical trial sites may also be required to withdraw from a clinical trial as a result of changing standards of care or may otherwise become ineligible

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

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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;



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regulatory objections to commencing a clinical trial;



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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, Schering-Plough, GSK or our potential future 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

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additional clinical or non-clinical testing. Success in preclinical testing and early clinical trials does not 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 and the outcome of certain non-clinical testing of AN2690, we currently anticipate that Schering-Plough will initiate Phase 3 clinical trials for AN2690 by the end of 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.

        A small number of patients who received AN2690 treatment experienced skin irritation around their toenails during clinical trials of AN2690 for onychomycosis. These side effects were reversible and did not interrupt or delay our clinical trials. However, the results of future clinical trials may show that our product candidates may cause more severe skin irritation or other 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, Schering-Plough, GSK or our potential future 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.

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         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. 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, Schering-Plough, GSK or our potential future 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

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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.

         Our use of boron chemistry to develop pharmaceutical product candidates is novel and may not prove successful in producing approved products. 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-based 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-based 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. Also, our preclinical and clinical safety studies to date have focused upon our product candidates for topical treatments and we have not conducted safety studies on potential side effects of systemic therapeutics using boron-based compounds, including those that may be developed pursuant to our collaboration with GSK. If boron-based 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. Even if topical treatments using our boron-based compounds do not have adverse side effects, systemic therapeutics might. Additionally, even if our boron-based compounds do not have adverse side effects but boron-based 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-based drugs. If boron-based compounds prove unsuitable as therapeutic agents, our business will be significantly harmed.

         We have limited experience developing systemic therapeutics and may not be able to do so.

        Most of our drug discovery and clinical development efforts to date have focused upon the identification and development of boron-based topical treatments and all of our leading product candidates are topical treatments. Pursuant to our agreement with GSK, we will significantly increase our research and development efforts to identify boron-based compounds for use in systemic therapeutics. We have limited experience in the development and approval process for systemic therapeutics. Accordingly, it may take us longer or we may fail to develop a systemic product candidate, in which case we will not receive additional payments from GSK.

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         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;



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lack of cost-effectiveness;



•

timing of market introduction and perceived effectiveness of competitive products;



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



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



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



•

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.

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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;



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clinical trial experience;



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regulatory experience;



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intellectual property portfolios;



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expertise in prosecution of intellectual property rights;



•

manufacturing and distribution experience; and



•

sales and marketing experience.

        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 dermatological 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

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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.

         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, Schering-Plough, GSK or our potential future partners may never receive approval or commercialize our product candidates outside of the United States.

        To market and commercialize any product candidates 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

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assure the safety of marketed drugs has resulted in the proposal of new legislation addressing drug safety issues. If enacted, any new legislation could result in delays or increased costs during the period of product development, clinical trials and regulatory review and approval, as well as increased costs to assure compliance with any new post-approval regulatory requirements. Any of these restrictions or requirements could force us or our partners to conduct costly studies.

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

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issue warning letters;



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



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impose other civil or criminal penalties;



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suspend regulatory approval;



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suspend any ongoing clinical trials;



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refuse to approve pending applications or supplements to approved applications filed by us, Schering-Plough, GSK or our potential future partners;



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



•

seize or detain products or require a product recall.

         Our limited experience in regulatory affairs could delay or harm our ability to obtain regulatory approvals necessary to market our product candidates.

        We have limited experience in preparing, submitting and prosecuting regulatory filings, including NDAs and other applications necessary to gain regulatory approvals. As a result, we may require more time and incur greater costs than our competitors 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, Schering-Plough, GSK or our potential future 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.

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

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

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withdrawal of clinical trial participants;



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termination of clinical trial sites or entire trial programs;



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costs of related litigation;



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substantial monetary awards to patients or other claimants;



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decreased demand for our product candidates and loss of revenues;



•

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. Our coverage is currently limited to $3 million per occurrence and $3 million in the aggregate per year. As such, 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 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. Our commercial business insurance covers us for up to $1 million per occurrence and up to $2 million in the aggregate per year and includes hazardous materials coverage. Our umbrella policy covers us for up to an additional $2 million per occurrence and up to $2 million in the aggregate per year. This coverage may not be adequate to cover all 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.

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         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, our ability to achieve research and development milestones for systemic therapeutics pursuant to our agreement with GSK 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 increased expenses as we expand our research and development programs and advance our product candidates. For example, our research and development collaboration with GSK will require us to commit specific resources to discovery and development activities and will significantly increase our level of research and development expenditures on systemic drug discovery projects. 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. As a result of the foregoing, we expect to continue to experience net losses and negative cash flows for the foreseeable future. In addition, if our alliances with Schering-Plough and GSK are unsuccessful or if we are unable to generate revenue from additional collaborations, then our losses and negative cash flows will be even greater.

        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 payments under our agreements 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 alliances with Schering-Plough and GSK are uncertain because agreed-upon milestones may not be achieved, and AN2690 and product candidates that may be identified pursuant to our collaboration with GSK may not receive regulatory approval or, if approved, be accepted in the market. In addition, we may not be able to enter into other alliances 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.

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         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 for topical treatments. 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 for topical treatments. In addition, pursuant to our research collaboration with GSK, we have committed to significantly expand our research and development efforts to identify systemic therapeutics, an area where we have not previously devoted significant resources. Under the GSK agreement, we are required to use reasonable efforts to identify and optimize product candidates and have committed to provide certain numbers of personnel and other resources under four drug development projects. 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 and GSK, 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 through at least December 31, 2008. 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.

        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;



•

our ability to meet research plan timelines and goals within budgeted costs for the drug discovery projects that we undertake in collaboration with GSK;



•

the success of our alliances with Schering-Plough and GSK and the attainment of milestones and royalty payments, if any, under those agreements;



•

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

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•

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 currently expect Schering-Plough to initiate Phase 3 clinical trials of AN2690 in onychomycosis by the end of 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 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 expect to expend substantial resources in our collaboration with GSK. If the research collaboration fails to successfully identify product candidates or if GSK elects not to license any of the resulting compounds or fails to

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successfully develop and commercialize any compounds it does license, our operating results and financial condition will be materially and adversely affected.

        In October 2007, we entered into a research and development collaboration, option and license agreement with GSK for the discovery, development, manufacture and worldwide commercialization of novel systemic therapeutics for viral and bacterial diseases utilizing our boron-based chemistry. During the research term, both we and GSK are committed to use our reasonable efforts to discover and optimize compounds and to provide specified resources, including certain numbers of full-time equivalent scientists, on a project-by-project basis. Each party is responsible for its own research costs and we expect to expend substantial resources on the collaboration. If we fail to successfully identify product candidates or demonstrate proof of concept for the candidates we identify, our operating results and financial condition will be materially and adversely affected. GSK has the right, but is not required, to exclusively license a specified number of compounds under the agreement. GSK is obligated to make payments to us upon the achievement of certain initial discovery and developmental milestones but further, more significant milestone payments are payable only on compounds that GSK chooses to license. Accordingly, achievement of future payments from GSK depends upon the extent to which the collaborative research projects successfully identify compounds that meet agreed upon criteria and GSK chooses to license such compounds for further development and commercialization. If we devote substantial resources to a research project and GSK elects not to exercise its option with respect to any resulting product candidates, our financial condition will be materially and adversely affected.

        If GSK elects to license a compound, GSK will assume sole responsibility for development, regulatory approval and commercialization of such compound. Accordingly, even with respect to compounds that GSK chooses to license, if any, future payments from GSK, including milestone and royalty payments to us, will depend on the extent to which such licensed compounds advance through development, regulatory approval and commercialization. Additionally, GSK can choose to terminate the agreement on six months' notice or its license to any compounds at any time with no further obligation to develop and commercialize such compounds. Although we retain rights to develop and market compounds that GSK does not license or if GSK terminates the agreement or a license, we would not be eligible to receive further payments from GSK for the affected compounds and would be required to fund further development and commercialization ourselves or with other partners if we continue to pursue the product candidate.

        With respect to control over decisions and responsibilities, the agreement provides for a joint research committee to oversee the research collaboration consisting of representatives of GSK and us. Decisions regarding projects will be made on a consensus basis, except that ultimate decision-making authority with respect to the design of proof of concept trials for each research compound and determining whether proof of concept criteria have been satisfied is vested in GSK.

        If GSK does not devote sufficient resources to the research, development and commercialization of compounds identified through our research collaboration or is ineffective in doing so, our operating results will be materially and adversely affected. In particular, under the agreement, GSK is generally entitled to, either alone or with third parties, develop and commercialize compounds directed at the same targets we are working on under the agreement. If GSK independently develops compounds that compete with our compounds, it could elect to advance such compounds and not develop or commercialize our product candidates. We cannot assure you that GSK will fulfill its obligations under this agreement or develop and commercialize compounds identified by the research collaboration. If GSK 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 such compounds, enter into alternative arrangements with a third party or halt our development efforts in these areas. We could also become involved in disputes with GSK, which could lead to delays in or termination of the research collaboration or the development and commercialization of identified product candidates and time-consuming and expensive litigation or arbitration. If GSK terminates or breaches the agreement with us or otherwise does not advance the

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compounds identified by our research collaboration, our chances of successfully developing or commercializing such compounds 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 with GSK for the identification, development and commercialization of certain boron-based systemic product candidates, and we plan to establish alliances 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 depend on third-party contractors for a substantial portion of our operations and may not be able to control their work as effectively as if we performed these functions ourselves.

        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 functions including chemical synthesis, biological screening and manufacturing to a variety of different parties. Our agreements with third-party service providers and clinical research organizations are on a study-by-study basis and are typically short-term. Our agreements with chemical synthesis suppliers typically run from three months to one year. In all cases, we may terminate the agreements with notice and are responsible for the supplier's previously incurred costs.

        Because we have relied on third parties, 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

23

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, time consuming and cause delays in our development programs. We currently have a small number of employees, which limits the internal resources we have 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.

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         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 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 was issued outside of the United States and there can be no assurance that our pending patent applications will result in issued patents. As of October 2, 2007, we are the owner of record and are actively pursuing 17 U.S. patent applications (3 provisional and 14 non-provisional), 6 international (PCT) patent applications and 94 non-U.S. patent applications in 16 jurisdictions, including the European Union, Japan, Canada, Australia and Mexico. Seven U.S. patent applications, 2 international PCT applications and 55 foreign applications are related to AN0128. Seven U.S. patent applications, 5 international PCT applications and 13 foreign applications are related to AN2690. Seven U.S. patent applications, 5 international PCT applications and 13 foreign applications are related to AN2718. Six U.S. patent applications, 5 international PCT applications and 13 foreign applications are related to AN2728. 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.

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        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 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

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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 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.

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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. Additionally, our research collaboration with GSK commits us to provide a certain number of full-time equivalent employees to participate in the collaboration, which will result in a significant increase in our research and development headcount and expenses. We also share responsibility with GSK to oversee and manage the four research projects contemplated by the GSK agreement. 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;



•

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.

        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 executive officers and key employees identified in the "Management" section of this prospectus. If we lose one or more of our executive officers or key employees, our ability to implement our business strategy successfully could be seriously harmed. In August 2007, our board of directors approved the terms of a change of control and severance agreement that we will enter into with each of our executive officers and key employees as part of our retention efforts. The terms of these agreements, as well as the terms of our arrangements with our Chief Executive Officer and Chief Financial Officer, are described in the "Employment, Change of Control and Severance Agreements" section of this prospectus. Replacing executive officers and 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.

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         Failure to effectively integrate our new 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 senior management 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 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.

         Failure to make sufficient progress in building our finance infrastructure and improving our accounting systems and controls could impair our ability to comply with the financial reporting and internal controls requirements for publicly traded companies.

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

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adapting to our recently upgraded financial accounting computer systems;



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establishing written policies and procedures; and



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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 unplanned additional expenses.

        In October 2007 we entered into a facilities lease for a 36,960 square foot building consisting of office and laboratory space in Palo Alto, California, that will replace our current facility as our corporate headquarters. We expect the lease term to commence for the new facility in April 2008. 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 have to obtain necessary licenses and permits and make improvements before we can move into the new facility. 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.

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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 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:

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results of our clinical trials;



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results of clinical trials of our competitors' products;



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



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



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



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



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competition from existing products or new products that may emerge;



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



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



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



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market conditions for biopharmaceutical stocks in general; and



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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.

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         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 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 and the concurrent private placements to Schering-Plough and GSK. 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

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public offering price of $            per share and reflecting the concurrent private placements to Schering-Plough and GSK. To the extent outstanding options to purchase shares of common stock are exercised, there will be further dilution. Investors who purchase shares in this offering will contribute approximately      % of the total amount of equity capital raised by us through the date of this offering, but will only own approximately      % of the shares outstanding immediately following the completion of this offering and the two concurrent private placements. 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 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

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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.

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