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Anadys' Stock Sale Doesn't Just Dilute

A new stock offering from Anadys Pharmaceuticals isn't just dilutive to shareholders, it's disappointing to those expecting the company to land a partner for development of its hep-C drug.



) -- The dilution of a new stock offering is usually bad enough, but the selloff in

Anadys Pharmaceuticals

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on Friday was exacerbated by the perception that the San Diego-based biotech struck out with potential strategic partners.

ThinkEquity cut its rating on the stock to hold from buy following news of the $25 million equity sale, saying it thinks the shift in strategy toward raising money on its own and away from trying to establish a joint venture with or buyout by a larger drug company to develop its ANA598 treatment for hepatitis C means that Anadys had no takers on either front.

"We believe that raising a quarter of the company's market cap to move ANA598 into a Phase 2b trial makes no sense for shareholder value if there were any serious potential acquirers on the other side of the table," the firm said.

The stock finished down nearly 16% at $1.75. Volume of roughly 4.2 million exceeded 30 times the issue's three-month trailing daily average of around 128,000. The session's low of $1.63 is a new 52-week nadir for the stock, which has also dipped meaningfully below both its 50- and 200-day moving averages of $1.96 and $2.21 respectively.

After Thursday's closing bell, Anadys disclosed plans for the stock sale, saying it would use the proceeds to support the next trial of ANA598, which is slated to begin early in the first quarter of 2011, and for general corporate purposes, including working capital. This morning, the company announced the pricing on the offering, selling roughly 13.9 million shares at $1.80 each, a 13% discount to Thursday's close at $2.08. The deal also includes an over-allotment option for the sale of an additional 2.1 million shares.

Wedbush Morgan was already neutral on the stock ahead of the offering news, and it remained so after it. The firm, which also stuck with a 12-month price target of $4 on the stock, offered a few scenarios on why Anadys went this route, including the lack of a willing partner.

"We speculate that the equity offering, as opposed to consummating a strategic transaction, may be a result of (1) lukewarm reception from the industry on ANA598 for a deal; (2) renewed interest in an oral interferon approach; (3) Anadys being enabled to conduct combination studies with its own candidates, as opposed to having to be dependent on a transaction to advance the pipeline," Wedbush wrote.

The firm estimated elsewhere in its note that the funds raised should be enough to sustain operations through mid-2012, and said its thesis on the stock assumes ANA598 has the potential for peak sales of $970 million as part of a combination with a larger partner with Anadys getting royalties of 20%. Wedbush puts the probability of ANA598 reaching the market at 55%.

Unsurprisingly, the tone of ThinkEquity's note is much harsher, as the firm not only downgraded the stock, it cut its price target to $2 from $7, noting that Anadys's inability to stir up interest in ANA598 is especially disturbing given how much industry interest there's been in hepatitis C programs of late, as illustrated by

Roche Holdings's

deal for the rights to danoprevir with



earlier this month, and

Bristol-Myers Squibb's

(BMY) - Get Report

agreement to acquire


TICKER TYPE="EQUITY" SYMBOL="ZYGO"/> in early September.

"We have always believed that the lack of interest by Wall Street did not reflect a lack of interest by big pharma," ThinkEquity said. "However since Anadys has come back to the capital markets for a financing, we can only conclude that our thesis was incorrect and that the pharma world is actually less interested in ANA598 than the public markets."

Talks will apparently continue about strategic deals, but barring a change in the market's attitude, Anadys could be dead money for a while with 24-week response and safety results from the Phase 2b trial of ANA598 not expected to surface until the fourth quarter of 2011, according to ThinkEquity.

The lone potential catalyst for the stock in the near term could be additional results from the phase 2a trial of the drug, which are due in the current fourth quarter. Noble Financial, which maintained its buy rating but cut its 12-month price target on the stock to $3.50 from $5 on Friday, said there's still a possibility for a partnership to surface if the data is strong enough, and it's hopeful it will be.

"The antiviral data presented so far is encouraging and in our view improves the outlook for potential partnerships," Noble said in its note.

The next dates worth paying attention to for Anadys believers will be the company's release of its third-quarter results on Oct. 25, and the American Association Study of Liver Disease meeting taking place from Oct. 29-Nov.2, where Noble thinks the next batch of phase 2a data could surface.


Written by Michael Baron in New York.

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