Updated from 11:49 a.m. EDT

Anadys Pharmaceuticals ( ANDS) released new data on its lead hepatitis C drug Thursday demonstrating the drug's antiviral activity at three different doses, but patient dropouts due to rash raised concerns about the drug's safety and sent Anadys shares tumbling.

Anadys owns full rights to its drug ANA598 but wants to attract one of the larger drug companies involved in hepatitis C for a partnership or outright acquisition. The company has already shared the new data on ANA598 made public Thursday with prospective suitors under confidentiality agreements.

In the phase 1b study of 35 patients with hepatitis C, three days of treatment with ANA598 resulted in a median viral load reduction of greater than 2 log, or more than 99%, at all three dose levels tested, the company said.

Biotech Select

At the lowest dose, 200 mg twice daily, treatment with ANA598 resulted in a median 2.4-log reduction in the hepatitis C viral load. At the 400 mg twice-daily dose, the median viral load reduction was 2.3 log; while at 800 mg twice daily, the median viral load reduction was 2.9 log. None of the patients receiving placebo in the study reported significant reductions in viral load, by comparison.

Patients in the study with the genotype 1b form of hepatitis C reported a greater decrease in viral load across all three doses of ANA598 compared to patients with the genotype 1a form of the disease. Genotype 1b is the most common subtype of hepatitis C found in North America and Europe.

But three healthy volunteers treated with ANA598 in a separate 14-day safety study developed a rash severe enough to cause them to discontinue treatment and drop out of the study. Investors Thursday were more worried about this potential safety issue than the drug's efficacy, which is why Anadys shares are falling.

The final results of this phase Ib study of ANA598 were presented Thursday at the annual meeting of the European Association of the Study of the Liver, which began today in Copenhagen, Denmark. Anadys released initial data from this study in January.

Companies like Anadys first conduct brief studies in small numbers of patients to quickly demonstrate a drug's safety and ability to quickly tamp down the virus that causes hepatitis C.

Only if an experimental drug passes this initial test does a company then advance to longer and bigger studies in which the drug being developed is usually combined with existing hepatitis C therapies.

Just such a combination phase II study of ANA598 with the current standard of care in hepatitis C will be ready to begin in the middle of the year, the company said.

ANA598 is what is known as a non-nucleoside polymerase inhibitor. These drugs act directly against specific enzymes to prevent the hepatitis C virus from making copies of itself. That's different from current treatments for hepatitis C, namely long-acting forms of interferon and a drug called ribavirin, which work by stimulating the body's immune system to destroy the virus.

Pfizer ( PFE), Vertex Pharmaceuticals ( VRTX) and Merck> ( MRK) also are working on non-nucleoside polymerase inhibitors for hepatitis C.

The future in hepatitis C treatment is moving toward combinations of direct antivirals, in much the same way that HIV patients are treated today. A drug like ANA598, therefore, may be valuable to a larger drug company that can combine it with another drug already in clinical trials.

Anadys ended the first quarter with about $20 million in cash, which based on its burn rate is enough to last another two or three quarters. Anadys, therefore, needs to come to an agreement on a partnership and/or acquisition relatively quickly or face having to raise more money in the public equity markets.

In the coming days at the EASL conference, companies like Pharmasset ( VRUS), InterMune> ( ITMN), Johnson & Johnson ( JNJ) and Vertex will be presenting new data on their respective hepatitis C drug candidates.

Anadys shares were down 35.5% to $3.80 in recent trading.

At the time of publication, Feuerstein's Biotech Select model portfolio was long Vertex.

Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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