10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 001-34973

Anacor Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	25-1854385
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

1020 East Meadow Circle

Palo Alto, California 94303-4230

(Address of Principal Executive Offices) (Zip Code)

(650) 543-7500

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

As of August 4, 2014, there were 41,995,593 shares of the registrant’s common stock outstanding.

Table of Contents

Anacor Pharmaceuticals, Inc.

Form 10-Q

Index

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013	4
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2014 and 2013	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	31
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 6.	Exhibits	59
Signatures		60

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Anacor Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In Thousands)

	June 30,			December 31,
	2014			2013 (1)
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	19,962		$	114,755
Short-term investments	106,445			35,574
Restricted investments, short-term	1,294			1,475
Contract receivables	856			1,324
Prepaid expenses and other current assets	2,770			2,286
Total current assets	131,327			155,414
Long-term investments	215			11,856
Restricted investments, long-term	2,616			3,155
Property and equipment, net	1,588			1,458
Other assets	1,885			282
Total assets	$	137,631		$	172,165
Liabilities, redeemable common stock and stockholders’ equity
Current liabilities:
Accounts payable	$	5,224		$	4,708
Accrued liabilities	12,349			8,431
Income taxes payable	—			1,706
Notes payable	4,479			—
Deferred revenue	496			1,115
Deferred rent	294			269
Total current liabilities	22,842			16,229
Notes payable, less current portion	23,972			28,018
Deferred revenue, less current portion	149			315
Deferred rent, less current portion	1,066			1,219
Commitments and contingencies
Redeemable common stock	4,952			4,952
Stockholders’ equity:
Preferred stock	—			—
Common stock	41			41
Additional paid-in capital	260,694			251,839
Accumulated other comprehensive income (loss)	41			(2		)
Accumulated deficit	(176,126		)	(130,446		)
Total stockholders’ equity	84,650			121,432
Total liabilities, redeemable common stock and stockholders’ equity	$	137,631		$	172,165

(1) Derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

See accompanying notes.

3

Anacor Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(In Thousands, Except Share and Per Share Data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(unaudited)						(unaudited)
Revenues:
Contract revenue	$	2,931		$	3,424		$	7,089		$	5,132
Total revenues	2,931			3,424			7,089			5,132
Operating expenses:
Research and development	19,261			10,146			35,196			21,305
General and administrative	7,095			5,086			15,423			9,802
Total operating expenses	26,356			15,232			50,619			31,107
Loss from operations	(23,425		)	(11,808		)	(43,530		)	(25,975		)
Interest income	59			14			123			28
Interest expense	(1,100		)	(903		)	(2,189		)	(1,814		)
Loss on early extinguishment of debt	—			(1,381		)	—			(1,381		)
Other expense	(42		)	(18		)	(84		)	(32		)
Net loss	$	(24,508	)	$	(14,096	)	$	(45,680	)	$	(29,174	)
Net loss per share — basic and diluted	$	(0.58	)	$	(0.36	)	$	(1.09	)	$	(0.78	)
Weighted-average number of shares used in calculating net loss per share — basic and diluted	41,921,329			39,273,330			41,830,803			37,569,275

See accompanying notes.

4

Anacor Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In Thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(unaudited)						(unaudited)
Net loss	$	(24,508	)	$	(14,096	)	$	(45,680	)	$	(29,174	)
Change in unrealized gain (loss) on investments	21			(11		)	44			(9		)
Comprehensive loss	$	(24,487	)	$	(14,107	)	$	(45,636	)	$	(29,183	)

See accompanying notes.

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Anacor Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(In Thousands)

	Six Months Ended June 30,
	2014			2013
	(unaudited)
Operating activities
Net loss	$	(45,680	)	$	(29,174	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	228			273
Amortization of debt discount and debt issuance costs	516			337
Stock-based compensation	7,927			2,014
Amortization of premium on investments	564			215
Accrual of final payment on notes payable	—			318
Noncash loss on early extinguishment of debt	—			1,175
Changes in assets and liabilities:
Contract receivables	468			(267		)
Prepaid and other current assets	(492		)	99
Other assets	(1,678		)	(281		)
Accounts payable	516			1,781
Accrued liabilities	3,918			(1,291		)
Income taxes payable	(1,706		)	—
Deferred revenue	(785		)	684
Deferred rent	(128		)	81
Net cash used in operating activities	(36,332		)	(24,036		)
Investing activities
Transfers from (to) restricted investments, net	719			(5,092		)
Purchases of investments	(109,352		)	(32,886		)
Maturities of investments	49,603			29,337
Acquisition of property and equipment	(358		)	(52		)
Net cash used in investing activities	(59,388		)	(8,693		)
Financing activities
Proceeds from the sale of redeemable common stock, net of issuance costs	—			4,952
Proceeds from the sale of common stock, net of issuance costs	—			22,607
Proceeds from issuance of notes payable	—			30,000
Principal payments on notes payable	—			(25,716		)
Final payment on notes payable	—			(1,650		)
Payment of financing fee, debt issuance costs and loan fees	—			(877		)
Proceeds from employee stock plan purchases and the exercise of stock options by employees and nonemployee advisors	927			393
Net cash provided by financing activities	927			29,709
Net decrease in cash and cash equivalents	(94,793		)	(3,020		)
Cash and cash equivalents at beginning of period	114,755			10,335
Cash and cash equivalents at end of period	$	19,962		$	7,315
Supplemental disclosure of cash flow information
Cash paid for interest, including final payment on notes payable	$	1,767		$	3,018
Supplemental disclosure of noncash financing activities
Fair value of warrants to purchase common stock issued in connection with notes payable	$	—		$	1,815

See accompanying notes.

6

Anacor Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. The Company

Nature of Operation

Anacor Pharmaceuticals, Inc. (the Company) is a biopharmaceutical company focused on discovering, developing and commercializing novel small-molecule therapeutics derived from its boron chemistry platform. The Company’s first approved drug, KERYDINTM (tavaborole) topical solution, 5% (formerly known as AN2690), is an oxaborole antifungal approved by the U.S. Food and Drug Administration (FDA) in July 2014 for the topical treatment of onychomycosis of the toenails. The Company’s lead product candidate is AN2728, an investigational anti-inflammatory PDE-4 inhibitor in development for the potential treatment of mild-to-moderate atopic dermatitis and psoriasis. The Company initiated Phase 3 studies of AN2728 for the treatment of mild-to-moderate atopic dermatitis in the first quarter of 2014. In addition to KERYDIN and AN2728, the Company has discovered, synthesized and is developing six molecules. These include three wholly-owned investigational product candidates. AN2718 is an investigational topical antifungal, AN2898 is a backup compound to AN2728 and AN3365 (formerly referred to as GSK2251052, or GSK ‘052) is an investigational antibiotic for the potential treatment of infections caused by Gram-negative bacteria, which previously was licensed to GlaxoSmithKline LLC (GSK). In October 2012, GSK advised the Company that it had discontinued further development of AN3365 and substantially all rights to this compound reverted to the Company. The Company is currently considering its options for further development, if any, of AN3365. The Company has also discovered three other investigational compounds that it has out-licensed for further development. The first compound is licensed to Eli Lilly and Company (Lilly) for the potential treatment of an animal health indication.  The second compound, AN5568, also referred to as SCYX-7158, is licensed to Drugs for Neglected Diseases initiative (DNDi) for the potential treatment of human African trypanosomiasis (HAT, or sleeping sickness) and the third compound is licensed to GSK for development in tuberculosis (TB). The Company also has a pipeline of other internally discovered topical and systemic boron-based compounds in earlier stages of research and pre-clinical development.

Since inception, the Company has not generated revenue from product sales and, as of June 30, 2014, has an accumulated deficit of $176.1 million. The Company may require additional capital to fund research and development activities, including clinical trials for its development programs and preclinical activities for its product candidates. While management believes that the Company’s existing capital resources, together with the payments it is expected to receive based on sales of KERYDIN under the Sandoz Agreement (as defined below), will be sufficient to meet its anticipated operating requirements for at least the next twelve months, the Company may also elect to finance its future cash needs through public or private equity offerings, debt financings or licensing, collaboration or other similar arrangements, or a combination of these sources.

2. Summary of Significant Accounting Policies

Interim Financial Information

The accompanying condensed consolidated financial statements as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the results included in the condensed consolidated financial statements for the interim periods presented. The December 31, 2013 balance sheet is derived from the audited financial statements for the year ended December 31, 2013 but does not include all the disclosures necessary for audited financial statements. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to the three and six month periods are unaudited. The results for the three and six months ended June 30, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014 or for any other interim period or for any future year.

These condensed consolidated financial statements follow the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (GAAP) for annual periods can be condensed or omitted. For more complete financial information, these condensed consolidated financial statements, and the notes hereto, should be read in conjunction with the audited financial statements for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 17, 2014.

The Company’s significant accounting policies are more fully described in Note 2 of the notes to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Anacor IP Holdings, Ltd., which was incorporated in the Cayman Islands on October 1, 2013. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the condensed consolidated financial statements in accordance with U.S. GAAP requires the Company to make estimates and judgments in certain circumstances that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. In preparing these condensed consolidated financial statements, management has made its best estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, fair values of financial instruments in which it invests, income taxes, preclinical study and clinical trial accruals, accrued compensation, stock compensation and other contingencies. Management bases its estimates on historical experience or on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from these estimates.

Cash and Cash Equivalents, Short-Term Investments, Long-Term Investments and Restricted Investments

The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash and cash equivalents. Unless restricted, investments with a maturity date of more than three months, but less than twelve months, from the date of purchase are considered short-term investments and are classified as current assets. Long-term investments have contractual maturities at the date of purchase of over one but less than two years and are classified as noncurrent assets until such time as the time to maturity becomes one year or less, at which time they are reclassified to short-term investments. The Company’s investments in marketable securities are classified as available for sale (see Note 3). Securities available for sale are carried at estimated fair value, with unrealized gains and losses reported as part of accumulated other comprehensive income or loss, a separate component of stockholders’ equity. The Company has estimated the fair value amounts by using available market information. The cost of available for sale securities sold is based on the specific-identification method. Restricted investments are classified as a current or noncurrent asset based upon the terms of the relevant contract and, in some cases, management’s estimate of when the restrictions will be eliminated.

Under its facility lease agreements, the Company is required to deliver letters of credit securing the performance of its obligations thereunder. As of both June 30, 2014 and December 31, 2013, these letters of credit were secured by approximately $0.2 million of long-term restricted investments.

Fair Value of Financial Instruments

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, short-term investments, restricted investments, contract receivables and accounts payable, approximate their fair value due to their short maturities.  Based on the borrowing rates available to the Company for loans with similar terms and average maturities, the carrying value of the Company’s long-term notes payable approximate their fair values at June 30, 2014 and December 31, 2013.

Fair value is considered to be the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on or derived from observable market prices or other observable inputs. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments, long-term investments and restricted investments. Substantially all the Company’s cash and cash equivalents, short-term investments, long-term investments and restricted investments are held by two financial institutions that management believes are of high credit quality. Such deposits may, at times, exceed federally insured limits. At June 30, 2014 and December 31, 2013, approximately 60% and 93%, respectively, of the cash and cash equivalents were held in a money market fund invested in U.S. Treasuries, securities guaranteed as to principal and interest by the U.S. government and repurchase agreements in respect of such securities. At June 30, 2014 and December 31, 2013, approximately 90% and 100%, respectively, of the Company’s short-term investments, long-term investments and restricted investments were held in securities guaranteed as to principal and interest by the U.S. government. The Company has not experienced any losses on its deposits of cash and cash equivalents, short-term investments, long-term investments and restricted investments and management believes that its guidelines for investment of its excess cash maintain safety and liquidity through diversification and investment maturity.

8

Customer Concentration

For the three and six month periods ended June 30, 2014, the Company’s revenues consisted primarily of contract revenues from a research agreement with The Bill and Melinda Gates Foundation (Gates Foundation), a contract with the United States Department of Defense, Defense Threat Reduction Agency (DTRA) and a collaboration agreement with Lilly. For the three and six month periods ended June 30, 2013, the Company also recognized contract revenues from its collaboration with GSK and from a subcontract with a research institution, each of which accounted for 10% or more of its total revenues during one of those periods. Collaborators, including GSK and Lilly, have accounted for significant revenues in the past and may not provide contract revenues in the future under existing agreements and/or new collaboration agreements, which may have a material effect on the Company’s operating results.

The following table shows the percentage of revenues attributable to contracts that accounted for 10% or more of total revenues in the specified periods:

	Three Months Ended June 30,		Six Months Ended June 30,
	2014	2013	2014	2013
	(unaudited)		(unaudited)
Gates Foundation	55%	38%	46%	25%
Lilly	*	28%	18%	40%
DTRA	30%	—	26%	—
GSK	*	*	*	13%
Research Institution	—	10%	*	*

*    less than 10% of total revenue

Contract Receivables

At June 30, 2014 and December 31, 2013, the Company’s contract receivables included $0.6 million and $0.5 million, respectively, due from DTRA (see Note 7), less than $0.1 million and $0.7 million, respectively, due from GSK (see Note 7) and $0.3 million and $0.1 million, respectively, due from other contracts.

The Company’s contract receivables are primarily composed of amounts due under research agreements and government contracts and the Company believes that the credit risks associated with these parties are not significant. During the three and six months ended June 30, 2014, the Company has not written-off any contract receivables and, accordingly, does not have an allowance for doubtful accounts as of June 30, 2014.

Revenue Recognition

For the three and six month periods ended June 30, 2014, the Company’s contract revenues were generated primarily through research and development collaboration agreements, which typically may include non-refundable, non-creditable upfront fees, funding for research and development efforts, payments for achievement of specified development, regulatory and sales goals and royalties on product sales of licensed products.

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

For arrangements with multiple deliverables, the Company evaluates each deliverable to determine whether it qualifies as a separate unit of accounting. This determination is generally based on whether the deliverable has stand-alone value to the customer. The selling price used for each unit of accounting will be based on vendor-specific objective evidence, if available, third party evidence if vendor-specific objective evidence is not available or estimated selling price if neither vendor-specific nor third party evidence is available. Management may be required to exercise considerable judgment in determining whether a deliverable is a separate unit of accounting and in estimating the selling prices of identified units of accounting for new agreements. Where multiple deliverables are combined as a single unit of accounting, revenues are recognized based on the performance requirements of the related agreement.

Upfront payments for licensing the Company’s intellectual property are evaluated to determine if the licensee can obtain stand-alone value from the license separate from the value of the research and development services to be provided by the Company. Typically, the Company has determined that the licenses it has granted to collaborators do not have stand-alone value separate from the value of the research and development services provided. As such, upfront payments are recorded as deferred revenue in the

9

condensed consolidated balance sheets and are recognized as contract revenue ratably over the contractual or estimated performance period that is consistent with the term of the research and development obligations contained in the research and development collaboration agreement. When stand-alone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property rights are issued.

Some arrangements involving the licensing of the Company’s intellectual property, the provision of research and development services or both may also include exclusivity clauses whereby the Company agrees that, for a specified period of time, it will not conduct further research on licensed compounds or on compounds that would compete with licensed compounds or that it will do so only on a limited basis. Such provisions may also restrict the future development or commercialization of such compounds. The Company does not treat such exclusivity clauses as a separate element within an arrangement and any upfront payments received related to the exclusivity clause would be allocated to the identified elements in the arrangement and recognized as described in the preceding paragraph.

Payments resulting from the Company’s efforts under research and development agreements or government grants are recognized as the activities are performed and are presented on a gross basis. Revenue is recorded gross because the Company acts as a principal, with discretion to choose suppliers, bears credit risk and performs part of the services. The costs associated with these activities are reflected as a component of research and development expense in the condensed consolidated statements of operations and the revenues recognized from such activities approximate these costs.

For certain contingent payments under research or development arrangements, the Company recognizes revenue using the milestone method. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can be achieved based in whole or in part on either the Company’s performance or on the occurrence of a specific outcome resulting from the Company’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the Company. The determination that a milestone is substantive requires estimation and judgment and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is (i) commensurate with either the Company’s performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverables and payment terms in the arrangement. In making the determination as to whether a milestone is substantive or not, management of the Company considers all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether any portion of the milestone consideration is related to future performance or deliverables.

Other contingent payments received for which payment is either contingent solely upon the passage of time or the results of a collaborative partner’s performance (bonus payments) are not accounted for using the milestone method. Such bonus payments will be recognized as revenue when earned and when collectibility is reasonably assured.

Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectibility is reasonably assured. As of June 30, 2014, none of the Company’s products had been approved and therefore the Company had not earned any royalty revenue from product sales as of such date.

Preclinical Study and Clinical Trial Accruals and Deferred Advance Payments

The Company estimates preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct these activities on its behalf. In recording service fees, the Company estimates the time period over which the related services will be performed and compares the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services and, as appropriate, accrues additional service fees or defers any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust its accrual or deferred advance payment accordingly. If the Company later determines that it no longer expects the services associated with a deferred non-refundable advance payment to be rendered, the deferred advance payment will be charged to expense in the period that such determination is made.

10

Stock-Based Compensation

Employee stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period). Stock option awards granted to the Company’s nonemployee directors for their board-related services are included in employee stock-based compensation in accordance with current accounting standards. The Company uses the Black-Scholes option-pricing model to estimate the fair value of its time-based vesting stock option awards and uses the straight-line (single-option) method for expense attribution. The Company uses a Monte Carlo valuation method to estimate the fair value of its market-based vesting performance stock option and restricted stock unit awards. The Company estimates forfeitures and recognizes expense only for those shares expected to vest.

The Company accounts for equity instruments issued to nonemployees based on their fair values on the measurement dates using the Black-Scholes option-pricing model. The fair values of the options granted to nonemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options that vest in any given reporting period is affected by changes in the fair value of the Company’s common stock during that period.

Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares outstanding during the period, without consideration for potentially dilutive shares. Diluted net loss per share includes the effect of all potential shares, consisting of stock options (including performance stock options), restricted stock units (including performance restricted stock units) and warrants outstanding for the period, determined using the treasury-stock method. For purposes of this calculation, potentially dilutive securities consisting of stock options, restricted stock units and warrants are considered to be potential shares and, for each period presented in these financial statements, are excluded in the calculation of diluted net loss per share because their effect would be antidilutive. The following table presents the calculation of basic and diluted net loss per share (in thousands, except share and per share data):

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(unaudited)						(unaudited)
Net loss per share:
Numerator:
Net loss	$	(24,508	)	$	(14,096	)	$	(45,680	)	$	(29,174	)
Denominator:
Weighted-average number of shares used in calculating net loss per share—basic and diluted	41,921,329			39,273,330			41,830,803			37,569,275
Net loss per share—basic and diluted	$	(0.58	)	$	(0.36	)	$	(1.09	)	$	(0.78	)
Outstanding securities at period end not included in the computation of diluted net loss per share as they had an anti-dilutive effect:
Common stock options and restricted stock units	6,273,923			5,056,549			6,273,923			5,056,549
Warrants to purchase common stock	125,206			980,072			125,206			980,072
	6,399,129			6,036,621			6,399,129			6,036,621

Recent Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board (FASB) issued a new accounting standard on accounting for share-based payments for performance-based stock awards, which will require that a performance target that affects vesting and that could be achieved after the required service period be treated as a performance condition. The Company does not currently have any performance-based stock awards that meet these conditions. The updated standard becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company is currently evaluating the effect that the updated standard will have on the Company’s consolidated financial statements.

In May 2014, the FASB issued a new accounting standard on revenue from contracts with customers, which will require the Company to recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The updated standard will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective and will permit the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The updated standard becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the Company’s consolidated financial statements and related disclosures.

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In July 2013, a new accounting standard was issued that requires the netting of unrecognized tax benefits against a deferred tax asset for a net operating loss carryforward or other carryforward that would apply in the settlement of uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction net operating loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company adopted this guidance as of January 1, 2014 and its adoption did not have an effect on the Company’s financial statements.

3. Marketable Securities and Fair Value Measurements

The following tables summarize the estimated fair values of the Company’s financial assets measured on a recurring basis as of the dates indicated below. Such financial assets are comprised solely of available for sale securities with remaining contractual maturities of less than two years.

The input levels used in the fair value measurements, the amortized cost and fair value of marketable securities, with gross unrealized gains and losses, were as follows (in thousands and unaudited):

June 30, 2014	Input Level	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Money market fund	Level 1	$	12,061	$	—	$	—		$	12,061
Federal agency securities	Level 2	99,557		36		—			99,593
Commercial paper	Level 2	11,893		6		—			11,899
Corporate debt securities	Level 2	6,757		—		(1		)	6,756
Total available for sale securities		$	130,268	$	42	$	(1	)	$	130,309
Classified as:
Cash and cash equivalents									$	19,961
Short-term investments									106,445
Restricted investments, short-term									1,294
Long-term investments									215
Restricted investments, long-term									2,394
Total available for sale securities									$	130,309

December 31, 2013	Input Level	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Money market fund	Level 1	$	107,253	$	—	$	—		$	107,253
Federal agency securities	Level 2	59, 341		2		(4		)	59,339
Total available for sale securities		$	166,594	$	2	$	(4	)	$	166,592
Classified as:
Cash and cash equivalents									$	114,755
Short-term investments									35,574
Restricted investments, short-term									1,475
Long-term investments									11,856
Restricted investments, long-term									2,932
Total available for sale securities									$	166,592

All cash equivalents, short-term investments and short-term restricted investments held at June 30, 2014 and December 31, 2013 had maturities as of these dates of less than one year. Long-term investments and long-term restricted investments had maturities as of these dates of more than one but less than two years.

None of the available for sale securities held as of June 30, 2014 have been in a continuous unrealized loss position for more than one year. As of June 30, 2014, unrealized losses on available for sale investments are not attributed to credit risk and are considered to be temporary. The Company believes that it is more-likely-than-not that investments in an unrealized loss position will be held until maturity or the recovery of the cost basis of the investment. To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.

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Management of the Company does not intend to sell these securities and believes that it will be able to hold these securities to maturity and recover their amortized cost bases. There were no realized gains or losses recognized from the sale of marketable securities for the three and six months ended June 30, 2014 and 2013.

In measuring fair value, the Company evaluates valuation techniques such as the market approach, the income approach and the cost approach. A three-level valuation hierarchy, which prioritizes the inputs to valuation techniques that are used to measure fair value, is based upon whether such inputs are observable or unobservable.

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

·Level 1—Observable inputs such as quoted prices (unadjusted) for identical instruments in active markets at the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis;

·Level 2—Observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations whose significant inputs are either directly or indirectly observable; and

·Level 3—Unobservable inputs that reflect management’s assumptions and best estimates of inputs that market participants would use in pricing the asset or liability at the reporting date.

During the three and six months ended June 30, 2014 and June 30, 2013, there were no transfers between Level 1 and Level 2 financial assets. At June 30, 2014 and December 31, 2013, the Company utilized the market approach to measure fair value for its marketable securities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable instruments. The fair values of the money market fund (Level 1) were based on quoted market prices in an active market. Federal agency securities, commercial paper and corporate debt securities (Level 2) are valued using third party pricing sources that apply applicable inputs and other relevant data, such as quoted prices, interest rates and yield curves, into their models to estimate fair value.

4. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	June 30, 2014		December 31, 2013
	(unaudited)
Accrued compensation	$	2,867	$	3,321
Accrued preclinical study and clinical trial costs	7,062		2,799
Other	2,420		2,311
Total accrued liabilities	$	12,349	$	8,431

5. Commitments and Contingencies

Indemnifications

The Company, as permitted under Delaware law and in accordance with its bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is equal to the officer’s or director’s lifetime.

The maximum amount of potential future indemnification is unlimited; however, the Company currently holds director and officer liability insurance. This insurance limits the Company’s exposure and may enable it to recover a portion of any future amounts paid. The Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations for any period presented.

The Company has certain agreements with contract research organizations and other parties with which it does business that contain indemnification provisions pursuant to which the Company typically agrees to indemnify the party against certain types of third party claims. The Company accrues for known indemnification claims when a loss is probable and can be reasonably estimated. The Company would also accrue for estimated incurred but unidentified indemnification claims based on historical activity. There were no accruals for or expenses related to indemnification claims for any period presented.

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Legal Proceedings

The Company is not a party to any material legal proceedings at this time. From time to time, the Company may be involved in litigation relating to claims arising out of its ordinary course of business.

6. Notes Payable

On June 7, 2013, the Company entered into a loan and security agreement (the Loan Agreement) with Hercules Technology Growth Capital, Inc. as collateral agent and a lender and Hercules Technology III, L.P. as a lender (the lenders, or together Hercules), providing for loans to the Company of up to $45.0 million in three tranches of $30.0 million, $10.0 million and $5.0 million.

The first $30.0 million tranche was drawn at the closing of the transaction, at which time the Company repaid $22.6 million in remaining obligations associated with its previous loan. The Company elected not to draw the second tranche of $10.0 million, which was available to the Company from the closing date of the Loan Agreement until December 5, 2013. The Company also elected not to draw the third tranche of $5.0 million, which was available to the Company from the date of FDA approval of KERYDIN until August 6, 2014. The interest rate applicable to the loans outstanding under the Loan Agreement is a variable rate based upon the greater of either (i) 11.65% and (ii) the sum of (a) the Prime Rate (as defined in the Loan Agreement) as reported in The Wall Street Journal minus 5.25%, plus (b) 11.65%; with a maximum interest rate of 14.90%. As a result of the FDA’s approval of KERYDIN in July 2014 (see Note 10), the end of the interest only period for payments under the Loan Agreement was automatically extended from January 1, 2015 to July 1, 2015. Equal monthly payments of principal and interest will begin at that time and continue through the scheduled maturity date of July 1, 2017.

The Company has paid Hercules financing and amendment fees of $0.6 million and incurred other debt issuance costs, including legal fees, of $0.5 million in connection with the Loan Agreement. These fees are being accounted for as a debt discount and deferred debt issuance costs, respectively. In addition, if the Company repays all or a portion of the loan prior to maturity, it will pay Hercules a prepayment penalty fee, based on a percentage of the then outstanding principal balance, equal to 2% if the prepayment occurs prior to June 7, 2015 or 1% if the prepayment occurs after such date but prior to July 1, 2017.

The Loan Agreement includes customary affirmative and restrictive covenants, and was amended in December 2013 to include a liquidity covenant requiring the Company to maintain certain minimum balances in its United States bank and investment accounts while at the same time increasing the amount of investments the Company is permitted to make in its foreign subsidiaries. The Loan Agreement also includes standard events of default, including payment defaults, breaches of covenants following any applicable cure period, a material impairment in the perfection or priority of Hercules’ security interest in or the value of the collateral and a material impairment of the prospect of repayment of the Company’s obligations under the Loan Agreement.

Upon the occurrence and during the continuance of an event of default, a default interest rate of an additional 5% applies to the outstanding loan balances, and Hercules may declare all outstanding obligations immediately due and payable and take such other actions as are set forth in the Loan Agreement.

The Company’s obligations under the Loan Agreement are secured by substantially all of the assets of the Company except intellectual property. The Company’s intellectual and other property is subject to certain negative pledge and other restrictions set forth in the Loan Agreement, subject to certain exceptions.

In connection with the Loan Agreement, the Company issued warrants to Hercules to purchase 528,375 shares of the Company’s common stock at an exercise price of $5.11 per share (the Warrants).

The fair value of the warrants issued was approximately $1.8 million and was calculated using a Black-Scholes valuation model with assumptions based upon observed risk-free interest rates appropriate for the expected term of the warrants; expected volatility based on the average historical volatilities of a peer group of publicly-traded companies within the Company’s industry; expected term equal to the contractual life of the warrants; and a dividend yield of 0%. The Company recorded a debt discount of $1.8 million in connection with the issuance of the Warrants.

The Warrants were net exercised on a cashless basis in December 2013, resulting in the issuance of 361,995 shares of the Company’s common stock to Hercules. The par value of the shares issued was reclassified from additional paid-in capital to common stock.

The interest on the loans outstanding under the Loan Agreement is calculated using the interest method with the debt issuance costs paid directly to Hercules (financing, amendment and legal fees) and the fair value of the warrants issued to Hercules treated as a discount on the debt. The Company’s debt issuance costs for legal fees and other debt-related expenses are included as prepaid expenses and other current assets and as other assets in the condensed consolidated balance sheet. The amortization of the debt discount is recorded as a noncash interest expense and the amortization of the debt issuance costs is recorded as other expense in the condensed consolidated statements of operations.

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In June 2013, the Company recorded a loss of approximately $1.4 million on the early extinguishment of its previous loan facility. This loss was recorded as a loss on early extinguishment of debt in the condensed consolidated statements of operations for the three and six months ended June 30, 2013.

Future payments as of June 30, 2014, prior to the extension of the interest only period, are as follows (in thousands):

Year ending December 31,	(unaudited)
Remainder of 2014	$	1,776
2015	13,890
2016	13,890
2017	7,029
Total minimum payments	36,585
Less amount representing interest	(6,585		)
Notes payable, gross	30,000
Unamortized discount on notes payable	(1,549		)
	28,451
Less current portion of notes payable, including unamortized discount	(4,479		)
Notes payable, less current portion	$	23,972

The Company recorded interest expense related to all borrowings of $1.1 million and $0.9 million for the three months ended June 30, 2014 and 2013, respectively, and $2.2 million and $1.8 million for the six months ended June 30, 2014 and 2013,  respectively. Included in interest expense for these periods was $0.2 million and $0.2 million, respectively, for the three months ended June 30, 2014 and 2013, and $0.4 million and $0.3 million, respectively, for the six months ended June 30, 2014 and 2013, for the amortization of the financing fees and debt discounts. The annual effective interest rate on amounts borrowed under the Loan Agreement, including the amortization of the debt discounts, is 16.56%.

7. License, Research, Development and Commercialization Agreements

DTRA

On October 16, 2013, the Company entered into a research agreement with DTRA to design and discover new classes of systemic antibiotics. A drug discovery consortium formed by the Company, Colorado State University and the University of California at Berkeley is conducting the research over a period of up to three and a half years. The work is funded by an award of up to $13.5 million from DTRA’s R&D Innovation and Systems Engineering Office, which was established to search for and execute strategic investments in innovative technologies for combating weapons of mass destruction. Under this award, the Company will apply its boron chemistry to discover rationally designed novel antibiotics that target DTRA-priority pathogens known to exhibit resistance to existing antibiotics. The award is available to the consortium to fund $2.7 million of research reimbursements for the eleven month period through September 15, 2014, with an additional $5.0 million and $5.7 million becoming available subject to the exercise by DTRA of options to fund the research for subsequent twelve and nineteen month periods, respectively. In August 2014, DTRA exercised the first option to fund the twelve month research extension.

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Revenues recognized under the research agreement were as follows (in thousands):

	Three Months Ended June 30,		Six Months Ended June 30,
	2014		2014
	(unaudited)
Contract revenue:
Research and development funding	$	887	$	1,855
Total contract revenue	$	887	$	1,855

Gates Foundation

On April 5, 2013, the Company entered into a research agreement with the Gates Foundation to discover drug candidates intended to treat two filarial worm diseases (onchocerciasis, or river blindness, and lymphatic filariasis, commonly known as elephantiasis) and tuberculosis (TB) (the Gates Research Agreement). Under the Gates Research Agreement, the Gates Foundation will pay the Company up to $17.7 million over a three-year research term (the Research Funding) to conduct research activities directed at discovering potential neglected disease drug candidates in accordance with an agreed upon research plan. As part of the funded research activities, the Company is also responsible for creating, during the first 18 months following execution of the Gates Research Agreement, an expanded library of boron compounds to screen for additional potential drug candidates to treat neglected diseases (the Library). Once the Library is completed, the Company is responsible for storing the Library compounds and making them accessible to the Gates Foundation and other parties to which the Gates Foundation grants access (the Library Access Services) for the subsequent five-year period.

Upon signing the Gates Research Agreement, the Company received an advance payment of $1.75 million of Research Funding (the Advance Funds). These Advance Funds are replenished by the Gates Foundation each quarter following the Company’s submission of a quarterly report of the expenses incurred for the research activities conducted in the prior quarter. In addition, the Gates Foundation paid the Company a total of $0.8 million as reimbursement for the costs of filarial worm research that was included in the agreed upon research plan, which the Company conducted prior to the April 5, 2013 effective date of the Gates Research Agreement (the Pre-Contract Reimbursements). These Pre-Contract Reimbursements are non-refundable, non-creditable payments and were included in the $17.7 million of Research Funding.

Under the terms of the agreement, the Gates Foundation will have the exclusive right to commercialize selected drug candidates in specified neglected diseases in specified developing countries. The Company retains the exclusive right to commercialize any selected drug candidate outside of the specified neglected diseases as well as with respect to the specified neglected diseases in specified developed countries and would be obligated to pay the Gates Foundation royalties on specified license revenue received. The Gates Research Agreement will continue in effect until the later of five years from the effective date or the expiration of the Company’s specified obligation to provide access to the Library. Either party may terminate the Gates Research Agreement for the other party’s uncured material breach of the Gates Research Agreement.

In connection with the Gates Research Agreement, the Company entered into a Common Stock Purchase Agreement (the Purchase Agreement) pursuant to which the Company issued 809,061 shares of potentially redeemable common stock to the Gates Foundation for net proceeds of approximately $5.0 million (the Stock Proceeds)  (see Note 8). In addition, in connection with both the Gates Research Agreement and the Purchase Agreement, the Company and the Gates Foundation entered into a letter agreement (the Letter Agreement) that, among other things, restricts the Company’s use of both the Research Funding and the Stock Proceeds to expenditures, including an allocation of overhead and administrative expenses, that are reasonably attributable to the activities that are required to support the research projects funded by the Gates Foundation. As a result of such restrictions, in its June 30, 2014 condensed consolidated balance sheet, the Company classified $2.4 million of the Stock Proceeds as long-term restricted investments and $1.1 million of the Stock Proceeds plus the unspent portion of the Advance Funds, approximately $0.2 million, as short-term restricted investments.

The Company evaluated the Gates Research Agreement under the accounting guidance for multiple-element arrangements and identified three deliverables: the research activities, the 5-year Library Access Services and the obligation to participate in the joint steering committee. Although participation in the joint steering committee has stand alone value, it will be delivered as the research activities are performed and has a similar pattern of performance. Accordingly, the Company has combined this deliverable with the research activities deliverable as a single unit of accounting. The Company developed its best estimates of selling prices (BESP) for each deliverable in order to allocate the arrangement consideration to the two units of accounting. The Company determined the BESP for the research activities based on factors such as estimated direct expenses and other costs involved in providing these services, the contractually agreed reimbursement rates for the services and the rates it has charged and the margins it has realized under its other contracts involving the provision of and reimbursement for research services. The Company determined

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the BESP for the Library Access Services based on the projected costs that would be incurred to have a third party store and distribute the library compounds and the estimated costs that would be incurred to provide the Library Access Services for the required 5-year period, plus a reasonable margin, and concluded that the BESP of such services is insignificant. As a result, the entire arrangement consideration was allocated to the research activities and joint steering committee combined unit of accounting. The Company will recognize revenue related to this unit of accounting on a proportional performance basis and the revenue that is recognized as future research services are performed will reduce the Advance Funds. The unspent portion of the Advance Funds will be recorded as deferred revenue in the Company’s condensed consolidated balance sheets.

The Company also evaluated the accounting treatment for the $0.8 million of Pre-Contract Reimbursements, noting that the research activities that gave rise to such reimbursements were conducted prior to the signing of the Gates Research Agreement. The Company concluded that activities performed prior to commencing delivery of the contracted services should not be considered in effort-expended measures of performance when revenue is recognized for services using a proportional performance method and, accordingly, the Company will recognize revenue from the Pre-Contract Reimbursements over the three-year research term on a proportional performance basis. As of June 30, 2014, the Company has deferred revenue of $0.2 million related to the unspent Advance Funds and $0.4 million related to the Pre-Contract Reimbursements.

Revenues recognized under the Gates Research Agreement were as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(unaudited)				(unaudited)
Contract revenue:
Amortization of Pre-Contract Reimbursements	$	69	$	55	$	140	$	55
Reimbursement for research costs	1,547		1,247		3,145		1,247
Total contract revenue	$	1,616	$	1,302	$	3,285	$	1,302

GSK

In September 2011, the Company amended and expanded its 2007 research and development collaboration with GSK (the Master Amendment) to, among other things, give effect to certain rights in AN3365 that would be acquired by the U.S. government in connection with GSK’s contract for government funding to support GSK’s further development of AN3365, provide GSK the option to extend its rights around the bacterial enzyme target leucyl-tRNA synthetase (LeuRS), as well as to add new programs for tuberculosis (TB) and malaria using the Company’s boron chemistry platform. As a result of the Master Amendment, the Company received a $5.0 million upfront payment in September 2011 and was eligible to receive additional milestone payments, bonus payments and research funding as described below, all of which, if earned, will be non-refundable and non-creditable. The Company is also eligible to receive royalties on future sales of resulting products. The Master Amendment also terminated any research and development obligations that the Company had with respect to the original agreement.

Under the terms of the Master Amendment, GSK retained sole responsibility for the further development and commercialization of AN3365. In October 2012, GSK advised the Company that it had discontinued further development of AN3365; accordingly, all rights to the compound have reverted to the Company.

The Master Amendment added a new program for TB, pursuant to which GSK funded the Company’s TB research activities up until candidate selection. Once TB compounds met specified candidate selection criteria, GSK had the option to license such compounds and, upon exercise of such option, would become responsible for all further development and commercialization of such compounds.

In September 2013, GSK selected a compound that resulted from the TB program for further development. GSK will be responsible for all further development and commercialization of the TB compound, and the Company may receive contingent payments, if certain regulatory events occur and/or if certain sales levels are achieved for resulting TB products, and may also receive royalties on sales of such resulting products.

On October 5, 2013, the research period under the collaboration agreement with GSK expired, except with respect to the TB program for which the research period has been extended to October 2014. The Company continues to work with GSK on the TB program. As of June 30, 2014, the Company has no deferred revenue associated with the GSK collaboration agreement.

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Revenues recognized under this agreement were as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(unaudited)				(unaudited)
Contract revenue:
Reimbursement for research and patent costs	$	—	$	328	$	34	$	686
Total contract revenue	$	—	$	328	$	34	$	686

Lilly

In August 2010, the Company entered into a research, license and commercialization agreement with Lilly to collaborate on the discovery of products for a variety of animal health applications. Lilly will be responsible for worldwide development and commercialization of compounds advancing from these efforts. The Company received an upfront payment of $3.5 million in September 2010, which it had been recognizing over the expected four-year research term on a straight-line basis. The agreement allowed for termination by Lilly upon written notice, with certain additional payments to the Company and a notice period that had a duration dependent on whether the notice was delivered prior to or after the first regulatory approval of a product under the agreement.

In January 2014, Lilly notified the Company of the termination of the research term of the agreement. As a result, the Company revised the expected research term to end in April 2014, approximately five months earlier than estimated under the agreement. The remainder of the agreement remains in effect and Lilly retained its exclusive rights to the development of one of the two compounds it licensed from the Company (as described further below).

From August 2010 through June 30, 2014, the Company received $11.5 million in research funding under the agreement. The termination of the funding for the agreement became effective 90 days after the Company’s receipt of the termination notice discussed above, and ended Lilly’s obligation to make quarterly research payments.

In 2011 and 2012, Lilly licensed two development compounds from the Company and the Company was eligible to receive additional payments upon the occurrence of specified development and regulatory events for these compounds. The Company has determined that none of these contingent payments are substantive milestones. To date, no products have been approved and therefore no royalties have been earned under this agreement. In September 2013, Lilly notified the Company that it was ceasing further development of one of the two previously licensed compounds; Lilly granted the Company a fully paid, sublicenseable, perpetual, irrevocable, exclusive license to the related technology and patents.

As of June 30, 2014, the Company has no deferred revenue related to the upfront fee and no deferred revenue related to the research term funding.

Revenues recognized under the agreement and for other research services were as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(unaudited)				(unaudited)
Contract revenue:
Amortization of upfront fee	$	30	$	219	$	480	$	438
Research funding	50		750		800		1,635
Total contract revenue	$	80	$	969	$	1,280	$	2,073

Medicines for Malaria Venture

In March 2011, the Company entered into a three-year development agreement with Medicines for Malaria Venture (MMV) to collaborate on the development of compounds for the treatment of malaria through human proof-of-concept studies. This development agreement was preceded by a 2010 research agreement between the two parties. In August 2011, the Company and MMV amended the development agreement to, among other things, specify that any advance payments in excess of the actual costs incurred by the Company for the research and development activities under the agreement are either refundable or creditable against future payments, at MMV’s option. In January 2014, the research agreement was amended and extended through December 31, 2014. Under the amended agreement, MMV will no longer make advance payments to the Company and will now reimburse the Company quarterly in arrears for expenses incurred. As of June 30, 2014, the Company had no deferred revenue associated with its agreements with MMV.

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Revenues recognized under the MMV research and development agreement were as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(unaudited)				(unaudited)
Contract revenue:
Research and development funding	$	163	$	215	$	269	$	291
Total contract revenue	$	163	$	215	$	269	$	291

8. Potentially Redeemable Common Stock and Stockholders’ Equity

Potentially Redeemable Common Stock

In connection with the Gates Research Agreement (see Note 7), the Company entered into the Purchase Agreement with the Gates Foundation pursuant to which the Company issued 809,061 shares of its common stock at a purchase price of $6.18 per share on April 5, 2013. Net proceeds to the Company from this offering were approximately $5.0 million, after deducting offering expenses of $48,000. On June 28, 2013, the Company filed a registration statement on Form S-3 with the SEC, which became effective on July 11, 2013, to register the resale of the 809,061 shares of common stock. In the event of termination of the Gates Research Agreement by the Gates Foundation for certain specified uncured material breaches by the Company (the Triggering Events), the Company will be obligated, among other remedies, to redeem for cash the Company’s common stock purchased in connection with the Gates Research Agreement, facilitate the purchase of such common stock by a third party or elect to register the resale of such common stock into the public markets unless certain specified conditions are satisfied. The redemption price per share would be the fair value per share of the Company’s common stock on the redemption date or, under certain circumstances, the greater of (i) the fair value per share and (ii) the purchase price of $6.18 per share plus interest at 5% compounded annually from April 5, 2013, the stock purchase date. In connection with both the Gates Research Agreement and the Purchase Agreement, the Company and the Gates Foundation also entered into the Letter Agreement that, among other things, places certain restrictions on the use of both the Research Funding and the Stock Proceeds (see Note 7).

The Company concluded that certain of these Triggering Events are not solely within the control of the Company; and, accordingly, has classified the potentially redeemable securities outside of permanent equity in temporary equity. The 809,061 shares of common stock issued were recorded as potentially redeemable common stock at an initial carrying amount equal to the net proceeds of approximately $5.0 million, which approximates their issuance date fair value.

The Company has determined that the 809,061 shares of potentially redeemable common stock are not currently redeemable and that none of the Triggering Events are currently probable. Accordingly, the carrying amount of the potentially redeemable common stock remains at approximately $5.0 million as of June 30, 2014. Only if, and when, a Triggering Event becomes probable will the Company record a change in the carrying amount to adjust it to the redemption value of the potentially redeemable common stock. At the time of such an occurrence, the potentially redeemable common stock will be immediately adjusted, by a credit or charge to other income or expense, to equal the redemption value and will continue to be adjusted to reflect any change in the redemption value as of the end of each reporting period.

Shelf Registration

In August 2013, the Company filed a shelf registration statement on Form S-3 with the SEC (the Shelf Registration). The Shelf Registration was declared effective by the SEC and permits the Company to sell, from time to time, up to $50.0 million of common stock, preferred stock, debt securities and warrants.

Preferred Stock

In November 2010, the Company amended and restated its certificate of incorporation to authorize 10,000,000 shares of preferred stock upon the completion of its Initial Public Offering (IPO). As of June 30, 2014 and December 31, 2013, there was no preferred stock outstanding.

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9. Stock-Based Compensation

The Company recorded stock-based compensation expense for the three and six months ended June 30, 2014 and 2013 as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014(1)		2013
	(unaudited)				(unaudited)
Research and development	$	1,249	$	741	$	2,334	$	1,166
General and administrative	1,942		514		5,593		848
Total	$	3,191	$	1,255	$	7,927	$	2,014

(1) Includes $3.0 million of expense relating to the modification of options held by the Company’s prior chief executive officer upon his resignation. See discussion of Stock Option Modification below.

For the three and six months ended June 30, 2014, the Company issued 40,022  and 183,846 shares of the Company’s common stock and received approximately $0.3 million and $0.8 million, respectively, in cash from the exercise of stock options. Total stock options (including Performance Stock Options (PSOs) as described below) granted for the three and six months ended June 30, 2014 were 356,000 options, which included no stock option grants to nonemployee advisors, and 1,786,628 options, which included stock option grants of 12,828 options to nonemployee advisors, respectively. Grants to nonemployee advisors do not include grants made to the Company’s nonemployee directors for their board-related services. The weighted-average fair value per share of options, other than PSOs, granted to employees and the Company’s nonemployee directors was $11.80 and $13.58 for the three and six months ended June 30, 2014, respectively.

At June 30, 2014, there were outstanding stock options to purchase 5,826,923 shares of the Company’s common stock. At June 30, 2014, the Company had $29.4 million and $0.1 million of unrecognized compensation expense, net of estimated forfeitures, related to outstanding stock option and restricted stock unit awards and Employee Stock Purchase Program (ESPP) stock purchase rights, respectively, that will be recognized over a weighted-average period of 3.1 years and 0.5 years, respectively. For the six months ended June 30, 2014, there were 43,063 shares of the Company’s common stock purchased under the ESPP. No shares were purchased under the ESPP during the three months ended June 30, 2014.

Stock Option Modification

In connection with the resignation of the Company’s former chief executive officer in March 2014, the Company’s board of directors approved an additional 18 months of vesting for his unvested stock options, or 223,542 stock options. These stock options would have otherwise expired upon termination. The Company’s board of directors also approved the extension of the post-termination period for the exercise of his vested stock options from three months to six months. As a result of these modifications, during the three months ended March 31, 2014, the Company recorded a one-time stock-based compensation expense of $3.0 million for the incremental value of the stock options vested and the extension of the post-termination exercise period.

Restricted Stock Units (RSUs), Performance Restricted Stock Units (PRSUs) and Performance Stock Options (PSOs)

During the six months ended June 30, 2014, the Company began issuing time-based vesting RSUs and market-based vesting PRSUs and PSOs. RSU and PRSU grants cannot be transferred, and until they vest, the underlying shares are subject to forfeiture if the grantee’s service with the Company terminates prior to the release of the applicable vesting restrictions. The Company uses a Monte Carlo valuation method to estimate the fair value of market-based vesting PRSU and PSO grants. Time-based vesting RSUs are valued at the closing price of the Company’s common stock on the date of grant. The vesting conditions applicable to the Company’s outstanding RSUs, PRSUs and PSOs are as follows:

·One-fourth of the RSU grants will vest on each of the first four anniversaries of the applicable vesting commencement date, subject to the grantee’s continued service with the Company. Upon vesting of RSUs, the Company will issue to the grantee thereof one share of the Company’s common stock for each such RSU.

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·Grants of PRSUs and PSOs made during the three months ended March 31, 2014 will vest in full, subject to the grantee’s continued service with the Company, if at any time during the four-year period beginning March 21, 2014, the volume-weighted average price for the Company’s common stock exceeds $30 per share (using the VAP function on Bloomberg for the Company “ANAC US EQUITY VAP”, or successor thereof) for 30 consecutive trading days. If such vesting condition is not met within such four-year period, such PRSU and PSO grants will expire. Once vested, each PSO provides the grantee with the right to purchase one share of the Company’s common stock at the applicable option exercise price. Upon vesting of PRSUs, the Company will issue to the grantee thereof one share of the Company’s common stock for each such PRSU.

The weighted-average fair values for these PSOs and PRSUs granted during the six months ended June 30, 2014 were determined using Monte Carlo simulation models incorporating the following weighted-average assumptions:

	Six Months Ended June 30, 2014
	PSOs			PRSUs
	(unaudited)
Number of PSOs or PRSUs granted	100,000			50,000
Exercise price	$	21.21		$	N/A
Risk-free interest rate	1.32		%	1.32		%
Volatility	60.20		%	60.20		%
Dividends	—			—
Weighted-average fair value per share of PSOs or PRSUs granted	$	9.82		$	17.87

The Company will recognize the estimated expense of these PSOs and PRSUs, as determined under the simulation models, over the expected life of the award, with no adjustment in future periods based upon the Company’s actual stock price over the performance period.

For the three and six months ended June 30, 2014, the Company granted 25,000 and 397,000 RSUs, respectively. The Company granted 50,000 PRSUs and 100,000 PSOs in the six months ended June 30, 2014. There were no PRSU or PSO grants made during the three months ended June 30, 2014.

10. Subsequent Events

On July 7, 2014, the FDA approved the New Drug Application for KERYDINTM (tavaborole) topical solution, 5% for the topical treatment of onychomycosis of the toenails.

On July 18, 2014, the Company entered into a Distribution and Commercialization Agreement (the Sandoz Agreement) with Sandoz Inc. (together with its affiliates, Sandoz), a Novartis company, pursuant to which Sandoz will distribute and commercialize KERYDIN in the United States on an exclusive basis. PharmaDerm, the branded dermatology business of Sandoz, will be responsible for the sales and marketing of KERYDIN.

Under the Sandoz Agreement, the Company is entitled to (i) upfront payments totaling $40 million (of which $15 million was payable upon entry into the Sandoz Agreement and $25 million is payable within 30 days thereof), (ii) a milestone payment of $25 million payable upon the later of (a) the 90th day following the successful fulfillment, as determined pursuant to the Sandoz Agreement, by the Company of Sandoz’s initial purchase order for KERYDIN and (b) January 5, 2015 and (iii) 50% of the gross profits (defined as net sales less cost of goods sold) accrued by Sandoz on sales of KERYDIN, except that in 2015 the Company will start receiving gross profit sharing payments after the first $50 million of gross profits have been accrued by Sandoz. The gross profit sharing arrangement entitles the Company to cumulative minimum gross profit sharing payments totaling $45 million for 2016. The Company is not entitled to cumulative minimum gross profit sharing payments in any other fiscal period under the Sandoz Agreement. Under the terms of the Sandoz Agreement, the Company will continue to hold the New Drug Application for, and be responsible for any further development of, KERYDIN and will supply KERYDIN to Sandoz at cost through the Company’s contract manufacturers, and Sandoz will be responsible for setting the price for KERYDIN and for all of its selling, marketing, distribution, general and administrative costs related to the commercialization of KERYDIN. The Sandoz Agreement also grants the Company an option to repurchase all rights in KERYDIN from Sandoz on the later of three years from the first commercial sale of KERYDIN or December 31, 2017, at a price to be determined pursuant to the Sandoz Agreement. The Sandoz Agreement will continue for an initial term of 5 years and is subject to automatic 5-year renewal terms, unless terminated for specified events under the Sandoz Agreement.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with our condensed consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and in our other Securities and Exchange Commission (SEC) filings, including our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 17, 2014. This discussion contains forward-looking statements that involve risks and uncertainties. We use words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “predict,” “potential,” “believe,” “should” and similar expressions to identify forward-looking statements. These statements appearing throughout this Quarterly Report on Form 10-Q are statements regarding our intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements. Unless otherwise noted or the context otherwise requires, references in this Quarterly Report on Form 10-Q to “we,” “us” or “our” refer to Anacor Pharmaceuticals, Inc. and its subsidiary.

Overview

We are a biopharmaceutical company focused on discovering, developing and commercializing novel small-molecule therapeutics derived from our boron chemistry platform. Our first approved drug, KERYDINTM (tavaborole) topical solution, 5% (formerly known as AN2690), is an oxaborole antifungal approved by the U.S. Food and Drug Administration (FDA) in July 2014 for the topical treatment of onychomycosis of the toenails. In July 2014, we entered into an exclusive agreement with Sandoz Inc. (together with its affiliates, Sandoz), a Novartis company, pursuant to which Sandoz will distribute and commercialize KERYDIN in the United States. Our lead product candidate is AN2728, an investigational anti-inflammatory PDE-4 inhibitor in development for the potential treatment of mild-to-moderate atopic dermatitis and psoriasis.  We initiated Phase 3 studies of AN2728 for the treatment of mild-to-moderate atopic dermatitis in the first quarter of 2014.

Beyond KERYDIN and AN2728, we have discovered, synthesized and are developing six molecules. These include three wholly-owned investigational product candidates. AN2718 is an investigational topical antifungal, AN2898 is a backup compound to AN2728 and AN3365 is an investigational antibiotic for the potential treatment of infections caused by Gram-negative bacteria. We have also discovered three other investigational compounds that we have out-licensed for further development. The first compound is licensed to Eli Lilly and Company (Lilly) for the potential treatment of an animal health indication. The second compound, AN5568, is licensed to Drugs for Neglected Diseases initiative (DNDi) for the potential treatment of human African trypanosomiasis (HAT, or sleeping sickness) and the third compound is licensed to GlaxoSmithKline LLC (GSK) for development in tuberculosis (TB). We also have a pipeline of other internally discovered topical and systemic boron-based compounds in earlier stages of research and pre-clinical development.

Recent Developments

On July 18, 2014, we entered into a Distribution and Commercialization Agreement (the Sandoz Agreement) with Sandoz Inc., a Novartis company, pursuant to which Sandoz will distribute and commercialize KERYDIN in the United States on an exclusive basis. PharmaDerm, the branded dermatology business of Sandoz, will be responsible for the sales and marketing of the drug. The Sandoz Agreement entitles us to (i) upfront payments totaling $40 million (of which $15 million was payable upon entry into the Sandoz Agreement  and $25 million is payable within 30 days thereof), (ii)  a milestone payment of $25 million payable upon the later of (a) the 90th day following the successful fulfillment, as determined pursuant to the Sandoz Agreement, by us of Sandoz’s initial purchase order for KERYDIN and (b) January 5, 2015 and (iii) 50% of the  gross profits (defined as net sales less cost of goods sold) accrued by Sandoz on sales of KERYDIN, except that in 2015 we will start receiving gross profit sharing payments after the first $50 million of gross profits have been accrued by Sandoz. The gross profit sharing arrangement entitles us to cumulative minimum gross profit sharing payments totaling $45 million for 2016.  We are not entitled to cumulative minimum gross profit sharing payments in any other fiscal period under the Sandoz Agreement. Under the terms of the Sandoz Agreement, we will continue to hold the New Drug Application (NDA) for, and be responsible for any further development of, KERYDIN and will supply KERYDIN to Sandoz at cost through our contract manufacturers, and Sandoz will be responsible for setting the price for KERYDIN and for all of its selling, marketing, distribution, general and administrative costs related to the commercialization of KERYDIN.  The Sandoz Agreement also grants us an option to repurchase all rights in KERYDIN from Sandoz on the later of three years from launch or December 31, 2017, at a price to be determined pursuant to the Sandoz Agreement. The Sandoz Agreement will continue for an initial term of five years and is subject to automatic five-year renewal terms, unless terminated for specified events under the Sandoz Agreement.

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On July 7, 2014, the FDA approved the NDA for KERYDINTM (tavaborole) topical solution, 5% for the topical treatment of onychomycosis of the toenails.

In October 2013, we entered into a research agreement with the United States Department of Defense, Defense Threat Reduction Agency (DTRA) to design and discover new classes of systemic antibiotics. A drug discovery consortium formed by Colorado State University, the University of California at Berkeley and us is conducting the research over a period of up to three and a half years. The work is funded by an award of up to $13.5 million from DTRA’s R&D Innovation and Systems Engineering Office, which was established to search for and execute strategic investments in innovative technologies for combating weapons of mass destruction. Under this award, we will apply our boron chemistry to discover rationally designed novel antibiotics that target DTRA-priority pathogens known to exhibit resistance to existing antibiotics. The award is available to the consortium to fund $2.7 million of research reimbursements for the eleven month period through September 15, 2014, with an additional $5.0 million and $5.7 million becoming available subject to the exercise by DTRA of options to fund the research for subsequent twelve and nineteen month periods, respectively. In August 2014, DTRA exercised the first option to fund the twelve month research extension.

In April 2013, we entered into a research agreement with The Bill & Melinda Gates Foundation (the Gates Foundation) to discover drug candidates intended to treat two filarial worm diseases (onchocerciasis, or river blindness, and lymphatic filariasis, commonly known as elephantiasis) and TB. Under the research agreement, the Gates Foundation will pay us up to $17.7 million over a three-year research term to conduct research activities directed at discovering potential neglected disease drug candidates in accordance with an agreed upon research plan. As part of the funded research activities, we are responsible for creating an expanded library of boron compounds to screen for additional potential drug candidates to treat neglected diseases, which will be accessible to the Gates Foundation and other third parties. Under the terms of the agreement, the Gates Foundation will have the exclusive right to commercialize selected drug candidates in specified neglected diseases in specified developing countries. We retain the exclusive right to commercialize any selected drug candidate outside of the specified neglected diseases as well as with respect to the specified neglected diseases in specified developed countries and would be obligated to pay the Gates Foundation royalties on specified license revenue received. The agreement will continue in effect until the later of five years from the effective date or the expiration of our specified obligation to provide access to the expanded library of boron compounds. In connection with the research agreement, we issued 809,061 shares of potentially redeemable common stock to the Gates Foundation for net proceeds of approximately $5.0 million. In the event of termination of the research agreement by the Gates Foundation for certain specified uncured material breaches by us, we will be obligated, among other remedies, to redeem for cash our common stock purchased in connection with the research agreement, facilitate the purchase of such common stock by a third party or elect to register the resale of such common stock into the public markets unless certain specified conditions are satisfied. In addition, we are subject to certain restrictions on our use of the potentially redeemable common stock proceeds and the research funding we receive from the Gates Foundation.

In September 2011, the Company amended and expanded its 2007 research and development collaboration with GSK to, among other things, add a new research program using our boron chemistry platform for TB. In September 2013, GSK selected a compound for further development in TB and will be responsible for all further development and commercialization of this compound. In October 2013, the research period under the agreement with GSK expired, except with respect to the TB program for which the research period has been extended to October 2014.

In August 2010, we entered into a research, license and commercialization agreement with Lilly to collaborate on the discovery of products for a variety of animal health applications. Pursuant to this agreement, Lilly licensed a development compound from us in December 2012 and will be responsible for all further development and commercialization of this compound. In January 2014, Lilly notified us of the termination of the research term of the agreement, effective April 2014, which was approximately five months earlier than the research period was originally expected to end. The remainder of the agreement, including provisions related to potential future payments and royalties, remains in effect and Lilly retains its exclusive rights to the development of the licensed compound.

We also have several collaborations with organizations that fund research leveraging our boron chemistry to discover new treatments for neglected diseases. In addition to potentially developing new therapies for such diseases, these collaborations provide us the potential benefits of expanding the chemical diversity of our boron compounds, understanding new properties of our boron compounds, receiving future incentives, such as the potential grant of a priority review voucher by the FDA, and ultimately, if a drug is approved, potential revenue in some regions. Our collaboration partners include DNDi to develop new therapeutics for sleeping sickness, visceral leishmaniasis and Chagas disease, Medicines for Malaria Venture (MMV) to develop compounds for the treatment of malaria, the Global Alliance for Livestock Veterinary Medicines (GALVMed) for the treatment of animal trypanosomiasis and the Liverpool School of Tropical Medicine for the treatment of river blindness and lymphatic filariasis. In 2011, DNDi completed pre-clinical studies of AN5568 for sleeping sickness and, in March 2012, AN5568 became the first compound from our neglected diseases initiatives to enter human clinical trials. The AN5568 Phase 1 clinical trial is currently in its final stages and, depending upon the results of that trial, a Phase 2/3 registration trial could be initiated as early as the first half of 2015.

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Recent Litigation Settlement and Capital Markets and Financing Activities

In October 2013, we entered into a settlement agreement with Valeant Pharmaceuticals International, Inc. (Valeant) and Dow Pharmaceutical Sciences, Inc. (DPS), which was acquired by Valeant in December 2008, pursuant to which Valeant agreed to pay us $142.5 million to settle all existing and future claims and all other disputes between Valeant, DPS and us related to our intellectual property, confidential information and contractual rights, including the breach of contract dispute that we initiated under a master services agreement that we entered into with DPS in March 2004. In addition, we and Valeant, which acquired Medicis Pharmaceutical Corporation (Medicis) in December 2012, agreed to withdraw all claims and complaints relating to arbitration or litigation in connection with a research and development option and license agreement that we entered into with Medicis in February 2011 (the Medicis Agreement), to terminate the Medicis Agreement effective immediately and to cause all rights and intellectual property under the Medicis Agreement to revert to us.

In June 2013, we entered into a loan and security agreement (Loan Agreement) with Hercules Technology Growth Capital, Inc. as collateral agent and a lender and Hercules Technology III, L.P. as a lender (together, Hercules), providing for loans to us of up to $45.0 million. The first $30.0 million tranche was drawn at the closing of the transaction, at which time we repaid $22.6 million in remaining obligations associated with our previous loan facility. We elected not to draw the second tranche of $10.0 million, which was available to us from the closing date of the Loan Agreement until December 5, 2013. We also elected not to draw the third tranche of $5.0 million, which was available to us from the date of FDA approval of KERYDIN until August 6, 2014.

In May 2013, we issued and sold 3,599,373 shares of our common stock, including 469,483 shares issuable pursuant to the exercise of an overallotment option, in a registered public offering. Our net proceeds from this offering were approximately $21.3 million, after deducting underwriting discounts and other offering costs.

In January 2013, we entered into an equity distribution agreement with Wedbush Securities Inc. (Wedbush) under which we may, from time to time, offer and sell common stock having aggregate sales proceeds of up to $25.0 million. Through June 30, 2014, we have sold shares of our common stock under this agreement generating net proceeds of approximately $1.3 million, after deducting underwriting discounts and other offering costs. No shares were sold under this agreement during the six months ended June 30, 2014.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments in certain circumstances that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, fair values of financial instruments in which we invest, income taxes, preclinical study and clinical trial accruals, accrued compensation, other contingencies and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances and review our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes during the six months ended June 30, 2014 to our critical accounting policies and significant judgments and estimates as disclosed in our management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2013, with the exception of stock-based compensation, which is discussed in greater detail below.

Stock-Based Compensation

Employee stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period). Stock option awards granted to our nonemployee directors for their board-related services are included in employee stock-based compensation in accordance with current accounting standards. We use the Black-Scholes option-pricing model to estimate the fair value of our time-based vesting stock option awards and use the straight-line (single-option) method for expense attribution. We estimate forfeitures and recognize expense only for those shares expected to vest.

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During the three and six months ended June 30, 2014, we began to issue time-based vesting restricted stock units (RSUs), market-based vesting performance restricted stock units (PRSUs) and market-based vesting performance stock options (PSOs). RSU and PRSU grants cannot be transferred and, until they vest, the underlying shares are subject to forfeiture if the grantee’s service with us terminates prior to the release of the applicable vesting restrictions. The RSUs granted during the three and six months ended June 30, 2014 will vest in equal tranches on the first four anniversaries of the applicable vesting commencement dates, subject to the grantee’s continued service with us. Upon vesting of RSUs, we will issue to the grantee thereof one share of common stock for each such RSU. The PSOs and PRSUs granted in the three months ended March 31, 2014 will vest in full, subject to the grantee’s continued service with us, if at any time during the four-year period beginning March 21, 2014, the volume-weighted average price for our common stock exceeds $30 per share (using the VAP function on Bloomberg for the Company “ANAC US EQUITY VAP”, or successor thereof) for 30 consecutive trading days. If such vesting condition is not met within such four-year period, such PRSU and PSO grants will expire.  We use a Monte Carlo valuation method to estimate the fair value of our market-based vesting PSO and PRSU grants. We will recognize the estimated expense of PSOs and PRSUs, as determined under the simulation models, over the expected life of the award, with no adjustment in future periods based upon our actual stock price over the performance period. Time-based vesting RSUs are valued at the closing price of our common stock on the date of grant.

We account for stock options issued to nonemployees based on their fair values on the measurement dates using the Black-Scholes option-pricing model. The fair values of the options granted to nonemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options that vest in any given reporting period is affected by changes in the fair value of our common stock during that period.

We recorded noncash stock-based compensation for employee and nonemployee stock option grants, employee restricted stock units and employee stock purchase program (ESPP) stock purchase rights of $3.2 million and $1.3 million for the three months ended June 30, 2014 and 2013, respectively and $7.9 million and $2.0 million for the six months ended June 30, 2014 and 2013, respectively. Included in the amounts for the six months ended June 30, 2014 was $3.0 million of stock based compensation relating to the modification of options held by the Company’s former chief executive officer upon his resignation. As of June 30, 2014, we had outstanding options (including PSOs) to purchase 5,826,923 shares of our common stock and 447,000 RSUs and PRSUs and had $29.4 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to outstanding stock options and $0.1 million related to ESPP stock purchase rights that will be recognized over weighted-average periods of 3.1 and 0.5 years, respectively. There were 43,063 common shares purchased under the ESPP for the six months ended June 30, 2014. No shares were purchased under the ESPP during the three months ended June 30, 2014. We expect to continue to grant stock options, restricted stock units and ESPP stock purchase rights in the future, which will increase our stock-based compensation expense in future periods. If any of the assumptions used in the Black-Scholes option pricing model or Monte Carlo valuation method change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

Recent Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board (FASB) issued a new accounting standard on accounting for share-based payments for performance-based stock awards, which will require that a performance target that affects vesting and that could be achieved after the required service period be treated as a performance condition. We do not currently have any performance-based stock awards that meet these conditions. The updated standard becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements.

In May 2014, the FASB issued a new accounting standard on revenue from contracts with customers, which will require us to recognize revenue when we transfer promised goods or services to a customer in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. The updated standard will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective and will permit the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The updated standard becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. We have not yet selected a transition method and are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

In July 2013, a new accounting standard was issued that requires the netting of unrecognized tax benefits against a deferred tax asset for a net operating loss carryforward or other carryforward that would apply in the settlement of uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction net operating loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We adopted this guidance as of January 1, 2014 and its adoption did not have an effect on our financial statements.

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Results of Operations

Comparison of Three and Six Months Ended June 30, 2014 and 2013

	Three Months Ended June 30,							Six Months Ended June 30,
	2014		2013		Increase/ (decrease)			2014		2013		Increase/ (decrease)
	(in thousands)
Contract revenue	$	2,931	$	3,424	$	(493	)	$	7,089	$	5,132	$	1,957
Research and development expenses(1)	19,261		10,146		9,115			35,196		21,305		13,891
General and administrative expenses(1)	7,095		5,086		2,009			15,423		9,802		5,621
Interest income	59		14		45			123		28		95
Interest expense	1,100		903		197			2,189		1,814		375
Loss on early extinguishment of debt	—		1,381		(1,381		)	—		1,381		(1,381		)
Other expense	42		18		24			84		32		52

(1)Includes the following stock-based compensation expenses:

Research and development expenses	$	1,249	$	741	$	508	$	2,334	$	1,166	$	1,168
General and administrative expenses	1,942		514		1,427		5,593		848		4,745

Comparison of Three Months Ended June 30, 2014 and 2013

Contract revenue. For the three months ended June 30, 2014, we recognized $1.6 million for research services performed under the Gates Foundation agreement, $0.1 million of which related to reimbursements for services performed prior to the effective date of the agreement. We also recognized $0.9 million under our research contract with DTRA, $0.1 million for research funding under our collaboration with Lilly and $0.3 million for research performed under our agreements with not-for-profit organizations for neglected diseases. For the three months ended June 30, 2013, we recognized $1.3 million for research services performed under the Gates Foundation agreement, $0.1 million of which related to reimbursements for services performed prior to the effective date of the agreement. We also recognized $0.7 million for research funding and $0.2 million of the $3.5 million upfront fee received under the Lilly agreement, $0.3 million primarily for research funding under our collaboration with GSK and $0.9 million for research work performed under our agreements with not-for-profit organizations for neglected diseases.

Research and development expenses. Research and development expenses consist primarily of costs associated with research activities, as well as costs associated with our product development efforts, including preclinical studies and clinical trials. Research and development expenses, including those paid to third parties, are recognized as incurred. Research and development expenses include:

·external research and development expenses incurred pursuant to agreements with third party manufacturing organizations, contract research organizations and investigational sites;

·employee and consultant-related expenses, which include salaries, benefits, stock-based compensation and consulting fees;

·third party supplier expenses; and

·facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, amortization or depreciation of leasehold improvements and equipment, laboratory supplies and other expenses.

For the three months ended June 30, 2014, research and development expenses increased by $9.1 million as compared to the same period in the prior year. In the second quarter of 2014, expenses for our AN2728 and KERYDIN programs increased by $7.3 million and $1.1 million, respectively, over the comparable quarter in 2013. The increase in AN2728 costs was primarily due to increased clinical trial and drug development activities, including the associated increase in internal efforts. In the second quarter of 2014, we were actively enrolling patients in two Phase 3 trials and a long-term safety trial for AN2728, as compared to the second quarter of 2013 when we were completing a less costly Phase 2 dose ranging trial and conducting start up activities for our Phase 1

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Maximal Use Systemic Exposure (MUSE) and cardiac safety trials for AN2728. In the second quarter of 2014, we were manufacturing drug supplies for certain AN2728 regulatory activities and for our Phase 3 and long-term safety trials, as compared with a lower level of clinical- and regulatory-related drug supply activities in the same period of the prior year. For KERYDIN, the increase in costs for the second quarter of 2014 versus the same quarter in 2013 was primarily due to increased manufacturing activities related to our pre-commercialization and regulatory efforts, other pre-launch related activities and clinical trial costs. The increase in clinical trial costs for KERYDIN compared with the prior year quarter was due to our initiation in 2014 of a clinical study of KERYDIN to evaluate its efficacy, safety and local tolerability when treating mild-to-moderate toenail onychomycosis in conjunction with debridement, as needed. These increases were partially offset by a decrease in the costs associated with our Phase 3 trials of KERYDIN, which completed in 2013. In addition, we filed our NDA for KERYDIN in July 2013 and our consulting and internal efforts were higher in the second quarter of 2013, as compared to the second quarter of 2014, due to our NDA preparation activities. In connection with our entry into the Sandoz Agreement, we and Sandoz reviewed development plans for KERYDIN and made a commercial decision to terminate the recently-initiated KERYDIN debridement study. Given the early stage of the study at the time of termination, we believe that we will realize cost savings from the termination. The termination was not the result of any safety concerns or input or guidance from the FDA.

In the second quarter of 2014, our research and development expenses for our DTRA and Gates Foundation programs increased by $0.8 million and $0.3 million, respectively, over the same period in 2013. We entered into the Gates Foundation agreement in the second quarter of 2013 and the DTRA agreement in the fourth quarter of 2013. We also had an increase of $0.9 million in our spending on other research activities. These increases were partially offset by a decrease of $0.8 million in research expenses under our collaboration with Lilly due to the early termination of the research term and a decrease in spending on our GSK and neglected disease programs of $0.3 million and $0.2 million, respectively.

General and administrative expenses. The increase in general and administrative expenses of $2.0 million for the three months ended June 30, 2014 compared to the same period in 2013 was primarily due to increases of $1.4 million in stock-based compensation, $1.0 million in salaries, benefits and other compensation, $1.7 million in pre-launch sales, marketing and compliance expenses for KERYDIN and $0.2 million of other costs. The increase in other costs was related to our pre-launch commercialization efforts for KERYDIN. These increases were partially offset by a reduction of $2.3 million in legal fees compared to the second quarter of 2013, primarily due to the completion of our legal proceedings with Valeant and Medicis in late 2013.

Interest income. The increase in interest income for the second quarter of 2014 compared to the same period in 2013 was primarily due to higher average investment balances resulting from our settlement with Valeant.

Interest expense and early extinguishment of debt. Interest expense increased in the three months ended June 30, 2014 compared to the same period in 2013 due to the higher outstanding balance of our debt and a higher effective interest rate. Upon the early extinguishment of our debt under our previous loan facility in June 2013, we incurred a loss of $1.4 million, which consisted of the unaccrued balance of the final payment, the unamortized balances of the debt discount and deferred issuance costs and a prepayment penalty.

Other expense. Other expense increased in the second quarter of 2014 compared to the second quarter of 2013 due to higher amortization of deferred financing fees related to our expanded debt facility.

Comparison of Six Months Ended June 30, 2014 and 2013

Contract revenue. For the six months ended June 30, 2014, we recognized $3.3 million for research services performed under the Gates Foundation agreement, $0.1 million of which related to reimbursements for services performed prior to the effective date of the agreement. We also recognized $1.9 million under our research contract with DTRA, $0.8 million for research funding and $0.5 million of the upfront fee under our collaboration with Lilly and $0.6 million for research performed under our agreements with not-for-profit organizations for neglected diseases. For the six months ended June 30, 2013, we recognized $1.3 million for research services performed under our research agreement with the Gates Foundation, $0.1 million of which related to reimbursements for services performed prior to the effective date of the agreement, $1.6 million for research funding and $0.4 million of the upfront fee received under the Lilly agreement and $0.7 million primarily for research funding under our collaboration agreement with GSK. We also recognized $1.1 million for research work performed under research and development agreements with not-for-profit organizations for neglected diseases.

Research and development expenses. For the six months ended June 30, 2014, research and development expenses increased by $13.9 million as compared with the same period in the prior year, primarily due to increases in costs for our AN2728 program of $12.0 million. The increase in AN2728 costs in the first six months of 2014 as compared with the same period in the prior year was primarily due to increased clinical trial and drug development activities, including the associated increase in internal efforts. In the first half of 2014, we incurred costs associated with actively enrolling patients in two Phase 3 trials and a long-term safety trial for AN2728, as compared with lower costs in the first half of 2013 associated with our Phase 2 dose ranging trial and conducting start up

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activities for our Phase 1 MUSE trials and cardiac safety trials for AN2728. In addition, we were manufacturing drug supplies for certain regulatory activities and for our Phase 3 and long-term safety trials in the first half of 2014, as compared with a lower level of clinical- and regulatory-related drug supply activities in the same period of the prior year. Our costs for our KERYDIN program increased by $0.1 million in the first six months of 2014 as compared with the six months ended June 30, 2013 due to an increase in pre-commercialization and other  pre-launch related costs, partially offset by a decrease in our internal efforts, consulting and clinical trial expenses.  Costs for our Gates Foundation and DTRA programs increased by $1.3 million and $1.7 million, respectively, during the first six months of 2014 over the same period in 2013. The Gates Foundation contract was executed in April 2013 and the DTRA contract was executed in October 2013. We had a decrease of $1.8 million in research expenses under our collaboration with Lilly due to the early termination of the research term and a net decrease of $0.6 million in spending on our other research activities, including our GSK and neglected disease programs.

General and administrative expenses.  The increase in general and administrative expenses of $5.6 million for the six months ended June 30, 2014 compared to the same period in 2013 was primarily due to increases of $3.7 million in stock-based compensation and severance benefits related to the resignation of our former chief executive officer, $2.7 million in pre-launch sales, marketing and compliance activities for KERYDIN, $1.7 million in other stock-based compensation  and $1.8 million of other expenses including salaries, benefits, other compensation and consulting. These increases were partially offset by a reduction of $4.3 million in legal fees for the six months ended June 30, 2014 as compared to the same period in the prior year, primarily due to the completion of our legal proceedings with Valeant and Medicis in late 2013.

Interest income. The increase in interest income for the six months ended June 30, 2014 compared to the same period in 2013 was primarily due to higher average investment balances resulting from our settlement with Valeant.

Interest expense and early extinguishment of debt. Interest expense increased in the six months ended June 30, 2014 compared to the same period in 2013 due to the higher outstanding balance of our debt and a higher effective interest rate. Upon the early extinguishment of our debt under our previous loan facility in June 2013, we incurred a loss of $1.4 million, which consisted of the unaccrued balance of the final payment, the unamortized balances of the debt discount and deferred issuance costs and a prepayment penalty.

Other expense. Other expense increased in the first six months of 2014 compared to the first six months of 2013 due to higher amortization of deferred financing fees related to our expanded debt facility.

Liquidity and Capital Resources

The following table sets forth the primary sources and uses of cash for each of the periods presented below (in thousands):

	Six months ended June 30,
	2014			2013
Net cash used in operating activities	$	(36,332	)	$	(24,036	)
Net cash used in investing activities	(59,388		)	(8,693		)
Net cash provided by financing activities	927			29,709
Net decrease in cash and cash equivalents	$	(94,793	)	$	(3,020	)

Net cash used in operating activities was $36.3 million and $24.0 million for the six months ended June 30, 2014 and 2013, respectively. The net cash used in operating activities for the first six months of 2014 reflected our net loss adjusted for noncash items plus the net changes in operating assets and liabilities during this period, including those related to increases in our long-term advance payments and accrued liabilities related to our clinical trials, and our payment of 2013 estimated income taxes. For the first six months of 2013, the net cash used in operating activities reflected our net loss adjusted for noncash items, which was partially offset by the net changes in operating assets and liabilities for the same period, including increases in our accounts payable and deferred revenue, partially offset by decreases in our clinical trial accrued liabilities.

Net cash used in investing activities was $59.4 million during the first six months of 2014 as purchases of investments with the proceeds from our settlement with Valeant and purchases of property and equipment exceeded the maturities of investments during this period. Our investing activities during the first six months of 2013 used net cash of $8.7 million, primarily related to the purchases of investments and property and equipment, net of the proceeds from the maturities of investments. In addition, for the six months ended June 30, 2013, we transferred $5.1 million related to the redeemable common stock proceeds and the research funding received from the Gates Foundation to restricted investments as a result of restrictions placed on the use of such funds pursuant to our Gates Foundation agreement.

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Net cash provided by financing activities was $0.9 million for the first six months of 2014 compared to net cash provided by financing activities of $29.7 million in the first six months of 2013. The net cash provided by financing activities for the first six months of 2014 reflects proceeds from the exercises of stock options and employee stock plan purchases. The net cash provided by financing activities for the first six months of 2013 primarily reflects net proceeds of $21.3 million from the sale of our common stock in May 2013, net proceeds of $1.3 million from the sale of our common stock under our equity distribution agreement with Wedbush in the first quarter of 2013, net proceeds of $5.0 million from the issuance of shares of redeemable common stock to the Gates Foundation in April 2013 and the $30.0 million drawdown of the first tranche under our Loan Agreement with Hercules, partially offset by $28.2 million paid in respect of regularly scheduled principal payments and remaining obligations under our previous loan facility and  financing fees, debt issuance costs and loan fees associated with the Hercules Loan Agreement.

We believe that our existing capital resources will be sufficient to meet our anticipated operating requirements for at least the next twelve months. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

Our future capital requirements are difficult to forecast and will depend on many factors, including:

·the timely and successful launch of KERYDIN pursuant to the Sandoz Agreement;

·the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates and potential product candidates, including our ongoing and/or planned trials for AN2728

·the success of our efforts under our contracts with the Gates Foundation and DTRA and the attainment of contingent event-based payments and royalties, if any, under our agreements with GSK and Lilly;

·the number and characteristics of product candidates that we pursue;

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

·the outcome, timing and cost 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;

·the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval;

·the cost of implementing healthcare compliance policies and procedures; and

·the extent to which we acquire or invest in businesses, products or technologies.

If, over the next several years, adequate funds are not available, we may be required to delay, reduce the scope of or eliminate some, or all, of the above-listed activities that we control.

We began business operations in March 2002. Since inception, we have not generated revenue from product sales and, as of June 30, 2014, we had an accumulated deficit of $176.1 million. Historically, we funded our operations primarily through the sale of equity securities, payments received under our collaborations and research agreements, government contracts and grants and contracts with not-for-profit organizations for neglected diseases, borrowings under our debt agreements and our settlement with Valeant. We expect to incur operating losses in future years as we continue to develop our drug candidates, including AN2728. We may require additional capital to fund research and development activities, including clinical trials for our development programs and preclinical activities for our product candidates. Although we believe that our existing capital resources, together with the payments we expect to receive based on sales of KERYDIN pursuant to the Sandoz Agreement, will be adequate to fund our operations for at least the next twelve months, we may also seek to finance our future cash needs through public or private equity offerings, debt financings or licensing, collaboration or other similar arrangements, or a combination of these sources.

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Contractual Obligations

Our contractual obligations consist primarily of obligations under lease agreements and our notes payable obligations. As a result of the FDA’s approval of KERYDIN in July 2014, the end of the interest only period for payments under our Loan Agreement with Hercules was automatically extended from January 1, 2015 to July 1, 2015.  Equal monthly payments of principal and interest will begin at that time and continue through the scheduled maturity date of July 1, 2017. Our other contractual obligations for 2014 and beyond have not changed materially from those included in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 17, 2014. The following table summarizes our contractual obligations at June 30, 2014 and the effect such obligations are expected to have on our liquidity and cash flow in future years.

	Payments due by period (in thousands)
	Total		Remainder of 2014		1 - 3 years		3 - 5 years		Thereafter
Contractual obligations:
Operating leases	$	6,596	$	921	$	3,539	$	2,136	$	—
Notes payable	37,392		1,777		27,098		8,517		—
Total contractual obligations	$	43,988	$	2,698	$	30,637	$	10,653	$	—

Contracts

We enter into contracts in the normal course of business with clinical research organizations for clinical trials and clinical supply manufacturing and with vendors for sales and marketing services, preclinical research studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements.

Interest Rate Risk

The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and short-term and long-term investments in a variety of high credit quality securities, including U.S. government instruments, commercial paper, money market funds and corporate debt securities. Our investment policy prohibits us from holding auction rate securities or derivative financial instruments. To the extent that the investment portfolios of companies whose commercial paper is included in our investment portfolio may be subject to interest rate risks, which could be negatively impacted by reduced liquidity in auction rate securities or derivative financial instruments they hold, we may also be subject to these risks. However, our investment portfolio as of June 30, 2014 is comprised of a money market fund, federal agency securities with minimum ratings of AAA or AA+, corporate bonds with minimum ratings of A2/A and commercial paper with minimum ratings of P1/A1. The remaining average maturity of the entire portfolio is 146 days. Due to the short-term nature of our investments, we believe that there is no material exposure to interest rate risk and we are not aware of any material exposure to market risk.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A discussion of our exposure to, and management of, market risk appears in Part I, Item 2 of this Quarterly Report on Form 10-Q under the heading “Interest Rate Risk.”

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Based on the evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) required by Rules 13a-15(b) or 15d-15(b) of the Exchange Act, our Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in internal controls

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not a party to any material legal proceedings at this time. From time to time, we may be involved in litigation relating to claims arising out of our ordinary course of business.

ITEM 1A.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 Quarterly Report on Form 10-Q, before deciding whether to invest in shares of our common stock. The occurrence of any of the adverse developments described in the following risk factors could materially 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 Our Financial Position and Need for Additional Capital

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.

We have recorded a net loss of $45.7 million for the six months ended June 30, 2014 and do not expect to be profitable in 2014. With the exception of 2013, which was impacted by a significant legal settlement with Valeant Pharmaceuticals International, Inc. (Valeant), we have incurred net losses in each year since our inception, including net losses of approximately $56.1 million and $47.9 million for 2012 and 2011, respectively. As of June 30, 2014, we had an accumulated deficit of approximately $176.1 million. Historically, we have devoted most of our financial resources to research and development, including our preclinical development activities and clinical trials. We do not expect to receive revenues relating to sales of KERYDIN under the Sandoz Agreement over the remainder of 2014 sufficient to offset our losses for the year, and cannot guarantee that payments under the Sandoz Agreement will be sufficient to offset losses in future years. While Sandoz will be responsible for selling, marketing, distribution, general and administrative costs and costs related to the commercialization of KERYDIN under the Sandoz Agreement, we expect that, as a general matter, both sales and marketing and research and development expenses for our other products will increase in the future as we progress such product candidates through clinical development into the commercialization stage, conduct our research and development activities under our various current and potential collaborations, including those related to our neglected diseases initiatives, advance our discovery research projects into the preclinical stage and continue our early-stage research. As a result of the foregoing, and as stated above, we expect to continue to experience net losses and negative cash flows in 2014. These losses and negative cash flows have had, and until we are profitable, will continue to have, an adverse effect on our stockholders’ equity and working capital.

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of our expenses or when, or if, we will be able to maintain profitability. In addition, our expenses could increase if we are required by the United States Food and Drug Administration (FDA) to perform studies in addition to, or that are larger than, those that we currently expect. Whether we continue to incur future net losses will depend, in part, on our future expenses and our ability to generate revenues. Revenues from the Sandoz Agreement will depend in large part on the successful commercialization of KERYDIN. Prior to our entry into the Sandoz Agreement, we financed our operations primarily through the sale of equity securities, debt arrangements, government contracts and grants and payments under our agreements with GlaxoSmithKline LLC (GSK), Schering Corporation (Schering), Eli Lilly and Company (Lilly), Medicis Pharmaceutical Corporation (Medicis), the Bill and Melinda Gates Foundation (the Gates Foundation) and the United States Department of Defense, Defense Threat Reduction Agency (DTRA) and our arbitration settlement with Valeant. Revenues from our collaborations and research agreements with GSK, Lilly, the Gates Foundation and DTRA are uncertain because milestones or other contingent payments under our agreements with them may not be achieved or received. In addition, we may not be able to enter into other collaborations that will generate significant cash. If we are unable to successfully develop and commercialize our product candidates, or if revenues from any product candidate that receives marketing approval, including KERYDIN, 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 developing our technology and undertaking preclinical studies and clinical trials of our product candidates and we are reliant on collaborators for certain of our products. In particular, under the Sandoz Agreement, Sandoz will be responsible for the distribution and commercialization of KERYDIN in the United States. Consequently, any predictions regarding 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 following risk factors, as well as other factors described elsewhere in this Quarterly Report on Form 10-Q:

·the timely and successful launch of KERYDIN pursuant to the Sandoz Agreement;

·our ability to timely obtain and maintain regulatory approval for AN2728 or any of our other product candidates;

·competition from existing products or new products that may emerge, including Jublia, Valeant’s efinaconazole product that was approved by the FDA for the treatment for onychomycosis of the toenails in the United States in June 2014;

·our dependency on third party manufacturers to supply or manufacture our products;

·our ability to establish an effective sales, marketing and distribution infrastructure in a timely manner;

·market acceptance of KERYDIN or our product candidates;

·delays in the commencement, enrollment and timing of clinical testing for our product candidates, including our Phase 3 trials of AN2728 for the treatment of mild-to-moderate atopic dermatitis;

·the success of our clinical trials through all phases of clinical development;

·any delays in regulatory review and approval of product candidates in clinical development;

·potential side effects of our product candidates that could delay or prevent commercialization or cause an approved drug to be taken off the market;

·the ability of patients or healthcare providers to obtain coverage of or sufficient reimbursement for our products;

·      our ability to obtain additional funding to develop our product candidates;

·our ability to receive approval and commercialize KERYDIN or our other product candidates outside of the United States;

·our ability to establish or maintain collaborations, licensing or other arrangements;

·our ability and the ability of third parties’ to protect and defend intellectual property rights;

·costs related to and outcomes from potential litigation;

·our ability to adequately support future growth;

·our ability to attract and retain key personnel to manage our business effectively;

·our ability to maintain our accounting systems and controls;

·potential product liability claims;

·potential liabilities associated with hazardous materials; and

·our ability to maintain adequate insurance coverage.

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Due to the various factors mentioned above, and others, the results of any quarterly or annual periods should not be relied upon as indications of future operating performance.

We may continue to require substantial additional capital and if we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate our product development programs.

The development and commercialization of pharmaceutical products is expensive. The costs include those associated with conducting preclinical and clinical trials, interactions with regulatory authorities and the expenses associated with product commercialization. If, for example, the FDA requires that we perform additional studies beyond those that we currently expect, our expenses could increase materially beyond what we currently anticipate and the timing of any potential product approval may be delayed.  Although we believe that our existing capital resources, together with the payments we expect to receive based on sales of KERYDIN pursuant to the Sandoz Agreement, will be sufficient to meet our anticipated operating requirements for at least the next twelve months, we may need to raise additional capital to fund our research and development activities, including clinical trials for our development programs and preclinical activities for our product candidates, and meet our operating requirements beyond the next twelve months. Furthermore, any delays in, or unanticipated costs associated with, our development, regulatory and commercial efforts could significantly increase the amount of additional capital required for us to conduct these research, development and commercialization activities and meet our operating requirements beyond the next twelve months. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results, including the costs to maintain our currently planned operations, could vary materially.

Unless and until we can generate a sufficient amount of revenue from our products, including sales of KERYDIN under the Sandoz Agreement, we expect to finance future cash needs through public or private equity offerings, debt financings or licensing, collaboration or other similar arrangements, or a combination of these sources. 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 some of our research or development programs or our commercialization efforts and may not be able to make scheduled debt payments on a timely basis or at all. 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 collaborations and licensing arrangements, it may be necessary to relinquish some rights to our technologies or our products or 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 forecasts regarding the period of time that our existing capital resources will be sufficient to meet our operating requirements, the timing of our future capital resource requirements, both near and long-term, will depend on many factors, including, but not limited to:

·the timely and successful launch of KERYDIN pursuant to the Sandoz Agreement;

·the outcome, timing and cost of regulatory approvals;

·the effects of competing technological and market developments, including Jublia, Valeant’s efinaconazole product that was approved by the FDA for the treatment for onychomycosis of the toenails in the United States in June 2014;

·the cost and timing of completion of commercial-scale outsourced manufacturing activities;

·the cost of establishing sales, marketing and distribution capabilities for product candidates for which we may receive regulatory approval;

·the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates and potential product candidates, including the Phase 3 clinical trials of AN2728;

·the success of our collaborations and research agreements and the attainment of milestones and royalty payments, if any, under those agreements;

·the number and characteristics of product candidates that we pursue;

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

·the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

·      the extent to which we acquire or invest in businesses, products or technologies.

Raising funds through lending arrangements may restrict our operations or produce other adverse results.

Our current loan and security agreement with Hercules (the Loan Agreement), which we entered into in June 2013, contains a variety of affirmative and negative covenants, including required financial reporting, limitations on certain dispositions of assets, limitations on the incurrence of additional debt and other requirements. To secure the performance of our obligations under the Loan Agreement, we granted a security interest over substantially all of our assets, other than our intellectual property assets, to the lenders. Our failure to comply with the covenants in the Loan Agreement, the occurrence of a material impairment of the prospect of repayment or in the perfection or priority of the lenders’ lien on our assets, as determined by the lenders, or the occurrence of certain other specified events could result in an event of default that, if not cured or waived, could result in the acceleration of all or a substantial portion of our debt, potential foreclosure on our assets and other adverse results.

Risks Relating to the Development, Regulatory Approval and Commercialization of Our Products and Product Candidates

If KERYDIN fails to timely achieve and sustain commercial success, our business will suffer, our future prospects may be harmed and our stock price would likely decline.

KERYDIN is our first product to be approved by the FDA and will be our first commercialized product. Unless and until we successfully commercialize another product candidate or obtain approval to market KERYDIN, directly or through another collaboration, in jurisdictions outside of the United States, the payments that we receive under the Sandoz Agreement will constitute the entirety of our revenues from product sales. The amount of such payments will depend largely on the commercial success of KERYDIN, which will determine the level of gross profit sharing payments, if any, in excess of any minimum amounts that we are entitled to under the Sandoz Agreement. In addition, Sandoz will be responsible for the distribution and commercialization of KERYDIN and will control sales, marketing and other commercialization matters under the Sandoz Agreement, including pricing and reimbursement matters. We will have limited ability to control such decisions, which may affect the commercial success of KERYDIN. The commercial success of KERYDIN will depend on, and may be limited by, a number of factors, including the following:

·acceptance of and ongoing satisfaction with KERYDIN by the medical community, patients receiving treatment and third-party payers in the United States, and eventually in foreign markets to the extent we seek and receive marketing approvals abroad;

·KERYDIN’s market share;

·the extent and effectiveness of the development, sales and marketing and distribution support KERYDIN receives;

·the amount of resources and efforts utilized by Sandoz in relation to the commercialization of KERYDIN;

·the existence of competing products, including whether Jublia, Valeant’s efinaconazole product that was approved by the FDA for the treatment for onychomycosis of the toenails in the United States in June 2014, or other competing products or therapies are prescribed in place of KERYDIN for certain patients or are perceived as superior or more cost-effective to KERYDIN by physicians or patients;

·adequate coverage or reimbursement for KERYDIN by government healthcare programs and third-party payers, including private health coverage insurers and health maintenance organizations; and

·the ability of patients to afford any required co-payments for KERYDIN.

As discussed above, we will have limited ability under the Sandoz Agreement to control decisions that may affect the commercial success of KERYDIN. If Sandoz is unable to timely and successfully launch KERYDIN, our revenues would be impacted and our business would be seriously harmed.

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We cannot be certain that AN2728 or any of our other wholly-owned or partnered product candidates will receive regulatory approval, and without regulatory approval our product candidates will not be able to be marketed.

We have invested a significant portion of our efforts and financial resources in the development of our most advanced product candidates. Our ability to generate significant revenue related to product sales will depend on the successful development and regulatory approval of our product candidates.

Currently, our lead product candidate is AN2728, an investigational anti-inflammatory PDE-4 inhibitor in development for the potential treatment of mild-to-moderate atopic dermatitis. We initiated Phase 3 studies of AN2728 for the treatment of mild-to-moderate atopic dermatitis in the first quarter of 2014. We may conduct lengthy and expensive Phase 3 clinical trials of AN2728 only to learn that this drug candidate is not a safe or effective treatment, in which case these clinical trials may not lead to regulatory approval. Similarly, GSK’s development of our partnered product candidate in tuberculosis (TB) and Lilly’s development program for our partnered animal health product candidate may be subject to delays in development and not lead to regulatory approval from the FDA and similar foreign regulatory agencies. Such failure to timely develop and obtain regulatory approvals would prevent our product candidates from being marketed and would have a material and adverse effect on our business.

The development of a product candidate, including preclinical and clinical testing, manufacturing, quality systems, labeling, approval, record-keeping, selling, promotion, marketing and distribution of products, is subject to extensive regulation by the FDA in the United States and regulatory authorities in 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 an NDA from the FDA. Obtaining approval of an NDA is a lengthy, expensive and uncertain process. An NDA must include extensive preclinical and clinical data and supporting information to establish the product candidate’s safety and effectiveness for each indication. The approval application must also include significant information regarding the chemistry, manufacturing and controls for the product. The regulatory development and review process typically takes years to complete and approval is never guaranteed. If a product is approved, the FDA may limit the indications for which the product may be used, include extensive warnings on the product labeling or require costly ongoing requirements for post-marketing clinical studies and surveillance or other risk management measures to monitor the safety or efficacy of the product candidate. Markets outside of the United States also have requirements for approval of drug candidates with which we must comply prior to marketing. Obtaining regulatory approval for marketing of a product candidate in one country does not ensure we will be able to obtain regulatory approval in other countries but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries. Any regulatory approval of any of our products or product candidates, once obtained, may be withdrawn. If AN2728 or any of our other wholly-owned or partnered product candidates do not receive regulatory approval, we may not be able to generate sufficient revenue to become profitable or to continue our operations. Moreover, our submission of an NDA or our receipt of regulatory approval with respect to any product does not assure the commercial success of such product.

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 or limit the regulatory approval of our product candidates. We initiated Phase 3 studies of AN2728 for the treatment of mild-to-moderate atopic dermatitis in the first quarter of 2014. We can give no assurance that our future clinical trials for AN2728, or any of our other product candidates, will begin when expected or, if commenced, will be completed on schedule or at all. The commencement, enrollment and completion of clinical trials can be delayed for a variety of reasons, including:

·our inability to reach agreements on acceptable terms with prospective clinical research organizations (CROs) and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

·regulatory objections to commencing a clinical trial;

·our inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same indication as our product candidates;

·the withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials;

·our inability to obtain institutional review board (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

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·our 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 either a vehicle without the active ingredient or a placebo.

In addition, a clinical trial may be suspended or terminated by us, our current or any future partners, the FDA or other regulatory authorities due to a number of factors, including:

·our failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

·      a failed inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities;

·unforeseen safety or efficacy 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 are required to conduct additional clinical trials or other testing of our product candidates beyond those currently contemplated, we may be delayed in obtaining, or may not be able to obtain, marketing approval for such product candidates.

In addition, if our current or any future partners assume development of our product candidates, they may suspend or terminate their development and commercialization efforts, including clinical trials for our product candidates, at any time. For example, in September 2013, Lilly notified us that it was ceasing further development of a development compound it licensed in August 2011 for an animal health indication and has granted us a fully paid, sublicenseable, perpetual, irrevocable, exclusive license to the related technology and patents. Similarly, GSK discontinued clinical development of AN3365 in October 2012 and all rights to AN3365 have reverted to us. We continue to evaluate further development of these molecules.

Changes in regulatory requirements and guidance may occur and we or our partners may be required by appropriate regulatory authorities to amend clinical trial protocols to reflect these changes. Amendments may require us or our partners to resubmit clinical trial protocols to IRBs for reexamination, 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 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 prevented or delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials ultimately may 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, GSK, Lilly, Drugs for Neglected Diseases initiative (DNDi) the Gates Foundation, DTRA 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 clinical development. Clinical trials may produce negative or inconclusive results, and we or our partners may decide, or regulators may require us, to conduct additional clinical or preclinical testing. In addition, data obtained from tests are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay, limit or prevent regulatory approval. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will generate the same results or otherwise provide adequate data to demonstrate the efficacy and safety of a product candidate. Frequently, product candidates that have shown promising results in early clinical trials have subsequently suffered significant setbacks in later clinical trials. In addition, the design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support regulatory approval. Further, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts. If AN2728, AN5568, also referred to as SCYX-7158 for human African trypanosomiasis (HAT, or sleeping sickness), or our other product candidates are found to be unsafe or lack efficacy, we or our collaborators will not be able to obtain regulatory approval for them and our business would be harmed. For example, we are conducting standard cardiac safety monitoring in our Phase 3 clinical trials for AN2728. If the results of Phase 3 clinical trials of AN2728 do not achieve the primary efficacy endpoints and demonstrate an acceptable safety level, the prospects for approval of AN2728 would be materially and 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.

In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors, including changes in trial protocols, differences in size and type of the patient populations, adherence to the dosing regimen, particularly for self-administered topical drugs, and the rate of dropout among clinical trial participants. We do not know whether any Phase 2, Phase 3 or other clinical trials we or any partners may conduct will demonstrate consistent and/or adequate efficacy and safety to obtain regulatory approval to market our product candidates.

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We have limited experience in conducting Phase 3 clinical trials and we may be unable to submit NDAs for AN2728 and other product candidates we are developing.

We initiated our Phase 3 clinical trials of AN2728 for the treatment of mild-to-moderate atopic dermatitis in March 2014. The proper conduct of Phase 3 clinical trials is essential in obtaining regulatory approval and the submission of a successful NDA is a complicated process. Although our NDA for KERYDIN was accepted for filing by the FDA in September 2013 and approved by the FDA in July 2014, we have limited experience in preparing, submitting and prosecuting regulatory filings. Consequently, we may be unable to successfully and efficiently execute and complete additional planned clinical trials in a way that leads to an NDA submission, acceptance and approval of AN2728 or any of our other product candidates under development. 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. In addition, failure to commence or complete, or delays in, our planned clinical trials may prevent us from or delay us in commercializing AN2728 and our other product candidates under development.

Undesirable side effects may delay or prevent marketing approval of our product candidates, require that our approved products be taken off the market or otherwise limit the sales of our approved products.

Unforeseen side effects may arise during clinical development or after an approved product has been marketed. For example, during our clinical trials for KERYDIN, a small number of patients being treated for onychomycosis experienced some skin irritation around their toenails. In addition, a small number of patients who received AN2728 during our clinical trials experienced some skin irritation. The range and potential severity of possible side effects from systemic therapies is generally greater than for topically administered drugs. The results of future clinical trials may show that our product candidates cause undesirable or unacceptable 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 undesirable or unacceptable side effects caused by our product are identified after such product receives marketing approval:

·regulatory authorities may require changes to the label, including the inclusion of specific warnings or contraindications, and may issue field alerts to physicians and pharmacies;

·we may be required to change the way the product is administered or conduct additional clinical trials;

·we or contractual partners may be subject to limitations on how the product may be promoted;

·sales of the product may decrease significantly;

·regulatory authorities may require us to take our approved product 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, Sandoz, GSK, Lilly, the Gates Foundation, DTRA 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 products.

All of our product candidates require regulatory review and approval prior to commercialization. Any delay in the regulatory review or approval of any of our product candidates will harm our business.

All of our product candidates require regulatory review and approval prior to commercialization. Any delays in the regulatory review or approval of our product candidates would delay market launch, increase our cash requirements and result in additional operating losses.

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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, GSK, Lilly, the Gates Foundation, DTRA or our potential future partners may be unable to successfully submit NDAs in the United States or marketing approval applications or other foreign applications for any of our products. Upon submitting an 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 these submissions will be accepted for filing and review by the FDA, or that any 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 product candidates will receive favorable recommendations 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, recommendations made in regulatory advice letters, 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. For example, if preclinical results suggest a potential for drug-drug interactions (DDI), clinical trials are generally conducted to assess the likelihood of DDI and their potential impact on product safety. Although, to date, we have not been requested to perform DDI studies by the FDA, we nevertheless completed a clinical DDI study in February 2014 demonstrating that AN2728 and metabolites do not interact with cytochrome P450 subtype 2C9. However, if any DDI studies are required, it may delay any potential product approval and may 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 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 NDAs have fluctuated over the last ten years, and we cannot predict the review time for any of our submissions with any regulatory authorities. Review times can be affected by a variety of factors, including budget and funding levels and statutory, regulatory and policy changes. Moreover, 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 evaluation and mitigation strategies (REMS) 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, a delay or failure in obtaining approval or approval for a more limited indication than originally sought.

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, may 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 on compounds containing boron. The use of boron chemistry to develop new drugs is largely unproven. If boron-based compounds developed by us or others have significant adverse side effects, regulatory authorities could require additional studies of our boron-based compounds, which could delay the timing of and increase the cost for regulatory approvals of our product candidates. Additionally, adverse side effects for other boron-based compounds could affect the willingness of healthcare payors and medical providers to provide reimbursement for or use our boron-based drugs and could impact market acceptance of our products.

Additionally, there can be no assurance that boron-based products will be free of significant adverse side effects. During clinical trials, a small number of patients who received KERYDIN experienced some skin irritation around their toenails and a few patients who received AN2728 experienced some skin irritation in the treated areas. 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 products that are safe and effective using our boron chemistry platform, our business will be materially and adversely affected.

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If any of our product candidates for which we receive regulatory approval, including KERYDIN, do not achieve broad market acceptance, the revenues that are generated from their sales will be limited.

The commercial success of KERYDIN and our product candidates such as AN2728, if approved, will depend upon the acceptance of these products among physicians, patients and healthcare payors. The degree of market acceptance of our approved products will depend on a number of factors, including:

·limitations or warnings contained in the FDA-approved labeling for our products;

·changes in the standard of care for the targeted indications for any of our products;

·limitations in the approved indications for our products;

·lower demonstrated clinical safety or efficacy compared to other products;

·occurrence of significant adverse side effects;

·ineffective sales, marketing and distribution support;

·lack of availability of reimbursement from managed care plans and other healthcare payors;

·timing of market introduction and perceived effectiveness of competitive products, including information provided in competitor products’ package inserts;

·lack of cost-effectiveness;

·availability of alternative therapies with potentially advantageous results, or other products with similar results at similar or lower cost, including generics and over-the-counter products;

·adverse publicity about our products or favorable publicity about competitive products;

·lack of convenience and ease of administration of our products; and

·potential product liability claims.

If our approved products do not achieve an adequate level of acceptance by physicians, healthcare payors and patients, sufficient revenue may not be generated from these products, and we may not become or remain profitable. In addition, efforts to educate the medical community and healthcare payors on the benefits of our products may require significant resources and may never be successful. We can provide no assurances regarding the level of acceptance that KERYDIN will receive among physicians, healthcare payors and patients. Additionally, our product candidates intended for use against neglected diseases, such as AN5568 for sleeping sickness and our product candidate for TB are not expected to generate significant revenues, if any.

We have never marketed a drug before, and if we are unable to establish an effective commercial infrastructure or enter into acceptable third party sales and marketing or licensing arrangements, we may not be able to commercialize our product candidates successfully.

The marketing and sales of pharmaceutical products in specific U.S. specialty markets requires a commercial infrastructure and the implementation of such infrastructure requires substantial resources and time. Historically we have not had any sales, distribution or marketing capabilities. Under the Sandoz Agreement, Sandoz will be responsible for the distribution and commercialization of KERYDIN in the United States. However, to the extent we are successful in our clinical trials and are able to gain approval for AN2728 or our other product candidates, we intend to continue to evaluate how best to commercialize our products, whether through the establishment of our internal infrastructure, partnerships with third party organizations or a combination of both. The costs of any such internal structure in advance of any approval of our product candidates could be significant. In addition to the risk and expense of establishing sales capabilities in advance of commercial launch, we may not be able to hire a commercial organization that has adequate expertise in the medical markets that we intend to target. If we are unable to establish a sales force and marketing capability, our operating results may be adversely affected. In addition, we continue to evaluate entering into sales and marketing or licensing arrangements with third parties for non-specialty markets in the United States and for the international sales of any approved products. If we are unable to enter into any such arrangements on acceptable terms, or at all, we may be unable to market and sell our products in these markets and the potential product revenues for our products would be reduced.

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We expect that our existing and future approved products will face competition and most of our competitors have significantly greater resources than we do.

The pharmaceutical industry is highly competitive, with a number of established, large pharmaceutical companies, as well as many smaller companies. Many of these companies have significant financial resources, marketing capabilities and experience in obtaining regulatory approvals for product candidates. 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 products. We expect any future products we develop to compete on the basis of, among other things, product efficacy, safety, price and convenience. For example, we expect that KERYDIN will face competition from Jublia, Valeant’s efinaconazole product that was approved by the FDA for the treatment for onychomycosis of the toenails in the United States in June 2014, and we can provide no assurances regarding the level of acceptance that KERYDIN will receive among physicians, healthcare payors and patients as compared to Jublia.

Compared to us, many of our potential competitors, including Valeant, have substantially greater:

·resources, including capital, personnel and technology;

·manufacturing and distribution expertise;

·sales and marketing expertise.

·research and development capability;

·clinical trial expertise;

·regulatory expertise;

·intellectual property prosecution and portfolio management expertise; and

·international capabilities;

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 regulatory or intellectual property based exclusivity that limits our ability to develop or commercialize our product candidates. Our competitors also may develop drugs that are more effective, more widely used and less costly than ours and also may be more successful than us in manufacturing and marketing their products.

The dermatology and podiatry markets are competitive, which may adversely affect our ability to commercialize our products.

We expect that KERYDIN will face competition from Jublia, as well as other currently marketed nail fungal therapeutics including Lamisil, Sporanox, Onmel, Penlac and generic versions of those compounds. KERYDIN will also compete with lasers, which have received clearance from the FDA for the temporary increase of clear nail in patients with onychomycosis and with over-the-counter products. There are also several pharmaceutical product candidates under development that could potentially be used to treat onychomycosis and compete with KERYDIN, as well as several companies pursuing various devices for onychomycosis, including laser technology. For example, 10% Luliconazole Solution from Topica Pharmaceuticals, Inc. is currently in a Phase 2b/3 clinical trial to evaluate efficacy and safety of two different dosing regimens.  If approved for the treatment of mild-to-moderate atopic dermatitis and/or psoriasis, AN2728 may compete against a number of approved treatments. For mild-to-moderate atopic dermatitis, competing treatments would include: combinations of antibiotics, antihistamines, topical corticosteroids and topical immunomodulators, such as Elidel (pimecrolimus) and Protopic (tacrolimus); and, for psoriasis, Taclonex (a combination of calcipotriene and the high potency corticosteroid, betamethasone dipropionate), Dovonex (calcipotriene), Tazorac (tazarotene) and generic versions, where available. AN2728 may one day also compete against systemic treatments for psoriasis, which include oral products such as Soriatane (acitretin), Otezla (apremilast), methotrexate and cyclosporine and injected biologic products such as Enbrel (etanercept), Remicade (infliximab), Stelara (ustekinumab), Simponi (golimumab), Humira (adalimumab), brodalumab and dupilumab. A number of other treatments are used for psoriasis, including light-based treatments and non-prescription topical treatments. In addition, each of our product candidates may compete against product candidates currently under development by other companies.

Even if a generic product or an over-the-counter product is less effective than our product, a less effective generic or over-the-counter product may be more quickly adopted by health insurers and patients than our competing product based upon cost or convenience.

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Reimbursement decisions by healthcare payors may have an adverse effect on pricing and market acceptance. If there is not sufficient reimbursement for our products, including KERYDIN, 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 healthcare payors. Patients or healthcare providers who purchase drugs generally rely on healthcare payors to reimburse all or part of the costs associated with such products. Adequate coverage and reimbursement from governmental payors, such as Medicare and Medicaid, and commercial payors, such as HMOs and insurance companies, can be essential to new product acceptance.

Current treatments for onychomycosis are often not reimbursed by healthcare payors. We do not know the extent to which KERYDIN will be reimbursed. Reimbursement decisions by healthcare payors may have an effect on pricing and market acceptance. Our product candidates, such as AN2728, also will be subject to uncertain reimbursement decisions by healthcare payors. Our products are less likely to be used if they do not receive adequate reimbursement.

The market for our products and product candidates may depend on access to healthcare payors’ drug formularies, or lists of medications for which healthcare payors provide coverage and reimbursement. Industry competition to be included in such formularies results in downward pricing pressures on pharmaceutical companies. Healthcare payors may refuse to include a particular branded drug in their formularies when a competing generic product is available.

All healthcare 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.

Virtually all countries regulate or set the prices of pharmaceutical products, which is a separate determination from whether a particular product will be subject to reimbursement under that government’s health plans. There are systems for reimbursement and pricing approval in each country and moving a product through those systems is time consuming and expensive.

Healthcare policy changes, including the Healthcare Reform Act, may have a material adverse effect on us.

Healthcare costs have risen significantly over the past decade. The Patient Protection and Affordable Care Act (PPACA), as amended by the Health Care and Education Reconciliation Act of 2010, or collectively, the Healthcare Reform Act, substantially changes the way healthcare is financed by both governmental and private insurers and significantly impacts the pharmaceutical industry. The Healthcare Reform Act contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse, which will impact existing government healthcare programs and will result in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program. We anticipate that following KERYDIN’s launch, some of our revenue may be derived from United States government healthcare programs, including Medicare. In addition, the Healthcare Reform Act imposes a non-deductible excise tax on pharmaceutical manufacturers or importers who sell “branded prescription drugs,” which includes innovator drugs and biologics (excluding orphan drugs or generics) to U.S. government programs. We expect that the Healthcare Reform Act and other healthcare reform measures that may be adopted in the future could have a material adverse effect on our industry generally and our ability to successfully commercialize our products or could limit or eliminate our spending on development projects.

In addition to the Healthcare Reform Act, we expect that there will continue to be proposals by legislators at both the federal and state levels, regulators and healthcare payors to keep healthcare costs down while expanding individual healthcare benefits. Certain of these changes could impose limitations on the prices we will be able to charge for any products that are approved or the amounts of reimbursement available for these products from governmental agencies or healthcare payors or may increase the tax requirements for life sciences companies such as ours. While it is difficult to predict what effect the Healthcare Reform Act or any future legislation or regulation will have on us, such laws could have a material adverse effect on our business, financial position and results of operations.

We currently expect that a portion of the market for our products will be outside the United States. Our products approved in the United States and product candidates may never receive approval or be commercialized outside of the United States.

We may enter into sales and marketing arrangements with third parties for international sales of approved products. To market and commercialize any products outside of the United States, we or any third parties that are marketing or selling our products 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 in these risk factors regarding failure to obtain FDA approval in the United States as well as other risks such as those relating to the pricing of any such product, which will likely require negotiations with foreign governments or agencies of such governments prior to commercialization in these countries. 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

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approval in the United States. In addition, regulatory approval often involves further efforts to obtain adequate pricing or reimbursement from regulatory authorities in foreign jurisdictions. As a result, regulatory risks include the possibility that our product candidates may not be approved for all indications requested, or at all, which could limit the uses of our approved products and have an adverse effect on our product sales and potential royalties.

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 high profile adverse safety events with certain drug products, regulatory authorities may require, as a condition of approval, costly risk evaluation and mitigation strategies, 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 products may include a restriction on the term of its use, or it may not include one or more of our intended indications. Furthermore, any new legislation addressing drug safety issues 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 approved products will 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. Furthermore, any post-approval changes that we may seek to make to an approved NDA, including KERYDIN’s NDA, such as a change in the manufacturing site, manufacturing process, drug specifications, drug container, drug packaging or labeling, are subject to varying degrees of FDA review depending on the categorization of the change as a “major change”, “moderate change” or “minor change”. We can offer no assurances that any such proposed change will be accepted or approved by the FDA, and failure to obtain such acceptance or approval may have a material adverse effect on our business or results of operations. In addition, approved products, manufacturers and manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practices (cGMP). As such, we and our contract manufacturers are subject to continual review and periodic inspections to assess compliance with cGMP. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control. We also will be required to report certain adverse reactions and production problems, if any, to the FDA and to comply with certain requirements concerning advertising and promotion for our products.

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, it may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If any of our products fail to comply with applicable regulatory requirements, a regulatory agency may:

·issue warning letters;

·mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;

·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;

·impose other civil or criminal penalties;

·suspend regulatory approval;

·suspend any ongoing clinical trials;

·refuse to approve pending applications or supplements to approved applications filed by us, our partners or our potential future partners;

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

·seize or detain products or require a product recall.

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In addition, the occurrence of any of the foregoing, even if promptly remedied, could negatively impact the perception of us or the relevant product among the medical community, patients or third-party payors.

We currently are subject to federal and state laws prohibiting “kickbacks” and false or fraudulent claims, and federal and state physician payment disclosure laws that, if violated, could subject us to substantial penalties. Additionally, any challenge to or investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business.

We are subject to regulation by regional, national, state and local agencies, including the Department of Justice, the Federal Trade Commission, the Office of Inspector General of the U.S. Department of Health and Human Services and other regulatory bodies, as well as governmental authorities in those foreign countries in which we may commercialize our products. The FFDCA, the Public Health Service Act and other federal and state statutes and regulations govern to varying degrees the research, development, manufacturing and commercial activities relating to prescription pharmaceutical products, including preclinical testing, approval, production, labeling, sale, distribution, import, export, post-market surveillance, advertising, dissemination of information and promotion. These statutes and regulations include Anti-Kickback statutes and false claims statutes.

The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical companies, on the one hand, and prescribers, purchasers and formulary managers, on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting identified common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid.

Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the company’s marketing of the product for unapproved and, thus, non-reimbursable, uses. Pharmaceutical and other healthcare companies have also been prosecuted on other legal theories of Medicare fraud. The majority of states also have statutes or regulations similar to the federal Anti-Kickback Statute and federal false claims laws that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a company’s products from reimbursement under government programs, criminal fines and imprisonment. Federal “sunshine” laws require transparency regarding financial arrangements with health care providers, including requiring applicable manufacturers of covered drugs to comply with applicable reporting and disclosure requirements regarding payments and any other “transfer of value” made or distributed to prescribers, physicians, teaching hospitals and other health care providers. Several states have similar healthcare professional aggregate spend reporting obligations or prohibitions that require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products and prohibit or require reporting of the provision of gifts, meals and entertainment to individual healthcare providers. Other states require the posting of information relating to clinical studies. In addition, California requires pharmaceutical companies to implement a comprehensive compliance program that includes a limit on expenditures for, or payments to, individual medical or health professionals. We have adopted a comprehensive compliance program that we believe satisfies the California law. Several additional states are considering similar proposals. Compliance with these laws is difficult and time consuming, and companies that do not comply with these state laws face civil penalties. Because of the breadth of these laws and the narrowness of available statutory and regulatory exemptions, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Such a challenge could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved label. The FDA’s Office of Prescription Drug Promotion (OPDP), formerly the Division of Drug Marketing, Advertising, and Communications, is responsible for reviewing prescription drug advertising and promotional labeling to ensure that the information contained in these materials is not false or misleading. There are specific disclosure requirements and the applicable regulations mandate that advertisements cannot be false or misleading or omit material facts about the product. Prescription drug promotional materials must present a fair balance between the drug’s effectiveness and the risks associated with its use. Most warning letters from OPDP cite inadequate disclosure of risk information. In addition, we may not promote our products for indications or uses for which they do not have approval. If a regulatory agency disagrees with the promotion, marketing or labeling of a product, it may impose restrictions on that product or us, including requiring withdrawal of the product from the market.

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In addition to the federal Anti-Kickback Statute and federal false claims laws, the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH) and its implementing regulations, also imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information. State and foreign laws governing the privacy and security of health information in certain circumstances differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

While Sandoz will be responsible for sales and marketing activities associated with the commercialization of KERYDIN in the United States, we may in the future employ, or contract with a contract sales organization that employs, the sales representatives who promote our drug products. We expect that government and regulatory agencies will hold us responsible for any actions by such sales representatives or sales organizations. If we or our contract sales organization fails to comply with the regulatory requirements of the FDA and other applicable United States and foreign regulatory authorities or if previously unknown problems with our products, manufacturers or manufacturing processes are discovered, we and our partners could be subject to administrative or judicially imposed sanctions.

If we or our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including criminal and significant civil penalties, damages, fines, imprisonment, exclusion of products from reimbursement under United States federal or state healthcare programs, and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could materially adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with these laws may prove costly.

Current healthcare laws and regulations and future legislative or regulatory reforms to the healthcare system may affect our ability to profitably sell any products that we may develop.

The United States and some foreign jurisdictions are considering, or have enacted, a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.

In 2010, PPACA became law in the United States. PPACA substantially changes the way healthcare is financed by both governmental and private insurers and significantly affects the pharmaceutical industry. Among the provisions of PPACA of importance to the pharmaceutical industry are the following:

·an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs;

·an increase in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program, retroactive to January 1, 2010, to 23.1% and 13% of the average manufacturer price for branded and generic drugs, respectively;

·a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D;

·extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

·expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the Federal Poverty Level beginning in 2014, thereby potentially increasing manufacturers’ Medicaid rebate liability;

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·expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;

·new requirements to report certain financial arrangements with physicians and teaching hospitals, as defined in PPACA and its implementing regulations, including reporting any “transfer of value” made or distributed to teaching hospitals, prescribers and other healthcare providers, and reporting any ownership and investment interests held by physicians and their immediate family members and applicable group purchasing organizations during the preceding calendar year, with data collection required as of August 1, 2013 and reporting to the Centers for Medicare & Medicaid Services required as of June 30, 2014 and by the 90th day of each subsequent calendar year;

·a new requirement to annually report drug samples that manufacturers and distributors provide to physicians;

·expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers and enhanced penalties for noncompliance;

·a licensure framework for follow-on biologic products; and

·a new Patient-Centered Outcomes Research Institute to oversee, identify priorities and conduct comparative clinical effectiveness research, along with funding for such research.

In addition, other legislative changes have been proposed and adopted since PPACA was enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. In 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (ATRA) which, among other things, reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our customers and accordingly, our financial operations.

We anticipate that PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and an additional downward pressure on the price that we receive for any approved product, and could seriously harm our business. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. Insurers may also refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA has granted market approvals. As a result, significant uncertainty exists as to whether and how much third party payors will reimburse for any newly-approved drugs, which in turn will put pressure on the pricing of drugs.

We also cannot be certain that KERYDIN or any products that may result from our product candidates will successfully be placed on the list of drugs covered by particular health plan formularies, nor can we predict the negotiated price for such products, which will be determined by market factors. Many states have also created preferred drug lists and include drugs on those lists only when the manufacturers agree to pay a supplemental rebate. If KERYDIN or other products that may result from our product candidates are not included on these preferred drug lists, physicians may not be inclined to prescribe them to their patients, thereby diminishing the potential market for such products.

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, our partners or our potential future partners and our products or 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 healthcare 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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Risks Related to Our Dependence on Third Parties

We are dependent on Sandoz for the distribution and commercialization of KERYDIN in the United States, and our ability to generate revenues from KERYDIN will depend on sales of this product by Sandoz in the United States.

Unless and until we obtain approval to market KERYDIN, directly or through another collaboration, in jurisdictions outside of the United States, our ability to generate revenue from KERYDIN will depend on payments that we receive from Sandoz under the Sandoz Agreement. Under the Sandoz Agreement, we are entitled to, among other things,  50% of the gross profits  (defined as net sales less cost of goods sold) accrued by Sandoz on sales of KERYDIN, except that in 2015 we will start receiving gross profit sharing payments after the first $50 million of gross profits have been accrued by Sandoz. The gross profit sharing arrangement entitles us to cumulative minimum gross profit sharing payments totaling $45 million for 2016. We are not entitled to cumulative minimum gross profit sharing payments in any other fiscal period under the Sandoz Agreement. The level of gross profit sharing payments, if any, in excess of any minimum amounts that we are entitled to under the Sandoz Agreement will depend on the level of commercial success that KERYDIN achieves. Sandoz will be responsible for the distribution and commercialization of KERYDIN and will control sales (including setting the price for KERYDIN), marketing and other commercialization matters under the Sandoz Agreement, including pricing and reimbursement matters. We will have limited ability to control such decisions, which may affect the commercial success of KERYDIN. If Sandoz does not devote sufficient resources to the commercialization of KERYDIN, is ineffective in doing so or is otherwise unable to timely and successfully commercialize KERYDIN, our operating results would be materially and adversely affected. In addition, Sandoz may terminate the Sandoz Agreement for convenience upon 180 days prior written notice, subject to the payment to us (to the extent then unpaid) of any milestone payment and minimum gross profit sharing amounts. Accordingly, there can be no assurance that Sandoz will continue to distribute and commercialize KERYDIN through the full initial term of the Sandoz Agreement (or any renewal term thereof).

We are dependent on our existing third party collaborations and research agreements to fund additional development opportunities and expect to continue to expend resources in our current collaborations and/or research agreements. These research collaborations may fail to successfully identify product candidates, may result in disputes or our partners may elect not to license, develop or commercialize any of the resulting compounds. In the event our collaborator does not elect to exercise its option or elects not to develop or commercialize our collaboration product candidates, our operating results and financial condition could be materially and adversely affected.

Currently, we have two significant ongoing collaboration and research agreements: an April 2013 research collaboration with the Gates Foundation to discover drug candidates intended to treat two filarial worm diseases (onchocerciasis, or river blindness, and lymphatic filariasis, commonly known as elephantiasis) and TB and an October 2013 research agreement with DTRA to design and discover new classes of systemic antibiotics. In addition, while the research period under our 2007 collaboration agreement with GSK expired in October 2013, GSK selected a compound for further development in TB in September 2013 and will be responsible for all further development and commercialization of this compound. Similarly, while the research term under our 2010 research, license and commercialization agreement with Lilly ended in April 2014, Lilly licensed a development compound for an animal health indication from us in December 2012 and will be responsible for all further development and commercialization of this compound.

During the research terms of the collaborations and research agreements, we and, in some cases, our partner are committed to use our diligent efforts to discover and develop compounds and to provide specified resources, on a project-by-project basis. We are either reimbursed for our research costs, or each party is responsible for its own research costs, but in all cases we expect to continue to expend resources on the collaborations and research agreements. If we fail to successfully identify product candidates or, in some cases, demonstrate proof-of-concept for those product candidates we identify, our operating results and financial condition could be materially and adversely affected. In the case of the DTRA award, after the initial term of eleven months and twelve month research extension, DTRA has the sole option to fund the research for a subsequent nineteen month period. We can offer no assurance that DTRA will exercise the option to fund the nineteen month research extension. In addition, we may mutually agree with our collaboration partner not to pursue all of the research activities contemplated under the applicable agreement. Certain collaboration partners have the option, but are not required, to exclusively license or select for further development certain product candidates under the agreement once the product candidate meets specified criteria, subject to continuing obligations to make milestone payments and royalty payments on commercial sales, if any, of such licensed compounds. Certain collaboration partners are 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 the partner chooses to license or develop. If we devote significant resources to a research project and our collaboration partner elects not to exercise its option with respect to any resulting product candidates or elects not to develop such candidates, our financial condition could be materially and adversely affected. In certain cases, if our partner does not exercise a given option or terminates development, we may request a license to develop and commercialize products containing the relevant compounds. If we make such a request, we will be obligated to make certain milestone and royalty payments to the partner upon development and commercialization of such products.

If our collaboration partner elects to license or develop a compound, like GSK and Lilly have, the partner assumes sole responsibility for further development, regulatory approval and commercialization of such compound. Thus, with respect to compounds that our partner chooses to develop, the timing of development and future payments to us, including milestone and royalty payments, will depend on the extent to which such licensed compounds advance through development, regulatory approval and commercialization by our partner. Additionally, our partner can choose to terminate the agreement with a specified notice period or its license to any compounds at any time with no further obligation to develop and commercialize such compounds. In such event, we

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would not be eligible to receive further payments for the affected compounds. We would retain rights to develop and market any such product candidates. However, we would be required to fund further development and commercialization ourselves or with other partners if we continue to pursue these product candidates and, in some cases, would owe our previous partner royalties if we succeeded in commercializing any such product candidates. For example, in September 2013, Lilly notified us that it was ceasing further development of the compound licensed in August 2011 for an animal health indication. There can be no assurance that our partners will not terminate development candidates remaining under license in our existing collaboration agreements.

If our partner 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 could be materially and adversely affected. In particular, if our partner independently develops products that compete with our compounds, it could elect to advance such products and not develop or commercialize our product candidates, even while complying with applicable exclusivity provisions. We cannot assure you that our collaboration partners will fulfill their obligations under the agreements or develop and commercialize compounds identified by the research collaborations. If our partners fail to fulfill their obligations under the agreements or terminate the agreements, we would need to obtain the capital necessary to fund the development and commercialization of the returned compounds, enter into alternative arrangements with a third party or halt our development efforts in these areas. We also could become involved in disputes with our partners, which could lead to delays in or termination of the research collaborations or the development and commercialization of identified product candidates and time-consuming and expensive litigation or arbitration. For example, we settled in October 2013 our breach of contract dispute and all related existing and future claims with Valeant who paid us $142.5 million following an expensive and time-consuming litigation process. There can be no assurance that we will not have other disputes in the future with our current or future partners with respect to our collaboration agreements. If our partners terminate or breach their agreements with us or otherwise do not advance the compounds identified by our research collaborations, our chances of successfully developing or commercializing such compounds could be materially and adversely affected.

We may not be successful in establishing and maintaining 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 routinely evaluate the establishment of collaborations for development and commercialization of product candidates and research programs. For example, in July 2014, we entered into the Sandoz Agreement, pursuant to which Sandoz will distribute and commercialize KERYDIN in the United States. In addition, if AN2728 or any of our other product candidates receives marketing approval, we may enter into sales and marketing arrangements with third parties targeting podiatrists, dermatologists, other specialty and non-specialty markets in the United States and internationally, or we may develop our own sales force targeting such markets. If we are unable to enter into any such arrangements with third parties on acceptable terms, or at all, we may be unable to market and sell our products in these markets. We expect to face competition in seeking appropriate collaborators. Moreover, collaboration arrangements such as our arrangement with Sandoz 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 or product candidate, we can expect to relinquish to the third party some or all of the control over the future success of that product or product candidate. Our collaboration partner may not devote sufficient resources to the commercialization of our products or product candidates or may otherwise fail in their commercialization. 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 commercialization and development of our products or 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 products or product candidates, we may incur increased costs, we may be forced to limit the number of products or product candidates we can commercially develop or the territories in which we commercialize them and we might fail to commercialize products or programs or territories for which a suitable collaborator cannot be found. If we fail to achieve successful collaborations, our operating results and financial condition could be materially and adversely affected.

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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.

We outsource substantial portions of our operations to third party service providers, including chemical synthesis, biological screening and manufacturing and the conduct of our clinical trials and various preclinical studies, as well as certain medical affairs activities. In addition, under the Sandoz Agreement, Sandoz will be responsible for the distribution and commercialization of KERYDIN in the United States, as well as certain governmental reporting obligations associated therewith.

Because we have relied on third parties, unless and until we establish our internal infrastructure, 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 produce results in a timely manner, may become troubled financially or may fail to perform at all. If these third-party service providers fail to comply with applicable laws and regulations, fail to provide us with timely and accurate information or otherwise do not carry out their contractual duties to us, it could impact our ability to comply with applicable state and federal laws, which could expose us to liability and adversely affect our business. In addition, our agreements with contract research organizations and other third parties with which we do business often contain indemnification provisions pursuant to which we typically agree to indemnify the party against certain types of third party claims.  To the extent that we are subject to a claim under such an indemnification provision, our financial condition and results of operations could be materially adversely affected.  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 have the expertise required to achieve our business objectives. Identifying, qualifying and managing performance of third party service providers can be difficult and time consuming and could 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 materially adversely affected.

We have limited, if any, experience manufacturing active pharmaceutical ingredients and products or product candidates on a large clinical or commercial scale, and have no manufacturing facility. As a result, we are dependent on third parties for the manufacture of our products and product candidates and our supply chain. If we experience problems with any of these suppliers, the manufacturing of our products such as KERYDIN or product candidates could be delayed.

We do not own or operate facilities for the manufacture of KERYDIN or other products or product candidates. We have a small number of personnel with experience in drug product manufacturing. We outsource to a third party the active drug substance manufacturing for KERYDIN.  In addition, pursuant to our manufacturing agreement with DPT Laboratories, Ltd. (DPT), we outsource to DPT the manufacturing and packaging of drug product for KERYDIN. Any inability by our third party manufacturers to supply sufficient quantities of the active drug substance or drug product could adversely affect product commercialization and delay certain payments under the Sandoz Agreement. In addition, we currently outsource all active drug substance and drug product manufacturing and packaging of our preclinical and clinical product candidates such as AN2728 to third parties and intend to continue to do so. We also outsource to third parties the active drug substance and drug product manufacturing for AN2728 and our other product candidates. We may be unable to enter into agreements for commercial supply with third party manufacturers, or may be unable to do so on acceptable terms. We rely on single source suppliers, including DPT, for our current requirements of active pharmaceutical ingredients (API) and drug product for KERYDIN and AN2728 under manufacturing agreements. In the event that the parties cannot agree to the terms and conditions for these suppliers to provide some or all of our clinical and commercial supply needs of API and drug products, or we are unable to renew or continue on terms acceptable to us, or at all, existing agreements with such suppliers following the expiration of their terms, we would not be able to manufacture API and drug products until alternative suppliers are identified and qualified, which could delay the further development of, and impair our ability to commercialize, these products and, in the case of KERYDIN, delay certain payments under the Sandoz Agreement. For example, the initial term of our manufacturing agreement with DPT is currently expected to expire on December 31, 2019 and, while the agreement contains automatic renewal provisions, there can be no assurance that DPT will allow the agreement to continue past its initial term on terms acceptable to us, or at all. 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 products and product candidates, as well as for products and product candidates owned by other companies. These suppliers are also 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 or product candidate supply while we seek to secure another supplier that meets all regulatory requirements.

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Reliance on third party manufacturers entails risks to which we would not be subject if we manufactured a product or product candidate ourselves, including:

·the possible breach of the manufacturing agreements by the third parties because of factors beyond our control;

·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;

·the potential that such third parties will encounter difficulties in achieving volume production, quality control and quality assurance, which could result in their inability to manufacture sufficient quantities of drugs to meet commercial needs or clinical supplies of our products and product candidates;

·the potential failure by such third parties to establish and follow FDA-mandated cGMPs or the failure to document their adherence to cGMPs, either of which could require costly recalls of products already having received approval, lead to significant delays in the availability of material for commercial or clinical study needs or delay or prevent marketing approval for our product candidates;

·the potential failure by such third parties to consistently produce quality batches of the product in accordance with the current manufacturing process. If modifications are required to the manufacturing processes or facilities, approval of a new or supplemental NDA may be required; and

·the potential that such third parties may encounter financial difficulties that would interfere with their obligations to supply our products and product candidates.

In addition, the manufacturing facilities of certain of our suppliers, including the manufacturer of active drug substance for KERYDIN, are located outside of the United States. This may give rise to difficulties in importing our products or product candidates or their components into the United States or other countries as a result of, among other things, regulatory agency import inspections, incomplete or inaccurate import documentation or defective packaging.

Any of these factors could result in significant delays or higher costs in connection with our clinical trials, regulatory submissions, required approvals or the commercialization of our products, which could have a material adverse effect on our financial condition and results of operations.

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, or at all. Even if we locate an alternative provider, it is likely that such a 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 commercialization and development of our products or 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 products and 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. If we fail to obtain and maintain adequate intellectual property protection we may not be able to prevent third parties from launching generic versions of our products, using our proprietary technologies or from marketing products that are very similar or identical to ours.

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The patent positions of pharmaceutical 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 pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions, and the legal standards relating to the patentability, validity and enforceability of pharmaceutical patents are evolving. Changes in either the patent laws or in interpretations of patent laws in the United States and foreign jurisdictions may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be enforced in the patents that we currently own or that may be issued from the applications we have filed or may file in the future or that we may license from third parties. Additionally, our currently pending or future patent applications may not result in issued patents, and any term extensions that we seek may not be granted. Further, if any patents we obtain or license are deemed invalid or unenforceable, it could impact our ability to commercialize or license our technology or prevent third parties from marketing products that are similar or identical to ours.

There have been numerous changes to the patent laws that may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. For example, in September 2011, President Obama signed the America Invents Act that codifies several significant changes to the U.S. patent laws, including, among other things, changing from a “first to invent” to a “first inventor to file” system and creating a post-grant opposition process to challenge patents after they have been issued. This Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

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 products or 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 or exclusivity in a particular product area;

·we may not develop additional proprietary technologies that are patentable; and

·the patents of others may have an adverse effect on our business.

As of June 30, 2014, we are an owner of record, either solely or with a collaborator, of numerous issued U.S. patents and non-U.S. patents with claims to boron-containing compounds, methods of making these compounds or methods of using these compounds in various indications. We are actively pursuing, either solely or with a collaborator, additional U.S. patent applications, international (PCT) patent applications and non-U.S. patent applications in various jurisdictions.

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 to expand our intellectual property portfolio.

We currently hold issued trademark registrations and have trademark applications pending in the United States and other countries, which may be subject to government or third party objections that could prevent the issuance or maintenance of the applications or registrations. In addition, from time to time, parties may assert trademark or other intellectual property infringement claims against us in the form of letters, lawsuits and other forms of communication. If there is a determination that we have infringed third-party proprietary rights, we could incur substantial monetary liability and be prevented from using the rights in the future.

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Furthermore, if we are unable to prevent third parties from adopting, registering or using trademarks that infringe, dilute or otherwise violate our trademark rights, our business could be materially adversely affected.

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 enforce or 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 may 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 grounds that such other party’s activities do not infringe our rights to such patents.

Third parties may in the future seek FDA approval to market generic versions of our products, including KERYDIN, through an abbreviated new drug application (ANDA) and challenge the patents protecting our products. If we are unsuccessful in all or some of these lawsuits, some or all of our claims in the patents may be held invalid, unenforceable and/or not infringed, and generic versions of our products could be launched prior to the expiration of our patents.

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 such activities, including making or selling our products or 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. 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 patents and we may have indemnification obligations to our commercial partners in such circumstances.

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 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 or first to file an application covering 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 patent application on inventions similar to ours, we may have to participate in litigation, interference, or other proceedings to determine our right to a patent. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our patent position with respect to such inventions.

Patents covering the composition of matter of tavaborole and AN2718 that were owned by others have expired. Our patent applications and patents include or support claims on other aspects of tavaborole or AN2718, such as pharmaceutical formulations containing tavaborole or AN2718, methods of using tavaborole or AN2718 to treat disease and methods of manufacturing tavaborole or AN2718. Without patent protection on the composition of matter of tavaborole or AN2718, our ability to assert our patents to stop others from using or selling tavaborole or AN2718 may be limited.

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. For example, in our legal proceedings with Valeant, we spent considerable resources, including management time, in the proceedings before reaching a settlement agreement with Valeant in October 2013 pursuant to which Valeant paid us $142.5 million to settle all existing and related future claims against Valeant, including claims for damages previously awarded to us pursuant to a prior arbitration ruling, and we agreed to provide Valeant a paid-up, irrevocable, non-exclusive, worldwide license to all patents that contain claims covering efinaconazole.

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We do not have exclusive rights to intellectual property we developed under U.S. federally funded research grants and contracts in connection with certain of our neglected diseases initiatives, including our research agreements with the Gates Foundation and DTRA, and, in the case of those funded research activities, we could ultimately share or lose the rights we do have under certain circumstances.

Some of our intellectual property rights related to compounds that are not currently in clinical development were initially 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 pursuant to the Bayh-Dole Act of 1980. 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.

Some of our intellectual property rights related to boron-containing compounds that are currently in clinical development, although not funded by the U.S. government, were developed through collaborations. We receive research funding from DNDi, which requires that we share rights with DNDi. For example, we have a co-exclusive, royalty-free, sublicensable license with DNDi to make, use, import and manufacture products for treatment of sleeping sickness, Chagas disease and cutaneous and visceral leishmaniasis in humans in all countries of the world, specifically excluding Japan, Australia, New Zealand, Russia, China and all countries of North America and Europe (DNDi Territory). We also grant to DNDi an exclusive, royalty-free, sublicensable license to distribute, including uses by, or on behalf of, a public sector agency, products containing molecules synthesized under the research plan for treatment of sleeping sickness, Chagas disease and cutaneous and visceral leishmaniasis in humans in the DNDi Territory. As a result of these licenses, we are unlikely to realize any revenue in the DNDi Territory for any human therapeutics that we discover for these diseases. In March 2012, DNDi initiated a Phase 1 clinical trial for AN5568 in France. AN5568 is being developed for the treatment of sleeping sickness. The boron-containing compounds being studied in our DNDi collaboration are structurally distinct from our other clinical product candidates. Currently, none of our existing product candidates under development are being considered for use in the DNDi collaboration. Likewise, some of our intellectual property rights related to boron-containing compounds that are not currently in clinical development were developed through a collaboration with MMV. We accept research and development funding from MMV, and we provide MMV with a worldwide, royalty-free non-exclusive license (without the right to sublicense, except with our prior written approval) to intellectual property rights arising under the collaboration to develop human therapeutics for the treatment of malaria under our research and development agreements with MMV. The boron-containing compounds under development in our MMV collaboration are currently structurally distinct from our clinical product candidates and none of our existing clinical product candidates are being considered for use in the MMV collaboration.

Under our Gates Foundation research agreement, our research efforts with respect to project compounds in neglected diseases and Gates Foundation priority areas in identified developing countries are subject to co-ownership or exclusive exploitation rights of the Gates Foundation. While we have a first right to develop and commercialize those project compounds, we are required to implement a global access program for such compounds and we may not be able to further develop or exploit project compounds identified in the collaboration.

Under our DTRA collaboration, we will design and discover new classes of systemic antibiotics under a drug discovery consortium formed by us, Colorado State University (CSU) and the University of California at Berkeley (UCB). Our research efforts under the DTRA collaboration are subject to co-ownership rights with CSU, UCB and the U.S. Government.

We do not have exclusive rights to certain intellectual property as our rights to certain patents and molecules in our collaborations are jointly owned with our collaborators.

As of June 30, 2014, we jointly own 1 U.S. patent, 2 provisional U.S. patent applications and 1 international (PCT) patent application with one of our collaborators. Under a separate collaboration, we jointly own 1 international (PCT) patent application and 2 non-U.S. patent applications. The rights of our collaborators to these patents, applications, and other compounds under the collaborations may in the future restrict our ability to further develop or generate revenues from those compounds except through the collaborations.

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Risks Related to Employee Matters and Managing Growth

We may need to expand certain of 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 products and product candidates through development and commercialization, we may need to increase our product development, scientific, regulatory, marketing, sales and administrative headcount to manage these efforts. Our management, personnel and systems currently in place may not be adequate to support this future growth. Our need to effectively manage our operations, growth and various projects may require that we:

·successfully attract and recruit new employees with the expertise and experience we will require;

·develop a marketing, sales and distribution capability;

·manage our clinical programs effectively, which we anticipate being conducted at numerous clinical sites; and

·continue to develop 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, sales and marketing, finance, scientific, clinical and administrative 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. 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. We have entered into change of control and severance agreements with each of our officers as part of our retention efforts. 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, motivate or retain these additional key personnel. Our failure to retain key personnel could materially harm our business.

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which may adversely affect our business and our stock price.

We operate in an increasingly demanding regulatory environment, which requires us to comply with the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 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 and maintaining adequate internal control over financial reporting and disclosure controls and procedures. Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. The growth of our operations and our initial public offering created a need for additional resources within the accounting and finance functions in order to produce timely financial information and to create the level of segregation of duties customary for a U.S. public company.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected.

We were required to comply with Section 404 of the Sarbanes-Oxley Act (Section 404) in connection with the Annual Report on Form 10-K for the year ending December 31, 2013. We have expended significant resources to develop the necessary documentation and testing procedures required by Section 404. We cannot be certain that the actions we have taken to improve our internal control over financial reporting will be sufficient, and if we are unable to produce accurate financial statements on a timely basis, investors could lose confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations and growth.

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Other Risks Relating to Our Business

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

The sale of approved products, including KERYDIN, and the use of our product candidates in clinical trials 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, healthcare 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:

·recall of products;

·decreased demand for our products or product candidates and loss of revenues;

·the inability to commercialize our products;

·substantial litigation costs;

·withdrawal of clinical trial participants;

·termination of clinical trial sites or entire trial programs;

·substantial monetary awards to patients or other claimants;

·impairment of our business reputation; and

·diversion of management and scientific resources from our business operations.

We have obtained limited product liability insurance coverage for the commercial sale of our products, including KERYDIN. In addition, 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 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. Large judgments have been awarded in class action lawsuits based on the unanticipated side effects of drug products. A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash and materially 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 have general liability insurance coverage of up to $10.0 million per occurrence, with an annual aggregate limit of $10.0 million, which excludes pollution liability. This coverage may not be adequate to cover all claims related to our biological or hazardous materials. Furthermore, if we were to be held liable for a claim involving our biological or hazardous materials, this liability could exceed our insurance coverage, if any, and our other financial resources. 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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In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

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.

Significant disruptions of information technology systems or breaches of data security could adversely affect our business.

Our business is increasingly dependent on critical, complex and interdependent information technology systems, including Internet-based systems, to support business processes as well as internal and external communications. The size and complexity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion and computer viruses that may result in the impairment of production and key business processes. In addition, our systems are potentially vulnerable to data security breaches—whether by employees or others—that may expose sensitive data to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other intellectual property, or could lead to the public exposure of personal information (including sensitive personal information) of our employees, clinical trial patients, potential customers and others. Such disruptions and breaches of security could have a material adverse effect on our business, financial condition and results of operations.

Risks Relating to Owning Our Common Stock

Ownership in our common stock is highly concentrated. Our executive officers, directors and principal stockholders have the ability to significantly influence all matters submitted to our stockholders for approval.

Our executive officers, directors and stockholders who own more than 5% of our outstanding common stock together beneficially own a significant percentage of our common stock based on reports filed with the SEC. While this does not represent a majority of our outstanding common stock, if these stockholders were to choose to act together, they would be able to significantly influence 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 significantly influence 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.

If we raise additional capital by issuing securities in the future, such as under our existing equity distribution agreement, it will cause dilution to existing stockholders and may cause our share price to decline.

We may raise additional funds through the issuance and sale of additional shares of our common stock or other securities convertible into or exchangeable for our common stock. For example, in January 2013, we entered into an equity distribution agreement with Wedbush Securities Inc. (Wedbush) pursuant to which we may, from time to time, issue and sell shares of our common stock having aggregate sales proceeds of up to $25.0 million. Through June 30, 2014, we have sold shares of our common stock under this agreement generating net proceeds of approximately $1.3 million, after deducting underwriting discounts and other offering costs. No shares were sold under this agreement during the six months ended June 30, 2014. The number of shares ultimately offered for sale by Wedbush is dependent upon the number of shares that we elect to sell through Wedbush under the agreement. Depending upon market liquidity at the time, sales of shares of our common stock through Wedbush under the agreement may cause the trading price of our common stock to decline.

Additionally, and separate from our equity distribution agreement with Wedbush, in April 2013 and May 2013, we sold shares of our common stock for net proceeds of approximately $5.0 million and $21.3 million, respectively. To the extent that we raise additional capital by issuing equity securities under the agreement with Wedbush or otherwise, our stockholders will experience additional dilution, and any such issuances, or the perception that we may engage in such issuances, may result in downward pressure on the price of our common stock.

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We do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.

We do not anticipate paying cash dividends in the future. As a result, only appreciation of the price of our common stock, which may never occur, will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock. In addition, our ability to pay cash dividends is currently prohibited by the terms of our Loan Agreement with Hercules.

Our share price may be volatile and could decline significantly.

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:

·the timely and successful launch of KERYDIN pursuant to the Sandoz Agreement;

·problems in our manufacturing or supply chain that limit or exhaust the quantity of supplies of KERYDIN or product candidates that are available to patients;

·announcement of FDA approval or non-approval of our product candidates, and the timing of the FDA review process;

·actions taken by regulatory agencies with respect to products or drug classes related to KERYDIN or our product candidates;

·changes in the structure of healthcare payment systems;

·results or delays of our clinical trials;

·results of clinical trials of our competitors’ products;

·regulatory actions with respect to our products or our competitors’ products;

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

·actual or anticipated fluctuations in our or our competitors’ operating results or changes in their product sales growth rates;

·competition from existing products or new products;

·announcements by us, our collaborators or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;

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

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

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

·additions or departures of key management or scientific personnel;

·litigation, including disputes or other developments related to proprietary rights, patents, and our ability to obtain patent protection for our technologies;

·announcement or expectation of additional financing efforts;

·sales of our common stock by us, our insiders or our other stockholders;

·market conditions for biopharmaceutical stocks in general; and

·general economic and market conditions.

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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. You may not realize any return on an investment in us and may lose some or all of your investment.

We may be subject to securities litigation, which is expensive and could divert management attention.

Our share price may be volatile, and 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 materially harm our business.

A significant portion of our total outstanding shares of common stock is subject to demand registration rights, which could require us to register such shares for public sale at the holders’ option.

Holders of shares of our common stock who are party to an investors’ rights agreement and a registration rights agreement with us 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.

As a public company, we are subject to additional expenses and administrative burden.

As a public company, we incur significant legal, accounting and other expenses and our administrative staff is required to perform additional tasks, such as adopting additional internal controls, disclosure controls and procedures, retaining a transfer agent and bearing 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 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 these rules and proposed changes to 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 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 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 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 advance 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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If we commit certain material breaches under the research agreement with the Gates Foundation, and fail to cure them, we may be required to redeem shares of our common stock held by the Gates Foundation and its affiliates.

In the event of termination of the research agreement by the Gates Foundation for certain specified uncured material breaches by us, we will be obligated, among other remedies, to redeem for cash the common stock purchased by the Gates Foundation in connection with the research agreement, facilitate the purchase of such common stock by a third party or elect to register the resale of such common stock into the public markets unless certain specified conditions are satisfied. If we are required to repurchase such shares of common stock, our financial condition could be materially and adversely affected.

ITEM 6. EXHIBITS

Exhibits. The exhibits listed in the accompanying index to exhibits are filed or furnished as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 11, 2014	ANACOR PHARMACEUTICALS, INC.
	/s/ GEOFFREY M. PARKER
	Geoffrey M. Parker
	Executive Vice President, Chief Financial Officer
	(Principal Financial and Accounting Officer)

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Exhibit Number	Description
3.1(1)	Amended and Restated Certificate of Incorporation of the Registrant.
3.2(2)	Amended and Restated Bylaws of the Registrant.
10.37†	Manufacturing Agreement, dated as of April 18, 2014, between DPT Laboratories, Ltd. and the Registrant.
31.1	Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
31.2	Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).
32.1(3)	Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
101	The following materials from Anacor Pharmaceuticals, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Condensed Balance Sheets, (ii) the unaudited Condensed Statements of Operations, (iii) the unaudited Condensed Statements of Comprehensive Loss, (iv) the unaudited Condensed Statements of Cash Flows and (vi) the unaudited Notes to Condensed Financial Statements.

†	Confidential treatment has been received with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
(1)	Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on December 6, 2010, and incorporated herein by reference.
(2)	Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-169322), effective November 23, 2010, and incorporated herein by reference.
(3)	This certification “accompanies” the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Commission and is not to be incorporated by reference into any filing of Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

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EX-10.37

Exhibit 10.37

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

MANUFACTURING AGREEMENT

DPT LABORATORIES, LTD.

AND

ANACOR PHARMACEUTICALS

Table of Contents

I - DEFINITIONS		4
1.1	ACT	4
1.2	AFFILIATE	4
1.3	FDA	5
1.4	FORECASTED NEEDS	5
1.5	LABEL, LABELED, OR LABELING	5
1.6	MANUFACTURING FEE	5
1.7	LAUNCH YEAR	5
1.8	MATERIALS FEE	6
1.9	MATERIAL SAFETY DATA SHEET	6
1.10	PACKAGING	6
1.11	PRODUCT(S)	6
1.12	SPECIFICATIONS	6
II - PRODUCT MANUFACTURE AND SUPPLY		7
2.1	MANUFACTURE AND PURCHASE	7
2.2	SUPPLY OF MATERIALS	7
(a)	Materials Supplied by COMPANY	7
(b)	Materials Supplied by DPT	8
(c)	Packaging and Labeling	8
(d)	Additional Charges	8
2.3	MATERIALS TESTING	9
2.4	MATERIAL SAFETY DATA SHEETS	9
2.5	COMMENCEMENT OF MANUFACTURING FOR NEW PRODUCTS	9
2.6	PURCHASE ORDERS	9
(a)	Purchase of Products	9
(b)	Forecasted Needs	10
(c)	Time of Issuance	10
(d)	Contents of Purchase Orders	11
2.7	REJECTED PRODUCTS	11
(a)	Rejection of Product by COMPANY	11
(b)	Replacement of Rejected Product	11
(c)	Responsibility for Costs	12
(d)	Resolution of Conflict	12
(e)	Recalled Product	13
2.8	PRODUCT PRICE	13
(a)	Manufacturing Fees	13
(b)	Materials Fees	14
2.9	PAYMENT	15
2.10	LATE PAYMENT	15

2.11	DISPOSAL COSTS	16
2.12	SUBCONTRACTING	16
III - SHIPMENT AND RISK OF LOSS		16
3.1	SHIPMENT	16
3.2	DELIVERY TERMS	16
3.3	CLAIMS	16
IV - TERM AND TERMINATION		17
4.1	TERM	17
4.2	TERMINATION	17
4.3	PAYMENT ON TERMINATION	17
4.4	SURVIVAL	17
V - CERTIFICATES OF ANALYSIS AND MANUFACTURING COMPLIANCE		18
5.1	CERTIFICATES OF ANALYSIS	18
5.2	STABILITY TESTING	18
5.3	VALIDATION WORK OR ADDITIONAL TESTING	18
5.4	FDA INSPECTION	19
5.5	REGULATORY FILINGS	19
VI - WARRANTIES		19
6.1	CONFORMITY WITH SPECIFICATIONS	19
6.2	COMPLIANCE WITH THE ACT	20
6.3	CONFORMITY WITH FDA REGULATIONS AND CGMP’S	20
6.4	COMPLIANCE OF PACKAGING AND LABELING WITH LAWS AND REGULATIONS	20
6.5	ACCESS TO DPT’S FACILITIES	20
6.6	INSPECTIONS	21
6.7	DEBARMENT	21
6.8	DISCLAIMER	22
VII - FORCE MAJEURE		22
VIII — CHANGES TO PROCESS OR PRODUCT		22
8.1	CHANGES BY COMPANY	22
8.2	CHANGES BY DPT	23
8.3	CHANGES BY REGULATORY AUTHORITIES	23
8.4	OBSOLETE INVENTORY	23
IX - CONFIDENTIAL INFORMATION		24
9.1	CONFIDENTIAL INFORMATION	24
(a)	Obligations of Confidentiality	24
(b)	Exceptions	25
(c)	DPT Business Model	26
9.2	TRADEMARKS AND TRADE NAMES	26
X — INDEMNIFICATION		26
10.1	INDEMNIFICATION BY DPT	26
10.2	INSURANCE BY DPT	27
10.3	INDEMNIFICATION BY COMPANY	27

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10.4	INSURANCE BY COMPANY	27
10.5	STACKING OF INSURANCE	28
10.6	PATENT AND OTHER INTELLECTUAL PROPERTY RIGHTS	28
(a)	Warranty by COMPANY	28
(b)	Warranty by DPT	29
10.7	CONDITIONS OF INDEMNIFICATION	29
XI - GENERAL PROVISIONS		29
11.1	NOTICES	29
11.2	ENTIRE AGREEMENT; AMENDMENT	30
11.3	WAIVER	30
11.4	OBLIGATIONS TO THIRD PARTIES	30
11.5	ASSIGNMENT	30
11.6	GOVERNING LAW AND ARBITRATION	31
(a)	Governing Law	31
(b)	Arbitration	31
(c)	Mediation	31
11.7	SEVERABILITY	31
11.8	HEADINGS, INTERPRETATION	32
11.9	COUNTERPARTS	32
11.10	INDEPENDENT CONTRACTOR	32
11.11	EXPORT/IMPORT LAWS AND REGULATIONS	32

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This Manufacturing Agreement (the “Agreement”) is made as of this 18th day of April 2014 (the “Effective Date”) by and between Anacor Pharmaceuticals, Inc. a corporation organized under the laws of the State of Delaware with its principal place of business at 1020 East Meadow Circle, Palo Alto, CA 94303 (hereinafter referred to as “COMPANY”) and DPT Laboratories, Ltd., a Texas Limited Partnership with a place of business at 307 East Josephine Street, San Antonio, Texas 78215 individually and on behalf of its Affiliate (hereinafter collectively referred to as “DPT”).

WITNESSETH:

WHEREAS, COMPANY is engaged in the distribution and sale of certain pharmaceutical and/or cosmetic products; and

WHEREAS, DPT owns and has a broad spectrum of technologies for the development, formulation, testing, control, manufacture, filling and distribution of pharmaceutical, over-the-counter and cosmetic products; and

WHEREAS, COMPANY desires DPT to manufacture and sell the Products hereinafter defined to COMPANY, and DPT desires to do so.

NOW, THEREFORE, in consideration of the mutual covenants hereinafter expressed, the parties agree as follows:

I - DEFINITIONS

1.1Act

“Act” means the Federal Food, Drug and Cosmetic Act, as amended, and regulations promulgated thereunder.

1.2Affiliate

“Affiliate” means any legal entity, domestic or foreign, that directly or indirectly, owns or controls, is owned or controlled by, or is under common “Ownership” or “Control” with, a party.  Ownership means possession of at least 50% of the equity in such legal entity or party, as the case may be.  Control means the ability to direct or cause the direction of the

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management and policies of such legal entity or party, as the case may be.

1.3FDA

“FDA” means the United States Food and Drug Administration, or any successor entity thereto.

1.4Forecasted Needs

“Forecasted Needs” means COMPANY’s estimate of Products to be ordered from DPT for each of the [*****] months following the month in which such estimate is provided.

1.5Label, Labeled, or Labeling

“Label”, “Labeled”, or “Labeling” means all labels and other written, printed, or graphic matter upon:  (i) Product or any container or wrapper utilized with Product or  (ii) any written material accompanying Product.

1.6Manufacturing Fee

“Manufacturing Fee” means the fee paid by COMPANY to DPT for services required to manufacture and package Products.  The Manufacturing Fee is quoted in single final Product unit increments (i.e. by the bottle or tube).  The Manufacturing Fee shall include services for [*****].  The Manufacturing Fee does not include, without limitation, [*****].  These services are in addition to the Manufacturing Fee and shall be billed under the relevant protocol.  In addition, the Manufacturing Fee does not include [*****].

1.7Launch Year

“Launch Year” means a period of a variable number of months commencing on the first day of the month following the initial invoicing of Product which has been commercially manufactured by DPT in accordance with the terms and conditions of this Agreement and ending on December 31 of the year of the initial invoicing.

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

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1.8Materials Fee

“Materials Fee” is quoted in single final Product unit increments and is defined as DPT’s Standard Cost (“Standard Cost” is the [*****]. Materials Fee does not include, without limitation, costs associated with [*****].  These items will be invoiced to COMPANY at DPT’s cost on a [*****] basis and COMPANY agrees to reimburse DPT for any such authorized expenditures made on COMPANY’s behalf.

1.9Material Safety Data Sheet

“Material Safety Data Sheet” (“MSDS”) means written or printed material concerning a hazardous chemical which is prepared in accordance with the regulations promulgated by the Occupational Safety & Health Administration, or any successor entity thereto.

1.10Packaging

“Packaging” means all primary containers, cartons, shipping cases, inserts or any other like material used in packaging, or accompanying, Product.

1.11Product(s)

“Product(s)” means product(s) (as listed in Schedule A) manufactured, packaged, labeled and/or finished by DPT to meet the Specifications (as hereinafter defined).

1.12Specifications

“Specifications” means the (i) raw material specifications (including chemical, micro, and packaging specifications) and, whenever possible, the grade of the materials; (ii) sampling requirements (i.e., lab, chemical, and micro);  (iii) compounding module, including compounding process and major equipment; (iv) intermediate specifications; (v) packaging module (including packaging procedures, torque and fill weights); and (vi) finished Product specifications release criteria including DPT’s Acceptable Quality Limits (“AQL’s”).  Specifications shall be established and/or amended from time to time upon the written agreement of both DPT and COMPANY via a Change Control Request (“CCR”) in accordance with Section IX below.

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

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II - PRODUCT MANUFACTURE AND SUPPLY

2.1Manufacture and Purchase

Subject to the terms and conditions of this Agreement, DPT agrees that it will manufacture for and provide to COMPANY, and COMPANY agrees that it will purchase from DPT, [*****] percent ([*****]%) of the COMPANY’s requirements of the Products as described in Exhibit A for a minimum of [*****] from the date of launch. COMPANY shall pay DPT for Products according to paragraph 2.8 below.  DPT shall manufacture Products in accordance with the Specifications or pursuant to exceptions approved in writing by COMPANY, and in sufficient quantity to meet COMPANY’s Forecasted Needs for the length of this Agreement.

2.2Supply of Materials

(a)Materials Supplied by COMPANY

If COMPANY is to supply any material for manufacture of Products as set forth under this Section, COMPANY shall notify DPT, in writing, specifying which materials it will supply.  COMPANY shall provide DPT with said materials at COMPANY’s expense along with Certificates of Analysis and MSDS sheets relating to same, at a minimum of [*****] prior to DPT’s scheduled production of Product requiring said materials and in sufficient amounts for DPT’s manufacture of Product but not to exceed quantities necessary to support [*****] of the most recently supplied Forecasted Needs or the minimum order quantity whichever is greater.  COMPANY supplied material in excess of these amounts shall be either subject to storage fees or returned to COMPANY, at the COMPANY’s option.  All COMPANY supplied material shall be shipped to DPT freight prepaid. In the event COMPANY ships or causes to ship such material freight collect, DPT shall invoice COMPANY for the cost of the freight plus a reasonable administrative fee which invoice shall be paid promptly upon receipt. DPT is hereby authorized by COMPANY to return any portion of COMPANY supplied material for which no future production is planned, with prior written notice.  COMPANY shall be responsible for the quality of all COMPANY-supplied materials.  COMPANY shall be

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

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responsible for the payment of all personal property and other taxes incident to the storage of COMPANY-owned material at DPT.  For each lot of materials supplied by COMPANY, DPT shall perform the quality control and inspection tests as agreed to in the Specifications unless COMPANY has made arrangements in writing for pre-approved material.  DPT shall have the right to reject any pre-approved material which does not meet the Specifications in accordance with paragraph 2.3 below.  DPT warrants that it will maintain, for the benefit of COMPANY, complete and accurate records of the inventory of all such COMPANY-supplied materials. If requested by COMPANY, DPT will provide to COMPANY a monthly report of ending monthly inventory balance of each COMPANY supplied/owned materials stored at DPT.  This reporting will be supplied exclusively on DPT forms.

(b)Materials Supplied by DPT

DPT shall be responsible for supply, at the expense of COMPANY of all other commodities necessary for the manufacture of Products.  All DPT supplied materials will be billed to COMPANY on the respective invoice for Product, into which the DPT supplied materials was converted, as part of the Materials Fee, and in addition to the Manufacturing Fee, all in accordance with the provisions of paragraph 2.8 below.

(c)Packaging and Labeling

COMPANY shall provide DPT with Specifications (including art proofs) for Packaging and Labeling, and DPT shall purchase, at the expense of COMPANY, Packaging and Labeling in accordance with the Specifications.

(d)Additional Charges

COMPANY shall be responsible for any additional agreed-upon charges (including, but not limited to, items such as brokerage fees, courier expenses, duty fees payable, etc.) that are incurred in the procurement of any materials and/or Packaging and Labeling components as detailed in the immediately preceding sub-sections

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(a), (b) and (c); required for the manufacture of the Products, irrespective of which party to the Agreement is responsible for supplying such items.

2.3Materials Testing

All materials and packaging supplies shall, when received by DPT, be submitted to analysis and evaluation in accordance with DPT’s SOP’s to determine whether or not said materials meet the Specifications.  The cost of all such analyses and evaluations shall be borne by DPT, except as otherwise provided in paragraph 2.2 of this Agreement.  DPT agrees to maintain and, upon COMPANY request, make available records of all such analyses and evaluations.

2.4Material Safety Data Sheets

Prior to DPT’s receipt and testing, and as a condition precedent of any testing or formulation work by DPT pursuant to this Agreement, COMPANY shall provide MSDS sheets to DPT for finished products and all components necessary for the manufacture of Products.  Any components or Products requiring disposal shall be presumed hazardous unless otherwise provided in the MSDS information provided.

2.5Commencement of Manufacturing for New Products

No later than [*****] prior to the initial calendar year of a new Product added to this Agreement, COMPANY agrees to notify DPT of its delivery requirements, including firm orders for same, for the [*****] and shall provide its Forecasted Needs for [*****] in order to ensure timely delivery of Product for initial sale and marketing.

2.6Purchase Orders

(a)Purchase of Products

COMPANY agrees to purchase from DPT all Products manufactured for COMPANY by DPT in accordance with COMPANY’s purchase orders or Forecasted Needs to the extent such Products meet the Specifications or exceptions pre-approved by COMPANY.  Products shall be ordered by COMPANY by the

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

9

issuance of separate, pre-numbered purchase orders in increments of full batches and in minimum order quantities.

(b)Forecasted Needs

COMPANY shall provide DPT with a written, non-binding [*****] projection with specific data as to its Forecasted Needs. Such Forecasted Needs shall be updated by COMPANY [*****] on a rolling [*****] basis. It is understood and agreed that with respect to all Forecasted Needs issued to DPT by COMPANY pursuant to the terms hereof, the forecast for the first [*****] thereof shall constitute a firm order for Products, regardless of receipt of COMPANY’s actual purchase order. Thereafter, COMPANY shall provide DPT with a Purchase Order on or before the [*****]. DPT may produce Product up to [*****] prior to the requested delivery date in order to accommodate fluctuations in production demands.  The remaining [*****] of the Forecasted Needs shall be utilized by DPT for purposes of material acquisition on behalf of COMPANY and DPT production planning.  DPT shall attempt to minimize the material inventory purchased on behalf of COMPANY. Certain materials, however, may have long lead times and/or require a minimum order quantity. Therefore, DPT may order the chemical and packaging components necessary to support up to [*****] of COMPANY’s Forecasted Needs, or the applicable minimum order quantity, whichever is greater.  Should COMPANY subsequently reduce its Forecasted Needs, COMPANY will be financially responsible for any material purchased by DPT on COMPANY’s behalf.  Any such material which is subsequently rendered in excess of that required to support up to [*****] of COMPANY’s Forecasted Needs may be subject to storage and inventory caring fees.  DPT may require a deposit for such materials and such materials may also be subject to storage and inventory carrying cost fees.

(c)Time of Issuance

COMPANY shall issue written purchase orders for Products to DPT at least [*****] prior to the requested delivery dates if the requirements are at or below [*****] percent ([*****]%) of the applicable Forecasted Needs, and at least [*****] prior to the

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

10

requested delivery dates if the requirements exceed the Forecasted Needs by more than [*****] percent ([*****]%).

(d)Contents of Purchase Orders

COMPANY’s purchase orders shall designate the desired quantities of Products, delivery dates and destinations. This Agreement allows for up to [*****] shipping destinations per batch of Product.  Additional destinations can be accommodated for a shipping preparation fee to be negotiated by DPT and COMPANY.  DPT shall not later than [*****] after receipt of a Purchase Order provide confirmation of such Purchase Order and the delivery dates required to COMPANY.  In the event, DPT can not make the proposed commitment delivery date, DPT shall promptly notify COMPANY and inform COMPANY of the proposed delivery date, which shall be as close as possible to the original requested delivery date set out in the specific Purchase Order.

2.7Rejected Products

(a)Rejection of Product by COMPANY

COMPANY may reject any Product which fails to meet the Specifications (“Rejected Product”).  COMPANY shall, within [*****] after its receipt of any shipment of Product and related Certificate of Analysis of Product batch (as described in paragraph 5.1 hereof), notify DPT in writing of any claim relating to rejected Product batch and, failing such notification, shall be deemed to have accepted such Product batch.  Such notice to DPT shall specify why the Product batch failed to meet Specifications.  COMPANY shall grant to DPT the right to inspect and test said Product batch.  All Products shall be submitted to inspection and evaluation in accordance with DPT’s SOP’s to determine whether or not said Products meet the Specifications.

(b)Replacement of Rejected Product

At the COMPANY’s option, as to any Rejected Product pursuant to paragraph 2.7(a) above (including phases of or complete batches of bulk product), DPT shall replace such Rejected Product (in an agreed upon batch order quantity, but in no event less than full

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

11

batch increments) promptly after all materials are available to DPT for the manufacture.  If requested, DPT shall make arrangements with COMPANY for the return or disposal of Rejected Product.

(c)Responsibility for Costs

For the [*****] batches of a Product produced by DPT, or in the event a Rejected Product is due to COMPANY supplied information, formulations or materials, COMPANY shall bear [*****] percent ([*****]%) of all costs directly related to and invoiced for Rejected Product including cost of destruction of the Rejected Product, which shall be conducted by COMPANY in accordance with all applicable laws and regulations.  Upon the completion of [*****] batches, and in the event a validated  Product is rejected due to DPT’s failure to comply with applicable written procedures and DPT’s equipment or facility failure and such failure renders the Product unmarketable, DPT shall bear [*****] percent ([*****]%) of the manufacturing fees, costs of all materials including but not limited to API and components, and costs of destruction. In the event a validated Product does not meet final Specifications and results in a Rejected Product, but such failure is not due to either COMPANY supplied information or DPT’s failure to follow written procedures, the COMPANY shall bear [*****] with DPT bearing [*****] related to Rejected Product, and with destruction to be paid by [*****].  Destruction of Rejected Product shall be in accordance with all applicable laws and regulations and the party conducting the destruction shall indemnify the other party hereto for any liability, costs or expenses, including attorney’s fees and court costs, relating to a failure to dispose of such Product in accordance with such laws and regulations.  The party conducting the destruction shall also provide to the other party hereto all manifests and other applicable evidence of proper destruction as may be requested by applicable law.

(d)Resolution of Conflict

In the event of a conflict between the test results of DPT and the test results of COMPANY with respect to any shipment of Product batch, a sample of such Product batch shall be submitted by DPT to an independent laboratory or recognized industry expert acceptable to both parties for testing against the Specifications

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

12

utilizing the methods set out in the Specifications.  The fees and expenses of such laboratory testing shall be borne entirely by the party against whom such laboratory’s findings are made.  If results from the independent laboratory are inconclusive, final resolution will be settled in accordance with paragraph 11.6 (b) below.

(e)Recalled Product

In the event (i) any government authority issues a request, directive or administrative order that Product be recalled, or (ii) a court of competent jurisdiction orders a Product recall, or (iii) the COMPANY reasonably determines that the Product should be recalled, the parties shall take all appropriate corrective actions which are reasonable under the circumstances.  In the event that such recall results solely from the breach of DPT’s warranties under this Agreement, at the COMPANY’s option, DPT shall be responsible for replacing the recalled Product and for the administrative expenses of the recall in any case not to exceed [*****] per recall incident.  In the event the recall results from the breach of COMPANY’s warranties under this Agreement, COMPANY shall be responsible for all of the expenses of the recall.  For the purposes of this Agreement, administrative expenses of the recall shall be the expenses of notification, destruction or return of the recalled Product; including any reasonable out-of-pocket costs incurred by the parties in connection with any corrective action.

2.8Product Price

(a)Manufacturing Fees.

The initial Manufacturing Fees to be paid by COMPANY to DPT are listed in Schedule A.  The parties hereto agree that the Manufacturing Fees set out in Schedule A shall be re negotiated, in good faith, at [*****].  If the parties are unable to agree on a re-negotiated price at least [*****] prior to the start of [*****], then this Agreement, effective the [*****] of the [*****], shall continue in force with prices being adjusted to reflect the change in [*****], in [*****] of the preceding [*****] as compared to the same [*****] prior thereto until such time as to when price negotiation can be completed. (For example: If in [*****] the [*****] is [*****] and then [*****] reflects a

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

13

[*****] of [*****] the difference would be [*****].  The [*****] would be divided by [*****] resulting in a [*****] increase of [*****]% in [*****]).

In addition, Manufacturing Fees are based on [*****] volumes for Products.  The Parties shall reserve the right to re-evaluate Manufacturing Fees at the beginning of the [*****] (and each [*****] thereafter) in the event that actual volumes differ from those volumes listed in Schedule A by more than [*****] percent ([*****]%).

Prices for new Products or new Product sizes, new batch sizes or product configuration changes not initially included in Schedule A, shall be negotiated and DPT and COMPANY shall arrive at a mutual agreement with respect to prices at the time said new Products or new Product sizes are added to Schedule A.

If a negotiated price cannot be agreed upon, final pricing for any of the above will be settled in accordance with paragraph 11.6 (b) below.

(b)Materials Fees

The Materials Fee to be paid by COMPANY to DPT shall be listed in Schedule A within [*****] of commencement of the initial commercial products of the applicable Product.  The Materials Fee will be adjusted [*****] at the beginning of [*****] and Schedule A shall be amended accordingly based on changes in DPT’s standard costs for materials.  In the event, however, the cost of a  material increases during [*****] greater than [*****] percent ([*****]%), with prior written notice to COMPANY, DPT may promptly upon the effective date of such increase adjust its invoice price for said material to COMPANY to compensate for the increase.

Material Fees for new Products or new Product sizes, new batch sizes or product configuration changes not initially included in Schedule A, shall be established at the time of first production.

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

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2.9Payment

Payment for all undisputed deliveries of Product and services shall be made in U.S. Dollars (USD), [*****] after the [*****].  If COMPANY disputes any portion of an invoice, it shall pay the undisputed portion and shall provide DPT with written notice of the disputed portion and its reasons therefor, and COMPANY shall not be obligated to pay such disputed portion unless and until such dispute is resolved in favor of DPT.  The parties shall use good faith efforts to resolve any such disputes within [*****].  Invoices shall be generated upon shipment of Product from DPT.  Total invoice price shall be equal to the quantity of Product times the Total Price per unit effective on [*****], as listed in Schedule A.

Payments shall be made by check, via wire transfer or through other instrument accepted by DPT.  Fund transfers by wire should be made to the following:

Account Name:  [*****]

Account Number: [*****]

Bank Name:  [*****]

ABA Routing Number (ACH/WIRE):  [*****]

SWIFT Code:  [*****]

Bank Location: [*****]

Contact:[*****]

2.10Late Payment

A late fee of [*****] percent ([*****]%) of total invoice can be added each month for late undisputed payments.  DPT, at its sole discretion, has the right to discontinue COMPANY’s credit on future orders if COMPANY’s account is not current.  In the event credit is discontinued, a [*****] percent ([*****]%) material deposit paid by COMPANY to DPT will be required prior to DPT ordering  materials.  In addition, a [*****] percent ([*****]%) Manufacturing Fee deposit will be required prior to DPT manufacturing any Product and the balance of the invoice must be paid in full prior to shipment.

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

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2.11Disposal Costs

With COMPANY’s prior written authorization, DPT reserves the right to invoice COMPANY for all disposal costs, related to manufacture of the Products, unless the disposal relates to a Rejected Product caused by the failure of DPT to follow established written procedures and DPT’s equipment and facility failure.

2.12Subcontracting

All services or materials for which DPT  contracts, subcontracts or purchases for purposes of this Agreement shall be subject to prior written approval by the COMPANY.

III - SHIPMENT AND RISK OF LOSS

3.1Shipment

Shipment of Product shall be in accordance with COMPANY instructions, provided that shipment is made in accordance with all relevant statutory requirements.  Product will be shipped to COMPANY or its designee immediately upon release, freight collect.  At COMPANY’s request, [*****].  Product held [*****] will be subject to payment as if the product was shipped in accordance with paragraph 2.9 above.  If COMPANY requests DPT to make any miscellaneous small shipments of Product, material, or other items on COMPANY’s behalf, COMPANY agrees to reimburse DPT for any shipping charges incurred.

3.2Delivery Terms

The delivery terms of the Products detailed in Schedule A hereof shall be [*****].  Title to, and risk of loss for, Product, shall transfer from DPT to COMPANY when [*****].  [*****] shall bear all risk of loss, delay, or damage in transit, as well as cost of freight and insurance.

3.3Claims

The weights, tares and tests affixed by DPT’s invoice shall govern unless established to be incorrect.  Claims relating to quantity, weight and loss or damage to any Product sold under this Agreement shall be waived by COMPANY unless made within [*****] of receipt of Product by COMPANY.

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

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IV - TERM AND TERMINATION

4.1Term

The initial term of this Agreement shall commence on the Effective Date hereof and will continue until December 31 of the fifth (5th) calendar year following the Launch Year, unless sooner terminated pursuant to paragraph 4.2 below. This Agreement shall thereafter automatically renew for periods of twelve (12) months, unless any party shall give notice to the other to the contrary at least twelve (12) months prior to the expiration of the initial term or any renewal term of the Agreement.

4.2Termination

This Agreement may be terminated at any time upon the occurrence of any of the following events:

(a)The failure of either party to comply with its obligations herein, which failure is not remedied within sixty (60) days after written notice thereof.

(b)Notice by either party to the other upon the insolvency or bankruptcy (voluntary or otherwise) or other similar financial distress of the other party.

4.3Payment on Termination

In the event of the termination or cancellation of this Agreement for any reason, and without prejudice to any other rights and remedies available to either party hereunder, COMPANY agrees to reimburse DPT the Materials Fee actually ordered for the manufacture of Products based on COMPANY’s Forecasted Needs as well as for  work-in-process and finished Products. Any “common” material shall be inventoried and will not be charged to COMPANY.

4.4Survival

Termination of this Agreement under paragraph 4.2 or due to expiration or cancellation shall not relieve either party of obligations or liability for breaches of this Agreement incurred prior to or in connection with

17

termination, expiration or cancellation.  Sections [*****] hereof shall survive the termination or cancellation of this Agreement for any reason.

V - CERTIFICATES OF ANALYSIS AND MANUFACTURING COMPLIANCE

5.1Certificates of Analysis

DPT shall test each lot of Product purchased pursuant to this Agreement before delivery to COMPANY.  Each Certificate of Analysis shall set forth the items tested, specifications and test results for each lot delivered.  DPT shall send one (1) Certificate of Analysis, one (1)  Certificate of Compliance, and a complete executed batch record including full analytical data set to COMPANY at the time of the release of Product.  Extraordinary reporting or documentation, outside this Agreement, may be subject to an additional charge by DPT and will not be incurred without the prior written authorization of the COMPANY.

5.2Stability Testing

DPT shall perform its standard stability test program as defined in DPT’s SOP’s or as separately agreed to in accordance with a CCR for each of the Products.  COMPANY shall receive a copy of DPT’s Annual Product Review for each Product as long as DPT is continuing to produce such Product for COMPANY and for as long as this Agreement is in effect.  If COMPANY elects to perform its own stability testing on Product, COMPANY agrees to provide DPT with a copy of the results from such testing on an annual basis.

5.3Validation Work or Additional Testing

It is understood by the parties hereto that the responsibility for any validation work shall be the sole responsibility of COMPANY. The parties agree that for any validation work or additional testing in connection with the Product, DPT and COMPANY shall enter into a specific written Project Protocol establishing methodology and pricing for such services.  It is understood between the parties hereto that if DPT is required by regulatory authority to perform validation studies or additional testing in order to legitimately continue to engage in the manufacture of the Product for COMPANY and DPT and COMPANY cannot reach an agreement on a

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

18

written Project Protocol, then DPT shall be under no obligation to continue the manufacture of the Product affected by said regulation.

5.4FDA Inspection

DPT shall advise COMPANY if an authorized agent of the FDA or other governmental agency schedules a visit at, or without scheduling visits, DPT’s manufacturing facility and requests or requires information or changes which specifically pertain to the Products or pertains to DPT’s ability to continue to provide Services and Product(s) under this Agreement.  FDA audit time specific to Products, e.g. for cause  or pre-approval inspection, will be billed to COMPANY from DPT at the then-prevailing QA hourly rate.  DPT shall immediately communicate to COMPANY all communications with the FDA or other government agency, including requests for audits or that an audit has started.  DPT shall allow COMPANY to be in close proximity at when there is a COMPANY specific regulatory audit.

5.5Regulatory Filings

COMPANY agrees to provide DPT with copies of the applicable drug product sections of NDA’s, ANDA’s, 510(k)’s or other regulatory filings applicable to the Products manufactured and/or tested by DPT, and copies of any changes in or updates of same as they, from time to time, hereafter occur, during the term of this Agreement.

VI - WARRANTIES

6.1Conformity with Specifications

DPT warrants that all Products sold pursuant to this Agreement will have been manufactured in accordance with (i) the Specifications for the release of the Product or pursuant to exceptions approved in writing by COMPANY at the time of manufacture (ii) the Quality Agreement attached hereto as Schedule B and incorporated herein by reference, as may be amended from time to time.

19

6.2Compliance with the Act

COMPANY shall bear sole responsibility for the validity of all test methods and appropriateness of all Specifications.  In addition, COMPANY shall bear sole responsibility for all regulatory approvals, filings, and registrations and adequacy of all validation, stability, and preservative efficacy studies.  COMPANY further warrants that to its knowledge, it has obtained any and all necessary approvals from all applicable regulatory agencies necessary to manufacture and distribute all Products under this Agreement.

6.3Conformity with FDA regulations and cGMP’s

Subject to the provisions set forth in paragraph 6.2 and 6.4 hereof, DPT warrants that all Products shall have been manufactured by DPT in compliance with applicable FDA regulations and current Good Manufacturing Practices as that term is defined under the Act.

6.4Compliance of Packaging and Labeling with Laws and Regulations

COMPANY warrants that to its knowledge, all Labeling copy and artwork approved, designated or supplied by COMPANY shall be in compliance with all applicable laws and governmental regulations.  Compliance with all federal, state, and local laws and regulations concerning Packaging and Labeling shall be the sole responsibility of COMPANY, provided that DPT purchases such Packaging and Labeling as provided in paragraph 2.2 (c) hereof.  COMPANY hereby represents and warrants to DPT that to its knowledge, all COMPANY designated formulas, components and artwork related to the Product do not violate or infringe any patent, copyright or trademark laws, and agrees to indemnify DPT, its employees, officers, directors and representatives from and against any third party claim, loss or damage including reasonable attorney’s fees paid or incurred by any of them in connection therewith, except where such claim loss or damage is the result of DPT’s negligence or willful misconduct.

6.5Access to DPT’s Facilities

COMPANY shall have access to DPT’s facilities, procedures, and documentation related to this Agreement at mutually agreeable times for the sole purpose of auditing DPT’s compliance with current Good Manufacturing Practices and the Act.  In connection with any audit, DPT

20

shall also provide the COMPANY access to its personnel. Such access shall in no way give COMPANY the right to any of DPT’s confidential or proprietary information.  Further, such audits shall normally be limited to a maximum of [*****] every [*****], unless for cause, and [*****] employees or agents of COMPANY, the identity of which are subject to the prior approval of DPT, which shall not be unreasonably withheld, who are subject to the same requirements of confidentiality as COMPANY, and for [*****] following the termination or expiration of this Agreement .

6.6Inspections

DPT agrees to permit representatives of the FDA or any other relevant regulatory or governmental authority to access at any reasonable time during normal business hours relevant records, information (and where applicable make copies of the same), personnel and facilities.  DPT shall immediately notify the COMPANY if the FDA or other governmental authority schedules, or without scheduling begins, an inspection or audit.  DPT shall make every reasonable effort to permit the COMPANY to be in close proximity  of such inspection or audit if the same relates directly to this Agreement or Services.  In addition, DPT will provide the COMPANY copies of any correspondence from or to the FDA or other regulatory authorities relating to this Agreement or any Services.  Such copies may be redacted in the event such correspondence incorporates other third party information that is not related to this Agreement or Services.

6.7Debarment

DPT hereby certifies that it knowingly does not and knowingly shall not employ, contract with or retain any person directly or indirectly to perform Services under this Agreement if such person is debarred under 21 U.S.C. 335a (a) or (b) or other equivalent laws, rules, regulations or standards of any other relevant jurisdiction.  Upon written request of Company, DPT shall, within ten (10) business days, provide written confirmation that it has complied with the foregoing obligation.  DPT agrees to immediately disclose in writing to Company if any employee or agent is debarred, or if any action or investigation is pending or, to the best of DPT’s knowledge, threatened, relating to the debarment of DPT or any person performing services related to this Agreement.

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

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6.8Disclaimer

DPT AND COMPANY MAKE NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCT, LABELING OR PACKAGING; EXCEPT AS DETAILED HEREIN.  ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE HEREBY DISCLAIMED. IN NO EVENT WILL DPT BE LIABLE FOR ANY LOSS OF PROFITS, LOSS OF USE, BUSINESS INTERRUPTION, COST OF COVER, OR INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES OF ANY KIND IN CONNECTION WITH OR ARISING OUT OF THE PERFORMANCE OF THIS AGREEMENT, WHETHER ALLEGED AS A BREACH OF CONTRACT OR TORTIOUS CONDUCT, INCLUDING NEGLIGENCE, EVEN IF DPT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.  DPT’S LIABILITY UNDER THIS AGREEMENT FOR FIRST PARTY DAMAGES OF ANY KIND, INCLUDING, WITHOUT LIMITATION, RESTITUTION, WILL NOT EXCEED, [*****].

VII - FORCE MAJEURE

Failure of either party to perform its obligations under this Agreement shall not subject such party to any liability to the other if such failure is caused by acts such as, but not limited to, acts of God, acts of terrorism, fires, explosion, flood, drought, war, riot, sabotage, embargo, strikes, or by any other cause beyond the reasonable control of the parties, whether or not foreseeable.

VIII — CHANGES TO PROCESS OR PRODUCT

8.1Changes by COMPANY

If COMPANY at any time requests a change to Product and DPT agrees such change is reasonable with regard to Product manufacture;  (i) such change shall be incorporated within the Master Batch Record and/or Specifications via a written CCR reviewed and agreed upon in writing by

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

22

both DPT and COMPANY;  (ii) The parties shall adjust the price of Product, if necessary, and Schedule A shall be amended accordingly; and  (iii) COMPANY shall pay DPT for the costs associated with such change including, but not limited to, any additional development or validation work required, charged at DPT’s then-prevailing R&D rates in accordance with Section XI contained herein.

8.2Changes by DPT

DPT agrees that any changes developed by DPT, which may be incorporated into the Product shall require the written approval of COMPANY via a CCR prior to such incorporation.  At the time of such incorporation, such changes shall become part of the Specifications.  It is also agreed that any regulatory filings incident to any such change shall be the sole responsibility of COMPANY.

8.3Changes by Regulatory Authorities

The parties agree that any changes required by regulatory authority, shall be incorporated into the Product as evidenced by the written approval of COMPANY via a CCR prior to such incorporation.  At the time of such incorporation, such changes shall become part of the Specifications.  If DPT is required by regulatory authority to perform validation studies for purposes of validating new manufacturing process or cleaning procedures or new  material and finished Product assay procedures with respect to Product in order to continue to engage in the manufacture of said Product for COMPANY, such studies shall be conducted in accordance with paragraph 5.3 herein. Any costs to DPT resulting from the operation of this paragraph shall be reimbursed by COMPANY.

8.4Obsolete Inventory

Any COMPANY-specific inventory including, but not limited to, materials, expired materials, work-in-process, and Products rendered obsolete as a result of formula, artwork or packaging changes requested by COMPANY or by changes required by regulatory authority shall be reimbursed to DPT by COMPANY at DPT’s Materials Fee.  At such time and unless otherwise instructed by COMPANY and agreed by DPT, DPT will destroy the obsolete inventory for COMPANY.  COMPANY shall bear [*****] percent ([*****]%) of all shipping and destruction costs related to said obsolete

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

23

inventory.  The destruction shall be in accordance with all applicable laws and regulations.  DPT shall provide written notification to COMPANY of its intent to dispose and or store obsolete inventory.  If DPT does not receive disposition instructions from COMPANY within [*****] from date of notification, obsolete inventory remaining at DPT’s facilities shall be subject to a deposit covering the standard cost of the obsolete inventory and storage fees and or destruction at DPT’s discretion, with notice to the COMPANY.

IX - CONFIDENTIAL INFORMATION

9.1Confidential Information

(a)Obligations of Confidentiality

The Parties agree to treat all Confidential Information (as described herein) acquired by either of them from the other under this Agreement as being secret and confidential and shall use it only as permitted under this Agreement.  For the purposes of this Agreement, “Confidential Information” shall mean all confidential or proprietary materials or information not generally available to the public that is confidential and proprietary to Company or DPT.  Company’s Confidential Information includes, but is not limited to, Company Intellectual Property and Company Developed Intellectual Property, confidential information provided to DPT prior to the date hereof, all information regarding any Product, its raw materials, processes, know-how, formulations, analytical procedures, clinical procedures, its INDs and any other regulatory filings, and other information related to any Product that may or will be under development.  DPT’s Confidential Information includes, but is not limited to, all information regarding its business, manufacturing procedures, know-how, customers, and price lists.  Neither Party shall disclose the Confidential Information of the other Party for any purposes other than as required in the performance of its duties under this Agreement.  All Confidential Information furnished by COMPANY to DPT, or by DPT to COMPANY, during the term of this Agreement, relating to the subject matter hereof, shall be kept confidential by the party receiving said confidential

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

24

information, except for purposes authorized by this Agreement, and shall not be disclosed to any person or firm, unless previously authorized in writing to do so, for a period of not less than [*****] following the date of disclosure. The party receiving said confidential information may, however, disclose the same to its responsible officers,  employees, consultants, advisors and agents (“Representatives”) who require said information for the purposes contemplated by this Agreement, provided that said Representatives shall have assumed like obligations of confidentiality.  It is understood that all confidential information provided by either party shall be identified or marked as such.  Any oral communications which are to be considered confidential shall be reduced to writing and identified as confidential within thirty (30) days after disclosure. DPT shall have no right to publish any Confidential Information.

(b)Exceptions

Any other provisions hereof to the contrary notwithstanding, it is expressly understood and agreed by the parties hereto that the obligations of confidence and nonuse herein assumed shall not apply to any information which:

(1)is at the time of disclosure or thereafter so becomes a part of the public domain; or

(2)was otherwise in the receiving party’s lawful possession prior to disclosure as shown by its competent written record; or

(3)is hereafter disclosed to the receiving party by a third party purporting not to be in violation of an obligation of confidentiality to the disclosing party relative to said information; or

(4)is by mutual agreement of the parties hereto released from a confidential status; or

(5)is required to be disclosed pursuant to regulatory or legal requirements.

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

25

(c)DPT Business Model

COMPANY acknowledges that as a contract manufacturing organization, DPT’s business involves the application of its expertise, technology and know-how to numerous pharmaceutical and other products and that DPT retains the right (subject to its obligations under the applicable confidentiality provision or agreement) to apply such expertise, technology and know-how to a variety of products or services.

9.2Trademarks and Trade Names

(a)Each party hereby acknowledges that it does not have, and shall not acquire any interest in any of the other party’s trademarks or trade names unless otherwise expressly agreed.

(b)Each party agrees not to use any trade names or trademarks of the other party, except as specifically authorized by the other party in writing both as to the names or marks which may be used and as to the manner and prominence of use.

X — INDEMNIFICATION

10.1Indemnification by DPT

Subject to paragraph 6.8 above, DPT will indemnify and hold COMPANY harmless against any and all liability, damage, loss, cost, or expense (including reasonable attorney’s fees) resulting from any third party claims made or suits brought against COMPANY which arise from DPT’s breach of its warranties set forth in Section VI hereof, including for DPT’s negligence and willful misconduct up to [*****].  Notwithstanding the foregoing, under no circumstances shall DPT have any responsibility for product liability or personal injury claims of such third parties which arise from the sale, distribution or any use of Product which meets the Specifications.

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

26

10.2Insurance by DPT

DPT shall maintain in full force and effect the following minimum, required insurance: products liability insurance coverage in the minimum amount of [*****] per occurrence with an annual aggregate amount of [*****]; workers compensation insurance in accordance with all applicable statutory requirements, and employers liability coverage of [*****] per accident/disease/injury/ general liability insurance, including contractual liability coverage, with limits of [*****] per occurrence and [*****] in annual aggregate.  Upon request, DPT shall provide Company with evidence of insurance coverage in the form of a Certificate of Insurance.  The limits required may be satisfied through a combination of both primary and excess casualty programs.  Such evidence of insurance shall be provided, upon written request, in the form of a Certificate of Insurance which shall name COMPANY as a “certificate holder” and shall reference COMPANY’s additional insured status as required.

10.3Indemnification by COMPANY

COMPANY will indemnify and hold DPT harmless against any and all liability, damage, loss, cost or expense (including reasonable attorney’s fees) resulting from any third party claims made or suits brought against DPT which are related to the breach of any of COMPANY’s warranties provided for herein or which arise out of the promotion, distribution, use, testing or sales of Products, including, without limitation, any claims, express, implied or statutory, made as to the efficacy, safety, or use to be made of Products, and claims made by reason of any Product Labeling or any Packaging containing Product (provided such packaging and Labeling was purchased by DPT as provided in paragraph 2.2 (c) hereof), unless, and to the extent such liability, damage, loss or expense is caused by the breach of DPT’s warranties under Section VI hereof or DPT’s negligence or willful misconduct. COMPANY shall have the right, at its sole option, to defend against such claim including selection of counsel and control of the proceedings, including reasonable settlement; provided, however, that the selection of counsel and settlement is with the approval of DPT, which approval will not be unreasonably withheld.

10.4Insurance by COMPANY

While this Agreement is in full force and effect, COMPANY shall furnish DPT with evidence of Commercial General Liability insurance (including endorsements for Products and Contractual Liability) coverage affording a minimum amount of [*****] per occurrence combined single limit, bodily

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

27

injury/property damage and [*****] aggregate liability limits.  Such evidence of insurance coverage can be in the form of the original policy or a Certificate of Insurance which shall name DPT as an additional insured and provide that COMPANY has assumed the liability as provided for herein.  Concurrent with the execution of this Agreement, COMPANY shall provide evidence of the foregoing insurance coverage to:

DPT Laboratories, Ltd.

[*****]

[*****]

[*****]

[*****]

10.5Stacking of Insurance

Neither COMPANY nor DPT intend for their respective insurance policies to stack on top of each other.  To that end, both parties agree that if a loss is incurred, for which DPT has an obligation under Section 10.1 to indemnify COMPANY hereunder, DPT’s policies will be triggered and DPT will defend COMPANY under the additional insured endorsement. Furthermore, if a loss is incurred for which Company has an obligation under Section 10.3 to indemnify DPT hereunder, then COMPANY’s policies will be triggered and COMPANY will defend DPT under the additional insured endorsement.

10.6Patent and Other Intellectual Property Rights

(a)Warranty by COMPANY

COMPANY warrants that, use of Products or sales of Products will not infringe any patent or other proprietary rights and that COMPANY will indemnify, defend and hold DPT harmless from any damage, judgment, loss, cost or other reasonable expense (including reasonable attorney’s fees) arising from third party claims that Products or the use of the Product names and any other trademarks, trade names, or trade dress used by COMPANY in connection with Products infringes patent or other proprietary rights of a third party.

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

28

(b)Warranty by DPT

DPT shall indemnify and hold COMPANY harmless from all costs, damages and expense (including reasonable attorney’s fees) arising out of any suit or action brought against COMPANY based upon a claim that any process or technical data furnished or utilized by DPT infringes any patent or other proprietary rights.

10.7Conditions of Indemnification

If either party expects to seek indemnification from the other under paragraphs 10.1, 10.3, or 10.6 hereof, it shall promptly give notice to the other party of any such claim or suit threatened, made or filed against it which forms the basis for such claim of indemnification and shall cooperate fully with the other party in the defense of all such claims or suits.  No settlement or compromise shall be binding on a party hereto without its prior written consent.

XI - GENERAL PROVISIONS

11.1Notices

Any notices permitted or required by this Agreement shall be sent by certified or registered mail and shall be effective the earlier of the date received or three (3) days after deposit in the U.S. mail, if sent and addressed as follows or to such other address as may be designated by either party in writing:

If to DPT:DPT Laboratories, Ltd.

[*****]

[*****]

[*****]

[*****]

If to COMPANY:Anacor Pharmaceuticals, Inc.

[*****]

[*****]

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

29

[*****]

With a copy to:

Cooley LLP

[*****]

[*****]

[*****]

11.2Entire Agreement; Amendment

The parties hereto acknowledge that this document together with the Quality Agreement executed on even date herewith sets forth the entire agreement and understanding of the parties and supersedes all prior written or oral agreements or understandings with respect to the subject matter hereof, and shall supersede any conflicting portions of DPT’s quotation, acknowledgment and invoice forms and COMPANY’s Purchase Order and other written forms.  No modification of any of the terms of this Agreement, or any amendments thereto, shall be deemed to be valid unless in writing and signed by the party against whom enforcement is sought.  No course of dealing or usage of trade shall be used to modify the terms and conditions herein.

11.3Waiver

No waiver by either party of any default shall be effective unless in writing, nor shall any such waiver operate as a waiver of any other default or of the same default on a future occasion.

11.4Obligations to Third Parties

Each party warrants and represents that proceeding herein is not inconsistent with any contractual obligations, express or implied, undertaken with any third party.

11.5Assignment

This Agreement shall be binding upon and inure to the benefit of the successors or permitted assigns of each of the parties and may not be assigned or transferred by either party without the prior written consent of the other, which consent will not be unreasonably withheld.  No such

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

30

assignment shall release the original party hereto from its duties and obligations under this Agreement.

11.6Governing Law and Arbitration

(a)Governing Law

The validity, interpretation and effect of this Agreement shall be governed by and construed under the substantive laws of the State of Delaware, excluding any conflicts of law provisions contained therein.

(b)Mediation

Each party hereto irrevocably agrees that any dispute arising out of or related in any way to this Agreement shall be submitted in the first instance to mediation and then, if still unresolved, to litigation pursuant to the provisions of 8 Del. C. §§ 346 and 347 in the Court of Chancery of the State of Delaware and subject to the substantive laws of the State of Delaware; excluding any conflicts of law provisions contained therein.  If the Delaware Court of Chancery lacks jurisdiction under 8 Del. C. §§ 346 and 347 to resolve the dispute either by mediation or litigation, then such dispute shall be brought in the appropriate court in the State of Delaware, and each of the parties hereto hereby (i) irrevocably submits with regard to any such dispute for itself and in respect to its property, generally and unconditionally, to the exclusive personal jurisdiction of the Delaware courts in the event that any dispute arises out of this Agreement or any transaction contemplated hereby, (ii) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion of leave from any such court in Delaware, and (iii) agrees that it will not bring any action relating to this Agreement or any transaction contemplated hereby in any court other than the aforesaid courts.

11.7Severability

In the event that any term or provision of this Agreement shall violate any applicable statute, ordinance, or rule of law in any jurisdiction in which it is used, or otherwise be unenforceable, such provision shall be ineffective to the extent of such violation without invalidating any other provision hereof.

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11.8Headings, Interpretation

The headings used in this Agreement are for convenience only and are not a part of this Agreement.

11.9Counterparts

This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same original.

11.10Independent Contractor

In performing its services hereunder, DPT shall act as an independent contractor.

11.11Export/Import Laws and Regulations

This Agreement is subject to any restrictions concerning the import or export of Product, active pharmaceutical ingredient, chemical or packaging  components (or related technical information or data) to or from the United States as well as the laws and regulations of any other country involved in the import or export of such Product, active pharmaceutical ingredient, chemical or packaging  components (or related technical information or data).  COMPANY acknowledges that it shall be solely and exclusively responsible for the preparation of all import and export documentation and compliance with all import and export laws of the United States  as well as the laws and regulations of any other country involved in the import or export of such Product, active pharmaceutical ingredient, chemical or packaging  components (or related technical information or data); except as otherwise agreed by the parties in writing.  COMPANY shall indemnify and hold DPT, its officers, directors, employees, shareholders and affiliates harmless, from any and all claims, losses, liabilities, damages, fines, penalties, costs and expenses (including reasonable attorneys’ fees) arising from, or related to, any breach by COMPANY of its obligations under this provision. COMPANY shall be the importer or exporter of record for all such import or export activities.  COMPANY shall cooperate with DPT as reasonably necessary to permit DPT to comply with the laws and regulations of the United States

32

and any other country relating to the control of import or export of Product, active pharmaceutical ingredient, chemical or packaging  components (or related technical information or data).

33

IN WITNESS WHEREOF, the parties hereto have each caused this Agreement to be executed by their duly authorized officers as of the date first above written.

	ANACOR PHARMACEUTICALS		DPT LABORATORIES, LTD.
By:	/s/ Lucy O. Day	By:	/s/ Paul Johnson
	Lucy O. Day		Paul Johnson
Its:	VP, Finance	Its:	President & COO

34

Schedule A

35

SCHEDULE A - 2014 - April 17, 2014

Client - Anacor Pharmaceuticals (616)

PRODUCT CODE	PRODUCT DESCRIPTION	ANNUAL QUANTITY	ESTIMATED ORDER QUANTITY (Bottle)	Batch Size	# of BATCHES per ORDER	# of BATCHES per YEAR	MANUFACTURING FEE per bottle ($)	MATERIAL FEE per bottle ($)	TOTAL PRICE US ($) per bottle
Tavabarole Topical Solution, 5% - [*****]
[*****]	[*****]	[*****]	[*****]	[*****]	[*****]	[*****]	[*****]	[*****]	[*****]
Tavabarole Topical Solution, 5% - [*****]
[*****]	[*****]	[*****]	[*****]	[*****]	[*****]	[*****]	[*****]	[*****]	[*****]
Total Batches

Notes:

1)[*****].

2)[*****].

3)[*****].

4)[*****].

5)[*****].

6)[*****].

7)[*****].

8)[*****].

9)[*****].

Anacor Pharmaceuticals	DPT Laboratories, Ltd.
By: /s/ Dina Coronado	By: /s/ Paul Josephs
Print Name: Dina Coronado	Print Name: Paul Josephs
Title: VP, CMC	Title: Sr. VP Sales, Marketing and Corporate Development
Date: 23 April 2014	Date: 4/17/14

CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) AND 240.24b-2. [*****] INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST FILED SEPARATELY WITH THE COMMISSION. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Paul L. Berns, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Anacor Pharmaceuticals, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 11, 2014
	/s/ PAUL L. BERNS
	Paul L. Berns
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Geoffrey M. Parker, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Anacor Pharmaceuticals, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 11, 2014
	/s/ GEOFFREY M. PARKER
	Geoffrey M. Parker
	Executive Vice President,
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the Exchange Act) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Paul L. Berns, President and Chief Executive Officer of Anacor Pharmaceuticals, Inc. (the Company), and Geoffrey M. Parker, Executive Vice President, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:

1.The Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2014, to which this Certification is attached as Exhibit 32.1 (the Periodic Report), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and

2.The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the 11th day of August 2014.

/s/ PAUL L. BERNS	/s/ GEOFFREY M. PARKER
Paul L. Berns	Geoffrey M. Parker
President and Chief Executive Officer	Executive Vice President,
	Chief Financial Officer

A signed original of this written statement required by Rule 13(a)-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350) has been provided to Anacor Pharmaceuticals, Inc. and will be retained by Anacor Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Anacor Pharmaceuticals, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

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Summary of Significant Accounting Policies (Details 2)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Bill and Melinda Gates Foundation [Member]
Contract revenues percentage accounted for 10% or more of total revenues
Revenue percentage	55.00%	38.00%	46.00%	25.00%
Eli Lilly and Company [Member]
Contract revenues percentage accounted for 10% or more of total revenues
Revenue percentage		28.00%	18.00%	40.00%
Eli Lilly and Company [Member] | Maximum [Member]
Contract revenues percentage accounted for 10% or more of total revenues
Revenue percentage	10.00%
United States Department of Defense, Defense Threat Reduction Agency [Member]
Contract revenues percentage accounted for 10% or more of total revenues
Revenue percentage	30.00%		26.00%
Glaxo Smith Kline LLC [Member]
Contract revenues percentage accounted for 10% or more of total revenues
Revenue percentage				13.00%
Glaxo Smith Kline LLC [Member] | Maximum [Member]
Contract revenues percentage accounted for 10% or more of total revenues
Revenue percentage	10.00%	10.00%	10.00%
Research institution member
Contract revenues percentage accounted for 10% or more of total revenues
Revenue percentage		10.00%
Research institution member | Maximum [Member]
Contract revenues percentage accounted for 10% or more of total revenues
Revenue percentage			10.00%	10.00%

XML

Stock-Based Compensation (Details 2) (USD $)	3 Months Ended		6 Months Ended		3 Months Ended		6 Months Ended	3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended	3 Months Ended		6 Months Ended	1 Months Ended		3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Mar. 31, 2014 Former Chief Executive Officer [Member]	Jun. 30, 2014 Employee Stock [Member]	Jun. 30, 2014 Employee Stock [Member]	Jun. 30, 2014 Employee Non Employee Stock Options [Member]	Jun. 30, 2014 Employee Non Employee Stock Options [Member]	Jun. 30, 2014 Employee Non Employee Stock Options [Member] Nonemployee Advisors [Member]	Jun. 30, 2014 Employee Non Employee Stock Options [Member] Nonemployee Advisors [Member]	Jun. 30, 2014 Market Based Performance Options [Member]	Mar. 31, 2014 Market Based Performance Options [Member]	Jun. 30, 2014 Market Based Performance Options [Member]	Mar. 31, 2014 Employee Stock Option [Member] Former Chief Executive Officer [Member]	Jun. 30, 2014 Stock Options and Restricted Stock Units [Member]	Jun. 30, 2014 Employee Stock Options Excluding Performance Options [Member]	Jun. 30, 2014 Employee Stock Options Excluding Performance Options [Member]	Jun. 30, 2014 Restricted Stock Units (RSUs) [Member]	Jun. 30, 2014 Restricted Stock Units (RSUs) [Member] item	Jun. 30, 2014 Market Based Restricted Stock Units RSU [Member]	Mar. 31, 2014 Market Based Restricted Stock Units RSU [Member]	Jun. 30, 2014 Market Based Restricted Stock Units RSU [Member]
Stock-Based Compensation Plans
Shares issued during the period								40,022	183,846
Cash received from exercise of stock options								$ 300,000	$ 800,000
Total stock options granted								356,000,000	356,000,000	0	0
Total stock options granted (in shares)								1,786,628	1,786,628		12,828			100,000
Weighted-average fair value of options granted (in dollars per share)														$ 9.82			$ 11.80	$ 13.58
Number of options outstanding (in shares)								5,826,923	5,826,923						223,542
Stock-based compensation expense	3,191,000	1,255,000	7,927,000	2,014,000	3,000,000
Percentage of awards vested																				25.00%
Unrecognized compensation expense						$ 100,000	$ 100,000									$ 29,400,000
Weighted-average period over which unrecognized compensation expense is expected to be recognized						6 months	6 months	3 years 1 month 6 days	3 years 1 month 6 days
Commons shares purchased						0	43,063
Vesting period													4 years		18 months					4 years		4 years
Threshold VWAP for vesting of awards (in dollars per share)													$ 30									$ 30
Number of consecutive trading days prior to March 20, 2018 for maintaining threshold VWAP for vesting of awards													30 days									30 days
Number of shares received after vesting for each RSU																				1
Number of shares of common stock receivable on exercise of awards upon achievement of performance measure													1									1
Weighted average assumptions for determining the weighted average fair values of performance options and units using Monte Carlo simulation models
Exercise price (in dollars per share)												$ 21.21		$ 21.21
Risk-free interest rate (as a percent)														1.32%									1.32%
Volatility (as a percent)														60.20%									60.20%
Weighted average fair value per share granted (in dollars per share)														$ 9.82			$ 11.80	$ 13.58
Weighted average fair value per share granted (in dollars per share)																							$ 17.87
Granted (in shares)												0		100,000					25,000	397,000	0		50,000

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Accrued Liabilities

6 Months Ended

Jun. 30, 2014

Accrued Liabilities

Accrued Liabilities

4. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	June 30, 2014		December 31, 2013
	(unaudited)
Accrued compensation	$	2,867	$	3,321
Accrued preclinical study and clinical trial costs	7,062		2,799
Other	2,420		2,311
Total accrued liabilities	$	12,349	$	8,431

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Marketable Securities and Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2014 Fair Value, Measurements, Recurring [Member]	Dec. 31, 2013 Fair Value, Measurements, Recurring [Member]	Jun. 30, 2013 Fair Value, Measurements, Recurring [Member]	Jun. 30, 2014 Fair Value, Measurements, Recurring [Member] Cash and Cash Equivalents [Member]	Dec. 31, 2013 Fair Value, Measurements, Recurring [Member] Cash and Cash Equivalents [Member]	Jun. 30, 2014 Fair Value, Measurements, Recurring [Member] Short-term Investments [Member]	Dec. 31, 2013 Fair Value, Measurements, Recurring [Member] Short-term Investments [Member]	Jun. 30, 2014 Fair Value, Measurements, Recurring [Member] Restricted Investments Current [Member]	Dec. 31, 2013 Fair Value, Measurements, Recurring [Member] Restricted Investments Current [Member]	Jun. 30, 2014 Fair Value, Measurements, Recurring [Member] Long Term Investments [Member]	Dec. 31, 2013 Fair Value, Measurements, Recurring [Member] Long Term Investments [Member]	Jun. 30, 2014 Fair Value, Measurements, Recurring [Member] Restricted Investments Noncurrent [Member]	Dec. 31, 2013 Fair Value, Measurements, Recurring [Member] Restricted Investments Noncurrent [Member]	Jun. 30, 2014 Fair Value, Measurements, Recurring [Member] Fair Value, Inputs, Level 1 [Member] Money Market Funds [Member]	Dec. 31, 2013 Fair Value, Measurements, Recurring [Member] Fair Value, Inputs, Level 1 [Member] Money Market Funds [Member]	Jun. 30, 2014 Fair Value, Measurements, Recurring [Member] Fair Value, Inputs, Level 2 [Member] US Government Agencies Debt Securities [Member]	Dec. 31, 2013 Fair Value, Measurements, Recurring [Member] Fair Value, Inputs, Level 2 [Member] US Government Agencies Debt Securities [Member]	Jun. 30, 2014 Fair Value, Measurements, Recurring [Member] Fair Value, Inputs, Level 2 [Member] Commercial Paper [Member]	Jun. 30, 2014 Fair Value, Measurements, Recurring [Member] Fair Value, Inputs, Level 2 [Member] Corporate Debt Securities [Member]
Marketable Securities and Fair Value Measurements
Amortized Cost				$ 130,268	$ 166,594												$ 12,061	$ 107,253	$ 99,557	$ 59,341	$ 11,893	$ 6,757
Gross Unrealized Gains				42	2														36	2	6
Gross Unrealized Losses				(1)	(4)															(4)		(1)
Fair Value				130,309	166,592												12,061	107,253	99,593	59,339
Fair Value							19,961	114,755	106,445	35,574	1,294	1,475	215	11,856	2,394	2,932					11,899	6,756
Long-term investments and long-term restricted investments contractual maturity period, minimum			1 year
Long-term investments and long-term restricted investments contractual maturity period, maximum			2 years
Realized gains or losses recognized	0	0
Available-for-sale securities in a continuous unrealized loss position for more than 12 months			0
Transfer of financial asset out of level 1 into Level 2				0		0
Transfer of financial asset out of level 2 into Level 1				$ 0		$ 0

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Summary of Significant Accounting Policies (Details 5) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Numerator:
Net loss	$ (24,508)	$ (14,096)	$ (45,680)	$ (29,174)
Denominator:
Weighted-average number of common shares used in calculating net loss per share-basic and diluted	41,921,329	39,273,330	41,830,803	37,569,275
Net loss per share-basic and diluted (in dollars per share)	$ (0.58)	$ (0.36)	$ (1.09)	$ (0.78)
Outstanding securities at period end not included in the computation of diluted net loss per share as they had an anti-dilutive effect:
Outstanding securities at period end not included in the computation of diluted net loss per share	6,399,129	6,036,621	6,399,129	6,036,621
Common Stock Options and Restricted Stock Units [Member]
Outstanding securities at period end not included in the computation of diluted net loss per share as they had an anti-dilutive effect:
Outstanding securities at period end not included in the computation of diluted net loss per share	6,273,923	5,056,549	6,273,923	5,056,549
Warrant [Member]
Outstanding securities at period end not included in the computation of diluted net loss per share as they had an anti-dilutive effect:
Outstanding securities at period end not included in the computation of diluted net loss per share	125,206	980,072	125,206	980,072

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Accrued Liabilities (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Accrued Liabilities
Accrued compensation	$ 2,867	$ 3,321
Accrued preclinical study and clinical trial costs	7,062	2,799
Other	2,420	2,311
Total accrued liabilities	$ 12,349	$ 8,431

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Commitments and Contingencies (Details ) (Indemnification Agreement [Member], USD $)	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Indemnification Agreement [Member]
Indemnifications
Accruals	$ 0		$ 0
Expenses	$ 0	$ 0

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Marketable Securities and Fair Value Measurements

6 Months Ended

Jun. 30, 2014

Marketable Securities and Fair Value Measurements

Marketable Securities and Fair Value Measurements

3. Marketable Securities and Fair Value Measurements

The following tables summarize the estimated fair values of the Company’s financial assets measured on a recurring basis as of the dates indicated below. Such financial assets are comprised solely of available for sale securities with remaining contractual maturities of less than two years.

The input levels used in the fair value measurements, the amortized cost and fair value of marketable securities, with gross unrealized gains and losses, were as follows (in thousands and unaudited):

June 30, 2014	Input Level	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Money market fund	Level 1	$	12,061	$	—	$	—		$	12,061
Federal agency securities	Level 2	99,557		36		—			99,593
Commercial paper	Level 2	11,893		6		—			11,899
Corporate debt securities	Level 2	6,757		—		(1		)	6,756
Total available for sale securities		$	130,268	$	42	$	(1	)	$	130,309
Classified as:
Cash and cash equivalents									$	19,961
Short-term investments									106,445
Restricted investments, short-term									1,294
Long-term investments									215
Restricted investments, long-term									2,394
Total available for sale securities									$	130,309

December 31, 2013	Input Level	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Money market fund	Level 1	$	107,253	$	—	$	—		$	107,253
Federal agency securities	Level 2	59,341		2		(4		)	59,339
Total available for sale securities		$	166,594	$	2	$	(4	)	$	166,592
Classified as:
Cash and cash equivalents									$	114,755
Short-term investments									35,574
Restricted investments, short-term									1,475
Long-term investments									11,856
Restricted investments, long-term									2,932
Total available for sale securities									$	166,592

All cash equivalents, short-term investments and short-term restricted investments held at June 30, 2014 and December 31, 2013 had maturities as of these dates of less than one year. Long-term investments and long-term restricted investments had maturities as of these dates of more than one but less than two years.

None of the available for sale securities held as of June 30, 2014 have been in a continuous unrealized loss position for more than one year. As of June 30, 2014, unrealized losses on available for sale investments are not attributed to credit risk and are considered to be temporary. The Company believes that it is more-likely-than-not that investments in an unrealized loss position will be held until maturity or the recovery of the cost basis of the investment. To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.

Management of the Company does not intend to sell these securities and believes that it will be able to hold these securities to maturity and recover their amortized cost bases. There were no realized gains or losses recognized from the sale of marketable securities for the three and six months ended June 30, 2014 and 2013.

In measuring fair value, the Company evaluates valuation techniques such as the market approach, the income approach and the cost approach. A three-level valuation hierarchy, which prioritizes the inputs to valuation techniques that are used to measure fair value, is based upon whether such inputs are observable or unobservable.

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

· Level 1—Observable inputs such as quoted prices (unadjusted) for identical instruments in active markets at the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis;

· Level 2—Observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations whose significant inputs are either directly or indirectly observable; and

· Level 3—Unobservable inputs that reflect management’s assumptions and best estimates of inputs that market participants would use in pricing the asset or liability at the reporting date.

               During the three and six months ended June 30, 2014 and June 30, 2013, there were no transfers between Level 1 and Level 2 financial assets. At June 30, 2014 and December 31, 2013, the Company utilized the market approach to measure fair value for its marketable securities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable instruments. The fair values of the money market fund (Level 1) were based on quoted market prices in an active market. Federal agency securities, commercial paper and corporate debt securities (Level 2) are valued using third party pricing sources that apply applicable inputs and other relevant data, such as quoted prices, interest rates and yield curves, into their models to estimate fair value.

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Notes Payable (Details) (USD $)	0 Months Ended	1 Months Ended	3 Months Ended		6 Months Ended
	Jun. 07, 2013 item	Dec. 31, 2013	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Notes payable
Repayment of previous loan	$ 22,600,000
Interest expense			1,100,000	903,000	2,189,000	1,814,000
Loss on early extinguishment of debt				1,381,000		1,381,000
Notes Payable, Other Payables [Member]
Notes payable
Maximum borrowing under loan agreement	45,000,000
Number of tranches	3
Minimum interest rate (as a percent)	11.65%
Maximum interest rate (as a percent)	14.90%
Financing and amendment fees paid	600,000
Other debt issuance costs, including legal fees	500,000
Additional default interest rate that may be applied to the outstanding loan balances (as a percent)	5.00%
Warrants to purchase shares of common stock (in shares)	528,375
Exercise price of warrants (in dollars per share)	5.11
Initial aggregate fair value of warrants issued	1,800,000
Dividend yield (as a percent)	0.00%
Initial debt discounts related to warrants issued	1,800,000
Issuance of common stock from cashless exercise of common stock warrants (in shares)		361,995
Interest expense			1,100,000	900,000	2,200,000	1,800,000
Amortization of the financing fees and debt discounts included in interest expense			200,000	200,000	400,000	300,000
Annual effective interest rate (as a percent)			16.56%		16.56%
Notes Payable, Other Payables [Member] | Prepayment Prior to 7, June 2015 [Member]
Notes payable
Prepayment penalty fee (as a percent)	2.00%
Notes Payable, Other Payables [Member] | Prepayment Prior to 1, July 2017 [Member]
Notes payable
Prepayment penalty fee (as a percent)	1.00%
Notes Payable, Other Payables [Member] | Prime Rate [Member]
Notes payable
Variable rate basis	Prime Rate
Basis spread reduction on variable rate (as a percent)	5.25%
Basis spread on variable rate (as a percent)	11.65%
Notes Payable First Tranche [Member]
Notes payable
Maximum borrowing under loan agreement	30,000,000
Amount drawn	30,000,000
Notes Payable Second Tranche [Member]
Notes payable
Maximum borrowing under loan agreement	10,000,000
Notes Payable Third Tranche [Member]
Notes payable
Maximum borrowing under loan agreement	$ 5,000,000

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 19,962	$ 114,755
Short-term investments	106,445	35,574
Restricted investments, short-term	1,294	1,475
Contract receivables	856	1,324
Prepaid expenses and other current assets	2,770	2,286
Total current assets	131,327	155,414
Long-term investments	215	11,856
Restricted investments, long-term	2,616	3,155
Property and equipment, net	1,588	1,458
Other assets	1,885	282
Total assets	137,631	172,165
Current liabilities:
Accounts payable	5,224	4,708
Accrued liabilities	12,349	8,431
Income taxes payable		1,706
Notes payable	4,479
Deferred revenue	496	1,115
Deferred rent	294	269
Total current liabilities	22,842	16,229
Notes payable, less current portion	23,972	28,018
Deferred revenue, less current portion	149	315
Deferred rent, less current portion	1,066	1,219
Commitments and contingencies
Redeemable common stock	4,952	4,952
Stockholders' equity:
Preferred stock
Common stock	41	41
Additional paid-in capital	260,694	251,839
Accumulated other comprehensive income (loss)	41	(2)
Accumulated deficit	(176,126)	(130,446)
Total stockholders' equity	84,650	121,432
Total liabilities, redeemable common stock and stockholders' equity	$ 137,631	$ 172,165

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The Company

6 Months Ended

Jun. 30, 2014

The Company

The Company

1. The Company

Nature of Operation

Anacor Pharmaceuticals, Inc. (the Company) is a biopharmaceutical company focused on discovering, developing and commercializing novel small-molecule therapeutics derived from its boron chemistry platform. The Company’s first approved drug, KERYDINTM (tavaborole) topical solution, 5% (formerly known as AN2690), is an oxaborole antifungal approved by the U.S. Food and Drug Administration (FDA) in July 2014 for the topical treatment of onychomycosis of the toenails. The Company’s lead product candidate is AN2728, an investigational anti-inflammatory PDE-4 inhibitor in development for the potential treatment of mild-to-moderate atopic dermatitis and psoriasis. The Company initiated Phase 3 studies of AN2728 for the treatment of mild-to-moderate atopic dermatitis in the first quarter of 2014. In addition to KERYDIN and AN2728, the Company has discovered, synthesized and is developing six molecules. These include three wholly-owned investigational product candidates. AN2718 is an investigational topical antifungal, AN2898 is a backup compound to AN2728 and AN3365 (formerly referred to as GSK2251052, or GSK ‘052) is an investigational antibiotic for the potential treatment of infections caused by Gram-negative bacteria, which previously was licensed to GlaxoSmithKline LLC (GSK). In October 2012, GSK advised the Company that it had discontinued further development of AN3365 and substantially all rights to this compound reverted to the Company. The Company is currently considering its options for further development, if any, of AN3365. The Company has also discovered three other investigational compounds that it has out-licensed for further development. The first compound is licensed to Eli Lilly and Company (Lilly) for the potential treatment of an animal health indication.  The second compound, AN5568, also referred to as SCYX-7158, is licensed to Drugs for Neglected Diseases initiative (DNDi) for the potential treatment of human African trypanosomiasis (HAT, or sleeping sickness) and the third compound is licensed to GSK for development in tuberculosis (TB). The Company also has a pipeline of other internally discovered topical and systemic boron-based compounds in earlier stages of research and pre-clinical development.

               Since inception, the Company has not generated revenue from product sales and, as of June 30, 2014, has an accumulated deficit of $176.1 million. The Company may require additional capital to fund research and development activities, including clinical trials for its development programs and preclinical activities for its product candidates. While management believes that the Company’s existing capital resources, together with the payments it is expected to receive based on sales of KERYDIN under the Sandoz Agreement (as defined below), will be sufficient to meet its anticipated operating requirements for at least the next twelve months, the Company may also elect to finance its future cash needs through public or private equity offerings, debt financings or licensing, collaboration or other similar arrangements, or a combination of these sources.

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Potentially Redeemable Common Stock and Stockholders' Equity (Details) (USD $)	1 Months Ended	6 Months Ended				0 Months Ended	6 Months Ended
	Aug. 31, 2013	Jun. 30, 2013	Jun. 30, 2014	Dec. 31, 2013	Nov. 30, 2010	Apr. 05, 2013 Potentially Redeemable Common Stock [Member]	Jun. 30, 2014 Potentially Redeemable Common Stock [Member]
Redeemable Common Stock and Stockholders' Equity
Number of shares of common stock issued and sold						809,061
Share price (in dollars per share)						$ 6.18
Net proceeds from issuance of potentially redeemable common stock		$ 4,952,000				$ 5,000,000
Offering expenses						48,000
Percentage of interest on purchase price per share compounded annually from the stock purchase date							5.00%
Carrying amount of potentially redeemable common stock			4,952,000	4,952,000		5,000,000	5,000,000
Maximum amount of securities for which the entity filed and permitted	50,000,000
Preferred Stock, shares authorized upon the completion of the IPO					10,000,000
Preferred stock, outstanding shares			0	0
Proceeds from issuance of common stock, net of underwriting discount and offering costs		$ 22,607,000

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Stock-Based Compensation (Tables)

6 Months Ended

Jun. 30, 2014

Stock-Based Compensation

Schedule of stock-based compensation expense

The Company recorded stock-based compensation expense for the three and six months ended June 30, 2014 and 2013 as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014(1)		2013
	(unaudited)				(unaudited)
Research and development	$	1,249	$	741	$	2,334	$	1,166
General and administrative	1,942		514		5,593		848
Total	$	3,191	$	1,255	$	7,927	$	2,014

(1) Includes $3.0 million of expense relating to the modification of options held by the Company’s prior chief executive officer upon his resignation. See discussion of Stock Option Modification below.

Schedule of weighted average assumptions for determining the weighted-average fair values for market-based performance stock options and RSUs using Monte Carlo simulation models

	Six Months Ended June 30, 2014
	PSOs			PRSUs
	(unaudited)
Number of PSOs or PRSUs granted	100,000			50,000
Exercise price	$	21.21		$	N/A
Risk-free interest rate	1.32		%	1.32		%
Volatility	60.20		%	60.20		%
Dividends	—			—
Weighted-average fair value per share of PSOs or PRSUs granted	$	9.82		$	17.87

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Stock-Based Compensation (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended		3 Months Ended			6 Months Ended		3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Mar. 31, 2014 Former Chief Executive Officer [Member]	Jun. 30, 2014 Research and Development Expense [Member]	Jun. 30, 2013 Research and Development Expense [Member]	Jun. 30, 2014 Research and Development Expense [Member]	Jun. 30, 2013 Research and Development Expense [Member]	Jun. 30, 2014 General and Administrative Expense [Member]	Jun. 30, 2013 General and Administrative Expense [Member]	Jun. 30, 2014 General and Administrative Expense [Member]	Jun. 30, 2013 General and Administrative Expense [Member]	Jun. 30, 2014 General and Administrative Expense [Member] Former Chief Executive Officer [Member]
Stock-based compensation
Stock-based compensation expense	$ 3,191	$ 1,255	$ 7,927	$ 2,014	$ 3,000	$ 1,249	$ 741	$ 2,334	$ 1,166	$ 1,942	$ 514	$ 5,593	$ 848	$ 3,000

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Summary of Significant Accounting Policies (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Cash and Cash Equivalents, Short Term Investments, Long Term Investments and Restricted Investments
Long-term investments contractual maturity period, minimum	1 year
Long-term investments contractual maturity period, maximum	2 years
Short-term investments contractual maturity period, maximum	1 year
Long-term restricted investments	$ 2,616	$ 3,155
Credit Concentration Risk [Member]
Cash and Cash Equivalents, Short Term Investments, Long Term Investments and Restricted Investments
Number of financial institutions holding cash, cash equivalents, short-term investments, long-term investments and restricted investments	2
Cash and Cash Equivalents [Member] | Credit Concentration Risk [Member]
Cash and Cash Equivalents, Short Term Investments, Long Term Investments and Restricted Investments
Percentage of concentration risk in money market funds	60.00%	93.00%
Short Term, Long Term and Restricted Investments [Member] | Credit Concentration Risk [Member]
Cash and Cash Equivalents, Short Term Investments, Long Term Investments and Restricted Investments
Percentage of concentration risk in money market funds	90.00%	100.00%
Leased Facility [Member]
Cash and Cash Equivalents, Short Term Investments, Long Term Investments and Restricted Investments
Long-term restricted investments	$ 200	$ 200

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2014

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Interim Financial Information

The accompanying condensed consolidated financial statements as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the results included in the condensed consolidated financial statements for the interim periods presented. The December 31, 2013 balance sheet is derived from the audited financial statements for the year ended December 31, 2013 but does not include all the disclosures necessary for audited financial statements. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to the three and six month periods are unaudited. The results for the three and six months ended June 30, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014 or for any other interim period or for any future year.

These condensed consolidated financial statements follow the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (GAAP) for annual periods can be condensed or omitted. For more complete financial information, these condensed consolidated financial statements, and the notes hereto, should be read in conjunction with the audited financial statements for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 17, 2014.

The Company’s significant accounting policies are more fully described in Note 2 of the notes to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Anacor IP Holdings, Ltd., which was incorporated in the Cayman Islands on October 1, 2013. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the condensed consolidated financial statements in accordance with U.S. GAAP requires the Company to make estimates and judgments in certain circumstances that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. In preparing these condensed consolidated financial statements, management has made its best estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, fair values of financial instruments in which it invests, income taxes, preclinical study and clinical trial accruals, accrued compensation, stock compensation and other contingencies. Management bases its estimates on historical experience or on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from these estimates.

Cash and Cash Equivalents, Short-Term Investments, Long-Term Investments and Restricted Investments

The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash and cash equivalents. Unless restricted, investments with a maturity date of more than three months, but less than twelve months, from the date of purchase are considered short-term investments and are classified as current assets. Long-term investments have contractual maturities at the date of purchase of over one but less than two years and are classified as noncurrent assets until such time as the time to maturity becomes one year or less, at which time they are reclassified to short-term investments. The Company’s investments in marketable securities are classified as available for sale (see Note 3). Securities available for sale are carried at estimated fair value, with unrealized gains and losses reported as part of accumulated other comprehensive income or loss, a separate component of stockholders’ equity. The Company has estimated the fair value amounts by using available market information. The cost of available for sale securities sold is based on the specific-identification method. Restricted investments are classified as a current or noncurrent asset based upon the terms of the relevant contract and, in some cases, management’s estimate of when the restrictions will be eliminated.

Under its facility lease agreements, the Company is required to deliver letters of credit securing the performance of its obligations thereunder. As of both June 30, 2014 and December 31, 2013, these letters of credit were secured by approximately $0.2 million of long-term restricted investments.

Fair Value of Financial Instruments

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, short-term investments, restricted investments, contract receivables and accounts payable, approximate their fair value due to their short maturities.  Based on the borrowing rates available to the Company for loans with similar terms and average maturities, the carrying value of the Company’s long-term notes payable approximate their fair values at June 30, 2014 and December 31, 2013.

Fair value is considered to be the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on or derived from observable market prices or other observable inputs. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments, long-term investments and restricted investments. Substantially all the Company’s cash and cash equivalents, short-term investments, long-term investments and restricted investments are held by two financial institutions that management believes are of high credit quality. Such deposits may, at times, exceed federally insured limits. At June 30, 2014 and December 31, 2013, approximately 60% and 93%, respectively, of the cash and cash equivalents were held in a money market fund invested in U.S. Treasuries, securities guaranteed as to principal and interest by the U.S. government and repurchase agreements in respect of such securities. At June 30, 2014 and December 31, 2013, approximately 90% and 100%, respectively, of the Company’s short-term investments, long-term investments and restricted investments were held in securities guaranteed as to principal and interest by the U.S. government. The Company has not experienced any losses on its deposits of cash and cash equivalents, short-term investments, long-term investments and restricted investments and management believes that its guidelines for investment of its excess cash maintain safety and liquidity through diversification and investment maturity.

Customer Concentration

For the three and six month periods ended June 30, 2014, the Company’s revenues consisted primarily of contract revenues from a research agreement with The Bill and Melinda Gates Foundation (Gates Foundation), a contract with the United States Department of Defense, Defense Threat Reduction Agency (DTRA) and a collaboration agreement with Lilly. For the three and six month periods ended June 30, 2013, the Company also recognized contract revenues from its collaboration with GSK and from a subcontract with a research institution, each of which accounted for 10% or more of its total revenues during one of those periods. Collaborators, including GSK and Lilly, have accounted for significant revenues in the past and may not provide contract revenues in the future under existing agreements and/or new collaboration agreements, which may have a material effect on the Company’s operating results.

The following table shows the percentage of revenues attributable to contracts that accounted for 10% or more of total revenues in the specified periods:

	Three Months Ended June 30,		Six Months Ended June 30,
	2014	2013	2014	2013
	(unaudited)		(unaudited)
Gates Foundation	55%	38%	46%	25%
Lilly	*	28%	18%	40%
DTRA	30%	—	26%	—
GSK	*	*	*	13%
Research Institution	—	10%	*	*

*less than 10% of total revenue

Contract Receivables

At June 30, 2014 and December 31, 2013, the Company’s contract receivables included $0.6 million and $0.5 million, respectively, due from DTRA (see Note 7), less than $0.1 million and $0.7 million, respectively, due from GSK (see Note 7) and $0.3 million and $0.1 million, respectively, due from other contracts.

The Company’s contract receivables are primarily composed of amounts due under research agreements and government contracts and the Company believes that the credit risks associated with these parties are not significant. During the three and six months ended June 30, 2014, the Company has not written-off any contract receivables and, accordingly, does not have an allowance for doubtful accounts as of June 30, 2014.

Revenue Recognition

For the three and six month periods ended June 30, 2014, the Company’s contract revenues were generated primarily through research and development collaboration agreements, which typically may include non-refundable, non-creditable upfront fees, funding for research and development efforts, payments for achievement of specified development, regulatory and sales goals and royalties on product sales of licensed products.

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

For arrangements with multiple deliverables, the Company evaluates each deliverable to determine whether it qualifies as a separate unit of accounting. This determination is generally based on whether the deliverable has stand-alone value to the customer. The selling price used for each unit of accounting will be based on vendor-specific objective evidence, if available, third party evidence if vendor-specific objective evidence is not available or estimated selling price if neither vendor-specific nor third party evidence is available. Management may be required to exercise considerable judgment in determining whether a deliverable is a separate unit of accounting and in estimating the selling prices of identified units of accounting for new agreements. Where multiple deliverables are combined as a single unit of accounting, revenues are recognized based on the performance requirements of the related agreement.

Upfront payments for licensing the Company’s intellectual property are evaluated to determine if the licensee can obtain stand-alone value from the license separate from the value of the research and development services to be provided by the Company. Typically, the Company has determined that the licenses it has granted to collaborators do not have stand-alone value separate from the value of the research and development services provided. As such, upfront payments are recorded as deferred revenue in the condensed consolidated balance sheets and are recognized as contract revenue ratably over the contractual or estimated performance period that is consistent with the term of the research and development obligations contained in the research and development collaboration agreement. When stand-alone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property rights are issued.

Some arrangements involving the licensing of the Company’s intellectual property, the provision of research and development services or both may also include exclusivity clauses whereby the Company agrees that, for a specified period of time, it will not conduct further research on licensed compounds or on compounds that would compete with licensed compounds or that it will do so only on a limited basis. Such provisions may also restrict the future development or commercialization of such compounds. The Company does not treat such exclusivity clauses as a separate element within an arrangement and any upfront payments received related to the exclusivity clause would be allocated to the identified elements in the arrangement and recognized as described in the preceding paragraph.

Payments resulting from the Company’s efforts under research and development agreements or government grants are recognized as the activities are performed and are presented on a gross basis. Revenue is recorded gross because the Company acts as a principal, with discretion to choose suppliers, bears credit risk and performs part of the services. The costs associated with these activities are reflected as a component of research and development expense in the condensed consolidated statements of operations and the revenues recognized from such activities approximate these costs.

For certain contingent payments under research or development arrangements, the Company recognizes revenue using the milestone method. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can be achieved based in whole or in part on either the Company’s performance or on the occurrence of a specific outcome resulting from the Company’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the Company. The determination that a milestone is substantive requires estimation and judgment and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is (i) commensurate with either the Company’s performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverables and payment terms in the arrangement. In making the determination as to whether a milestone is substantive or not, management of the Company considers all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether any portion of the milestone consideration is related to future performance or deliverables.

Other contingent payments received for which payment is either contingent solely upon the passage of time or the results of a collaborative partner’s performance (bonus payments) are not accounted for using the milestone method. Such bonus payments will be recognized as revenue when earned and when collectibility is reasonably assured.

Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectibility is reasonably assured. As of June 30, 2014, none of the Company’s products had been approved and therefore the Company had not earned any royalty revenue from product sales as of such date.

Preclinical Study and Clinical Trial Accruals and Deferred Advance Payments

The Company estimates preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct these activities on its behalf. In recording service fees, the Company estimates the time period over which the related services will be performed and compares the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services and, as appropriate, accrues additional service fees or defers any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust its accrual or deferred advance payment accordingly. If the Company later determines that it no longer expects the services associated with a deferred non-refundable advance payment to be rendered, the deferred advance payment will be charged to expense in the period that such determination is made.

Stock-Based Compensation

Employee stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period). Stock option awards granted to the Company’s nonemployee directors for their board-related services are included in employee stock-based compensation in accordance with current accounting standards. The Company uses the Black-Scholes option-pricing model to estimate the fair value of its time-based vesting stock option awards and uses the straight-line (single-option) method for expense attribution. The Company uses a Monte Carlo valuation method to estimate the fair value of its market-based vesting performance stock option and restricted stock unit awards. The Company estimates forfeitures and recognizes expense only for those shares expected to vest.

               The Company accounts for equity instruments issued to nonemployees based on their fair values on the measurement dates using the Black-Scholes option-pricing model. The fair values of the options granted to nonemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options that vest in any given reporting period is affected by changes in the fair value of the Company’s common stock during that period.

Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares outstanding during the period, without consideration for potentially dilutive shares. Diluted net loss per share includes the effect of all potential shares, consisting of stock options (including performance stock options), restricted stock units (including performance restricted stock units) and warrants outstanding for the period, determined using the treasury-stock method. For purposes of this calculation, potentially dilutive securities consisting of stock options, restricted stock units and warrants are considered to be potential shares and, for each period presented in these financial statements, are excluded in the calculation of diluted net loss per share because their effect would be antidilutive. The following table presents the calculation of basic and diluted net loss per share (in thousands, except share and per share data):

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(unaudited)						(unaudited)
Net loss per share:
Numerator:
Net loss	$	(24,508	)	$	(14,096	)	$	(45,680	)	$	(29,174	)
Denominator:
Weighted-average number of shares used in calculating net loss per share—basic and diluted	41,921,329			39,273,330			41,830,803			37,569,275
Net loss per share—basic and diluted	$	(0.58	)	$	(0.36	)	$	(1.09	)	$	(0.78	)
Outstanding securities at period end not included in the computation of diluted net loss per share as they had an anti-dilutive effect:
Common stock options and restricted stock units	6,273,923			5,056,549			6,273,923			5,056,549
Warrants to purchase common stock	125,206			980,072			125,206			980,072
	6,399,129			6,036,621			6,399,129			6,036,621

Recent Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board (FASB) issued a new accounting standard on accounting for share-based payments for performance-based stock awards, which will require that a performance target that affects vesting and that could be achieved after the required service period be treated as a performance condition. The Company does not currently have any performance-based stock awards that meet these conditions. The updated standard becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company is currently evaluating the effect that the updated standard will have on the Company’s consolidated financial statements.

In May 2014, the FASB issued a new accounting standard on revenue from contracts with customers, which will require the Company to recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The updated standard will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective and will permit the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The updated standard becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the Company’s consolidated financial statements and related disclosures.

               In July 2013, a new accounting standard was issued that requires the netting of unrecognized tax benefits against a deferred tax asset for a net operating loss carryforward or other carryforward that would apply in the settlement of uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction net operating loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company adopted this guidance as of January 1, 2014 and its adoption did not have an effect on the Company’s financial statements.

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Condensed Consolidated Statements of Operations (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Revenues:
Contract revenue	$ 2,931	$ 3,424	$ 7,089	$ 5,132
Total revenues	2,931	3,424	7,089	5,132
Operating expenses:
Research and development	19,261	10,146	35,196	21,305
General and administrative	7,095	5,086	15,423	9,802
Total operating expenses	26,356	15,232	50,619	31,107
Loss from operations	(23,425)	(11,808)	(43,530)	(25,975)
Interest income	59	14	123	28
Interest expense	(1,100)	(903)	(2,189)	(1,814)
Loss on early extinguishment of debt		1,381		1,381
Other expense	(42)	(18)	(84)	(32)
Net loss	$ (24,508)	$ (14,096)	$ (45,680)	$ (29,174)
Net loss per share - basic and diluted (in dollars per share)	$ (0.58)	$ (0.36)	$ (1.09)	$ (0.78)
Weighted-average number of shares used in calculating net loss per share - basic and diluted (in shares)	41,921,329	39,273,330	41,830,803	37,569,275

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Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2014

Summary of Significant Accounting Policies

Schedule of Revenue by Major Customers

	Three Months Ended June 30,		Six Months Ended June 30,
	2014	2013	2014	2013
	(unaudited)		(unaudited)
Gates Foundation	55%	38%	46%	25%
Lilly	*	28%	18%	40%
DTRA	30%	—	26%	—
GSK	*	*	*	13%
Research Institution	—	10%	*	*

*less than 10% of total revenue

Schedule of calculation of basic and diluted net loss per share of common stock

The following table presents the calculation of basic and diluted net loss per share (in thousands, except share and per share data):

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(unaudited)						(unaudited)
Net loss per share:
Numerator:
Net loss	$	(24,508	)	$	(14,096	)	$	(45,680	)	$	(29,174	)
Denominator:
Weighted-average number of shares used in calculating net loss per share—basic and diluted	41,921,329			39,273,330			41,830,803			37,569,275
Net loss per share—basic and diluted	$	(0.58	)	$	(0.36	)	$	(1.09	)	$	(0.78	)

Schedule of outstanding securities at period end not included in the computation of diluted net loss per share

Outstanding securities at period end not included in the computation of diluted net loss per share as they had an anti-dilutive effect:
Common stock options and restricted stock units	6,273,923	5,056,549	6,273,923	5,056,549
Warrants to purchase common stock	125,206	980,072	125,206	980,072
	6,399,129	6,036,621	6,399,129	6,036,621

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Document and Entity Information	6 Months Ended
	Jun. 30, 2014	Aug. 04, 2014
Document and Entity Information
Entity Registrant Name	Anacor Pharmaceuticals, Inc.
Entity Central Index Key	0001411158
Document Type	10-Q
Document Period End Date	Jun. 30, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		41,995,593
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q2

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Marketable Securities and Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2014

Marketable Securities and Fair Value Measurements

Summary of estimated fair values of the financial assets measured on a recurring basis

The input levels used in the fair value measurements, the amortized cost and fair value of marketable securities, with gross unrealized gains and losses, were as follows (in thousands and unaudited):

June 30, 2014	Input Level	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Money market fund	Level 1	$	12,061	$	—	$	—		$	12,061
Federal agency securities	Level 2	99,557		36		—			99,593
Commercial paper	Level 2	11,893		6		—			11,899
Corporate debt securities	Level 2	6,757		—		(1		)	6,756
Total available for sale securities		$	130,268	$	42	$	(1	)	$	130,309
Classified as:
Cash and cash equivalents									$	19,961
Short-term investments									106,445
Restricted investments, short-term									1,294
Long-term investments									215
Restricted investments, long-term									2,394
Total available for sale securities									$	130,309

December 31, 2013	Input Level	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Money market fund	Level 1	$	107,253	$	—	$	—		$	107,253
Federal agency securities	Level 2	59,341		2		(4		)	59,339
Total available for sale securities		$	166,594	$	2	$	(4	)	$	166,592
Classified as:
Cash and cash equivalents									$	114,755
Short-term investments									35,574
Restricted investments, short-term									1,475
Long-term investments									11,856
Restricted investments, long-term									2,932
Total available for sale securities									$	166,592

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Condensed Consolidated Statements of Comprehensive Loss (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Condensed Consolidated Statements of Comprehensive Loss
Net loss	$ (24,508)	$ (14,096)	$ (45,680)	$ (29,174)
Change in unrealized gain (loss) on investments	21	(11)	44	(9)
Comprehensive loss	$ (24,487)	$ (14,107)	$ (45,636)	$ (29,183)

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License, Research, Development and Commercialization Agreements

6 Months Ended

Jun. 30, 2014

License, Research, Development and Commercialization Agreements

License, Research, Development and Commercialization Agreements

7. License, Research, Development and Commercialization Agreements

DTRA

On October 16, 2013, the Company entered into a research agreement with DTRA to design and discover new classes of systemic antibiotics. A drug discovery consortium formed by the Company, Colorado State University and the University of California at Berkeley is conducting the research over a period of up to three and a half years. The work is funded by an award of up to $13.5 million from DTRA’s R&D Innovation and Systems Engineering Office, which was established to search for and execute strategic investments in innovative technologies for combating weapons of mass destruction. Under this award, the Company will apply its boron chemistry to discover rationally designed novel antibiotics that target DTRA-priority pathogens known to exhibit resistance to existing antibiotics. The award is available to the consortium to fund $2.7 million of research reimbursements for the eleven month period through September 15, 2014, with an additional $5.0 million and $5.7 million becoming available subject to the exercise by DTRA of options to fund the research for subsequent twelve and nineteen month periods, respectively. In August 2014, DTRA exercised the first option to fund the twelve month research extension.

Revenues recognized under the research agreement were as follows (in thousands):

	Three Months Ended June 30,		Six Months Ended June 30,
	2014		2014
	(unaudited)
Contract revenue:
Research and development funding	$	887	$	1,855
Total contract revenue	$	887	$	1,855

Gates Foundation

On April 5, 2013, the Company entered into a research agreement with the Gates Foundation to discover drug candidates intended to treat two filarial worm diseases (onchocerciasis, or river blindness, and lymphatic filariasis, commonly known as elephantiasis) and tuberculosis (TB) (the Gates Research Agreement). Under the Gates Research Agreement, the Gates Foundation will pay the Company up to $17.7 million over a three-year research term (the Research Funding) to conduct research activities directed at discovering potential neglected disease drug candidates in accordance with an agreed upon research plan. As part of the funded research activities, the Company is also responsible for creating, during the first 18 months following execution of the Gates Research Agreement, an expanded library of boron compounds to screen for additional potential drug candidates to treat neglected diseases (the Library). Once the Library is completed, the Company is responsible for storing the Library compounds and making them accessible to the Gates Foundation and other parties to which the Gates Foundation grants access (the Library Access Services) for the subsequent five-year period.

Upon signing the Gates Research Agreement, the Company received an advance payment of $1.75 million of Research Funding (the Advance Funds). These Advance Funds are replenished by the Gates Foundation each quarter following the Company’s submission of a quarterly report of the expenses incurred for the research activities conducted in the prior quarter. In addition, the Gates Foundation paid the Company a total of $0.8 million as reimbursement for the costs of filarial worm research that was included in the agreed upon research plan, which the Company conducted prior to the April 5, 2013 effective date of the Gates Research Agreement (the Pre-Contract Reimbursements). These Pre-Contract Reimbursements are non-refundable, non-creditable payments and were included in the $17.7 million of Research Funding.

Under the terms of the agreement, the Gates Foundation will have the exclusive right to commercialize selected drug candidates in specified neglected diseases in specified developing countries. The Company retains the exclusive right to commercialize any selected drug candidate outside of the specified neglected diseases as well as with respect to the specified neglected diseases in specified developed countries and would be obligated to pay the Gates Foundation royalties on specified license revenue received. The Gates Research Agreement will continue in effect until the later of five years from the effective date or the expiration of the Company’s specified obligation to provide access to the Library. Either party may terminate the Gates Research Agreement for the other party’s uncured material breach of the Gates Research Agreement.

In connection with the Gates Research Agreement, the Company entered into a Common Stock Purchase Agreement (the Purchase Agreement) pursuant to which the Company issued 809,061 shares of potentially redeemable common stock to the Gates Foundation for net proceeds of approximately $5.0 million (the Stock Proceeds)  (see Note 8). In addition, in connection with both the Gates Research Agreement and the Purchase Agreement, the Company and the Gates Foundation entered into a letter agreement (the Letter Agreement) that, among other things, restricts the Company’s use of both the Research Funding and the Stock Proceeds to expenditures, including an allocation of overhead and administrative expenses, that are reasonably attributable to the activities that are required to support the research projects funded by the Gates Foundation. As a result of such restrictions, in its June 30, 2014 condensed consolidated balance sheet, the Company classified $2.4 million of the Stock Proceeds as long-term restricted investments and $1.1 million of the Stock Proceeds plus the unspent portion of the Advance Funds, approximately $0.2 million, as short-term restricted investments.

The Company evaluated the Gates Research Agreement under the accounting guidance for multiple-element arrangements and identified three deliverables: the research activities, the 5-year Library Access Services and the obligation to participate in the joint steering committee. Although participation in the joint steering committee has stand alone value, it will be delivered as the research activities are performed and has a similar pattern of performance. Accordingly, the Company has combined this deliverable with the research activities deliverable as a single unit of accounting. The Company developed its best estimates of selling prices (BESP) for each deliverable in order to allocate the arrangement consideration to the two units of accounting. The Company determined the BESP for the research activities based on factors such as estimated direct expenses and other costs involved in providing these services, the contractually agreed reimbursement rates for the services and the rates it has charged and the margins it has realized under its other contracts involving the provision of and reimbursement for research services. The Company determined the BESP for the Library Access Services based on the projected costs that would be incurred to have a third party store and distribute the library compounds and the estimated costs that would be incurred to provide the Library Access Services for the required 5-year period, plus a reasonable margin, and concluded that the BESP of such services is insignificant. As a result, the entire arrangement consideration was allocated to the research activities and joint steering committee combined unit of accounting. The Company will recognize revenue related to this unit of accounting on a proportional performance basis and the revenue that is recognized as future research services are performed will reduce the Advance Funds. The unspent portion of the Advance Funds will be recorded as deferred revenue in the Company’s condensed consolidated balance sheets.

The Company also evaluated the accounting treatment for the $0.8 million of Pre-Contract Reimbursements, noting that the research activities that gave rise to such reimbursements were conducted prior to the signing of the Gates Research Agreement. The Company concluded that activities performed prior to commencing delivery of the contracted services should not be considered in effort-expended measures of performance when revenue is recognized for services using a proportional performance method and, accordingly, the Company will recognize revenue from the Pre-Contract Reimbursements over the three-year research term on a proportional performance basis. As of June 30, 2014, the Company has deferred revenue of $0.2 million related to the unspent Advance Funds and $0.4 million related to the Pre-Contract Reimbursements.

Revenues recognized under the Gates Research Agreement were as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(unaudited)				(unaudited)
Contract revenue:
Amortization of Pre-Contract Reimbursements	$	69	$	55	$	140	$	55
Reimbursement for research costs	1,547		1,247		3,145		1,247
Total contract revenue	$	1,616	$	1,302	$	3,285	$	1,302

GSK

In September 2011, the Company amended and expanded its 2007 research and development collaboration with GSK (the Master Amendment) to, among other things, give effect to certain rights in AN3365 that would be acquired by the U.S. government in connection with GSK’s contract for government funding to support GSK’s further development of AN3365, provide GSK the option to extend its rights around the bacterial enzyme target leucyl-tRNA synthetase (LeuRS), as well as to add new programs for tuberculosis (TB) and malaria using the Company’s boron chemistry platform. As a result of the Master Amendment, the Company received a $5.0 million upfront payment in September 2011 and was eligible to receive additional milestone payments, bonus payments and research funding as described below, all of which, if earned, will be non-refundable and non-creditable. The Company is also eligible to receive royalties on future sales of resulting products. The Master Amendment also terminated any research and development obligations that the Company had with respect to the original agreement.

Under the terms of the Master Amendment, GSK retained sole responsibility for the further development and commercialization of AN3365. In October 2012, GSK advised the Company that it had discontinued further development of AN3365; accordingly, all rights to the compound have reverted to the Company.

The Master Amendment added a new program for TB, pursuant to which GSK funded the Company’s TB research activities up until candidate selection. Once TB compounds met specified candidate selection criteria, GSK had the option to license such compounds and, upon exercise of such option, would become responsible for all further development and commercialization of such compounds.

In September 2013, GSK selected a compound that resulted from the TB program for further development. GSK will be responsible for all further development and commercialization of the TB compound, and the Company may receive contingent payments, if certain regulatory events occur and/or if certain sales levels are achieved for resulting TB products, and may also receive royalties on sales of such resulting products.

On October 5, 2013, the research period under the collaboration agreement with GSK expired, except with respect to the TB program for which the research period has been extended to October 2014. The Company continues to work with GSK on the TB program. As of June 30, 2014, the Company has no deferred revenue associated with the GSK collaboration agreement.

Revenues recognized under this agreement were as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(unaudited)				(unaudited)
Contract revenue:
Reimbursement for research and patent costs	$	—	$	328	$	34	$	686
Total contract revenue	$	—	$	328	$	34	$	686

Lilly

In August 2010, the Company entered into a research, license and commercialization agreement with Lilly to collaborate on the discovery of products for a variety of animal health applications. Lilly will be responsible for worldwide development and commercialization of compounds advancing from these efforts. The Company received an upfront payment of $3.5 million in September 2010, which it had been recognizing over the expected four-year research term on a straight-line basis. The agreement allowed for termination by Lilly upon written notice, with certain additional payments to the Company and a notice period that had a duration dependent on whether the notice was delivered prior to or after the first regulatory approval of a product under the agreement.

In January 2014, Lilly notified the Company of the termination of the research term of the agreement. As a result, the Company revised the expected research term to end in April 2014, approximately five months earlier than estimated under the agreement. The remainder of the agreement remains in effect and Lilly retained its exclusive rights to the development of one of the two compounds it licensed from the Company (as described further below).

From August 2010 through June 30, 2014, the Company received $11.5 million in research funding under the agreement. The termination of the funding for the agreement became effective 90 days after the Company’s receipt of the termination notice discussed above, and ended Lilly’s obligation to make quarterly research payments.

In 2011 and 2012, Lilly licensed two development compounds from the Company and the Company was eligible to receive additional payments upon the occurrence of specified development and regulatory events for these compounds. The Company has determined that none of these contingent payments are substantive milestones. To date, no products have been approved and therefore no royalties have been earned under this agreement. In September 2013, Lilly notified the Company that it was ceasing further development of one of the two previously licensed compounds; Lilly granted the Company a fully paid, sublicenseable, perpetual, irrevocable, exclusive license to the related technology and patents.

As of June 30, 2014, the Company has no deferred revenue related to the upfront fee and no deferred revenue related to the research term funding.

Revenues recognized under the agreement and for other research services were as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(unaudited)				(unaudited)
Contract revenue:
Amortization of upfront fee	$	30	$	219	$	480	$	438
Research funding	50		750		800		1,635
Total contract revenue	$	80	$	969	$	1,280	$	2,073

Medicines for Malaria Venture

In March 2011, the Company entered into a three-year development agreement with Medicines for Malaria Venture (MMV) to collaborate on the development of compounds for the treatment of malaria through human proof-of-concept studies. This development agreement was preceded by a 2010 research agreement between the two parties. In August 2011, the Company and MMV amended the development agreement to, among other things, specify that any advance payments in excess of the actual costs incurred by the Company for the research and development activities under the agreement are either refundable or creditable against future payments, at MMV’s option. In January 2014, the research agreement was amended and extended through December 31, 2014. Under the amended agreement, MMV will no longer make advance payments to the Company and will now reimburse the Company quarterly in arrears for expenses incurred. As of June 30, 2014, the Company had no deferred revenue associated with its agreements with MMV.

Revenues recognized under the MMV research and development agreement were as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(unaudited)				(unaudited)
Contract revenue:
Research and development funding	$	163	$	215	$	269	$	291
Total contract revenue	$	163	$	215	$	269	$	291

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Notes Payable

6 Months Ended

Jun. 30, 2014

Notes Payable

Notes Payable

6. Notes Payable

On June 7, 2013, the Company entered into a loan and security agreement (the Loan Agreement) with Hercules Technology Growth Capital, Inc. as collateral agent and a lender and Hercules Technology III, L.P. as a lender (the lenders, or together Hercules), providing for loans to the Company of up to $45.0 million in three tranches of $30.0 million, $10.0 million and $5.0 million.

The first $30.0 million tranche was drawn at the closing of the transaction, at which time the Company repaid $22.6 million in remaining obligations associated with its previous loan. The Company elected not to draw the second tranche of $10.0 million, which was available to the Company from the closing date of the Loan Agreement until December 5, 2013. The Company also elected not to draw the third tranche of $5.0 million, which was available to the Company from the date of FDA approval of KERYDIN until August 6, 2014. The interest rate applicable to the loans outstanding under the Loan Agreement is a variable rate based upon the greater of either (i) 11.65% and (ii) the sum of (a) the Prime Rate (as defined in the Loan Agreement) as reported in The Wall Street Journal minus 5.25%, plus (b) 11.65%; with a maximum interest rate of 14.90%. As a result of the FDA’s approval of KERYDIN in July 2014 (see Note 10), the end of the interest only period for payments under the Loan Agreement was automatically extended from January 1, 2015 to July 1, 2015. Equal monthly payments of principal and interest will begin at that time and continue through the scheduled maturity date of July 1, 2017.

The Company has paid Hercules financing and amendment fees of $0.6 million and incurred other debt issuance costs, including legal fees, of $0.5 million in connection with the Loan Agreement. These fees are being accounted for as a debt discount and deferred debt issuance costs, respectively. In addition, if the Company repays all or a portion of the loan prior to maturity, it will pay Hercules a prepayment penalty fee, based on a percentage of the then outstanding principal balance, equal to 2% if the prepayment occurs prior to June 7, 2015 or 1% if the prepayment occurs after such date but prior to July 1, 2017.

The Loan Agreement includes customary affirmative and restrictive covenants, and was amended in December 2013 to include a liquidity covenant requiring the Company to maintain certain minimum balances in its United States bank and investment accounts while at the same time increasing the amount of investments the Company is permitted to make in its foreign subsidiaries. The Loan Agreement also includes standard events of default, including payment defaults, breaches of covenants following any applicable cure period, a material impairment in the perfection or priority of Hercules’ security interest in or the value of the collateral and a material impairment of the prospect of repayment of the Company’s obligations under the Loan Agreement.

Upon the occurrence and during the continuance of an event of default, a default interest rate of an additional 5% applies to the outstanding loan balances, and Hercules may declare all outstanding obligations immediately due and payable and take such other actions as are set forth in the Loan Agreement.

The Company’s obligations under the Loan Agreement are secured by substantially all of the assets of the Company except intellectual property. The Company’s intellectual and other property is subject to certain negative pledge and other restrictions set forth in the Loan Agreement, subject to certain exceptions.

In connection with the Loan Agreement, the Company issued warrants to Hercules to purchase 528,375 shares of the Company’s common stock at an exercise price of $5.11 per share (the Warrants).

The fair value of the warrants issued was approximately $1.8 million and was calculated using a Black-Scholes valuation model with assumptions based upon observed risk-free interest rates appropriate for the expected term of the warrants; expected volatility based on the average historical volatilities of a peer group of publicly-traded companies within the Company’s industry; expected term equal to the contractual life of the warrants; and a dividend yield of 0%. The Company recorded a debt discount of $1.8 million in connection with the issuance of the Warrants.

The Warrants were net exercised on a cashless basis in December 2013, resulting in the issuance of 361,995 shares of the Company’s common stock to Hercules. The par value of the shares issued was reclassified from additional paid-in capital to common stock.

The interest on the loans outstanding under the Loan Agreement is calculated using the interest method with the debt issuance costs paid directly to Hercules (financing, amendment and legal fees) and the fair value of the warrants issued to Hercules treated as a discount on the debt. The Company’s debt issuance costs for legal fees and other debt-related expenses are included as prepaid expenses and other current assets and as other assets in the condensed consolidated balance sheet. The amortization of the debt discount is recorded as a noncash interest expense and the amortization of the debt issuance costs is recorded as other expense in the condensed consolidated statements of operations.

In June 2013, the Company recorded a loss of approximately $1.4 million on the early extinguishment of its previous loan facility. This loss was recorded as a loss on early extinguishment of debt in the condensed consolidated statements of operations for the three and six months ended June 30, 2013.

Future payments as of June 30, 2014, prior to the extension of the interest only period, are as follows (in thousands):

Year ending December 31,	(unaudited)
Remainder of 2014	$	1,776
2015	13,890
2016	13,890
2017	7,029
Total minimum payments	36,585
Less amount representing interest	(6,585		)
Notes payable, gross	30,000
Unamortized discount on notes payable	(1,549		)
	28,451
Less current portion of notes payable, including unamortized discount	(4,479		)
Notes payable, less current portion	$	23,972

               The Company recorded interest expense related to all borrowings of $1.1 million and $0.9 million for the three months ended June 30, 2014 and 2013, respectively, and $2.2 million and $1.8 million for the six months ended June 30, 2014 and 2013,  respectively. Included in interest expense for these periods was $0.2 million and $0.2 million, respectively, for the three months ended June 30, 2014 and 2013, and $0.4 million and $0.3 million, respectively, for the six months ended June 30, 2014 and 2013, for the amortization of the financing fees and debt discounts. The annual effective interest rate on amounts borrowed under the Loan Agreement, including the amortization of the debt discounts, is 16.56%.

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The Company (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014 item	Dec. 31, 2013
The Company
Number of other wholly-owned clinical product candidates	3
Number of discovered compounds that are out-licensed for further development	3
Accumulated deficit	$ (176,126)	$ (130,446)

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Accrued Liabilities (Tables)

6 Months Ended

Jun. 30, 2014

Accrued Liabilities

Schedule of accrued liabilities

Accrued liabilities consisted of the following (in thousands):

	June 30, 2014		December 31, 2013
	(unaudited)
Accrued compensation	$	2,867	$	3,321
Accrued preclinical study and clinical trial costs	7,062		2,799
Other	2,420		2,311
Total accrued liabilities	$	12,349	$	8,431

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Subsequent Events

6 Months Ended

Jun. 30, 2014

Subsequent Events

Subsequent Events

10. Subsequent Events

On July 7, 2014, the FDA approved the New Drug Application for KERYDINTM (tavaborole) topical solution, 5% for the topical treatment of onychomycosis of the toenails.

On July 18, 2014, the Company entered into a Distribution and Commercialization Agreement (the Sandoz Agreement) with Sandoz Inc. (together with its affiliates, Sandoz), a Novartis company, pursuant to which Sandoz will distribute and commercialize KERYDIN in the United States on an exclusive basis. PharmaDerm, the branded dermatology business of Sandoz, will be responsible for the sales and marketing of KERYDIN.

Under the Sandoz Agreement, the Company is entitled to (i) upfront payments totaling $40 million (of which $15 million was payable upon entry into the Sandoz Agreement and $25 million is payable within 30 days thereof), (ii) a milestone payment of $25 million payable upon the later of (a) the 90th day following the successful fulfillment, as determined pursuant to the Sandoz Agreement, by the Company of Sandoz’s initial purchase order for KERYDIN and (b) January 5, 2015 and (iii) 50% of the gross profits (defined as net sales less cost of goods sold) accrued by Sandoz on sales of KERYDIN, except that in 2015 the Company will start receiving gross profit sharing payments after the first $50 million of gross profits have been accrued by Sandoz. The gross profit sharing arrangement entitles the Company to cumulative minimum gross profit sharing payments totaling $45 million for 2016. The Company is not entitled to cumulative minimum gross profit sharing payments in any other fiscal period under the Sandoz Agreement. Under the terms of the Sandoz Agreement, the Company will continue to hold the New Drug Application for, and be responsible for any further development of, KERYDIN and will supply KERYDIN to Sandoz at cost through the Company’s contract manufacturers, and Sandoz will be responsible for setting the price for KERYDIN and for all of its selling, marketing, distribution, general and administrative costs related to the commercialization of KERYDIN. The Sandoz Agreement also grants the Company an option to repurchase all rights in KERYDIN from Sandoz on the later of three years from the first commercial sale of KERYDIN or December 31, 2017, at a price to be determined pursuant to the Sandoz Agreement. The Sandoz Agreement will continue for an initial term of 5 years and is subject to automatic 5-year renewal terms, unless terminated for specified events under the Sandoz Agreement.

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Potentially Redeemable Common Stock and Stockholders' Equity

6 Months Ended

Jun. 30, 2014

Potentially Redeemable Common Stock and Stockholders' Equity

Potentially Redeemable Common Stock and Stockholders' Equity

8. Potentially Redeemable Common Stock and Stockholders’ Equity

Potentially Redeemable Common Stock

In connection with the Gates Research Agreement (see Note 7), the Company entered into the Purchase Agreement with the Gates Foundation pursuant to which the Company issued 809,061 shares of its common stock at a purchase price of $6.18 per share on April 5, 2013. Net proceeds to the Company from this offering were approximately $5.0 million, after deducting offering expenses of $48,000. On June 28, 2013, the Company filed a registration statement on Form S-3 with the SEC, which became effective on July 11, 2013, to register the resale of the 809,061 shares of common stock. In the event of termination of the Gates Research Agreement by the Gates Foundation for certain specified uncured material breaches by the Company (the Triggering Events), the Company will be obligated, among other remedies, to redeem for cash the Company’s common stock purchased in connection with the Gates Research Agreement, facilitate the purchase of such common stock by a third party or elect to register the resale of such common stock into the public markets unless certain specified conditions are satisfied. The redemption price per share would be the fair value per share of the Company’s common stock on the redemption date or, under certain circumstances, the greater of (i) the fair value per share and (ii) the purchase price of $6.18 per share plus interest at 5% compounded annually from April 5, 2013, the stock purchase date. In connection with both the Gates Research Agreement and the Purchase Agreement, the Company and the Gates Foundation also entered into the Letter Agreement that, among other things, places certain restrictions on the use of both the Research Funding and the Stock Proceeds (see Note 7).

The Company concluded that certain of these Triggering Events are not solely within the control of the Company; and, accordingly, has classified the potentially redeemable securities outside of permanent equity in temporary equity. The 809,061 shares of common stock issued were recorded as potentially redeemable common stock at an initial carrying amount equal to the net proceeds of approximately $5.0 million, which approximates their issuance date fair value.

The Company has determined that the 809,061 shares of potentially redeemable common stock are not currently redeemable and that none of the Triggering Events are currently probable. Accordingly, the carrying amount of the potentially redeemable common stock remains at approximately $5.0 million as of June 30, 2014. Only if, and when, a Triggering Event becomes probable will the Company record a change in the carrying amount to adjust it to the redemption value of the potentially redeemable common stock. At the time of such an occurrence, the potentially redeemable common stock will be immediately adjusted, by a credit or charge to other income or expense, to equal the redemption value and will continue to be adjusted to reflect any change in the redemption value as of the end of each reporting period.

Shelf Registration

In August 2013, the Company filed a shelf registration statement on Form S-3 with the SEC (the Shelf Registration). The Shelf Registration was declared effective by the SEC and permits the Company to sell, from time to time, up to $50.0 million of common stock, preferred stock, debt securities and warrants.

Preferred Stock

               In November 2010, the Company amended and restated its certificate of incorporation to authorize 10,000,000 shares of preferred stock upon the completion of its Initial Public Offering (IPO). As of June 30, 2014 and December 31, 2013, there was no preferred stock outstanding.

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Stock-Based Compensation

6 Months Ended

Jun. 30, 2014

Stock-Based Compensation

Stock-Based Compensation

9. Stock-Based Compensation

The Company recorded stock-based compensation expense for the three and six months ended June 30, 2014 and 2013 as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014(1)		2013
	(unaudited)				(unaudited)
Research and development	$	1,249	$	741	$	2,334	$	1,166
General and administrative	1,942		514		5,593		848
Total	$	3,191	$	1,255	$	7,927	$	2,014

(1) Includes $3.0 million of expense relating to the modification of options held by the Company’s prior chief executive officer upon his resignation. See discussion of Stock Option Modification below.

For the three and six months ended June 30, 2014, the Company issued 40,022  and 183,846 shares of the Company’s common stock and received approximately $0.3 million and $0.8 million, respectively, in cash from the exercise of stock options. Total stock options (including Performance Stock Options (PSOs) as described below) granted for the three and six months ended June 30, 2014 were 356,000 options, which included no stock option grants to nonemployee advisors, and 1,786,628 options, which included stock option grants of 12,828 options to nonemployee advisors, respectively. Grants to nonemployee advisors do not include grants made to the Company’s nonemployee directors for their board-related services. The weighted-average fair value per share of options, other than PSOs, granted to employees and the Company’s nonemployee directors was $11.80 and $13.58 for the three and six months ended June 30, 2014, respectively.

At June 30, 2014, there were outstanding stock options to purchase 5,826,923 shares of the Company’s common stock. At June 30, 2014, the Company had $29.4 million and $0.1 million of unrecognized compensation expense, net of estimated forfeitures, related to outstanding stock option and restricted stock unit awards and Employee Stock Purchase Program (ESPP) stock purchase rights, respectively, that will be recognized over a weighted-average period of 3.1 years and 0.5 years, respectively. For the six months ended June 30, 2014, there were 43,063 shares of the Company’s common stock purchased under the ESPP. No shares were purchased under the ESPP during the three months ended June 30, 2014.

Stock Option Modification

In connection with the resignation of the Company’s former chief executive officer in March 2014, the Company’s board of directors approved an additional 18 months of vesting for his unvested stock options, or 223,542 stock options. These stock options would have otherwise expired upon termination. The Company’s board of directors also approved the extension of the post-termination period for the exercise of his vested stock options from three months to six months. As a result of these modifications, during the three months ended March 31, 2014, the Company recorded a one-time stock-based compensation expense of $3.0 million for the incremental value of the stock options vested and the extension of the post-termination exercise period.

Restricted Stock Units (RSUs), Performance Restricted Stock Units (PRSUs) and Performance Stock Options (PSOs)

During the six months ended June 30, 2014, the Company began issuing time-based vesting RSUs and market-based vesting PRSUs and PSOs. RSU and PRSU grants cannot be transferred, and until they vest, the underlying shares are subject to forfeiture if the grantee’s service with the Company terminates prior to the release of the applicable vesting restrictions. The Company uses a Monte Carlo valuation method to estimate the fair value of market-based vesting PRSU and PSO grants. Time-based vesting RSUs are valued at the closing price of the Company’s common stock on the date of grant. The vesting conditions applicable to the Company’s outstanding RSUs, PRSUs and PSOs are as follows:

· One-fourth of the RSU grants will vest on each of the first four anniversaries of the applicable vesting commencement date, subject to the grantee’s continued service with the Company. Upon vesting of RSUs, the Company will issue to the grantee thereof one share of the Company’s common stock for each such RSU.

· Grants of PRSUs and PSOs made during the three months ended March 31, 2014 will vest in full, subject to the grantee’s continued service with the Company, if at any time during the four-year period beginning March 21, 2014, the volume-weighted average price for the Company’s common stock exceeds $30 per share (using the VAP function on Bloomberg for the Company “ANAC US EQUITY VAP”, or successor thereof) for 30 consecutive trading days. If such vesting condition is not met within such four-year period, such PRSU and PSO grants will expire. Once vested, each PSO provides the grantee with the right to purchase one share of the Company’s common stock at the applicable option exercise price. Upon vesting of PRSUs, the Company will issue to the grantee thereof one share of the Company’s common stock for each such PRSU.

The weighted-average fair values for these PSOs and PRSUs granted during the six months ended June 30, 2014 were determined using Monte Carlo simulation models incorporating the following weighted-average assumptions:

	Six Months Ended June 30, 2014
	PSOs			PRSUs
	(unaudited)
Number of PSOs or PRSUs granted	100,000			50,000
Exercise price	$	21.21		$	N/A
Risk-free interest rate	1.32		%	1.32		%
Volatility	60.20		%	60.20		%
Dividends	—			—
Weighted-average fair value per share of PSOs or PRSUs granted	$	9.82		$	17.87

The Company will recognize the estimated expense of these PSOs and PRSUs, as determined under the simulation models, over the expected life of the award, with no adjustment in future periods based upon the Company’s actual stock price over the performance period.

               For the three and six months ended June 30, 2014, the Company granted 25,000 and 397,000 RSUs, respectively. The Company granted 50,000 PRSUs and 100,000 PSOs in the six months ended June 30, 2014. There were no PRSU or PSO grants made during the three months ended June 30, 2014.

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2014

Summary of Significant Accounting Policies

Principles of Consolidation

Principles of Consolidation

               The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Anacor IP Holdings, Ltd., which was incorporated in the Cayman Islands on October 1, 2013. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

Use of Estimates

               The preparation of the condensed consolidated financial statements in accordance with U.S. GAAP requires the Company to make estimates and judgments in certain circumstances that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. In preparing these condensed consolidated financial statements, management has made its best estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, fair values of financial instruments in which it invests, income taxes, preclinical study and clinical trial accruals, accrued compensation, stock compensation and other contingencies. Management bases its estimates on historical experience or on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from these estimates.

Cash, and Cash Equivalents, Short-Term Investments, Long-Term Investments and Restricted Investments

Cash and Cash Equivalents, Short-Term Investments, Long-Term Investments and Restricted Investments

The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash and cash equivalents. Unless restricted, investments with a maturity date of more than three months, but less than twelve months, from the date of purchase are considered short-term investments and are classified as current assets. Long-term investments have contractual maturities at the date of purchase of over one but less than two years and are classified as noncurrent assets until such time as the time to maturity becomes one year or less, at which time they are reclassified to short-term investments. The Company’s investments in marketable securities are classified as available for sale (see Note 3). Securities available for sale are carried at estimated fair value, with unrealized gains and losses reported as part of accumulated other comprehensive income or loss, a separate component of stockholders’ equity. The Company has estimated the fair value amounts by using available market information. The cost of available for sale securities sold is based on the specific-identification method. Restricted investments are classified as a current or noncurrent asset based upon the terms of the relevant contract and, in some cases, management’s estimate of when the restrictions will be eliminated.

Under its facility lease agreements, the Company is required to deliver letters of credit securing the performance of its obligations thereunder. As of both June 30, 2014 and December 31, 2013, these letters of credit were secured by approximately $0.2 million of long-term restricted investments.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, short-term investments, restricted investments, contract receivables and accounts payable, approximate their fair value due to their short maturities.  Based on the borrowing rates available to the Company for loans with similar terms and average maturities, the carrying value of the Company’s long-term notes payable approximate their fair values at June 30, 2014 and December 31, 2013.

               Fair value is considered to be the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on or derived from observable market prices or other observable inputs. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.

Concentration of Credit Risk

Concentration of Credit Risk

               Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments, long-term investments and restricted investments. Substantially all the Company’s cash and cash equivalents, short-term investments, long-term investments and restricted investments are held by two financial institutions that management believes are of high credit quality. Such deposits may, at times, exceed federally insured limits. At June 30, 2014 and December 31, 2013, approximately 60% and 93%, respectively, of the cash and cash equivalents were held in a money market fund invested in U.S. Treasuries, securities guaranteed as to principal and interest by the U.S. government and repurchase agreements in respect of such securities. At June 30, 2014 and December 31, 2013, approximately 90% and 100%, respectively, of the Company’s short-term investments, long-term investments and restricted investments were held in securities guaranteed as to principal and interest by the U.S. government. The Company has not experienced any losses on its deposits of cash and cash equivalents, short-term investments, long-term investments and restricted investments and management believes that its guidelines for investment of its excess cash maintain safety and liquidity through diversification and investment maturity.

Customer Concentration

Customer Concentration

For the three and six month periods ended June 30, 2014, the Company’s revenues consisted primarily of contract revenues from a research agreement with The Bill and Melinda Gates Foundation (Gates Foundation), a contract with the United States Department of Defense, Defense Threat Reduction Agency (DTRA) and a collaboration agreement with Lilly. For the three and six month periods ended June 30, 2013, the Company also recognized contract revenues from its collaboration with GSK and from a subcontract with a research institution, each of which accounted for 10% or more of its total revenues during one of those periods. Collaborators, including GSK and Lilly, have accounted for significant revenues in the past and may not provide contract revenues in the future under existing agreements and/or new collaboration agreements, which may have a material effect on the Company’s operating results.

The following table shows the percentage of revenues attributable to contracts that accounted for 10% or more of total revenues in the specified periods:

	Three Months Ended June 30,		Six Months Ended June 30,
	2014	2013	2014	2013
	(unaudited)		(unaudited)
Gates Foundation	55%	38%	46%	25%
Lilly	*	28%	18%	40%
DTRA	30%	—	26%	—
GSK	*	*	*	13%
Research Institution	—	10%	*	*

*less than 10% of total revenue

Contract Receivables

Contract Receivables

At June 30, 2014 and December 31, 2013, the Company’s contract receivables included $0.6 million and $0.5 million, respectively, due from DTRA (see Note 7), less than $0.1 million and $0.7 million, respectively, due from GSK (see Note 7) and $0.3 million and $0.1 million, respectively, due from other contracts.

               The Company’s contract receivables are primarily composed of amounts due under research agreements and government contracts and the Company believes that the credit risks associated with these parties are not significant. During the three and six months ended June 30, 2014, the Company has not written-off any contract receivables and, accordingly, does not have an allowance for doubtful accounts as of June 30, 2014.

Revenue Recognition

Revenue Recognition

For the three and six month periods ended June 30, 2014, the Company’s contract revenues were generated primarily through research and development collaboration agreements, which typically may include non-refundable, non-creditable upfront fees, funding for research and development efforts, payments for achievement of specified development, regulatory and sales goals and royalties on product sales of licensed products.

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

For arrangements with multiple deliverables, the Company evaluates each deliverable to determine whether it qualifies as a separate unit of accounting. This determination is generally based on whether the deliverable has stand-alone value to the customer. The selling price used for each unit of accounting will be based on vendor-specific objective evidence, if available, third party evidence if vendor-specific objective evidence is not available or estimated selling price if neither vendor-specific nor third party evidence is available. Management may be required to exercise considerable judgment in determining whether a deliverable is a separate unit of accounting and in estimating the selling prices of identified units of accounting for new agreements. Where multiple deliverables are combined as a single unit of accounting, revenues are recognized based on the performance requirements of the related agreement.

Upfront payments for licensing the Company’s intellectual property are evaluated to determine if the licensee can obtain stand-alone value from the license separate from the value of the research and development services to be provided by the Company. Typically, the Company has determined that the licenses it has granted to collaborators do not have stand-alone value separate from the value of the research and development services provided. As such, upfront payments are recorded as deferred revenue in the condensed consolidated balance sheets and are recognized as contract revenue ratably over the contractual or estimated performance period that is consistent with the term of the research and development obligations contained in the research and development collaboration agreement. When stand-alone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property rights are issued.

Some arrangements involving the licensing of the Company’s intellectual property, the provision of research and development services or both may also include exclusivity clauses whereby the Company agrees that, for a specified period of time, it will not conduct further research on licensed compounds or on compounds that would compete with licensed compounds or that it will do so only on a limited basis. Such provisions may also restrict the future development or commercialization of such compounds. The Company does not treat such exclusivity clauses as a separate element within an arrangement and any upfront payments received related to the exclusivity clause would be allocated to the identified elements in the arrangement and recognized as described in the preceding paragraph.

Payments resulting from the Company’s efforts under research and development agreements or government grants are recognized as the activities are performed and are presented on a gross basis. Revenue is recorded gross because the Company acts as a principal, with discretion to choose suppliers, bears credit risk and performs part of the services. The costs associated with these activities are reflected as a component of research and development expense in the condensed consolidated statements of operations and the revenues recognized from such activities approximate these costs.

For certain contingent payments under research or development arrangements, the Company recognizes revenue using the milestone method. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can be achieved based in whole or in part on either the Company’s performance or on the occurrence of a specific outcome resulting from the Company’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the Company. The determination that a milestone is substantive requires estimation and judgment and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is (i) commensurate with either the Company’s performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverables and payment terms in the arrangement. In making the determination as to whether a milestone is substantive or not, management of the Company considers all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether any portion of the milestone consideration is related to future performance or deliverables.

Other contingent payments received for which payment is either contingent solely upon the passage of time or the results of a collaborative partner’s performance (bonus payments) are not accounted for using the milestone method. Such bonus payments will be recognized as revenue when earned and when collectibility is reasonably assured.

               Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectibility is reasonably assured. As of June 30, 2014, none of the Company’s products had been approved and therefore the Company had not earned any royalty revenue from product sales as of such date.

Preclinical Study and Clinical Trial Accruals and Deferred Advance Payments

Preclinical Study and Clinical Trial Accruals and Deferred Advance Payments

               The Company estimates preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct these activities on its behalf. In recording service fees, the Company estimates the time period over which the related services will be performed and compares the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services and, as appropriate, accrues additional service fees or defers any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust its accrual or deferred advance payment accordingly. If the Company later determines that it no longer expects the services associated with a deferred non-refundable advance payment to be rendered, the deferred advance payment will be charged to expense in the period that such determination is made.

Stock-Based Compensation

Stock-Based Compensation

Employee stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period). Stock option awards granted to the Company’s nonemployee directors for their board-related services are included in employee stock-based compensation in accordance with current accounting standards. The Company uses the Black-Scholes option-pricing model to estimate the fair value of its time-based vesting stock option awards and uses the straight-line (single-option) method for expense attribution. The Company uses a Monte Carlo valuation method to estimate the fair value of its market-based vesting performance stock option and restricted stock unit awards. The Company estimates forfeitures and recognizes expense only for those shares expected to vest.

               The Company accounts for equity instruments issued to nonemployees based on their fair values on the measurement dates using the Black-Scholes option-pricing model. The fair values of the options granted to nonemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options that vest in any given reporting period is affected by changes in the fair value of the Company’s common stock during that period.

Net Loss per Share

Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares outstanding during the period, without consideration for potentially dilutive shares. Diluted net loss per share includes the effect of all potential shares, consisting of stock options (including performance stock options), restricted stock units (including performance restricted stock units) and warrants outstanding for the period, determined using the treasury-stock method. For purposes of this calculation, potentially dilutive securities consisting of stock options, restricted stock units and warrants are considered to be potential shares and, for each period presented in these financial statements, are excluded in the calculation of diluted net loss per share because their effect would be antidilutive. The following table presents the calculation of basic and diluted net loss per share (in thousands, except share and per share data):

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(unaudited)						(unaudited)
Net loss per share:
Numerator:
Net loss	$	(24,508	)	$	(14,096	)	$	(45,680	)	$	(29,174	)
Denominator:
Weighted-average number of shares used in calculating net loss per share—basic and diluted	41,921,329			39,273,330			41,830,803			37,569,275
Net loss per share—basic and diluted	$	(0.58	)	$	(0.36	)	$	(1.09	)	$	(0.78	)
Outstanding securities at period end not included in the computation of diluted net loss per share as they had an anti-dilutive effect:
Common stock options and restricted stock units	6,273,923			5,056,549			6,273,923			5,056,549
Warrants to purchase common stock	125,206			980,072			125,206			980,072
	6,399,129			6,036,621			6,399,129			6,036,621

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board (FASB) issued a new accounting standard on accounting for share-based payments for performance-based stock awards, which will require that a performance target that affects vesting and that could be achieved after the required service period be treated as a performance condition. The Company does not currently have any performance-based stock awards that meet these conditions. The updated standard becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company is currently evaluating the effect that the updated standard will have on the Company’s consolidated financial statements.

In May 2014, the FASB issued a new accounting standard on revenue from contracts with customers, which will require the Company to recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The updated standard will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective and will permit the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The updated standard becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the Company’s consolidated financial statements and related disclosures.

               In July 2013, a new accounting standard was issued that requires the netting of unrecognized tax benefits against a deferred tax asset for a net operating loss carryforward or other carryforward that would apply in the settlement of uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction net operating loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company adopted this guidance as of January 1, 2014 and its adoption did not have an effect on the Company’s financial statements.

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License, Research, Development and Commercialization Agreements (Details) (USD $)	3 Months Ended		6 Months Ended		0 Months Ended		3 Months Ended	6 Months Ended	0 Months Ended		3 Months Ended		6 Months Ended		0 Months Ended		1 Months Ended	3 Months Ended	6 Months Ended		1 Months Ended			3 Months Ended		6 Months Ended		42 Months Ended	47 Months Ended	1 Months Ended	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014 item	Jun. 30, 2013	Apr. 05, 2013 Potentially Redeemable Common Stock [Member]	Oct. 16, 2013 Research Agreement [Member] United States Department of Defense, Defense Threat Reduction Agency [Member]	Jun. 30, 2014 Research Agreement [Member] United States Department of Defense, Defense Threat Reduction Agency [Member]	Jun. 30, 2014 Research Agreement [Member] United States Department of Defense, Defense Threat Reduction Agency [Member]	Oct. 16, 2013 Research Agreement [Member] United States Department of Defense, Defense Threat Reduction Agency [Member] Maximum [Member]	Apr. 05, 2013 Research Agreement [Member] Bill and Melinda Gates Foundation [Member] item	Jun. 30, 2014 Research Agreement [Member] Bill and Melinda Gates Foundation [Member]	Jun. 30, 2013 Research Agreement [Member] Bill and Melinda Gates Foundation [Member]	Jun. 30, 2014 Research Agreement [Member] Bill and Melinda Gates Foundation [Member]	Jun. 30, 2013 Research Agreement [Member] Bill and Melinda Gates Foundation [Member]	Apr. 05, 2013 Research Agreement [Member] Bill and Melinda Gates Foundation [Member] Maximum [Member]	Apr. 05, 2013 Research Agreement [Member] Potentially Redeemable Common Stock [Member] Bill and Melinda Gates Foundation [Member]	Sep. 30, 2011 Collaborative Arrangement [Member] Glaxo Smith Kline LLC [Member]	Jun. 30, 2013 Collaborative Arrangement [Member] Glaxo Smith Kline LLC [Member]	Jun. 30, 2014 Collaborative Arrangement [Member] Glaxo Smith Kline LLC [Member]	Jun. 30, 2013 Collaborative Arrangement [Member] Glaxo Smith Kline LLC [Member]	Jan. 31, 2014 Collaborative Arrangement [Member] Eli Lilly and Company [Member]	Sep. 30, 2013 Collaborative Arrangement [Member] Eli Lilly and Company [Member] item	Sep. 30, 2010 Collaborative Arrangement [Member] Eli Lilly and Company [Member]	Jun. 30, 2014 Collaborative Arrangement [Member] Eli Lilly and Company [Member] item	Jun. 30, 2013 Collaborative Arrangement [Member] Eli Lilly and Company [Member]	Jun. 30, 2014 Collaborative Arrangement [Member] Eli Lilly and Company [Member] item	Jun. 30, 2013 Collaborative Arrangement [Member] Eli Lilly and Company [Member]	Jun. 30, 2014 Collaborative Arrangement [Member] Eli Lilly and Company [Member] item	Jun. 30, 2014 Collaborative Arrangement [Member] Eli Lilly and Company [Member] item	Mar. 31, 2011 Collaborative Arrangement [Member] Medicines for Malaria Venture [Member]	Jun. 30, 2014 Collaborative Arrangement [Member] Medicines for Malaria Venture [Member]	Jun. 30, 2013 Collaborative Arrangement [Member] Medicines for Malaria Venture [Member]	Jun. 30, 2014 Collaborative Arrangement [Member] Medicines for Malaria Venture [Member]	Jun. 30, 2013 Collaborative Arrangement [Member] Medicines for Malaria Venture [Member]
License, Research, Development and Commercialization Agreements
Research term									3 years 6 months
Research Funding									$ 13,500,000
Research reimbursements for the first eleven month period through September 30, 2014						2,700,000
Additional amount that would become available upon DTRA exercising option to fund research for the first subsequent twelve month period						5,000,000
Additional amount that would become available upon DTRA exercising option to fund research for the next subsequent nineteen month period						5,700,000
Number of filarial worm diseases										2
Term for creating expanded library of boron compounds										18 months
Agreement term										3 years
Library Access period										5 years
Deferred revenue from unspent Advance Funds										1,750,000	200,000		200,000
Pre-contract reimbursements received										800,000
Potentially redeemable common stock issued (in shares)					809,061											809,061
Proceeds from issuance of potentially redeemable common stock classified as noncurrent restricted investments											2,400,000		2,400,000
Proceeds from issuance of potentially redeemable common stock classified as current restricted investments											1,100,000		1,100,000
Unspent portion of the Advance Funds classified as current restricted investments											200,000		200,000
Number of deliverables identified										3
Pre-Contract Reimbursements													800,000
Pre-Contract Reimbursements revenue recognition term										3 years
Net proceeds from issuance of potentially redeemable common stock				4,952,000	5,000,000											5,000,000
Deferred revenue from pre-contract reimbursements											400,000		400,000
Upfront fee received																							3,500,000
Period earlier than original estimated term																					5 months
Number of compounds where the party held its exclusive rights to develop																								1		1		1	1
Represents number of compounds licensed.																								2		2		2	2
Term of collaborative agreement																							4 years							3 years
Research funding received																													11,500,000
Potential research funding available															17,700,000
Notice period for termination of research funding																										90 days
Number of products approved			0																									0
Royalties earned																												0
Deferred revenue under the research agreement																			0												0		0
Number of previously licensed compounds whose further development is ceased																						1
Number of previously licensed compounds																						2
Deferred revenue from upfront fee																								0		0		0	0
Deferred revenue from research funding																								0		0		0	0
Revenues recognized
Amortization of upfront fee																								30,000	219,000	480,000	438,000
Amortization of pre-contract reimbursements											69,000	55,000	140,000	55,000
Reimbursement for research and patent costs											1,547,000	1,247,000	3,145,000	1,247,000				328,000	34,000	686,000
Research funding																								50,000	750,000	800,000	1,635,000
Research and development funding							887,000	1,855,000																							163,000	215,000	269,000	291,000
Total contract revenue	2,931,000	3,424,000	7,089,000	5,132,000			887,000	1,855,000			1,616,000	1,302,000	3,285,000	1,302,000				328,000	34,000	686,000				80,000	969,000	1,280,000	2,073,000				163,000	215,000	269,000	291,000
Amendment fee received as the result of the master amendment																	$ 5,000,000

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License, Research, Development and Commercialization Agreements (Tables)

6 Months Ended

Jun. 30, 2014

United States Department of Defense, Defense Threat Reduction Agency [Member]

License, Research, Development and Commercialization Agreements

Schedule of revenues recognized under collaboration agreements and for other research services

Revenues recognized under the research agreement were as follows (in thousands):

	Three Months Ended June 30,		Six Months Ended June 30,
	2014		2014
	(unaudited)
Contract revenue:
Research and development funding	$	887	$	1,855
Total contract revenue	$	887	$	1,855

Bill and Melinda Gates Foundation [Member]

License, Research, Development and Commercialization Agreements

Schedule of revenues recognized under collaboration agreements and for other research services

Revenues recognized under the Gates Research Agreement were as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(unaudited)				(unaudited)
Contract revenue:
Amortization of Pre-Contract Reimbursements	$	69	$	55	$	140	$	55
Reimbursement for research costs	1,547		1,247		3,145		1,247
Total contract revenue	$	1,616	$	1,302	$	3,285	$	1,302

Glaxo Smith Kline LLC [Member]

License, Research, Development and Commercialization Agreements

Schedule of revenues recognized under collaboration agreements and for other research services

Revenues recognized under this agreement were as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(unaudited)				(unaudited)
Contract revenue:
Reimbursement for research and patent costs	$	—	$	328	$	34	$	686
Total contract revenue	$	—	$	328	$	34	$	686

Eli Lilly and Company [Member]

License, Research, Development and Commercialization Agreements

Schedule of revenues recognized under collaboration agreements and for other research services

Revenues recognized under the agreement and for other research services were as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(unaudited)				(unaudited)
Contract revenue:
Amortization of upfront fee	$	30	$	219	$	480	$	438
Research funding	50		750		800		1,635
Total contract revenue	$	80	$	969	$	1,280	$	2,073

Medicines for Malaria Venture [Member]

License, Research, Development and Commercialization Agreements

Schedule of revenues recognized under collaboration agreements and for other research services

Revenues recognized under the MMV research and development agreement were as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(unaudited)				(unaudited)
Contract revenue:
Research and development funding	$	163	$	215	$	269	$	291
Total contract revenue	$	163	$	215	$	269	$	291

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Summary of Significant Accounting Policies (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Contract Receivable
Contract receivables	$ 856	$ 1,324
Collaborative Arrangement [Member] | United States Department of Defense, Defense Threat Reduction Agency [Member]
Contract Receivable
Contract receivables	600	500
Collaborative Arrangement [Member] | Eli Lilly and Company [Member]
Contract Receivable
Contract receivables	100	700
Non-arrangement Transactions [Member]
Contract Receivable
Contract receivables	$ 300	$ 100

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Condensed Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Operating activities
Net loss	$ (45,680)	$ (29,174)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	228	273
Amortization of debt discount and debt issuance costs	516	337
Stock-based compensation	7,927	2,014
Amortization of premium on investments	564	215
Accrual of final payment on notes payable		318
Noncash loss on early extinguishment of debt		1,175
Changes in assets and liabilities:
Contract receivables	468	(267)
Prepaid and other current assets	(492)	99
Other assets	(1,678)	(281)
Accounts payable	516	1,781
Accrued liabilities	3,918	(1,291)
Income taxes payable	(1,706)
Deferred revenue	(785)	684
Deferred rent	(128)	81
Net cash used in operating activities	(36,332)	(24,036)
Investing activities
Transfers from (to) restricted investments, net	719	(5,092)
Purchases of investments	(109,352)	(32,886)
Maturities of investments	49,603	29,337
Acquisition of property and equipment	(358)	(52)
Net cash used in investing activities	(59,388)	(8,693)
Financing activities
Proceeds from the sale of redeemable common stock, net of issuance costs		4,952
Proceeds from issuance of common stock, net of underwriting discount and offering costs		22,607
Proceeds from issuance of notes payable		30,000
Principal payments on notes payable		(25,716)
Final payment on notes payable		(1,650)
Payment of financing fee, debt issuance costs and loan restructuring fee		(877)
Proceeds from employee stock plan purchases and the exercise of stock options by employees and nonemployee advisors	927	393
Net cash provided by financing activities	927	29,709
Net decrease in cash and cash equivalents	(94,793)	(3,020)
Cash and cash equivalents at beginning of period	114,755	10,335
Cash and cash equivalents at end of period	19,962	7,315
Supplemental disclosure of cash flow information
Cash paid for interest, including final payment on notes payable	1,767	3,018
Supplemental disclosure of noncash financing activities
Fair value of warrants to purchase common stock issued in connection with notes payable		$ 1,815

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2014

Commitments and Contingencies

Commitments and Contingencies

5. Commitments and Contingencies

Indemnifications

The Company, as permitted under Delaware law and in accordance with its bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is equal to the officer’s or director’s lifetime.

The maximum amount of potential future indemnification is unlimited; however, the Company currently holds director and officer liability insurance. This insurance limits the Company’s exposure and may enable it to recover a portion of any future amounts paid. The Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations for any period presented.

The Company has certain agreements with contract research organizations and other parties with which it does business that contain indemnification provisions pursuant to which the Company typically agrees to indemnify the party against certain types of third party claims. The Company accrues for known indemnification claims when a loss is probable and can be reasonably estimated. The Company would also accrue for estimated incurred but unidentified indemnification claims based on historical activity. There were no accruals for or expenses related to indemnification claims for any period presented.

Legal Proceedings

               The Company is not a party to any material legal proceedings at this time. From time to time, the Company may be involved in litigation relating to claims arising out of its ordinary course of business.

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Summary of Significant Accounting Policies (Details 4)	6 Months Ended
	Jun. 30, 2014 item
Revenues recognized
Number of products approved	0

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Subsequent Events (Details) (Subsequent Event [Member], Distribution and Commercialization Agreement [Member], Sandoz Inc [Member], USD $) In Millions, unless otherwise specified	0 Months Ended
	Jul. 18, 2014
Subsequent events
Total upfront fee receivable	$ 40
Upfront fee due upon entry into agreement	15
Upfront fee due 30 days after entry into agreement	25
Number of days after entry into agreement second upfront payment is due	30 days
Amount of potential milestone payment to be received	25
Number of days following the successful fulfillment	90 days
Percentage of gross profits accrued on sales of Kerydin	50
Period after which option to repurchase all rights in KERYDIN from sandoz can be exercised	3 years
Initial agreement term	5 years
Automatic renewal term	5 years
Period One [Member]
Subsequent events
Gross profit accrued on sale of Kerydin	50
Period Two [Member] | Minimum [Member]
Subsequent events
Amount of gross profit sharing payments	$ 45

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Notes Payable (Tables)

6 Months Ended

Jun. 30, 2014

Notes Payable

Schedule of future payments of debt

Future payments as of June 30, 2014, prior to the extension of the interest only period, are as follows (in thousands):

Year ending December 31,	(unaudited)
Remainder of 2014	$	1,776
2015	13,890
2016	13,890
2017	7,029
Total minimum payments	36,585
Less amount representing interest	(6,585		)
Notes payable, gross	30,000
Unamortized discount on notes payable	(1,549		)
	28,451
Less current portion of notes payable, including unamortized discount	(4,479		)
Notes payable, less current portion	$	23,972