Hailed as the largest Phase I deal in biotech history, Anadys Pharmaceuticals Inc. entered a potential $570 million agreement with Novartis Pharma AG to advance ANA975 and other Toll-like receptor 7 oral prodrugs for chronic hepatitis C and hepatitis B viruses.

The money can be broken down into a $20 million initial license payment to San Diego-based Anadys and a potential $550 million in regulatory and commercial milestones, the vast majority of which would come pre-approval. The first $10 million milestone would be paid once Anadys submits an investigational new drug application for ANA975 in the middle of this year.

The deal not only advances ANA975 toward a potential $20 billion worldwide market, but it gives Anadys enough money to fund operations for two years and to advance its more early stage products.

"I think it's another example of big pharma and biotech getting together. It's one of the biggest Phase I deals, to the best of my knowledge, and I think that reflects two things," said analyst Mark Monane, of New York-based Needham & Co. Inc. "One is the potential of '975 as a drug in the real world. And two is the large market out there, which still has unmet needs for a well-tolerated and effective agent."

By and large, analysts praised the collaboration, with SG Cowen & Co. Inc.'s Eric Schmidt calling it a "significant positive," and Piper Jaffray & Co.'s Edward Tenthoff labeling it a "phenomenal deal." Anadys' stock (NASDAQ:ANDS) shot up 23.8 percent Thursday, or $1.61, to close at $8.37.

Anadys will pay 19.5 percent of the global development costs, and it has a co-promotion option to retain 35 percent of U.S. profits by contributing that same percentage in commercialization costs. For sales in the rest of the world, Anadys will receive double-digit royalties, estimated by Schmidt to be at least 15 percent. If the company does not exercise the co-promotion option, it would receive high double-digit royalties on net sales in the U.S.

"This is more of a partnership than a deal," said Kleanthis Xanthopoulos, Anadys' president and CEO. "We have an active role in development, an active role in finance and in sharing potential profits. It transforms our company because we don't have a need to go out and finance for at least 24 months."

The agreement enables Anadys to internally advance its earlier-stage compounds that target TLR7, TLR8 and TLR9, some of which are at the late preclinical stage and could reach the clinic in the next 12 months to 18 months for viral indications. The company also is focused on structural-based drug design and has a late discovery program targeting a viral enzyme.

While 90 percent of the milestone payments from the Novartis agreement are for achievements in the area of HCV, a smaller portion of milestones will cover development of ANA975 for HBV. The companies expect to start trials in that area in early 2006. The license to Novartis also includes rights to additional oral prodrugs of TLR7 agonists for infectious diseases. And Novartis now holds an exclusive option to license Anadys' rights to ANA380, a Phase II HBV compound that is co-developed with LG Life Sciences Ltd., of Seoul, South Korea.

It is the second deal this week for Basel, Switzerland-based Novartis in the area of Toll-like receptors. The company also signed a potential $136 million preclinical agreement with Cambridge, Mass.-based Hybridon Inc. to develop, with an option to commercialize, TLR9 candidates targeting asthma and allergy. (See BioWorld Today, June 2, 2005.)

"Toll-like receptors are found in basically all vertebrate species and have developed over millions of years to regulate our immune responses to bacterial, viral and fungal infections," Xanthopoulos said. "The first human receptor was cloned in 1998. Today, we know of 10 human receptors that are all categorized as Toll-like."

It is an emerging area of interest for several pharmaceutical companies, including New York-based Pfizer Inc., which signed a $505 million deal in March with Wellesley, Mass.-based Coley Pharmaceutical Group Inc. for the TLR9 agonist ProMune to treat, control and prevent cancer. (See BioWorld Today, March 25, 2005.)

"It's a very new area because it's only seven years ago that the first receptor was cloned," Xanthopoulos told BioWorld Today. "In many people's minds, it might represent the next big frontier."

Anadys is on the forefront of development with ANA975, an oral prodrug of isatoribine, a small-molecule TLR7 agonist. An ongoing Phase I trial, begun in January, indicates that the bioavailability of ANA975 is approaching 100 percent and that it has delivered levels of isatoribine that are clinically relevant.

In all likelihood, ANA975 would be used in combination with an antiviral, like Vertex Pharmaceuticals Inc.'s VX-950, or Idenix Pharmaceuticals Inc.'s NM283. Both companies are based in Cambridge, Mass. Novartis is Idenix's commercial partner for NM283.

"Our thesis, which I think is supported by the great majority, is that to combat hepatitis C, and hepatitis B for that matter, you need an immune modulatory molecule combined with a direct antiviral," Xanthopoulos said.

Using a direct antiviral alone cannot work, because of the rapid onset of resistance. Patients need something that can modulate their immune systems to accept drugs that counter the virus.

While Novartis will make final development decisions, Anadys plans to start a 28-day study of ANA975 in HCV patients in the second half of this year. A Phase II would start in the beginning of 2006, and, if all goes well, a new drug application filing could come at the end of 2007 or early in 2008.

The hepatitis C market is about $3 billion, but that does not represent all of the 130 million to 170 million people globally, or 3 million to 4 million in the U.S., who have the disease. A better figure to represent the market potential, if a drug such as ANA975 is added to the mix, is $20 billion, Monane said.

Only about 5 percent to 10 percent of patients worldwide are receiving treatment, Xanthopoulos added.

"It's a disease that takes a long time to manifest and so people don't really like to get on therapy unless they have to," he said. "And that might take decades sometimes."