The animal health market is focused on providing a quality life to animals which are generally categorized as companion animals or food animals. The market is driven primarily by two main factors: 1) pet owners in the United States and Europe demanding more advanced and expensive treatments for companion animals, and 2) the growing world population has increased the demand for food animals requiring improvements in livestock health care and feeding in food animal production.

Pharmaceutical products in animal health include vaccines, antibiotics, antifungals, anti-parasitics, and medical feed additives. The market for animal health products is approximately $20 billion a year with an annual growth rate averaging over 6% in the last 10 years. The top-selling animal health products are anti-parasitics for companion animals and generate annual sales of almost a $1 billion a year.

Our boron chemistry platform has demonstrated the potential to treat a number of diseases caused by bacteria, fungi and parasites, some of the leading causes of diseases in animals. As a result of some of our work in human neglected diseases, we identified the opportunity to address unmet medical needs in animals as well. In August 2010, we announced the establishment of a research agreement with Eli Lilly and Company (Lilly) to create and develop new therapeutics for animal health under which we will be eligible to receive milestone payments contingent on achieving development and regulatory hurdles as well as commercial royalties on sales. In August, 2011, we achieved the first development candidate (AN8914) in our collaboration with Lilly, for which we received a $1 million milestone payment. Lilly funded the research that resulted in this compound and will be responsible for future development and commercialization. Anacor is eligible to receive additional development and regulatory milestones as well as tiered royalties from the high single digits to low double digits on future sales.