##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___________ to ___________
 Commission file number: 1-33734
 ARDEA BIOSCIENCES, INC.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    94-3200380
(I.R.S. Employer
Identification No.)4939 Directors Place 
San Diego, CA
(Address of principal executive offices)
    
    92121
(Zip Code)
 (858) 652-6500
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



ARDEA BIOSCIENCES, INC.
 FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
 TABLE OF CONTENTS
 PART I FINANCIAL INFORMATIONITEM 1 Condensed Consolidated Financial Statements  UnauditedCondensed Consolidated Balance Sheets as of September 30, 2010 and
December 31, 2009
    
    
    1Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 2010 and 2009
    
    
    2Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2010 and 2009
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4ITEM 2 Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    11ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    17ITEM 4 Controls and Procedures
    
    
    18PART II OTHER INFORMATIONITEM 1A Risk Factors
    
    
    18ITEM 6 Exhibits
    
    
    36SIGNATURES
    
    
    38EX-10.1EX-31.1EX-31.2EX-32.1




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
 ARDEA BIOSCIENCES, INC.
 
 Condensed Consolidated Balance Sheets
 September 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)
    
    
    (See Note)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,115
    
    
    $
    11,562Short-term investments available for sale
    
    
    83,331
    
    
    
    39,329Receivables
    
    
    2,792
    
    
    
    1,433Prepaids and other current assets
    
    
    690
    
    
    
    215Total current assets
    
    
    92,928
    
    
    
    52,539Property and equipment, net
    
    
    2,142
    
    
    
    1,961Other assets
    
    
    417
    
    
    
    565Total assets
    
    $
    95,487
    
    
    $
    55,065LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,012
    
    
    $
    1,916Accrued clinical liabilities
    
    
    4,364
    
    
    
    4,072Accrued payroll and employee liabilities
    
    
    2,702
    
    
    
    2,138Other accrued liabilities
    
    
    787
    
    
    
    769Current portion of deferred revenue
    
    
    4,305
    
    
    
    9,706Current portion of long-term debt
    
    
    3,279
    
    
    
    2,995Total current liabilities
    
    
    17,449
    
    
    
    21,596Deferred rent
    
    
    196
    
    
    
    160Non-current portion of deferred revenue
    
    
    3,229
    
    
    
    4,853Non-current portion of long-term debt
    
    
    1,047
    
    
    
    3,315Other long-term liabilities
    
    
    400
    
    
    
    400Commitments and contingencies (see Note 5)Stockholders equity:Common stock
    
    
    23
    
    
    
    18Additional paid-in capital
    
    
    461,522
    
    
    
    372,091Accumulated other comprehensive income
    
    
    66
    
    
    
    42Accumulated deficit
    
    
    (388,445
    )
    
    
    (347,410
    )Total stockholders equity
    
    
    73,166
    
    
    
    24,741Total liabilities and stockholders equity
    
    $
    95,487
    
    
    $
    55,065
 
 Note:
    
    The condensed consolidated balance sheet at December 31, 2009 has been derived from the
audited financial statements as of that date, but does not include all of the information and
disclosures required by accounting principles generally accepted in the United States of America.  1




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ARDEA BIOSCIENCES, INC.
 
 Condensed Consolidated Statements of Operations
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues:License fees
    
    $
    2,171
    
    
    $
    8,178
    
    
    $
    7,024
    
    
    $
    13,191Reimbursable research and
development costs
    
    
    1,123
    
    
    
    991
    
    
    
    3,064
    
    
    
    1,490Total revenues
    
    
    3,294
    
    
    
    9,169
    
    
    
    10,088
    
    
    
    14,681Operating expenses:Research and development
    
    
    14,687
    
    
    
    8,999
    
    
    
    37,822
    
    
    
    30,720General and administrative
    
    
    6,669
    
    
    
    2,404
    
    
    
    12,915
    
    
    
    7,807Total operating expenses
    
    
    21,356
    
    
    
    11,403
    
    
    
    50,737
    
    
    
    38,527Loss from operations
    
    
    (18,062
    )
    
    
    (2,234
    )
    
    
    (40,649
    )
    
    
    (23,846
    )Other income (expense):Interest income
    
    
    100
    
    
    
    65
    
    
    
    281
    
    
    
    320Interest expense
    
    
    (204
    )
    
    
    (320
    )
    
    
    (693
    )
    
    
    (1,032
    )Other income, net
    
    
    1
    
    
    
    18
    
    
    
    26
    
    
    
    21Total other income (expense)
    
    
    (103
    )
    
    
    (237
    )
    
    
    (386
    )
    
    
    (691
    )Net loss
    
    $
    (18,165
    )
    
    $
    (2,471
    )
    
    $
    (41,035
    )
    
    $
    (24,537
    )Basic and diluted net loss per share
    
    $
    (0.79
    )
    
    $
    (0.13
    )
    
    $
    (1.92
    )
    
    $
    (1.36
    )Shares used in computing basic and
diluted net loss per share
    
    
    22,902
    
    
    
    18,327
    
    
    
    21,355
    
    
    
    18,062
  2




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ARDEA BIOSCIENCES, INC.
 
 Condensed Consolidated Statements of Cash Flows
 Nine Months EndedSeptember 30,2010
    
    
    2009Operating activities:Net loss
    
    $
    (41,035
    )
    
    $
    (24,537
    )Adjustments to reconcile net loss to net cash (used for) provided by
operating activities:Share-based compensation
    
    
    8,954
    
    
    
    4,345Depreciation
    
    
    429
    
    
    
    499Amortization of debt discount and debt issuance costs
    
    
    228
    
    
    
    334Loss on disposal of property and equipment
    
    
    1
    
    
    
    16Deferred rent
    
    
    36
    
    
    
    59Amortization of premium on short-term investments
    
    
    638
    
    
    
    206Realized gain on short-term investments
    
    
    (23
    )
    
    
    (24
    )Change in operating assets and liabilities:Receivables
    
    
    (1,359
    )
    
    
    (1,036
    )Prepaids and other assets
    
    
    (465
    )
    
    
    (204
    )Accounts payable
    
    
    96
    
    
    
    (1,028
    )Accrued clinical liabilities
    
    
    292
    
    
    
    (223
    )Accrued payroll and employee liabilities
    
    
    564
    
    
    
    78Other accrued liabilities
    
    
    18
    
    
    
    96Deferred revenue
    
    
    (7,025
    )
    
    
    21,809Net cash (used for) provided by operating activities
    
    
    (38,651
    )
    
    
    390Investing activities:Purchases of short-term investments
    
    
    (104,131
    )
    
    
    (42,833
    )Proceeds from sale or maturity of short-term investments
    
    
    59,538
    
    
    
    29,366Proceeds from sale of property and equipment
    
    
    25
    
    
    
    11Purchases of property and equipment
    
    
    (492
    )
    
    
    (288
    )Net cash used for investing activities
    
    
    (45,060
    )
    
    
    (13,744
    )Financing activities:Payments on long-term debt
    
    
    (2,218
    )
    
    
    (1,356
    )Net proceeds from issuance of common stock
    
    
    80,482
    
    
    
    3,391Net cash provided by financing activities
    
    
    78,264
    
    
    
    2,035Net decrease in cash and cash equivalents
    
    
    (5,447
    )
    
    
    (11,319
    )Cash and cash equivalents at beginning of period
    
    
    11,562
    
    
    
    41,551Cash and cash equivalents at end of period
    
    $
    6,115
    
    
    $
    30,232Supplemental schedule of non-cash information:Capital lease obligation incurred for property and equipment
    
    $
    144
    
    
    $
    Net unrealized gain (loss) on short-term investments
    
    $
    24
    
    
    $
    (120
    )
  3




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ARDEA BIOSCIENCES, INC.
 
 Notes to Condensed Consolidated Financial Statements
 1. Basis of Presentation
  2. Accounting Policies
 Principles of Consolidation
  Use of Estimates
  Reclassification
  Revenue Recognition
   4




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Earnings Per Share
   Comprehensive Loss
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net loss
    
    $
    18,165
    
    
    $
    2,471
    
    
    $
    41,035
    
    
    $
    24,537Net unrealized (gains) losses on
short-term investments
    
    
    (26
    )
    
    
    
    
    
    
    (24
    )
    
    
    120Comprehensive net loss
    
    $
    18,139
    
    
    $
    2,471
    
    
    $
    41,011
    
    
    $
    24,657
 Recent Accounting Pronouncements
 Fair Value Measurements and Disclosures (Topic 820)  Improving Disclosures
about Fair Value Measurements
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Revenue Recognition  Milestone Method (Topic 605):
Milestone Method of Revenue Recognition
 3. Fair Value Measurements
  
    
    Level 1  Quoted prices in active markets for identical assets or liabilities.
 
    
    Level 2  Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
 
    
    Level 3  Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities.
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Fair Value Measurements at Reporting Date UsingQuoted prices inactive markets for
    
    
    Significant other
    
    
    SignificantBalance at
    
    
    identical assets
    
    
    observable inputs
    
    
    unobservable inputsSeptember 30, 2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Money market
funds
    
    $
    5,628
    
    
    $
    5,628
    
    
    $
    
    
    
    $
    United States government
and agency
obligations
    
    
    63,915
    
    
    
    9,993
    
    
    
    53,922
    
    
    
    United States corporate
debt
securities
    
    
    9,021
    
    
    
    
    
    
    
    9,021
    
    
    
    United States commercial
paper
    
    
    5,298
    
    
    
    
    
    
    
    5,298
    
    
    
    Foreign commercial paper
    
    
    3,496
    
    
    
    
    
    
    
    3,496
    
    
    
    United States certificates
of deposit
    
    
    1,601
    
    
    
    
    
    
    
    1,601
    
    
    
    Total
    
    $
    88,959
    
    
    $
    15,621
    
    
    $
    73,338
    
    
    $
    
     4. Bayer Relationship
  7




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5. Commitments and Contingencies
  8




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6. Long-term Debt
  Notes Payable
    
    
    Capital LeaseYears ended December 31,2010 (remaining three months of
the year)
    
    $
    869
    
    
    $
    402011
    
    
    3,875
    
    
    
    1222012
    
    
    45
    
    
    
    452013
    
    
    45
    
    
    
    452014
    
    
    45
    
    
    
    45Thereafter
    
    
    19
    
    
    
    22Total
    
    
    4,898
    
    
    
    319Less unamortized
discount
    
    
    (59
    )
    
    
    Less amount representing
interest
    
    
    (756
    )
    
    
    (76
    )Total
balance
    
    
    4,083
    
    
    
    243Less current
portion
    
    
    (3,156
    )
    
    
    (123
    )Noncurrent portion of long-term
debt
    
    $
    927
    
    
    $
    120
 7. Stockholders Equity
 Common Stock
   Share-Based Compensation
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Research and development
    
    $
    1,401
    
    
    $
    473
    
    
    $
    2,828
    
    
    $
    1,826General and administrative
    
    
    4,097
    
    
    
    821
    
    
    
    6,126
    
    
    
    2,519Share-based compensation
expense included in
operating expenses
    
    $
    5,498
    
    
    $
    1,294
    
    
    $
    8,954
    
    
    $
    4,345
  9




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September 30,Options:
    
    2010
    
    
    2009Risk-free interest rate
    
    
    2.6
    %
    
    
    2.2
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    78.7
    %
    
    
    77.9
    %Expected life (years)
    
    
    5.5-6.1
    
    
    
    5.5-6.1
  8. Income Taxes
    9. Subsequent Events
  10




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis of our financial condition and results of operations
should be read together with our unaudited condensed consolidated financial statements and related
notes included in this quarterly report on Form 10-Q and the audited financial statements and notes
thereto as of and for the year ended December 31, 2009 included in our Annual Report on Form 10-K
for the year ended December 31, 2009 filed with the Securities and Exchange Commission, or SEC, on
March 12, 2010.
 This discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. The actual results may differ materially from those anticipated in
these forward-looking statements as a result of many factors, including, but not limited to, those
set forth under Risk Factors and elsewhere in this quarterly report on Form 10-Q . All
forward-looking statements included in this document are based on information available to us on
the date of this document and we assume no obligation to update any forward-looking statements
contained in this Form 10-Q .
 Overview and Business Strategy
  Product Portfolio
 Product Candidate
    
    Target Indication
    
    Development StatusRDEA594
    
    Gout
    
    Phase 2b ongoingNext-generation
    
    Gout
    
    Preclinical development ongoingBAY 86-9766
(formerly known as RDEA119)
    
    Cancer
    
    Phase 1 completed and Phase 1/2 ongoingMultiple candidates
    
    HIV
    
    Further development will be dependent
upon our ability to partner this
program
 GOUT
  ®
  
    
    When administered as a single agent in a Phase 2b study (Study 202), RDEA594 was well
tolerated and produced significant reductions in uric acid in the blood. In this
randomized,
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double-blind, placebo-controlled, dose-escalation study of 123 gout
patients with hyperuricemia
(sUA levels greater than or equal to 8 mg/dL) the primary endpoint was a significant
increase in the proportion of patients who achieved a response, defined as a reduction of
uric acid in the blood to < 6 mg/dL after four weeks of treatment, compared to placebo.
The primary endpoint was achieved, uric acid decreased and response rates increased in a
dose-related manner and were highly clinically and statistically significant at the two
highest doses tested. At the highest dose the response rate was 60 percent, compared to 0
percent for placebo (p < 0.0001). RDEA594 was also well tolerated in this study.
    
    In a Phase 1b clinical pharmacology study evaluating the use of
RDEA594 in combination with febuxostat (Study 111) in 21 gout
patients with hyperuricemia (sUA greater than or equal to 8 mg/dL),
100 percent of patients receiving the combination of RDEA594 and febuxostat
achieved sUA levels below the clinically important target level of 6 mg/dL, compared
 to 67 percent and 56 percent for patients receiving 40 mg and 80 mg, respectively, of
 febuxostat alone.  At the highest combination doses tested (600 mg RDEA594 combined with
 80 mg febuxostat), 100 percent of patients reached sUA levels below 4 mg/dL, with 58 percent achieving
 levels below 3 mg/dL. No patient achieved these reduced sUA levels on either dose of febuxostat alone.
The combination of RDEA594 and febuxostat was also well tolerated, with no serious adverse events or discontinuations
 due to adverse events and no clinically relevant drug interactions were observed between RDEA594 and
febuxostat.
    
    The use of RDEA594 in combination with allopurinol has been evaluated in a Phase
2a study (Study 201) in gout patients as well as a Phase 1b clinical pharmacology study
(Study 110) in gout patients.  In the recently completed Phase 1b study, 100 percent of patients receiving
all combinations of RDEA594 and allopurinol achieved sUA reductions to below the 6 mg/dL target.  On 300 mg
allopurinol alone, only 20 percent of all patients in the study achieved target sUA levels below 6 mg/dL.
On 600 mg RDEA594 alone, 67 percent of patients achieved sUA levels below 6 mg/dL, which was significantly
higher than the percent reaching target on allopurinol alone (p < 0.05).
At the highest combination doses tested, 90 percent of patients also
 reached sUA levels below 5 mg/dL, and 50 percent reached levels below 4 mg/dL.
The combination of RDEA594 and allopurinol was well tolerated, with no serious adverse
events or discontinuations that were considered possibly related to RDEA594 or the combination.
There were no clinically relevant increases in serum creatinine or ALT in this study.  Two patients receiving
RDEA594 and colchicine had Grade 4 increases in creatine kinase (CK), one of these, though asymptomatic, was considered
to be rhabdomyolysis by the investigator.  Both cases were considered possibly related to colchicine and not related to
 RDEA594.  Elevations in CK and rhabdomyolysis are a known side effect of colchicine.  One of these patients was also
receiving a statin, which is also known to cause CK elevations, particularly when combined with colchicine.  Clinically

significant elevations in CK have not been observed in more than 400 patients exposed to RDEA594 who were not also receiving

 colchicine.  Furthermore, in a previously reported, randomized, placebo-controlled trial
(Study 202), the rate of Grade 4 CK increases was lower in patients receiving RDEA594 plus colchicine
(2 percent) than those receiving colchicine alone (4 percent).
    
    Results from multiple studies have indicated that the activity of RDEA594 is not
diminished in patients with mild to moderate renal impairment.
   CANCER
 In vivo in vitro in vivo ®
  12




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HIV
 10
   Bayer Relationship
  Valeant Relationship
   13




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Critical Accounting Policies and Estimates
   Revenue Recognition
   Accrued Clinical Liabilities
  Share-Based Compensation
  14




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Recent Accounting Pronouncements
  Results of Operations
 Three and Nine Months Ended September 30, 2010 and 2009
 Revenues
  Research and Development Expense
  General and Administrative Expense
  15




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Other Income (expense)
  Liquidity and Capital Resources
        16




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Off-Balance Sheet Arrangements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  17




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ITEM 4. CONTROLS AND PROCEDURES
    
 PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
 You should carefully consider the following information about risks and uncertainties that may
affect us or our business, together with the other information appearing elsewhere in this
quarterly report on Form 10-Q and in our other filings with the SEC. If any of the following
events, described as risks, actually occur, our business, financial condition, results of
operations and future growth prospects would likely be materially and adversely affected. In these
circumstances, the market price of our common stock could decline, and you may lose all or part of
your investment in our securities. An investment in our securities is speculative and involves a
high degree of risk. You should not invest in our securities if you cannot bear the economic risk
of your investment for an indefinite period of time and cannot afford to lose your entire
investment. The risks described below include certain additions and revisions to the risks set
forth in our annual report on Form 10-K for the fiscal year ended December 31, 2009 and our
subsequent filings with the SEC. Risk factors containing such revisions are marked with an
asterisk.
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Risks Related to Our Business
 Our success depends substantially on our most advanced product candidate, RDEA594. We cannot be
certain that this product candidate will receive regulatory approval or be successfully
commercialized.*
    
    
    not deem a product candidate safe and effective;
    
    not find the data from preclinical studies and clinical trials sufficient to support
approval;
    
    not agree with our interpretation and characterization of efficacy and safety data from
our clinical trials;
    
    require additional preclinical or clinical studies;
    
    not approve of our third-party manufacturers processes and facilities; or
    
    change its approval policies, adopt new regulations, or provide new guidance or change
its view regarding guidance previously provided.
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Development of our products will take years; we may never attain product sales; and we expect to
continue to incur net operating losses.*
  We are not currently profitable and may never become profitable.
  Because the results of preclinical studies and early clinical trials are not necessarily predictive
of future results, we can provide no assurances that RDEA594, BAY 86-9766 or any other of our
product candidates will have favorable results in future clinical trials or receive regulatory
approval.*
  20




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Delays in the commencement of clinical testing of our current and potential product candidates
could result in increased costs to us and delay our ability to generate revenues.
   
    
    delays in demonstrating sufficient safety and efficacy to obtain regulatory approval to
commence a clinical trial;
    
    delays in reaching agreement on acceptable terms with prospective contract research
organizations and clinical trial sites;
    
    delays in manufacturing quantities of a product candidate sufficient for clinical
trials;
    
    delays in obtaining approval of an IND from the FDA or similar foreign approval;
    
    delays in obtaining institutional review board approval to conduct a clinical trial at a
prospective site; and
    
    insufficient financial resources.
  Once clinical testing of RDEA594, BAY 86-9766 and other potential product candidates has commenced,
the termination, or delays in the completion, of clinical testing could result in increased costs
to us and delay or prevent us from generating revenues.*
  
    
    ongoing discussions with the FDA or other regulatory authorities regarding the scope or
design of our clinical trials or FDA requests for supplemental information with respect to
our clinical trial results;
    
    failure to conduct clinical trials in accordance with regulatory requirements;
    
    lower than anticipated recruitment rate or retention rate of patients in clinical
trials;
    
    the imposition of a clinical hold;
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
    
    lack of adequate funding to continue clinical trials;
    
    negative results of clinical trials;
    
    changes to clinical trials protocols;
    
    insufficient supply or deficient quality of product candidates or other materials
necessary for the conduct of our clinical trials; or
    
    serious adverse events or other undesirable drug-related side effects experienced by
clinical trial participants.
  If our efforts to develop and commercialize RDEA594 are unsuccessful, we may be required to obtain
rights to new products or product candidates from third parties, which we may not be able to do.*
  
    
    our inability to purchase or license products or product candidates on terms that would
allow us to make a sufficient financial return from resulting products;
    
    competitors may be unwilling to assign or license products or product candidate rights
to us; or
    
    we may be unable to identify suitable products or product candidates within, or
complementary to, our areas of interest or capabilities.
  If we successfully complete clinical trials for RDEA594 or any other product candidate, there are
no assurances that we will be able to submit, or obtain regulatory approval of, a new drug
application.*
  22




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If we successfully develop products, but those products do not achieve and maintain market
acceptance, our business will not be profitable.
  
    
    our ability to provide acceptable evidence of safety and efficacy of our products;
    
    relative convenience and ease of administration of products;
    
    the prevalence and severity of any adverse side effects from the products;
    
    the availability of alternative treatments;
    
    pricing and cost effectiveness of products; and
    
    sufficient third-party insurance coverage or reimbursement.
  
    
    new products or technologies are introduced that are more favorably received than our
potential future products, are more cost effective or render our potential future products
obsolete; or
    
    complications arise with respect to use of our potential future products.
 We will need substantial additional funding and may be unable to raise capital when needed, or at
all, which would force us to delay, reduce or eliminate our research and development programs or
commercialization efforts.*
  
    
    advance RDEA594 and any other product candidates through the, development and regulatory
review and approval process;
    
    establish and maintain manufacturing, sales and marketing operations;
    
    commercialize RDEA594 or other product candidates, if any, that receive regulatory
approval; and
    
    acquire rights to products or product candidates, technologies or businesses.
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
    
    the rate of progress and cost of our research and development activities;
    
    the scope, prioritization and number of preclinical studies and clinical trials we
pursue;
    
    the costs of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights;
    
    the costs and timing of regulatory approval;
    
    the costs of establishing or contracting for manufacturing, sales and marketing
capabilities;
    
    the effects of competing technological and market developments;
    
    the terms and timing of any collaborative, licensing and other arrangements that we may
establish; and
    
    the extent to which we acquire or license new technologies, products or product
candidates.
  We have decreased the size of our organization and may need to do so again in the future, and we
may experience difficulties in managing these organizational changes.
   Raising additional funds by issuing securities or through additional collaboration and licensing
arrangements may cause dilution to existing stockholders, restrict our operations or require us to
relinquish proprietary rights.
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The investment of our cash balance and investments in marketable securities are subject to risks
which may cause losses and affect the liquidity of these investments.
  We depend on collaborations with other parties to develop and commercialize selected product
candidates and to provide substantially all of our revenues.*
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Conflicts may arise between us and any of our collaborators that could delay or prevent the
development or commercialization of our product candidates.
  
    
    unwillingness on the part of a collaborator to pay us milestone payments or royalties we
believe are due to us under our collaboration or license agreement;
    
    unwillingness on the part of a collaborator to keep us informed regarding the progress
of its development and commercialization activities or to permit public disclosure of the
results of those activities; or
    
    slowing or cessation of a collaborators development or commercialization efforts with
respect to our product candidates.
 We depend on outside parties to conduct our preclinical and clinical trials, which may result in
costs and delays that prevent us from obtaining regulatory approval or successfully commercializing
product candidates.*
  We do not have internal manufacturing capabilities, and if we fail to develop and maintain internal
capabilities or supply relationships with collaborators or other outside manufacturers, we may be
unable to develop or commercialize any products.*
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If we are unable to establish sales and marketing capabilities or enter into agreements with
other parties to sell and market any products we may develop, we may be unable to generate product
revenue.
  If we are unable to attract and retain key management and scientific staff, we may be unable to
successfully develop or commercialize our product candidates.
  Our quarterly results and stock price may fluctuate significantly.
  
    
    whether or not we achieve specified milestones under any agreement that we enter into
with collaborators and the timely payment by potential commercial collaborators of any
amounts payable to us or by us to Valeant or any other party, including the milestone
payments that we may make to Valeant;
    
    the addition or termination of research or development programs or funding support;
    
    the status of development of our product candidates, including results of preclinical
studies and any future clinical trials;
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
    
    variations in the level of expenses related to the development and commercialization of
our product candidates or potential product candidates during any given period;
    
    our execution of collaborative, licensing or other arrangements, and the timing and
accounting treatment of payments we make or receive under these arrangements;
    
    our selection of additional compounds for development; and
    
    fluctuations in the stock prices of other companies in the biotechnology and
pharmaceuticals industries and in the financial markets generally.
  If we make any acquisition, we will incur a variety of costs, and we may never realize the
anticipated benefits of the acquisition.
  
    
    assumption and exposure to unknown liabilities of an acquired business;
    
    disruption of our business and diversion of our managements time and attention to
acquiring and developing acquired products or technologies;
    
    incurrence of substantial debt or dilutive issuances of securities to pay for
acquisitions;
    
    higher than expected acquisition and integration costs;
    
    increased amortization expenses;
    
    negative effect on our earnings (or loss) per share;
    
    difficulties in combining and integrating the operations and personnel of any acquired
businesses with our operations and personnel;
    
    impairment of relationships with key suppliers, contractors or customers of any acquired
businesses due to changes in management and ownership; and
    
    inability to retain key employees of any acquired businesses.
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Earthquake damage to our facilities could delay our research and development efforts and adversely
affect our business.
  Our
business and operations would suffer in the event of system failures.*
  Valeants exercise of its option to repurchase commercialization rights in territories outside the
United States and Canada (the Valeant Territories) could limit the market for our first NNRTI
product and adversely affect our business.
  Failure to comply with our minimum commitments under the asset purchase agreement with Valeant
could expose us to potential liability or otherwise adversely affect our business.
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Failure to maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.
   Risks Related to Our Industry
 Because our product candidates and development and collaboration efforts depend on our intellectual
property rights, adverse events affecting our intellectual property rights will harm our ability to
commercialize products.
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
    
    we might not have been the first to make, conceive or reduce to practice the inventions
covered by any or all of 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;
    
    it is possible that none of our pending patent applications will result in issued
patents;
    
    our issued or acquired patents may not provide a basis for commercially viable products,
may not provide us with any competitive advantages, or may be challenged by other parties;
    
    our issued patents may not be valid or enforceable; or
    
    the patents of others may have an adverse effect on our business.
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Our business depends upon not infringing the rights of others.
   
    
    cease selling, incorporating or using any of our products that incorporate the
challenged intellectual property;
    
    obtain a license from the holder of the infringed intellectual property right, which
license may be costly or may not be available on reasonable terms, if at all; or
    
    redesign our processes so that they do not infringe, which could be costly and
time-consuming and may not be possible.
   Confidentiality agreements with employees and others may not adequately prevent disclosure of trade
secrets and other proprietary information and may not adequately protect our intellectual property.
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Many of our competitors have significantly more resources and experience, which may harm our
commercial opportunity.
  
    
    research and development;
    
    preclinical testing;
    
    clinical trials;
    
    regulatory approvals;
    
    manufacturing; and
    
    sales and marketing of approved products.
  If our competitors develop treatments for gout, cancer or HIV that are approved faster, marketed
better or demonstrated to be safer or more effective than any products that we may develop, our
commercial opportunity will be reduced or eliminated.*
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If we cannot establish favorable pricing of RDEA594 and other product candidates acceptable to the
United States or foreign governments, insurance companies, managed care organizations and other
payors, or arrange for favorable reimbursement policies, any product sales will be severely
hindered.*
    Product liability claims may damage our reputation and, if insurance proves inadequate, the product
liability claims may harm our results of operations.
  Any claims relating to our improper handling, storage or disposal of biological, hazardous and
radioactive materials could be time-consuming and costly.
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##### Table of Contents



Risks Related to Our Common Stock
 Directors, executive officers, principal stockholders and affiliated entities beneficially own or
control a significant majority of our outstanding voting common stock and together control our
activities.*
  Future sales of our common stock may cause our stock price to decline.
  Anti-takeover provisions in our charter documents and under Delaware law may make it more difficult
to acquire us.
  
    
    allow the authorized number of directors to be changed only by resolution of our Board
of Directors;
    
    require that stockholder actions must be effected at a duly called stockholder meeting
and prohibit stockholder action by written consent;
    
    establish advance notice requirements for nominations to our Board of Directors or for
proposals that can be acted on at stockholder meetings;
    
    authorize our Board of Directors to issue blank check preferred stock to increase the
number of outstanding shares; and
    
    limit who may call stockholder meetings.
  We have never paid cash dividends on our common stock and we do not anticipate paying
dividends in the foreseeable future.
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ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description2.1
    
    Asset Purchase Agreement with
Valeant Research & Development and Valeant Pharmaceuticals International dated December 21, 2006 (1)3.1
    
    Restated Certificate of
Incorporation filed with the Delaware Secretary of State on September 10, 2008 (2)3.2
    
    Amended and Restated Bylaws (3)4.1
    
    Registration Rights Agreement,
dated December 19, 2007, by and among Ardea Biosciences, Inc. and the
Purchasers listed on the signature pages thereto (4)4.2
    
    Registration Rights Agreement,
dated January 4, 2008, by and among Ardea Biosciences, Inc. and the
Purchasers listed on the signature pages thereto (5)4.3
    
    Form of Warrant issued by the
Company pursuant to the Loan and Security Agreement dated November 12, 2008 (6)4.4
    
    Form of Warrant issued by the
Company pursuant to the Securities Purchase Agreement dated December 17, 2008 (7)4.5
    
    Registration Rights Agreement,
dated December 17, 2008, by and among Ardea Biosciences, Inc. and the
Purchasers listed on the signature pages thereto (8)10.1*
    
    Form of  Stock Issuance Agreement
Under 2004 Stock Incentive Plan31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
    
    Confidential treatment request has
been granted with respect to
certain portions of this exhibit.
Omitted portions have been filed
separately with the Securities and
Exchange Commission.*
    
    Management contract or compensatory plan, contract or arrangement.(1)
    
    Incorporated by reference to our
Form 8-K (File No. 000-29993)
filed with the Securities and
Exchange Commission on December
28, 2006.(2)
    
    Incorporated by reference to our
Form 10-Q (File No. 001-33734)
filed with the Securities and
Exchange Commission on November
13, 2008.(3)
    
    Incorporated by reference to our
Form 8-K (File No. 000-29993)
filed with the Securities and
Exchange Commission on August 2,
2007.(4)
    
    Incorporated by reference to our
Form 8-K (File No. 001-33734)
filed with the Securities and
Exchange Commission on December
20, 2007.(5)
    
    Incorporated by reference to our
Form 8-K (File No. 001-33734)
filed with the Securities and
Exchange Commission on January 10,
2008.
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(6)
    
    Incorporated by reference to our
Form 10-K (File No. 001-33734)
filed with the Securities and
Exchange Commission on March 13,
2009.(7)
    
    Incorporated by reference to our
Form 8-K (File No. 001-33734)
filed with the Securities and
Exchange Commission on December
19, 2008.(8)
    
    Incorporated by reference to our
Form 8-K (File No. 001-33734)
filed with the Securities and
Exchange Commission on December
22, 2008.
 37




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##### Table of Contents



SIGNATURES
  Ardea Biosciences, Inc.Date:  November 9, 2010
    /s/ Barry D. QuartBarry D. Quart, Pharm.D.President and Chief Executive Officer
(On behalf of the Registrant)/s/ John W. BeckJohn W. BeckSenior Vice President, Finance and Operations
and Chief Financial Officer
(As Principal Financial and Accounting Officer) 38




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##### Table of Contents



ARDEA BIOSCIENCES, INC.
 INDEX TO EXHIBITS
 ExhibitNumber
    
    Description2.1
    
    Asset Purchase Agreement with
Valeant Research & Development and Valeant Pharmaceuticals International dated December 21, 2006 (1)3.1
    
    Restated Certificate of
Incorporation filed with the Delaware Secretary of State on September 10, 2008 (2)3.2
    
    Amended and Restated Bylaws (3)4.1
    
    Registration Rights Agreement,
dated December 19, 2007, by and among Ardea Biosciences, Inc. and the
Purchasers listed on the signature pages thereto (4)4.2
    
    Registration Rights Agreement,
dated January 4, 2008, by and among Ardea Biosciences, Inc. and the
Purchasers listed on the signature pages thereto (5)4.3
    
    Form of Warrant issued by the
Company pursuant to the Loan and Security Agreement dated November 12, 2008 (6)4.4
    
    Form of Warrant issued by the
Company pursuant to the Securities Purchase Agreement dated December 17, 2008 (7)4.5
    
    Registration Rights Agreement,
dated December 17, 2008, by and among Ardea Biosciences, Inc. and the
Purchasers listed on the signature pages thereto (8)10.1*
    
    Form of Stock Issuance Agreement Under 2004 Stock Incentive Plan31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
    
    Confidential treatment request has
been granted with respect to
certain portions of this exhibit.
Omitted portions have been filed
separately with the Securities and
Exchange Commission.*
    
    Management contract or compensatory plan, contract or arrangement.(1)
    
    Incorporated by reference to our
Form 8-K (File No. 000-29993)
filed with the Securities and
Exchange Commission on December
28, 2006.(2)
    
    Incorporated by reference to our
Form 10-Q (File No. 001-33734)
filed with the Securities and
Exchange Commission on November
13, 2008.(3)
    
    Incorporated by reference to our
Form 8-K (File No. 000-29993)
filed with the Securities and
Exchange Commission on August 2,
2007.(4)
    
    Incorporated by reference to our
Form 8-K (File No. 001-33734)
filed with the Securities and
Exchange Commission on December
20, 2007.(5)
    
    Incorporated by reference to our
Form 8-K (File No. 001-33734)
filed with the Securities and
Exchange Commission on January 10,
2008.




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(6)
    
    Incorporated by reference to our
Form 10-K (File No. 001-33734)
filed with the Securities and
Exchange Commission on March 13,
2009.(7)
    
    Incorporated by reference to our
Form 8-K (File No. 001-33734)
filed with the Securities and
Exchange Commission on December
19, 2008.(8)
    
    Incorporated by reference to our
Form 8-K (File No. 001-33734)
filed with the Securities and
Exchange Commission on December
22, 2008.