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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 Form 10-Q
 þ
    
    Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934For the quarterly period ended March 31, 2007
 Or
 o
    
    Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934For the transition period
from            to
 Commission File Number 0-29993
 ARDEA BIOSCIENCES, INC.
 (Exact name of Registrant as specified in its charter)
 DELAWARE
    
    94-3200380(State or other jurisdiction of
    
    (I.R.S. Employer Identification Number)incorporation or organization)
 2131 Palomar Airport Road, Suite 300
Carlsbad, CA 92011
 
 þ o
  o o þ
 o  þ




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TABLE OF CONTENTS
 ARDEA BIOSCIENCES, INC.
 FORM 10-Q
 QUARTER ENDED MARCH 31, 2007
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    1Condensed Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006
    
    
    1Condensed Statements of Operations for the Three months ended March 31, 2007 and 2006 (unaudited)
    
    
    2Condensed Statements of Cash Flows for the Three months ended March 31, 2007 and 2006 (unaudited)
    
    
    3Notes to Condensed Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    15PART II. OTHER INFORMATION
    
    
    17Item 1. Legal Proceedings
    
    
    17Item 1A. Risk Factors
    
    
    17Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3. Defaults Upon Senior Securities
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    29SIGNATURES
    
    
    30EXHIBIT INDEX
    
    
    31EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 ARDEA BIOSCIENCES, INC.
(formerly IntraBiotics Pharmaceuticals, Inc.)
 
 CONDENSED BALANCE SHEETS
(In thousands, except share and per share data)
 March 31,
    
    
    December 31,2007
    
    
    2006(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    9,908
    
    
    $
    14,779Short-term investments
    
    
    35,390
    
    
    
    33,890Prepaid expenses and other current assets
    
    
    1,666
    
    
    
    845Total current assets
    
    
    46,964
    
    
    
    49,514Property and equipment, net
    
    
    695
    
    
    
    726Total assets
    
    $
    47,659
    
    
    $
    50,240LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,029
    
    
    $
    234Accrued clinical liabilities
    
    
    4
    
    
    
    4Accrued employee liabilities
    
    
    244
    
    
    
    Other accrued liabilities
    
    
    521
    
    
    
    938Total current liabilities
    
    
    1,798
    
    
    
    1,176Commitments and contingencies (Note 7)Stockholders equity:Convertible preferred stock, $0.001 par value: 5,000,000 shares authorized;
300 shares outstanding and $3,000 aggregate liquidation preference at
March 31, 2007 and December 31, 2006
    
    
    1,634
    
    
    
    1,634Common stock, $0.001 par value: 70,000,000 shares authorized at
March 31, 2007 and December 31, 2006; 9,376,799 and 9,362,191 shares
outstanding at March 31, 2007 and December 31, 2006, respectively
    
    
    9
    
    
    
    9Additional paid-in capital
    
    
    283,823
    
    
    
    283,594Accumulated other comprehensive income
    
    
    1
    
    
    
    4Accumulated deficit
    
    
    (239,606
    )
    
    
    (236,177
    )Total stockholders equity
    
    
    45,861
    
    
    
    49,064Total liabilities and stockholders equity
    
    $
    47,659
    
    
    $
    50,240
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ARDEA BIOSCIENCES, INC.
(formerly IntraBiotics Pharmaceuticals, Inc.)
 
 CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended March 31,2007
    
    
    2006Revenue
    
    $
    893
    
    
    $
    Operating expenses:Research and development (includes non-cash stock-
based compensation of
$28 and $0, respectively)
    
    $
    3,513
    
    
    
    7General and administrative (includes non-cash stock-
based compensation of $141 and $135, respectively)
    
    
    1,544
    
    
    
    660Total operating expenses
    
    
    5,057
    
    
    
    667Operating loss
    
    
    (4,164
    )
    
    
    (667
    )Interest income
    
    
    611
    
    
    
    518Other income (expense), net
    
    
    184
    
    
    
    (1
    )Net loss
    
    
    (3,369
    )
    
    
    (150
    )Non-cash dividends on Series A preferred stock
    
    
    (60
    )
    
    
    (60
    )Net loss applicable to common stockholders
    
    $
    (3,429
    )
    
    $
    (210
    )Basic and diluted net loss per share applicable to common
stockholders
    
    $
    (0.37
    )
    
    $
    (0.02
    )Shares used to compute basic and diluted net loss per share
applicable to common stockholders
    
    
    9,373
    
    
    
    9,298
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ARDEA BIOSCIENCES, INC.
(formerly IntraBiotics Pharmaceuticals, Inc.)
 
 CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Three Months EndedMarch 31,2007
    
    
    2006Operating activitiesNet loss
    
    $
    (3,369
    )
    
    $
    (150
    )Adjustments to reconcile net loss to net cash used in operating activities:Stock compensation
    
    
    169
    
    
    
    135Depreciation and amortization
    
    
    58
    
    
    
    Gain on disposal of property and equipment
    
    
    (184
    )
    
    
    Change in assets and liabilities:Prepaid expenses and other current assets
    
    
    (821
    )
    
    
    83Other assets
    
    
    
    
    
    
    Accounts payable
    
    
    795
    
    
    
    (2
    )Accrued clinical liabilities
    
    
    
    
    
    
    (91
    )Accrued employee liabilities
    
    
    244
    
    
    
    Other accrued liabilities
    
    
    (417
    )
    
    
    (51
    )Net cash used in operating activities
    
    
    (3,525
    )
    
    
    (76
    )Investing activitiesCapital expenditures
    
    
    (27
    )
    
    
    Proceeds from sale of property and equipment
    
    
    184
    
    
    
    Purchase of short-term investments
    
    
    (35,496
    )
    
    
    (59,712
    )Proceeds from sale or maturity of short-term investments
    
    
    33,993
    
    
    
    57,730Net cash used in investing activities
    
    
    (1,346
    )
    
    
    (1,982
    )Net decrease in cash and cash equivalents
    
    
    (4,871
    )
    
    
    (2,058
    )Cash and cash equivalents at beginning of the period
    
    
    14,779
    
    
    
    2,772Cash and cash equivalents at end of the period
    
    $
    9,908
    
    
    $
    714Supplemental disclosure of non-cash information:Issuance of common stock dividend on Series A preferred stock
    
    $
    (60
    )
    
    $
    (60
    )
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ARDEA BIOSCIENCES, INC.
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 Note 1. Basis of Presentation and Summary of Significant Accounting Policies
    Use of Estimates
   Note 2. Stock-Based Compensation
 Stock Plans
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Adoption of SFAS No. 123 (R)
  Stock Compensation Expense
   Determining Fair Value
 Valuation and amortization method
 Expected Term
 Expected Volatility
 Risk-Free Interest Rate
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Expected
Dividend
 Estimated Forfeiture
  Three Months Ended March 31,2007Risk-free interest rate
    
    
    4.66
    %Volatility
    
    
    0.15Dividend yield
    
    
    0.00
    %Expected life of option
    
    6.1 years
  Stock Options and Awards Activities
  Outstanding OptionsWeighted Average
    
    AggregateNumber of
    
    Exercise
    
    Remaining
    
    IntrinsicShares
    
    Price
    
    Contract Life
    

Value (000s)Balance at December 31, 2006
    
    
    1,345,834
    
    
    $
    5.45
    
    
    
    8.58
    
    
    
    1,763,077Granted
    
    
    734,000
    
    
    $
    4.63
    
    
    
    9.76
    
    
    
    437,740ExercisedForfeitures and cancellationsBalance at March 31, 2007
    
    
    2,079,834
    
    
    $
    5.16
    
    
    
    8.67
    
    
    $
    2,200,817Vested and expected to Vest at March 31, 2007
    
    
    2,079,834
    
    
    $
    5.16
    
    
    
    8.67
    
    
    $
    2,200,817Exercisable at March 31, 2007
    
    
    444,583
    
    
    $
    7.51
    
    
    
    5.8
    
    
    $
    608,827
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Options Outstanding
    
    Options exercisableWeighted-Average
    
    Weighted
    
    
    
    
    
    Weighted-Remaining
    
    Average
    
    
    
    
    
    AverageExercise
    
    Number of
    
    Contractual Life
    
    Exercise
    
    Number of
    
    ExercisePrices
    
    Shares
    
    (years)
    
    Price
    
    Shares
    
    Price$
    2.76
    
    
    
    203,334
    
    
    
    3.76
    
    
    
    2.76
    
    
    
    203,334
    
    
    $
    2.76$
    3.50
    
    
    
    37,500
    
    
    
    8.87
    
    
    
    3.50
    
    
    
    37,500
    
    
    $
    3.50$
    3.90
    
    
    
    865,000
    
    
    
    9.73
    
    
    
    3.90
    
    
    
    10,000
    
    
    $
    3.90$
    4.08
    
    
    
    20,000
    
    
    
    7.76
    
    
    
    4.08
    
    
    
    20,000
    
    
    $
    4.08$
    4.24
    
    
    
    424,000
    
    
    
    9.76
    
    
    
    4.24
    
    
    
    
    
    
    $
    4.24$
    5.20
    
    
    
    190,000
    
    
    
    9.96
    
    
    
    5.20
    
    
    
    
    
    
    $
    5.20$
    5.10
    
    
    
    120,000
    
    
    
    9.96
    
    
    
    5.10
    
    
    
    
    
    
    $
    5.10$
    13.06
    
    
    
    100,000
    
    
    
    7.1
    
    
    
    13.06
    
    
    
    70,833
    
    
    $
    13.06$
    13.93
    
    
    
    40,000
    
    
    
    7.2
    
    
    
    13.93
    
    
    
    36,666
    
    
    $
    13.93$
    16.49
    
    
    
    80,000
    
    
    
    6.84
    
    
    
    16.49
    
    
    
    66,250
    
    
    $
    16.49Totals
    
    
    2,079,834
    
    
    
    8.67
    
    
    
    5.16
    
    
    
    444,583
    
    
    $
    7.51
 Note 3. Comprehensive Income (Loss)
  Three Months EndedMarch 31,2007
    
    
    2006(In thousands)Net loss
    
    $
    (3,369
    )
    
    $
    (150
    )Unrealized gain (loss) on available-for-sale securities
    
    
    (3
    )
    
    
    16Comprehensive loss
    
    $
    (3,372
    )
    
    $
    (134
    )
 Note 4. Net Income (Loss) Per Share
 Earnings Per Share,
 Note 5. Stockholders Equity
   Note 6. Acquisition
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
    
    Fixed assets of approximately $4.3 million,
    
    Intangible assets of approximately $300,000, and
    
    Goodwill of approximately $500,000.
  Note 7. Commitments and contingencies
    Note 8. Legal Proceedings
  Note 9. Recent Accounting Pronouncements
 
    
    In July 2006, the FASB issued Financial Interpretation No. 48, Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48), which
is a change in accounting for income taxes. FIN 48 specifies
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how tax benefits for uncertain
tax positions are to be recognized, measured, and derecognized in financial statements;
requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain
tax positions should be classified on the balance sheet; and provides transition and
interim period guidance, among other provisions. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We do not anticipate that this FASB will have any
material impact on our financial condition or results of operations.
    
    In September 2006, the FASB issued SFAS No. 157 (SFAS 157), Fair Value Measurements.
Among other requirements, SFAS No. 157 defines fair value and establishes a framework for
measuring fair value and also expands disclosure about the use of fair value to measure
assets and liabilities. SFAS No. 157 is effective beginning the first fiscal year after
November 15, 2007. The Company is currently evaluating the impact of SFAS No. 157 on its
financial position and results of operations.
    
    In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB
108), which provides interpretive guidance on how the effects of the carryover or reversal
of prior year misstatements should be considered in quantifying a current year
misstatement. The guidance is applicable for fiscal years ending after November 15, 2006.
We do not anticipate that this SAB will have any material impact on our financial condition
or results of operations.
    
    In September, 2006, the FASB issued SFAS No 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans (FAS 158). FAS 158 requires companies to
fully recognize the obligations associated with single-employer defined benefit pension,
retiree healthcare and other postretirement plans in their financial statements. As we do
not have defined benefit pensions or other postretirement plans, FAS 158 will have no
impact on our financial statements or results of operations. In July 2006, the FASB issued
FASB Staff Position (FSP) No. FAS 13-2, Accounting for a Change or Projected Change in the
Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,
that provides guidance on how a change or a potential change in the timing of cash flows
relating to income taxes generated by a leveraged lease transaction affects the accounting
by a lessor for the lease. This staff position was adopted by the Company on January 1,
2007. The Company does not expect the adoption of this provision to have a material effect
on its financial position, results of operations or cash flows.
    
    In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. The objective of this statement is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS
159, but does not expect adoption to have a material impact on its consolidated financial
position, results of operations or cash flows.
 Note 10. Income Taxes
 Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109,
   
 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 financial statements and related notes appearing elsewhere in this
Form 10-Q and the audited financial statements and notes thereto as of and for the year ended
December 31, 2006 included with our Annual Report on Form 10-K filed with the Securities and
Exchange Commission, or SEC. 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. 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 .
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Overview and Business Strategy
  
    
    800 Series Program.Our 800 Series Program is our lead program and is directed toward
the discovery and development of non-nucleoside reverse transcriptase inhibitors (NNRTIs)
for the potential treatment of HIV. The lead product candidate from this program is
RDEA806. In vitropreclinical tests have shown RDEA806 to be a potent inhibitor of a wide
range of HIV viral isolates, including isolates that are resistant to efavirenz (Sustiva®,
Bristol-Myers Squibb), the most widely prescribed NNRTI, in addition to other currently
available NNRTIs. Based on preclinical data, we anticipate that this compound could be
amenable to a patient-friendly oral dosing regimen, may have limited pharmacokinetic
interactions with other drugs, and may be readily co-formulated with other HIV antiviral
drugs. We initiated a Phase I clinical study of RDEA806 in March 2007 and plan to report
initial results from this study in the third quarter of 2007.
    
    900 Series Program.Our 900 Series Program, which is in preclinical development, is also
directed toward the discovery and development of NNRTIs for the potential treatment of HIV.
The compounds in our 900 Series Program are from a chemical class that is distinct from the
chemical class being investigated in our 800 Series Program. Based on early preclinical
data, we believe that the compounds in our 900 Series Program may have the potential to
share certain of the positive attributes of the compounds in our 800 Series Program, but
also appear to have even greater activity against a wide range of drug-resistant viral
isolates. We plan to select one or more development candidates from this program in the
second quarter of 2007 and to initiate a clinical study in the fourth quarter of 2007.
    
    100 Series Program.Our 100 Series Program, which is in preclinical development, is
directed toward the discovery and development of small-molecule kinase inhibitors for the
potential treatment of both cancer and inflammation. RDEA119 is our lead development
candidate from our 100 Series Program. In vitropreclinical tests have shown RDEA119 to be
a potent and selective inhibitor of mitogen-activated ERK kinase, or MEK, which is believed
to play an important role in cancer cell proliferation, apoptosis and metastasis, as well
as inflammatory cell signaling. In vivopreclinical tests have shown RDEA119 to have potent
anti-tumor activity. In other preclinical tests, RDEA119 and one of our follow-on MEK
inhibitors have been shown to have potent anti-inflammatory activity. Finally, preclinical
data suggest that RDEA119 may have favorable pharmaceutical properties, including the
potential for convenient oral dosing. We plan to initiate a Phase I clinical study of
RDEA119 in the third quarter of 2007.
 Market Opportunity
    10




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Company History
    Transaction with Valeant
     11




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Financial Outlook
   Critical Accounting Policies and Estimates
   Stock-Based Compensation
  12




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Clinical Trial Accruals
  Results of Operations
 Three Months Ended March 31, 2007 and 2006
 Research and Development
  General and Administrative
  Interest Income
  Loss Applicable to Common Stockholders
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Liquidity and Capital Resources
      Contractual Obligations
     14




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Off-Balance Sheet Arrangements
  Indemnifications
  
 ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
  
 ITEM 4. Controls and Procedures
   Disclosure Controls and Procedures
  Scope of the Controls Evaluation
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Future Requirements
  16




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PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A  Risk Factors
  Risks Related to Our Business
 *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 are not necessarily predictive of future results, we
can provide no assurances that, even if our product candidates are successful in preclinical
studies, such product candidates will have favorable results in clinical trials or receive
regulatory approval.
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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.
   
    
    demonstrating sufficient safety and efficacy to obtain regulatory approval to commence a clinical trial;
    
    reaching agreement on acceptable terms with prospective contract research organizations and trial sites;
    
    manufacturing sufficient quantities of a product candidate;
    
    obtaining approval of an IND (investigational new drug) from the FDA or similar foreign approval; and
    
    obtaining institutional review board approval to conduct a clinical trial at a prospective site.
  Delays in the completion of, or the termination of, clinical testing of our current and potential product candidates 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;
    
    failure to conduct clinical trials in accordance with regulatory requirements;
    
    lower than anticipated retention rate of patients in clinical trials;
    
    inspection of the clinical trial operations or trial sites by the FDA or other
regulatory authorities resulting in the imposition of a clinical hold;
    
    lack of adequate funding to continue clinical trials;
    
    negative results of clinical trials;
    
    insufficient supply or deficient quality of drug 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
participants.
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If our internal discovery and development efforts are unsuccessful, we will be required to obtain rights to new products or product candidates from third
parties, which we may not be able to do.
  
    
    we may be unable to purchase or license products or product candidates on terms that
would allow us to make an appropriate return from resulting products;
    
    competitors may be unwilling to assign or license product or product candidate rights to
us (in particular, if we are not able to successfully advance the further development of
the product candidates we acquired from Valeant); or
    
    we may be unable to identify suitable products or product candidates within, or
complementary to, our areas of interest relating to the treatment of HIV, cancer and
inflammatory diseases.
  Even if we successfully initiate and complete clinical trials for any product candidate, there are no assurances that we will be able to submit, or obtain FDA approval
of, a new drug application.
  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;
    
    relative convenience and ease of administration;
    
    the prevalence and severity of any adverse side effects;
    
    availability of alternative treatments;
    
    pricing and cost effectiveness; and
    
    our ability to obtain 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.
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*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.
  
    
    fund our research, discovery and development programs;
    
    advance our product candidates into and through clinical trials and the regulatory review and approval process;
    
    establish and maintain manufacturing, sales and marketing operations;
    
    commercialize our product candidates, if any, that receive regulatory approval; and
    
    acquire rights to products or product candidates, technologies or businesses.
  
    
    the rate of progress and cost of our research and development activities;
    
    whether Valeant terminates our research services agreement after the first year;
    
    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.
  Raising additional funds by issuing securities or through collaboration and licensing arrangements may cause dilution to existing stockholders, restrict our operations
or require us to relinquish proprietary rights.
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If we fail to establish additional research and development capability internally or through collaborations, we may not generate sufficient revenue to attain
profitability.
  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.
  If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market any products we may develop, we may be
unable to generate product revenue.
  We will need to increase the size of our organization, and we may encounter difficulties managing our growth, which could adversely affect our results of
operations.
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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 research or commercialization 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;
    
    whether Valeant terminates our research services agreement after the first year;
    
    our addition or termination of research programs or funding support;
    
    the status of development of our product candidates, including results of preclinical studies and any future clinical trials;
    
    variations in the level of expenses related to 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 recommendation of additional compounds for preclinical development; and
    
    fluctuations in the stock prices of other companies in the biotechnology and
pharmaceuticals industries and in the financial markets generally.
  If we engage in any acquisition, we will incur a variety of costs, and we may never realize the
anticipated benefits of the acquisition.
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
    
    exposure to unknown liabilities;
    
    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;
    
    difficulty and cost 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.
  Earthquake damage to our facilities could delay our research and development efforts and adversely
affect our business.
  Valeants exercise of its option to repurchase commercialization rights in territories outside the
United States and Canada could limit the market for our products 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 achieve and 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.
   
    
    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 third 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 product candidates 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.
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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.
  Many 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 HIV, cancer or inflammatory diseases that are approved
faster, marketed better or demonstrated to be 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 pricing of our product candidates acceptable to the government, 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.
  Our business and operations would suffer in the event of system failures.
  Risks Related to Our Common Stock
 The delisting of our common stock in October 2005 may be adversely affecting the price and
liquidity of our common stock.
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* Directors, executive officers, principal stockholders and affiliated entities beneficially own
or control at least 68% of our outstanding voting common and preferred stock and may be able to
exert control over our activities, and the results of our operations and financial condition may
suffer.
  * Future sales of our common stock may cause our stock price to decline.
  * The holders of our Series A preferred stock have a liquidation preference and other rights that
are adverse to the interests of our common stockholders and could be detrimental to our business.
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Anti-takeover provisions in our charter documents and under Delaware law may make it more
difficult to acquire us.
  
    
    provide for a classified Board of Directors of which approximately one-third of the directors will be elected each year;
    
    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.
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
  
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
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SIGNATURES
 th
 ARDEA BIOSCIENCES, INC.By:
    
    /s/ BARRY D. QUART, PHARM.D.

Barry D. Quart, Pharm.D.Chief Executive OfficerBy:
    
    /s/ DENIS HICKEY

Denis HickeyChief Financial Officer
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EXHIBIT INDEX
 Exhibit
    
    Document Description2.1
    
    Asset Purchase Agreement with Valeant Research & Development and Valeant Pharmaceuticals International dated
December 21, 2006.(1)3.1
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation; and Amended and
Restated Certificate of Incorporation.(2)3.2
    
    Amended and Restated Bylaws.(3)3.3
    
    Certificate of Amendment to Amended and Restated Certificate of Incorporation.(4)3.4
    
    Certificate of Designation filed with the Delaware Secretary of State on May 1, 2003.(4)3.5
    
    Certificate of Ownership and Merger filed with the Delaware Secretary of State December 21, 2006. (1)4.1
    
    Amended and Restated Investor Rights Agreement dated October 15, 1999.(5)4.2
    
    Form of Stock Purchase Agreement by and between the Company and each selling stockholder, dated
January 29, 2002.(6)4.3
    
    Form of Preferred Stock and Warrant Purchase Agreement, dated February 5, 2003, as amended on
February 11, 2003.(7)4.4
    
    Form of Second Amendment to Preferred Stock and Warrant Purchase Agreement of February 5, 2003,
dated April 10, 2003.(8)4.5
    
    Form of Warrant issued by the Company pursuant to Preferred Stock and Warrant Purchase Agreement of
February 5, 2003, as amended of February 11, 2003 and April 10, 2003.(8)4.6
    
    Form of Common Stock and Warrant Purchase Agreement, dated October 6, 2003.(9)4.7
    
    Form of Warrant issued by the Company pursuant to the Common Stock and Warrant Purchase Agreement of
October 6, 2003.(9)10.1
    
    Employment Agreement with Christopher W. Krueger.*31.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rules 13a-14(a) or
15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.*32.1
    
    Certifications of Chief Executive Officer and Chief Financial Officer as 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).*
 
 *
    
    Filed herewith.
    
    We have applied for confidential treatment of certain provisions of this exhibit with the
Securities and Exchange Commission. The confidential portions of this exhibit are marked by an
asterisk and have been omitted and filed separately with the Securities and Exchange
Commission pursuant to our request for confidential treatment.(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. 000-29993) filed with the Securities and
Exchange Commission on November 12, 2003.(3)
    
    Incorporated by reference to our Form 10-Q (File No. 000-29993) filed with the Securities and
Exchange Commission on May 12, 2005.(4)
    
    Incorporated by reference to our Form 10-K (File No. 000-29993) filed with the Securities and
Exchange Commission on March 10, 2005.(5)
    
    Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-95461)
initially filed with the Securities and Exchange Commission on January 27, 2000, as
subsequently amended.(6)
    
    Incorporated by reference to our Registration Statement on Form S-3 (File No. 333-82934)
filed with the Securities and Exchange Commission on February 15, 2002.(7)
    
    Incorporated by reference to Appendix B to the Definitive Proxy Statement for the Special
Meeting of Stockholders(File No. 000-29993) filed with the Securities and Exchange Commission on March 3, 2003.(8)
Incorporated by reference to our Form 10-Q (File No. 000-29993) filed with the Securities and
Exchange Commission on May 14, 2003.(9)
    
    Incorporated by reference to our Form 8-K (File No. 000-29993) filed with the Securities and
Exchange Commission on October 9, 2003. 31