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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 1934
 For the period ended March 31, 2008
 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.
 (Exact name of registrant as specified in its charter)
 DELAWARE
(State or other jurisdiction of incorporation or organization)
    
    94-3200380
(I.R.S. Employer Identification Number)
 4939 Directors Place
San Diego, CA 92121
   þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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TABLE OF CONTENTS
 ARDEA BIOSCIENCES, INC.
 FORM 10-Q
 QUARTER ENDED MARCH 31, 2008
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATION
    
    3Item 1. Financial Statements
    
    3Condensed Balance Sheets as of March 31, 2008 (unaudited) and December 31, 2007
    
    3Condensed Statements of Operations for the Three Months Ended March 31, 2008 and 2007 (unaudited)
    
    4Condensed
Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007 (unaudited)
    
    5Notes to Condensed Financial Statements (unaudited)
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    9Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    14Item 4. Controls and Procedures
    
    14PART II. OTHER INFORMATION
    
    15Item 1. Legal Proceedings
    
    15Item 1A. Risk Factors
    
    15Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    28Item 3. Defaults Upon Senior Securities
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    28Item 5. Other Information
    
    28Item 6. Exhibits
    
    28SIGNATURES
    
    29EXHIBIT INDEX
    
    30EXHIBIT 31.1EXHIBIT 32.1




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PART 1. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 
 ARDEA BIOSCIENCES, INC.
(formerly IntraBiotics Pharmaceuticals, Inc.)
CONDENSED BALANCE SHEETS
(In thousands, except share and par value data)
 March 31,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,297
    
    
    $
    46,384Short-term investments
    
    
    38,867
    
    
    
    19,831Receivables
    
    
    401
    
    
    
    1,224Prepaid expenses and other current assets
    
    
    398
    
    
    
    210Total current assets
    
    
    56,963
    
    
    
    67,649Property and equipment, net
    
    
    2,084
    
    
    
    879Other assets
    
    
    321
    
    
    
    312Total assets
    
    $
    59,368
    
    
    $
    68,840LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,961
    
    
    $
    2,200Accrued clinical liabilities
    
    
    1,589
    
    
    
    456Accrued payroll and employee liabilities
    
    
    1,145
    
    
    
    1,612Other accrued liabilities
    
    
    834
    
    
    
    833Total current liabilities
    
    
    6,529
    
    
    
    5,101Contingencies (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,
2008 and December 31, 2007
    
    
    1,634
    
    
    
    1,634Common stock, $0.001 par value: 70,000,000 shares authorized at March
31, 2008 and December 31, 2007; 13,354,464 and 13,312,686 shares outstanding at
March 31, 2008 and December 31, 2007, respectively
    
    
    13
    
    
    
    13Additional paid-in capital
    
    
    324,933
    
    
    
    323,566Accumulated other comprehensive income
    
    
    183
    
    
    
    14Accumulated deficit
    
    
    (273,924
    )
    
    
    (261,488
    )Total stockholders equity
    
    
    52,839
    
    
    
    63,739Total liabilities and stockholders equity
    
    $
    59,368
    
    
    $
    68,840
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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 31,2008
    
    
    2007Collaboration revenues
    
    $
    260
    
    
    $
    893Operating expenses:Research and development
    
    
    9,745
    
    
    
    3,513General and administrative
    
    
    3,632
    
    
    
    1,544Total operating expenses
    
    
    13,377
    
    
    
    5,057Operating loss
    
    
    (13,117
    )
    
    
    (4,164
    )Interest income
    
    
    607
    
    
    
    611Other income
    
    
    135
    
    
    
    184Net loss
    
    
    (12,375
    )
    
    
    (3,369
    )Non-cash dividends on Series A preferred stock
    
    
    (60
    )
    
    
    (60
    )Net loss applicable to common stockholders
    
    $
    (12,435
    )
    
    $
    (3,429
    )Basic and diluted net loss per share applicable to common
stockholders
    
    $
    (0.93
    )
    
    $
    (0.37
    )Shares used to compute basic and diluted net loss per share
applicable to common stockholders
    
    
    13,337
    
    
    
    9,373
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ARDEA BIOSCIENCES, INC.
(formerly IntraBiotics Pharmaceuticals, Inc.)
 
 CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007Operating activitiesNet loss
    
    $
    (12,375
    )
    
    $
    (3,369
    )Adjustments to reconcile net loss to net cash used in operating activities:Stock-based compensation expense
    
    
    1,015
    
    
    
    169Stock compensation arising from Employee Stock Purchase Plan
    
    
    95
    
    
    
    Depreciation and amortization
    
    
    89
    
    
    
    58Gain on disposal of property and
equipment
    
    
    
    
    
    
    (184
    )Change in assets and liabilities:Receivables
    
    
    823
    
    
    
    Prepaid expenses and other current
assets
    
    
    (188
    )
    
    
    (821
    )Other assets
    
    
    (9
    )
    
    
    Accounts payable
    
    
    761
    
    
    
    795Accrued clinical liabilities
    
    
    1,133
    
    
    
    Accrued payroll and employee
liabilities
    
    
    (467
    )
    
    
    244Other accrued liabilities
    
    
    1
    
    
    
    (417
    )Net cash used in operating activities
    
    
    (9,122
    )
    
    
    (3,525
    )Investing activitiesCapital expenditures
    
    
    (1,294
    )
    
    
    (27
    )Proceeds from sale of property and
equipment
    
    
    
    
    
    
    184Purchase of short term investments
    
    
    (21,327
    )
    
    
    (35,496
    )Proceeds from sale or maturity of short-term investments
    
    
    2,459
    
    
    
    33,993Net cash used in investing activities
    
    
    (20,162
    )
    
    
    (1,346
    )Financing
activitiesProceeds from issuance of common stock, net of issuance costs
    
    
    96
    
    
    
    Proceeds
from issuance of common stock upon exercise of options
    
    
    101
    
    
    
    Net cash provided by financing activities
    
    
    197
    
    
    
    Net decrease in cash and cash
equivalents
    
    
    (29,087
    )
    
    
    (4,871
    )Cash and cash equivalents at
beginning of period
    
    
    46,384
    
    
    
    14,779Cash and cash equivalents at end of
period
    
    $
    17,297
    
    
    $
    9,908Supplemental 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
   Note 2. Summary of Significant Accounting Policies
 Revenue Recognition
  Use of Estimates
  Stock-Based Compensation
  Note 3. Stock-Based Compensation
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Note 4. Comprehensive Loss
  Three Months Ended March 31,2008
    
    
    2007Net loss
    
    $
    (12,375
    )
    
    $
    (3,369
    )Unrealized gain/(loss) on available-for-sale securities
    
    
    168
    
    
    
    (3
    )Comprehensive loss
    
    $
    (12,207
    )
    
    $
    (3,372
    )
 Note 5. Net Loss Per Share
 Earnings Per Share,
 Note 6. Stockholders Equity
    Note 7. Contingencies
 nd nd
 Note 8. Recent Accounting Pronouncements
 
    
    In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities(SFAS 159). SFAS 159 amends SFAS 115 and permits fair
value measurement of financial instruments and certain other items. SFAS 159 is effective
beginning the first fiscal year that begins after November 15, 2007. The adoption of this
statement did not have a material impact on our financial position and results of
operations.
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
    
    In June 2007, the FASB ratified EITF Issue No. 07-3, Accounting for Non-refundable
Advance Payments for Goods or Services to Be Used in Future Research and Development
Activities(EITF 07-3). EITF 07-3 requires non-refundable advance payments for goods and
services to be used in future research and development (R&D) activities to be recorded as
assets and the payments to be expensed when the R&D activities are performed. EITF 07-3
applies prospectively for new contractual arrangements entered into in fiscal years
beginning after December 15, 2007. The adoption of EITF 07-3 did not have a material
impact on our financial position or results of operations.
    
    In December 2007, the FASB issued Summary of Statement No. 141 (revised 2007),which
replaces SFAS No. 141, Business Combinations, to improve the relevance and comparability of
the information that a reporting entity provides in its financial reports about a business
combination and its effects. Statement No. 141 retains the fundamental requirements that the
acquisition method of accounting (which SFAS No. 141 called the purchase method) be used for
all business combinations and for an acquirer to be identified for each business
combination. This statement requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition
date, measured at their fair values as of that date, with limited exceptions. This replaces
SFAS No. 141s cost-allocation process, which required the cost of an acquisition to be
allocated to the individual assets acquired and liabilities assumed based on their estimated
fair values. SFAS No. 141s guidance resulted in not recognizing some assets and liabilities
at the acquisition date, and it also resulted in measuring some assets and liabilities at
amounts other than their fair values at the acquisition date. This Summary Statement applies
prospectively to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008; it
may not be applied before that date. We have not yet determined the effect, if any, of the
adoption of this statement on our future financial position or results of operations.
    
    In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51(SFAS No. 160), which establishes
accounting and reporting standards for the noncontrolling interest (minority interest) in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. The amount of net income
attributable to the noncontrolling interest is to be included in consolidated net income on
the face of the income statement. SFAS No. 160 also includes expanded disclosure
requirements regarding the interests of the parent and its noncontrolling interest. SFAS No.
160 is effective for fiscal years, and interim periods within those fiscal years, beginning
on or after December 15, 2008; it may not be applied before that date. We have not yet
determined the effect, if any, of the adoption of this statement on our future financial
position or results of operations.
    
    In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities(SFAS 161). SFAS 161 is intended to improve the current disclosure
framework in SFAS 133 by requiring enhanced disclosures about an entitys derivative and
hedging activities, and how they affect an entitys financial position, financial
performance, and cash flows. SFAS 161 is effective for fiscal years that begin after
November 15, 2008. We do not expect that the adoption of this statement will have a
material impact on our financial position and results of operations.
 Note 9. Income Taxes
 Accounting
for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109,
    Note 10. Subsequent Event
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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 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, 2007 included in our Annual Report
for the year ended December 31, 2007 filed with the Securities and Exchange Commission, or SEC on
March 24, 2008.
 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 statusRDEA806
    
    HIV
    
    Phase 2a2nd generation NNRTI (RDEA427)
    
    HIV
    
    Phase 0*RDEA806
    
    Gout
    
    Entering Phase 2RDEA119
    
    Cancer
    
    Phase 1RDEA119
    
    Inflammation
    
    Phase 12nd generation MEK
inhibitor (RDEA436)
    
    Cancer/Inflammation
    
    Phase 0*
 
 *
    
    First in human micro-dose pharmacokinetic study 
    
    RDEA806 (HIV).RDEA806 is our lead non-nucleoside reverse
transcriptase inhibitor (NNRTI) for the potential treatment of HIV. 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 both preclinical and clinical 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 successfully completed Phase 1 single-ascending-dose, multiple-ascending-dose, food effect,
and drug-interaction clinical studies of RDEA806 in August 2007 and initiated a Phase 2a
proof-of-concept trial in the fourth quarter of 2007. In this Phase 2a, randomized, double-blind,
placebo-controlled monotherapy trial, we are evaluating the antiviral activity, pharmacokinetics, safety and
tolerability of RDEA806 versus placebo over seven days of treatment in HIV-positive patients who are naive to
antiretroviral treatment. Nine out of 12 patients in each cohort will receive RDEA806; the
remaining three will receive placebo. The primary efficacy endpoint is the change from
baseline in plasma viral load. Preliminary results, which include those from the first ten
evaluable patients in the 400 mg twice daily cohort and the first eight evaluable patients in
the 600 mg once daily cohort, showed the following:
 
    
    Patients receiving 400 mg twice daily had a 2.0 log placebo-adjusted
mean reduction in plasma viral load;
    
    Patients receiving 600 mg once daily had a 1.7 log placebo-adjusted
mean reduction in plasma viral load;
    
    There were no serious adverse events reported in either cohort;
    
    There were no ECG-related adverse events reported in either cohort;
    
    There were no discontinuations in either cohort;
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
    
    None of the typical side effects associated with other NNRTIs were
reported in either cohort, such as drug-related rash or abnormal
dreams; and
    
    The percentage of patients with adverse events that were possibly
drug-related was lower in patients receiving drug than in those
receiving placebo.
 Based on these preliminary results, further cohorts of patients will be evaluated in the Phase
2a study, and we plan to initiate a Phase 2b, dose-ranging study in HIV-positive patients who
are naive to antiretroviral treatment in the second quarter of 2008,
in which we will evaluate RDEA806 in standard combination therapy
over six months of treatment.
    
    RDEA427 (HIV).The lead compound in our 2nd
Generation NNRTI Program, RDEA427, is from a chemical
class that is distinct from the RDEA806 chemical
class. Based on early preclinical data, we believe
that RDEA427 may have the potential to share certain
of the positive attributes of RDEA806, but also
appears to have even greater activity against a wide
range of drug-resistant viral isolates. We evaluated
RDEA427 in a Phase 0 study in the first quarter of
2008 and have selected RDEA427 as a development
candidate.
    
    RDEA806 (Gout).In a Phase 1 multiple-ascending-dose
study, RDEA806 demonstrated statistically significant,
exposure-dependent reductions in serum uric acid in
patients dosed for either 10 or 14 days. At the dose
that resulted in the highest drug exposure, there was
a 50.9% placebo-adjusted mean reduction in serum uric
acid. We plan to initiate a Phase 2 dose-ranging study
of RDEA806 in patients with hyperuricemia and a
history of gout in the second quarter of 2008. We are also
investigating the action moeity and mechanism of
action responsible for this pharmacological effect.
    
    RDEA119 (Cancer).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. In vivo
preclinical tests have shown RDEA119 to have potent
anti-tumor activity. Preclinical data also suggest
that RDEA119 may have favorable pharmaceutical
properties, including the
potential for convenient oral dosing. We initiated a Phase 1 study of
RDEA119 in advanced cancer patients in November 2007. Once the maximum
tolerated dose is reached, we will look at activity in hepatocellular,
sarcoma, glioma, non-small cell lung, colon, pancreatic or thyroid
cancer or melanoma.
    
    RDEA119 (Inflammation).In vitropreclinical tests have shown
RDEA119 to be a potent and selective inhibitor of MEK, which, in
addition to its potential anti-cancer properties, is also believed to
play an important role in inflammatory cell signaling. In vivo
preclinical tests have shown RDEA119 to have potent anti-inflammatory
activity. Preclinical data also suggest that RDEA119 may have
favorable pharmaceutical properties, including the potential for
convenient oral dosing. We initiated a Phase 1 study of RDEA119 in
healthy volunteers in March 2008, which will include the evaluation of
RDEA119s effect on pro-inflammatory biomarkers.
    
    RDEA436 (Inflammation).The lead compound in our 2nd Generation MEK
Inhibitor Program, RDEA436, is from a chemical class that is distinct
from the RDEA119 chemical class. Based on early preclinical data, we
believe that RDEA436 may have the potential to share certain of the
positive attributes of RDEA119, but also appears to have even greater
potency. We evaluated RDEA436 in a Phase 0 study in the first quarter
of 2008 and have selected RDEA436 as a development candidate.
 Company History
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Recent Accounting Pronouncements
  Critical Accounting Policies and Estimates
  11




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Stock-Based Compensation
    Expected Term
 Expected Volatility
 Risk-Free Interest Rate
 Expected Dividend
  Contract Accruals
  Results of Operations
 Three Months Ended March 31, 2008 and 2007
 Revenues
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Research and Development Expenses
  General and Administrative Expenses
  Interest Income
  Loss Applicable to Common Stockholders
  Liquidity and Capital Resources
     13




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Indemnifications
  
 ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
  
 ITEM 4. Controls and Procedures
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PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 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. 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 risk factors set forth below with an asterisk (*) next to the
title contain changes to the description of the risk factors associated with our business
previously disclosed in Item 1A of our annual report on Form 10-K for the year ended December 31,
2007, filed with the SEC on March 24, 2008.
 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 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.
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
    
    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.*
  
    
    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 master services agreement after the first year or reduces the amount of services
that we provide to Valeant;
    
    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.
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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.
  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 master services agreement after the first year or
reduces the amount of services that we provide 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;
    
    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.
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If we engage in any acquisition, we will incur a variety of costs, and we may never realize
the anticipated benefits of the acquisition.
  
    
    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.
  Moving our research and development operations was costly and may be disruptive.
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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.
  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.
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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, including
gout, 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.
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Risks Related to Our Common Stock
 Directors, executive officers, principal stockholders and affiliated entities beneficially own
or control approximately 75% of our outstanding voting common stock and together
control our activities.*
  Future sales of our common stock may cause our stock price to decline.*
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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.
  
 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
 9th day of May 2008
 ARDEA BIOSCIENCES, INC.By:
    /s/ BARRY D. QUART, PHARM.D.Barry D. Quart, Pharm.D.Chief Executive Officer and
Principal Financial Officer 29




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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
    
    Amended and Restated Certificate of
Incorporation and Certificate of Amendment of 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)3.6
    
    Certificate of Amendment to Amended and Restated Certificate of Incorporation.(3)4.1
    
    Form of Warrant issued by the
Company pursuant to the Common Stock and Warrant Purchase Agreement
of October 6, 2003.4.2
    
    Registration Rights Agreement
dated December 19, 2007, by and among Ardea Biosciences, Inc.
and the Purchasers listed on the signature pages thereto.4.3
    
    Registration Rights Agreement dated
January 4, 2008, by and among Ardea Biosciences, Inc. and the
stockholders listed on the Signature pages thereto.31.1
    
    Certification of Chief Executive Officer and Principal 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 Principal 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-K (File No. 000-29993) filed with the Securities and
Exchange Commission on March 31, 2003.(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 10-Q (File No. 000-29993) filed with the Securities and
Exchange Commission on November 12, 2003. 30