##### 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, 2009
 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
    
    94-3200380(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)4939 Directors PlaceSan Diego, CA
    
    92121(Address of principal executive offices)
    
    (Zip Code)
 (858) 652-6500
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ




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##### 



ARDEA BIOSCIENCES, INC.
 FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED September 30, 2009
 TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONITEM 1. Condensed Consolidated Financial Statements  UnauditedCondensed Consolidated Balance Sheets as of September 30, 2009 and
December 31, 2008
    
    
    1Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 2009 and 2008
    
    
    2Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2009 and 2008
    
    
    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
    
    
    18ITEM 4. Controls and Procedures
    
    
    18PART II. OTHER INFORMATIONITEM 1A. Risk Factors
    
    
    18ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33ITEM 6. Exhibits
    
    
    34SIGNATURES
    
    
    35EX-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 31,2009
    
    
    2008(Unaudited)
    
    
    (See Note)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    30,232
    
    
    $
    41,551Short-term investments, available-for-sale
    
    
    29,357
    
    
    
    16,192Receivables
    
    
    1,420
    
    
    
    384Prepaids and other current assets
    
    
    441
    
    
    
    237Total current assets
    
    
    61,450
    
    
    
    58,364Property and equipment, net
    
    
    2,072
    
    
    
    2,310Other assets
    
    
    599
    
    
    
    801Total assets
    
    $
    64,121
    
    
    $
    61,475LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,232
    
    
    $
    2,260Accrued clinical liabilities
    
    
    2,055
    
    
    
    2,278Accrued payroll and employee liabilities
    
    
    1,713
    
    
    
    1,758Accrued restructuring
    
    
    123
    
    
    
    Other accrued liabilities
    
    
    641
    
    
    
    545Deferred revenue
    
    
    21,809
    
    
    
    Current portion of long-term debt
    
    
    2,909
    
    
    
    2,060Total current liabilities
    
    
    30,482
    
    
    
    8,901Deferred rent
    
    
    143
    
    
    
    84Non-current portion of long-term debt
    
    
    4,059
    
    
    
    6,132Other long-term liabilities
    
    
    400
    
    
    
    400Commitments and contingencies (see Note 6)Stockholders equity:Common stock
    
    
    18
    
    
    
    17Additional paid-in capital
    
    
    370,080
    
    
    
    362,345Accumulated other comprehensive income
    
    
    19
    
    
    
    139Accumulated deficit
    
    
    (341,080
    )
    
    
    (316,543
    )Total stockholders equity
    
    
    29,037
    
    
    
    45,958Total liabilities and stockholders equity
    
    $
    64,121
    
    
    $
    61,475
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ARDEA BIOSCIENCES, INC.
 
 Condensed Consolidated Statements of Operations
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:License fees
    
    $
    8,178
    
    
    $
    
    
    
    $
    13,191
    
    
    $
    Sponsored research
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    260Reimbursable research and
development expenses
    
    
    991
    
    
    
    
    
    
    
    1,490
    
    
    
    Total revenues
    
    
    9,169
    
    
    
    
    
    
    
    14,681
    
    
    
    260Operating expenses:Research and development
    
    
    8,999
    
    
    
    11,459
    
    
    
    30,720
    
    
    
    34,351General and administrative
    
    
    2,404
    
    
    
    3,043
    
    
    
    7,807
    
    
    
    9,723Total operating expenses
    
    
    11,403
    
    
    
    14,502
    
    
    
    38,527
    
    
    
    44,074Loss from operations
    
    
    (2,234
    )
    
    
    (14,502
    )
    
    
    (23,846
    )
    
    
    (43,814
    )Other income (expense):Interest income
    
    
    65
    
    
    
    293
    
    
    
    320
    
    
    
    1,314Interest expense
    
    
    (320
    )
    
    
    (10
    )
    
    
    (1,032
    )
    
    
    (11
    )Other income, net
    
    
    18
    
    
    
    (4
    )
    
    
    21
    
    
    
    182Total other income (expense)
    
    
    (237
    )
    
    
    279
    
    
    
    (691
    )
    
    
    1,485Net loss
    
    
    (2,471
    )
    
    
    (14,223
    )
    
    
    (24,537
    )
    
    
    (42,329
    )Non-cash dividends on Series A preferred
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60
    )Net loss applicable to common stockholders
    
    $
    (2,471
    )
    
    $
    (14,223
    )
    
    $
    (24,537
    )
    
    $
    (42,389
    )Basic and diluted net loss per share
applicable to common stockholders
    
    $
    (0.13
    )
    
    $
    (0.95
    )
    
    $
    (1.36
    )
    
    $
    (2.98
    )Shares used in computing basic and
diluted net loss per share applicable to
common stockholders
    
    
    18,327
    
    
    
    15,023
    
    
    
    18,062
    
    
    
    14,239
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ARDEA BIOSCIENCES, INC.
 
 Condensed Consolidated Statements of Cash Flows
 Nine Months EndedSeptember 30,2009
    
    
    2008Operating activities:Net loss
    
    $
    (24,537
    )
    
    $
    (42,329
    )Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:Share-based compensation
    
    
    4,345
    
    
    
    3,680Depreciation
    
    
    499
    
    
    
    380Amortization of debt discount and debt issuance costs
    
    
    334
    
    
    
    Loss (gain) on disposal of property and equipment
    
    
    16
    
    
    
    (16
    )Deferred rent
    
    
    59
    
    
    
    Amortization of premium on short-term investments
    
    
    206
    
    
    
    64Realized gain on short-term investments
    
    
    (24
    )
    
    
    Change in operating assets and liabilities:Receivables
    
    
    (1,036
    )
    
    
    833Prepaids and other current assets
    
    
    (204
    )
    
    
    (73
    )Deferred revenue
    
    
    21,809
    
    
    
    Accounts payable
    
    
    (1,028
    )
    
    
    (138
    )Accrued clinical liabilities
    
    
    (223
    )
    
    
    1,204Accrued payroll and employee liabilities
    
    
    (45
    )
    
    
    710Accrued restructuring
    
    
    123
    
    
    
    Other accrued liabilities
    
    
    96
    
    
    
    (223
    )Net cash provided by (used for) operating activities
    
    
    390
    
    
    
    (35,908
    )Investing activities:Purchases of short-term investments
    
    
    (42,833
    )
    
    
    (33,920
    )Proceeds from sale or maturity of short-term investments
    
    
    29,366
    
    
    
    24,370Proceeds from sale of property and equipment
    
    
    11
    
    
    
    56Purchases of property and equipment
    
    
    (288
    )
    
    
    (1,730
    )Net cash used for investing activities
    
    
    (13,744
    )
    
    
    (11,224
    )Financing activities:Proceeds from issuance of notes payable
    
    
    
    
    
    
    250Payments on long-term debt
    
    
    (1,356
    )
    
    
    (26
    )Net proceeds from issuance of common stock
    
    
    3,391
    
    
    
    722Net cash provided by financing activities
    
    
    2,035
    
    
    
    946Net decrease in cash and cash equivalents
    
    
    (11,319
    )
    
    
    (46,186
    )Cash and cash equivalents at beginning of period
    
    
    41,551
    
    
    
    46,384Cash and cash equivalents at end of period
    
    $
    30,232
    
    
    $
    198Supplemental schedule of non-cash information:Net unrealized loss on short-term investments
    
    $
    (120
    )
    
    $
    (30
    )Issuance of common stock dividend on Series A preferred stock
    
    $
    
    
    
    $
    (60
    )
  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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Net Loss Per Share
   Comprehensive Loss
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    2,471
    
    
    $
    14,223
    
    
    $
    24,537
    
    
    $
    42,329Net unrealized loss
on short-term
investments
    
    
    
    
    
    
    73
    
    
    
    120
    
    
    
    30Comprehensive net loss
    
    $
    2,471
    
    
    $
    14,296
    
    
    $
    24,657
    
    
    $
    42,359
 Recent Accounting Pronouncements
 Generally Accepted Accounting Principles 
Overall FASB Accounting Standards Codification
 Fair Value Measurements and
Disclosures  Overall
 5




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Fair Value Measurements and Disclosures  Overall  Implementation
Guidance and Illustrations
 Investments  Debt and Equity
Securities  Overall  Transition and Open Effective Date Information
 Fair Value Measurements and
Disclosures  Overall  Transition and Open Effective Date Information
 Financial Instruments  Overall 
Transition and Open Effective Date Information
 Subsequent Events  Overall
 Fair Value Measurements and
Disclosures (Topic 820) Fair Value
Measurements and Disclosures  Overall,
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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.
  Fair Value Measurements at Reporting Date UsingQuoted prices in
    
    Significantactive markets
    
    other
    
    SignificantBalance at
    
    for identical
    
    observable
    
    unobservableSeptember 30,
    
    assets
    
    inputs
    
    inputs2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Money market funds
    
    $
    29,990
    
    
    $
    29,990
    
    
    $
    
    
    
    $
    United States
government and agency
obligations
    
    
    23,213
    
    
    
    6,601
    
    
    
    16,612
    
    
    
    United States corporate
debt securities
    
    
    4,151
    
    
    
    
    
    
    
    4,151
    
    
    
    Foreign commercial paper
    
    
    1,993
    
    
    
    
    
    
    
    1,993
    
    
    
    Total
    
    $
    59,347
    
    
    $
    36,591
    
    
    $
    22,756
    
    
    $
    
   7




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4. Bayer Relationship
      8




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5. Restructuring
     6. Commitments and Contingencies
  9




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7. Long-term Debt
  Notes Payable
    
    
    Capital LeaseYears ended December 31,2009 (remaining three months of the year)
    
    $
    869
    
    
    $
    292010
    
    
    3,475
    
    
    
    1162011
    
    
    3,875
    
    
    
    782012
    
    
    46
    
    
    
    2013
    
    
    45
    
    
    
    Thereafter
    
    
    64
    
    
    
    Total
    
    
    8,374
    
    
    
    223Less unamortized discount
    
    
    (187
    )
    
    
    Less amount representing interest
    
    
    (1,429
    )
    
    
    (13
    )Total balance
    
    
    6,758
    
    
    
    210Less current portion
    
    
    (2,802
    )
    
    
    (107
    )Noncurrent portion of long-term debt
    
    $
    3,956
    
    
    $
    103
 8. Stockholders Equity
 Share-Based Compensation
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Research and development
    
    $
    473
    
    
    $
    437
    
    
    $
    1,826
    
    
    $
    1,401General and administrative
    
    
    821
    
    
    
    862
    
    
    
    2,519
    
    
    
    2,279Share-based compensation
expense included in
operating expenses
    
    $
    1,294
    
    
    $
    1,299
    
    
    $
    4,345
    
    
    $
    3,680
  September 30,Options:
    
    2009
    
    2008Risk-free interest rate
    
    
    2.2
    %
    
    
    3.8
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    77.9
    %
    
    
    72.6
    %Expected life (years)
    
    
    5.5-6.1
    
    
    
    5.2-6.3
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9. Income Taxes
    10. Subsequent Events
  
 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, 2008 included in our Annual Report on Form 10-K
for the year ended December 31, 2008 filed with the Securities and Exchange Commission, or SEC, on
March 13, 2009.
 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 .
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Overview and Business Strategy
  Product Portfolio
 Product Candidate
    
    Target Indication
    
    Development StatusRDEA594
    
    Gout
    
    Phase 2b ongoingRDEA684
    
    Gout
    
    Preclinical development ongoingRDEA119
    
    Cancer
    
    Phase 1 and Phase 1/2 ongoingRDEA806
    
    HIV
    
    Phase 2a completedRDEA427
    
    HIV
    
    Phase 0* completed
 
 *
    
    First-in-human micro-dose pharmacokinetic study in normal healthy volunteers. GOUT
    CANCER
 In vivo in vitro in vivo ®
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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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Results of Operations
 Three and Nine Months Ended September 30, 2009 and 2008
 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
  
 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,
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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, 2008 and our
subsequent filings with the SEC. Risk factors containing such revisions are marked with an
asterisk.
 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.
  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.
  19




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
    
    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 Investigational New Drug application (IND) from the
United States Food and Drug Administration (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.
  The termination of, or delays in the completion 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 or requests by them 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;
 
    
    lack of adequate funding to continue clinical trials;
 
    
    negative results of clinical trials;
 
    
    changes to the protocol of clinical trials;
 
    
    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.
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If our internal development efforts 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.
  
    
    we may be unable 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 (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 gout, cancer and HIV.
  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 regulatory 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 of our products;
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
    
    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
 
    
    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.
 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 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 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;
 22




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
    
    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.
  23




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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 third parties to develop and commercialize selected product
candidates and to provide substantially all of our revenues.
     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 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
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
    
    slowing or cessation of a collaborators development or commercialization efforts with
respect to our 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.
  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.
  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.
  25




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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;
    
    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.
  If we engage in 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 the 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;
 
    
    difficulty and cost in combining and integrating the operations and personnel of any
acquired businesses with our operations and personnel;
 26




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##### Table of Contents




    
    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 (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.*
  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.
  27




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##### Table of Contents



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;
 28




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##### Table of Contents




    
    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.
     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;
 29




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##### Table of Contents




    
    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.
  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.
 30




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##### Table of Contents



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.
  If we cannot establish pricing of our 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.
  31




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##### Table of Contents



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
 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;
 32




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##### Table of Contents




    
    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
  33




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##### Table of Contents



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)31.1
    
    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.(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.(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. 34




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##### Table of Contents



SIGNATURES
  Ardea Biosciences, Inc.Date:  November 6, 2009
    /s/ Barry D. QuartBarry D. Quart, Pharm.D.President and Chief Executive Officer
(On behalf of the Registrant)/s/ John W. BeckJohn W. Beck, C.P.A.Senior Vice President, Finance and Operations
and Chief Financial Officer
(As Principal Financial and Accounting Officer) 35




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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)31.1
    
    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.(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.(6)
    
    Incorporated by reference to our Form 10-K (File No. 001-33734) filed
with the Securities and Exchange Commission on March 13, 2009.




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(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.