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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 June 30, 2007
 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 0-29993
 ARDEA BIOSCIENCES, INC.
 (Exact name of Registrant as specified in its charter)
 DELAWARE
    
    94-3200380(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 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 AND SIX MONTHS ENDED JUNE 30, 2007
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    3Condensed Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006 (audited)
    
    3Condensed Statements of Operations for the Three months and Six months ended June 30, 2007 and 2006 (unaudited)
    
    4Condensed Statements of Cash Flows for the Six months ended June 30, 2007 and 2006 (unaudited)
    
    5Notes to Condensed Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    10Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    15Item 4. Controls and Procedures
    
    16PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    17Item 1A. Risk Factors
    
    17Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    29Item 3. Defaults Upon Senior Securities
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    30Item 5. Other Information
    
    30Item 6. Exhibits
    
    30SIGNATURES
    
    31EXHIBIT INDEX
    
    32EXHIBIT 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 data)
 June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,107
    
    
    $
    14,779Short-term investments
    
    
    33,394
    
    
    
    33,890Prepaid expenses and other current assets
    
    
    2,044
    
    
    
    845Total current assets
    
    
    43,545
    
    
    
    49,514Property and equipment, net
    
    
    669
    
    
    
    726Total assets
    
    $
    44,214
    
    
    $
    50,240LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,986
    
    
    $
    234Accrued clinical liabilities
    
    
    33
    
    
    
    4Accrued employee liabilities
    
    
    384
    
    
    
    Other accrued liabilities
    
    
    340
    
    
    
    938Total current liabilities
    
    
    2,743
    
    
    
    1,176Commitments and contingencies (Note 8)Stockholders equity:Convertible preferred stock, $0.001 par value: 5,000,000 shares authorized;
300 shares outstanding and $3,000 aggregate liquidation preference at June 30,
2007 and December 31, 2006
    
    
    1,634
    
    
    
    1,634Common stock, $0.001 par value: 70,000,000 shares authorized at June
30, 2007 and December 31, 2006; 10,177,620 and 9,362,191 shares outstanding at
June 30, 2007 and December 31, 2006, respectively
    
    
    10
    
    
    
    9Additional paid-in capital
    
    
    284,892
    
    
    
    283,594Accumulated other comprehensive (loss) income
    
    
    (23
    )
    
    
    4Accumulated deficit
    
    
    (245,042
    )
    
    
    (236,177
    )Total stockholders equity
    
    
    41,471
    
    
    
    49,064Total liabilities and stockholders equity
    
    $
    44,214
    
    
    $
    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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    $
    857
    
    
    $
    
    
    
    $
    1,750
    
    
    $
    Operating expenses:Research and development
    
    
    5,216
    
    
    
    
    
    
    
    8,729
    
    
    
    7General and administrative
    
    
    1,584
    
    
    
    554
    
    
    
    3,128
    
    
    
    1,214Total operating expenses
    
    
    6,800
    
    
    
    554
    
    
    
    11,857
    
    
    
    1,221Operating loss
    
    
    (5,943
    )
    
    
    (554
    )
    
    
    (10,107
    )
    
    
    (1,221
    )Interest income
    
    
    568
    
    
    
    577
    
    
    
    1,179
    
    
    
    1,095Other income (expense), net
    
    
    
    
    
    
    
    
    
    
    184
    
    
    
    (1
    )Net income (loss)
    
    
    (5,375
    )
    
    
    23
    
    
    
    (8,744
    )
    
    
    (127
    )Non-cash dividends on Series A preferred stock
    
    
    (60
    )
    
    
    (60
    )
    
    
    (120
    )
    
    
    (120
    )Net loss applicable to common stockholders
    
    
    (5,435
    )
    
    
    (37
    )
    
    
    (8,864
    )
    
    
    (247
    )Basic and diluted net loss per share applicable
to common stockholders
    
    
    (0.57
    )
    
    
    
    
    
    
    (0.94
    )
    
    
    (0.03
    )Shares used to compute basic and diluted net loss
per share applicable to common stockholders
    
    
    9,582
    
    
    
    9,315
    
    
    
    9,478
    
    
    
    9,307
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ARDEA BIOSCIENCES, INC.
(formerly IntraBiotics Pharmaceuticals, Inc.)
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six Months EndedJune 30,2007
    
    
    2006Operating activitiesNet loss
    
    $
    (8,744
    )
    
    $
    (127
    )Adjustments to reconcile net loss to net cash used in operating activities:Stock compensation
    
    
    363
    
    
    
    259Depreciation and amortization
    
    
    118
    
    
    
    Gain on disposal of property and equipment
    
    
    (184
    )
    
    
    Change in assets and liabilities:Prepaid expenses and other current assets
    
    
    (1,199
    )
    
    
    (406
    )Accounts payable
    
    
    1,752
    
    
    
    (25
    )Accrued clinical liabilities
    
    
    29
    
    
    
    (92
    )Accrued employee liabilities
    
    
    384
    
    
    
    Other accrued liabilities
    
    
    (598
    )
    
    
    (58
    )Net cash used in operating activities
    
    
    (8,079
    )
    
    
    (449
    )Investing activitiesCapital expenditures
    
    
    (61
    )
    
    
    Proceeds from sale of property and equipment
    
    
    184
    
    
    
    Purchase of short term investments
    
    
    (28,585
    )
    
    
    (121,877
    )Proceeds from sale or maturity of short-term investments
    
    
    29,055
    
    
    
    120,131Net cash provided by (used in) investing activities
    
    
    593
    
    
    
    (1,746
    )Financing ActivitiesProceeds from issuance of common stock, upon exercise of warrants
    
    
    814
    
    
    
    Net cash provided by financing activities
    
    
    814
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (6,672
    )
    
    
    (2,195
    )Cash and cash equivalents at beginning of the period
    
    
    14,779
    
    
    
    2,772Cash and cash equivalents at end of the period
    
    $
    8,107
    
    
    $
    577Supplemental disclosure of non-cash information:Issuance of common stock dividend on Series A preferred stock
    
    $
    (120
    )
    
    $
    (120
    )
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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
 Stock-Based Compensation
 Share-Based Payment,
 Use of Estimates
   Note 3. Stock-Based Compensation
 Stock Compensation Expense
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Determining Fair Value
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Risk-free interest rate
    
    
    5.00
    %
    
    
    n/a
    
    
    
    4.83
    %
    
    
    5.16
    %Volatility
    
    
    0.20
    
    
    
    n/a
    
    
    
    0.18
    
    
    
    0.20Dividend yield
    
    
    0.00
    %
    
    
    n/a
    
    
    
    0.00
    %
    
    
    0.00
    %Expected life of option
    
    
    6.1
    
    
    
    n/a
    
    
    
    6.1
    
    
    
    1.7
  Note 4. Comprehensive Income (Loss)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)
    
    
    (In thousands)Net income (loss)
    
    $
    (5,375
    )
    
    $
    23
    
    
    $
    (8,744
    )
    
    $
    (127
    )Unrealized gain (loss) on available-for-sale securities
    
    
    (24
    )
    
    
    9
    
    
    
    (27
    )
    
    
    25Comprehensive income (loss)
    
    $
    (5,399
    )
    
    $
    32
    
    
    $
    (8,771
    )
    
    $
    (102
    )
 Note 5. Net Income (Loss) Per Share
 Earnings Per Share,
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Note 6. Stockholders Equity
   Conversion of Warrants
  Note 7. Acquisition
    
    
    Fixed assets of approximately $4.3 million,
    
    Intangible assets of approximately $300,000, and
    
    Goodwill of approximately $500,000.
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Note 8. Commitments and contingencies
    Note 9. Legal Proceedings
  Note 10. 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 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 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 11. Income Taxes
 Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109,
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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 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 .
 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. One or more compounds from this series will be assessed in 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 second half of 2007 and a first-in-man
clinical study of a follow-on MEK inhibitor in the fourth quarter of 2007.
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Market Opportunity
    Company History
    Transaction with Valeant
   11




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Financial Outlook
   Recent Accounting Pronouncements
  Critical Accounting Policies and Estimates
   12




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Stock-Based Compensation
   Clinical Trial Accruals
  Results of Operations
 Three Months Ended June 30, 2007 and 2006
 Revenues
  Research and Development
  13




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General and Administrative
  Interest Income
  Loss Applicable to Common Stockholders
  Liquidity and Capital Resources
      14




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Contractual Obligations
     Off-Balance Sheet Arrangements
  Indemnifications
  
 ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
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ITEM 4. Controls and Procedures
   Internal Control Over Financial Reporting
  Future Requirements
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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;
    
    whether our stock becomes listed on a stock exchange;
    
    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.
  *Moving our research and development operations following the termination of our current Costa
Mesa lease in March 2008 will be costly and disruptive.
  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.
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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.
  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;
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
    
    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.
    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.
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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.
  * Directors, executive officers, principal stockholders and affiliated entities beneficially own
or control at least 72% 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.
  
    
    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
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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 HICKEYDenis 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
    
    Amended and Restated 2004 Stock Incentive Plan. (10)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. 32




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(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.(10)
    
    Incorporated by reference to our Form 8-K (File No. 000-29993) filed with the Securities and
Exchange Commission on July 3, 2007. 33