##### 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 June 30, 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.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    94-3200380
(I.R.S. Employer
Identification No.)4939 Directors Place 
San Diego, CA
(Address of principal executive offices)
    
    92121
(Zip Code)
 (858) 652-6500
  þ o
 Rule 12b-2
 Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company þ(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 JUNE 30, 2008
 TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONITEM 1.
    
    Condensed Financial Statements  UnauditedCondensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007
    
    
    1Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007
    
    
    2Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    16ITEM 4.
    
    Controls and Procedures
    
    
    16PART II. OTHER INFORMATIONITEM 1A.
    
    Risk Factors
    
    
    17ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    30ITEM 6.
    
    Exhibits
    
    
    30SIGNATURES
    
    
    32EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED FINANCIAL STATEMENTS UNAUDITED
 ARDEA BIOSCIENCES, INC.
 
 Condensed Consolidated Balance Sheets
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)
    
    
    (See Note)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,371
    
    
    $
    46,384Short-term investments
    
    
    36,311
    
    
    
    19,831Receivables
    
    
    326
    
    
    
    1,224Prepaids and other current assets
    
    
    373
    
    
    
    210Total current assets
    
    
    43,381
    
    
    
    67,649Property and equipment, net
    
    
    2,166
    
    
    
    879Other assets
    
    
    312
    
    
    
    312Total assets
    
    $
    45,859
    
    
    $
    68,840LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,865
    
    
    $
    2,200Accrued clinical liabilities
    
    
    1,729
    
    
    
    456Accrued payroll and employee liabilities
    
    
    1,683
    
    
    
    1,612Other accrued liabilities
    
    
    585
    
    
    
    833Current portion of obligations under notes payable
    
    
    29
    
    
    
    Total current liabilities
    
    
    6,891
    
    
    
    5,101Non-current portion of obligations under notes payable
    
    
    219
    
    
    
    Commitments and contingencies (see Note 5)Stockholders equity:Convertible preferred stock
    
    
    
    
    
    
    1,634Common stock
    
    
    15
    
    
    
    13Additional paid-in capital
    
    
    328,331
    
    
    
    323,566Accumulated other comprehensive income
    
    
    57
    
    
    
    14Accumulated deficit
    
    
    (289,654
    )
    
    
    (261,488
    )Total stockholders equity
    
    
    38,749
    
    
    
    63,739Total liabilities and stockholders equity
    
    $
    45,859
    
    
    $
    68,840
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ARDEA BIOSCIENCES, INC.
 
 Condensed Consolidated Statements of Operations
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Collaboration revenues
    
    $
    
    
    
    $
    857
    
    
    $
    260
    
    
    $
    1,750Operating expenses:Research and development
    
    
    13,006
    
    
    
    5,216
    
    
    
    22,751
    
    
    
    8,729General and administrative
    
    
    3,190
    
    
    
    1,584
    
    
    
    6,822
    
    
    
    3,128Total operating expenses
    
    
    16,196
    
    
    
    6,800
    
    
    
    29,573
    
    
    
    11,857Loss from operations
    
    
    (16,196
    )
    
    
    (5,943
    )
    
    
    (29,313
    )
    
    
    (10,107
    )Other income:Interest income
    
    
    414
    
    
    
    568
    
    
    
    1,021
    
    
    
    1,179Other income, net
    
    
    51
    
    
    
    
    
    
    
    186
    
    
    
    184Total other income
    
    
    465
    
    
    
    568
    
    
    
    1,207
    
    
    
    1,363Net loss
    
    
    (15,731
    )
    
    
    (5,375
    )
    
    
    (28,106
    )
    
    
    (8,744
    )Non-cash dividends on Series A preferred
stock
    
    
    
    
    
    
    (60
    )
    
    
    (60
    )
    
    
    (120
    )Net loss applicable to common stockholders
    
    $
    (15,731
    )
    
    $
    (5,435
    )
    
    $
    (28,166
    )
    
    $
    (8,864
    )Basic and diluted net loss per share
applicable to common stockholders
    
    $
    (1.10
    )
    
    $
    (0.57
    )
    
    $
    (2.03
    )
    
    $
    (0.94
    )Shares used in computing basic and
diluted net loss per share applicable to
common stockholders
    
    
    14,345
    
    
    
    9,582
    
    
    
    13,843
    
    
    
    9,478
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ARDEA BIOSCIENCES, INC.
 
 Condensed Consolidated Statements of Cash Flows
 Six Months EndedJune 30,2008
    
    
    2007Operating activities:Net loss
    
    $
    (28,106
    )
    
    $
    (8,744
    )Adjustments to reconcile net loss to net cash used for operating
activities:Stock-based compensation
    
    
    2,381
    
    
    
    363Depreciation
    
    
    233
    
    
    
    118Gain on disposal of property and equipment
    
    
    (18
    )
    
    
    (184
    )Amortization of premium/(accretion of discount) on short-term
investments
    
    
    33
    
    
    
    (118
    )Change in operating assets and liabilities:Receivables
    
    
    898
    
    
    
    (881
    )Prepaids and other current assets
    
    
    (163
    )
    
    
    (200
    )Accounts payable
    
    
    665
    
    
    
    1,752Accrued clinical liabilities
    
    
    1,273
    
    
    
    29Accrued payroll and employee liabilities
    
    
    71
    
    
    
    384Other accrued liabilities
    
    
    (188
    )
    
    
    (598
    )Net cash used for operating activities
    
    
    (22,921
    )
    
    
    (8,079
    )Investing activities:Purchases of short-term investments
    
    
    (30,320
    )
    
    
    (28,585
    )Proceeds from sale or maturity of short-term investments
    
    
    13,850
    
    
    
    29,055Proceeds from sale of property and equipment
    
    
    56
    
    
    
    184Purchases of property and equipment
    
    
    (1,558
    )
    
    
    (61
    )Net cash (used for) provided by investing activities
    
    
    (17,972
    )
    
    
    593Financing activities:Net proceeds from issuance of notes payable
    
    
    248
    
    
    
    Net proceeds from issuance of common stock
    
    
    632
    
    
    
    814Net cash provided by financing activities
    
    
    880
    
    
    
    814Net decrease in cash and cash equivalents
    
    
    (40,013
    )
    
    
    (6,672
    )Cash and cash equivalents at beginning of period
    
    
    46,384
    
    
    
    14,779Cash and cash equivalents at end of period
    
    $
    6,371
    
    
    $
    8,107Supplemental schedule of non-cash information:Net unrealized gain (loss) on short-term investments
    
    $
    43
    
    
    $
    (27
    )Issuance of common stock dividend on Series A preferred stock
    
    $
    (60
    )
    
    $
    (120
    )
  3




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




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Net Loss Per Share
 Earnings per Share,
  Comprehensive Loss
 , Reporting Comprehensive Income
 Recent Accounting Pronouncements
 Fair
Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
 Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used
in Future Research and Development Activities
 5




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Accounting for Collaborative Arrangements Reporting Revenue Gross as a Principal versus
Net as an Agent The Equity Method of Accounting for Investments in Common Stock
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles
 3. Fair Value of Financial Instruments
 Share-Based Payments Accounting for Leases
 Effective Date of FASB Statement No. 157
  
    
    Level 1  Quoted prices in active markets for identical assets or liabilities.
    
    Level 2  Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
    
    Level 3  Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities.
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Fair Value Measurements at Reporting Date UsingQuoted prices inactive markets for
    
    Significant other
    
    SignificantBalance at
    
    identical assets
    
    observable inputs
    
    unobservable inputsJune 30, 2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Cash and cash equivalents
    
    $
    6,371
    
    
    $
    6,371
    
    
    $
    
    
    
    $
    Short-term investments
    
    
    36,311
    
    
    
    
    
    
    
    36,311
    
    
    
    Total
    
    $
    42,682
    
    
    $
    6,371
    
    
    $
    36,311
    
    
    $
    
 Accounting for Certain Investments in Debt and Equity Securities
 4. Note Payable
  5. Commitments and Contingencies
  6. Stockholders Equity
 Preferred Stock
   7




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Stock-Based Compensation
      Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Research and development
    
    $
    511
    
    
    $
    99
    
    
    $
    964
    
    
    $
    127General and administrative
    
    
    759
    
    
    
    95
    
    
    
    1,417
    
    
    
    236Share-based compensation
expense included in
operating expenses
    
    $
    1,270
    
    
    $
    194
    
    
    $
    2,381
    
    
    $
    363
  Options:
 June 30,2008
    
    2007Risk-free interest rate
    
    
    3.8
    %
    
    
    4.8
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    72.7
    %
    
    
    0.2
    %Expected life (years)
    
    
    5.3-6.3
    
    
    
    6.1
 8




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ESPP:
 June 30,2008
    
    2007Risk-free interest rate
    
    
    3.8
    %
    
    
    Dividend yield
    
    
    0.0
    %
    
    
    Volatility
    
    
    69.0
    %
    
    
    Expected life (years)
    
    
    1.3
    
    
    
    
 7. Income Taxes
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
    
 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, 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 .
 9




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Overview and Business Strategy
  Product Portfolio
 Product Candidate
    
    Target Indication
    
    Development StatusRDEA806
    
    HIV
    
    Phase 2a completedRDEA427
    
    HIV
    
    Phase 0* completedRDEA806 (a prodrug of RDEA594)
    
    Gout
    
    Phase 2a ongoingRDEA594
    
    Gout
    
    PreclinicalRDEA119
    
    Cancer
    
    Phase 1 ongoingRDEA119
    
    Inflammation
    
    Phase 1 completedRDEA436
    
    Inflammation
    
    Phase 0* completed
 
 *
    
    First in human micro-dose pharmacokinetic study in normal healthy volunteers. HIV
 RDEA806
 In vitro ® In vitro In vivo ®
   RDEA427
 nd
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GOUT
 RDEA806
  RDEA594
  CANCER
 RDEA119
 In vivo
 in vitro
 INFLAMMATION
 RDEA119
 In vivo
 RDEA436
 nd
 Company History
  11




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nd nd
 Valeant Relationship
 nd nd nd nd
   Critical Accounting Policies and Estimates
  12




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Accrued Clinical Liabilities
  Stock-Based Compensation
 Share-Based Payment
   Recent Accounting Pronouncements
 Fair
Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
 13




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Accounting for Nonrefundable Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities
 Accounting for Collaborative Arrangements Reporting Revenue Gross as a Principal versus
Net as an Agent The Equity Method of Accounting for Investments in Common Stock
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles
 Results of Operations
 Three and Six Months Ended June 30, 2008 and 2007
 Revenues
  14




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Research and Development Expense
  General and Administrative Expense
  Other Income, net
  Liquidity and Capital Resources
       15




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Off-Balance Sheet Arrangements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  16




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PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
 You should consider carefully the following information about the risks described below,
together with the other information contained in this quarterly report on Form 10-Q and in our
other filings with the Securities and Exchange Commission, before you decide to buy or maintain an
investment in our common stock. We believe the risks described below are the risks that are
material to us as of the date of this quarterly report. If any of the following 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 the money you paid to buy our common
stock. The risks described below include certain revisions to the risks set forth in our annual
report on Form 10-K for the fiscal year ended December 31, 2007 and our subsequent filings with the
Securities and Exchange Commission. 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.*
  17




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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.*
   
    
    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
clinical trial sites;
    
    manufacturing quantities of a product candidate sufficient for clinical trials;
    
    obtaining approval of an Investigational New Drug Application (IND) from the United States
Food and Drug Administration (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;
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
    
    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 product candidates or
other materials necessary for the conduct of our clinical trials; or
    
    serious adverse events or other undesirable drug-related side effects
experienced by clinical trial participants.
  If our 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 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 HIV, gout, 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.*
  19




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If we successfully develop products, but those products do not achieve and maintain market
acceptance, our business will not be profitable.*
  
    
    our ability to provide acceptable evidence of safety and efficacy;
    
    relative convenience and ease of administration;
    
    the prevalence and severity of any adverse side effects;
    
    the 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.
 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 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;
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
    
    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.*
  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.
  21




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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.
  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 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;
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##### Table of Contents




    
    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;
    
    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.
  23




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Moving our research and development operations was costly and may be 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 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.*
 nd
 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.*
  24




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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.
  26




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##### Table of Contents



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.
  27




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##### Table of Contents



If our competitors develop treatments for HIV, gout, 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.*
  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.*
  28




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##### Table of Contents



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;
    
    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.*
  29




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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Director Nominee
    
    Votes in Favor
    
    Votes WithheldJohn W. Beck
    
    
    10,965,256
    
    
    
    818Henry J. Fuchs
    
    
    10,965,147
    
    
    
    927John Poyhonen
    
    
    10,962,355
    
    
    
    3,719Barry D. Quart
    
    
    10,965,256
    
    
    
    818Jack S. Remington
    
    
    10,962,246
    
    
    
    3,828Kevin Tang
    
    
    10,959,801
    
    
    
    6,273
  BrokerProposal Description
    
    Votes in Favor
    
    Votes Against
    
    Abstaining
    
    Non-VotesRatification of the
appointment of
Stonefield
Josephson, Inc. as
our independent
auditor for the
fiscal year ending
December 31, 2008
    
    
    10,965,662
    
    
    
    404
    
    
    
    8
    
    
    
    
 
 ITEM 6. EXHIBITS
 ExhibitNumber
    
    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 (5)4.2
    
    Registration Rights Agreement dated December 19, 2007, by and among
the Company and the Purchasers listed on the signature pages thereto
(6)4.3
    
    Registration Rights Agreement dated January 4, 2008, by and among the
Company and the stockholders listed on the Signature pages thereto (7)10.1*
    
    Executive Employment Agreement, effective as of May 27, 2008, between
the Company and John W. Beck (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 Section 906 of the Sarbanes-Oxley Act of 2002
 30




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##### Table of Contents




    
    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.*
    
    This exhibit is a management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference to our Form 8-K (File No. 000-29993) filed with
the Securities and Exchange Commission on December 28, 2006.(2)
    
    Incorporated by reference to our Form 10-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.(5)
    
    Incorporated by reference to our Form 8-K (File No. 000-29993) filed with
the Securities and Exchange Commission on October 9, 2003.(6)
    
    Incorporated by reference to our Form 8-K (File No. 001-33734) filed with
the Securities and Exchange Commission on December 20, 2007.(7)
    
    Incorporated by reference to our Form 8-K (File No. 001-33734) filed with
the Securities and Exchange Commission on January 10, 2008.(8)
    
    Incorporated by reference to our Form 8-K (File No. 001-33734) filed with
the Securities and Exchange Commission on May 13, 2008. 31




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##### Table of Contents



SIGNATURES
  Ardea Biosciences, Inc.Date:  August 14, 2008
    /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) 32




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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
    
    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 (5)4.2
    
    Registration Rights Agreement dated December 19, 2007, by and among
the Company and the Purchasers listed on the signature pages thereto
(6)4.3
    
    Registration Rights Agreement dated January 4, 2008, by and among the
Company and the stockholders listed on the Signature pages thereto (7)10.1*
    
    Executive Employment Agreement, effective as of May 27, 2008, between
the Company and John W. Beck (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 Section 906 of the Sarbanes-Oxley Act of 2002
 
 
    
    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.*
    
    This exhibit is a management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference to our Form 8-K (File No. 000-29993) filed with
the Securities and Exchange Commission on December 28, 2006.(2)
    
    Incorporated by reference to our Form 10-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.(5)
    
    Incorporated by reference to our Form 8-K (File No. 000-29993) filed with
the Securities and Exchange Commission on October 9, 2003.(6)
    
    Incorporated by reference to our Form 8-K (File No. 001-33734) filed with
the Securities and Exchange Commission on December 20, 2007.(7)
    
    Incorporated by reference to our Form 8-K (File No. 001-33734) filed with
the Securities and Exchange Commission on January 10, 2008.(8)
    
    Incorporated by reference to our Form 8-K (File No. 001-33734) filed with
the Securities and Exchange Commission on May 13, 2008.