##### 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 March 31, 2011
 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
  o o
  Large accelerated filer o
Accelerated filer þNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o  o þ




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##### 



ARDEA BIOSCIENCES, INC.
 FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
 TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONITEM 1. Condensed Consolidated Financial Statements  UnauditedCondensed Consolidated Balance Sheets as of March 31, 2011 and
December 31, 2010
    
    
    1Condensed Consolidated Statements of Operations for the three months
ended March 31, 2011 and 2010
    
    
    2Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2011 and 2010
    
    
    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
    
    
    19ITEM 6. Exhibits
    
    
    35SIGNATURES
    
    
    36EX-10.1EX-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
 March 31,
    
    
    December 31,2011
    
    
    2010(Unaudited)
    
    
    (See Note)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    53,657
    
    
    $
    15,926Short-term investments, available-for-sale
    
    
    103,148
    
    
    
    64,686Receivables
    
    
    2,019
    
    
    
    16,959Prepaids and other current assets
    
    
    1,040
    
    
    
    518Total current assets
    
    
    159,864
    
    
    
    98,089Property and equipment, net
    
    
    1,950
    
    
    
    2,007Other assets
    
    
    355
    
    
    
    358Total assets
    
    $
    162,169
    
    
    $
    100,454LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,547
    
    
    $
    3,073Accrued clinical liabilities
    
    
    4,789
    
    
    
    5,681Accrued payroll and employee liabilities
    
    
    2,080
    
    
    
    2,802Other accrued liabilities
    
    
    2,023
    
    
    
    1,550Current portion of deferred revenue
    
    
    4,306
    
    
    
    4,306Current portion of long-term debt
    
    
    2,532
    
    
    
    3,310Total current liabilities
    
    
    17,277
    
    
    
    20,722Deferred rent
    
    
    212
    
    
    
    205Non-current portion of deferred revenue
    
    
    1,076
    
    
    
    2,153Non-current portion of long-term debt
    
    
    236
    
    
    
    251Commitments and contingencies (see Note 5)Stockholders equity:Common stock
    
    
    26
    
    
    
    23Additional paid-in capital
    
    
    547,591
    
    
    
    466,110Accumulated other comprehensive income
    
    
    10
    
    
    
    31Accumulated deficit
    
    
    (404,259
    )
    
    
    (389,041
    )Total stockholders equity
    
    
    143,368
    
    
    
    77,123Total liabilities and stockholders equity
    
    $
    162,169
    
    
    $
    100,454
   1




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ARDEA BIOSCIENCES, INC.
 
 Condensed Consolidated Statements of Operations
 Three Months EndedMarch 31,2011
    
    
    2010Revenues:License fees
    
    $
    1,077
    
    
    $
    2,426Sponsored research
    
    
    90
    
    
    
    Reimbursable research and development costs
    
    
    603
    
    
    
    847Total revenues
    
    
    1,770
    
    
    
    3,273Operating expenses:Research and development
    
    
    12,715
    
    
    
    10,251General and administrative
    
    
    4,249
    
    
    
    2,926Total operating expenses
    
    
    16,964
    
    
    
    13,177Loss from operations
    
    
    (15,194
    )
    
    
    (9,904
    )Other income (expense):Interest income
    
    
    107
    
    
    
    69Interest expense
    
    
    (134
    )
    
    
    (261
    )Other income, net
    
    
    3
    
    
    
    13Total other income (expense)
    
    
    (24
    )
    
    
    (179
    )Net loss
    
    $
    (15,218
    )
    
    $
    (10,083
    )Basic and diluted net loss per share
    
    $
    (0.59
    )
    
    $
    (0.54
    )Shares used in computing basic and diluted net loss per share
    
    
    25,782
    
    
    
    18,559
  2




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ARDEA BIOSCIENCES, INC.
 
 Condensed Consolidated Statements of Cash Flows
 Three Months EndedMarch 31,2011
    
    
    2010Operating activities:Net loss
    
    $
    (15,218
    )
    
    $
    (10,083
    )Adjustments to reconcile net loss to net cash (used for) provided by
operating activities:Share-based compensation
    
    
    2,385
    
    
    
    1,613Depreciation and amortization
    
    
    167
    
    
    
    136Amortization of debt discount and debt issuance costs
    
    
    43
    
    
    
    86Deferred rent
    
    
    7
    
    
    
    15Amortization of premium on short-term investments
    
    
    237
    
    
    
    108Realized gain on short-term investments
    
    
    
    
    
    
    (11
    )Change in operating assets and liabilities:Receivables
    
    
    14,940
    
    
    
    68Prepaids and other assets
    
    
    (545
    )
    
    
    (252
    )Accounts payable
    
    
    (1,526
    )
    
    
    691Accrued clinical liabilities
    
    
    (892
    )
    
    
    (1,440
    )Accrued payroll and employee liabilities
    
    
    (722
    )
    
    
    (691
    )Other accrued liabilities
    
    
    473
    
    
    
    (149
    )Deferred revenue
    
    
    (1,077
    )
    
    
    (2,426
    )Net cash used for operating activities
    
    
    (1,728
    )
    
    
    (12,335
    )Investing activities:Purchases of short-term investments
    
    
    (70,453
    )
    
    
    (2,498
    )Proceeds from sale or maturity of short-term investments
    
    
    31,733
    
    
    
    9,280Proceeds from sale of property and equipment
    
    
    12
    
    
    
    Purchases of property and equipment
    
    
    (122
    )
    
    
    (125
    )Net cash (used for) provided by investing activities
    
    
    (38,830
    )
    
    
    6,657Financing activities:Payments on long-term debt
    
    
    (810
    )
    
    
    (716
    )Net proceeds from issuance of common stock
    
    
    79,099
    
    
    
    559Net cash provided by (used for) financing activities
    
    
    78,289
    
    
    
    (157
    )Net increase (decrease) in cash and cash equivalents
    
    
    37,731
    
    
    
    (5,835
    )Cash and cash equivalents at beginning of period
    
    
    15,926
    
    
    
    11,562Cash and cash equivalents at end of period
    
    $
    53,657
    
    
    $
    5,727Supplemental disclosure of cash flow information:Interest paid
    
    $
    99
    
    
    $
    182Supplemental schedule of non-cash information:Net unrealized loss on short-term investments
    
    $
    (21
    )
    
    $
    (22
    )
  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
  Revenue Recognition
   4




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Earnings Per Share
    Comprehensive Loss
  Three Months EndedMarch 31,2011
    
    
    2010Net loss
    
    $
    (15,218
    )
    
    $
    (10,083
    )Net unrealized losses on short-term investments
    
    
    (21
    )
    
    
    (22
    )Comprehensive net loss
    
    $
    (15,239
    )
    
    $
    (10,105
    )
 Recent Accounting Pronouncements
 Revenue Recognition  Milestone Method (Topic 605): Milestone Method of
Revenue Recognition
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Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements
 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
    
    Significantfor identical
    
    observable
    
    unobservableBalance at
    
    assets
    
    inputs
    
    inputsMarch 31, 2011
    
    (Level 1)*
    
    (Level 2)*
    
    (Level 3)Money market funds
    
    $
    7,803
    
    
    $
    7,803
    
    
    $
    
    
    
    $
    U.S. government and agency
obligations
    
    
    71,761
    
    
    
    12,537
    
    
    
    59,224
    
    
    
    U.S. corporate debt securities
    
    
    11,309
    
    
    
    
    
    
    
    11,309
    
    
    
    U.S. commercial paper
    
    
    45,777
    
    
    
    
    
    
    
    45,777
    
    
    
    Foreign commercial paper
    
    
    17,196
    
    
    
    
    
    
    
    17,196
    
    
    
    Foreign certificates of deposit
    
    
    2,400
    
    
    
    
    
    
    
    2,400
    
    
    
    Total
    
    $
    156,246
    
    
    $
    20,340
    
    
    $
    135,906
    
    
    $
    
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Fair Value Measurements at Reporting Date UsingQuoted prices in
    
    Significantactive markets
    
    other
    
    Significantfor identical
    
    observable
    
    UnobservableBalance at
    
    assets
    
    inputs
    
    inputsMarch 31, 2010
    
    (Level 1)*
    
    (Level 2)*
    
    (Level 3)Money market funds
    
    $
    4,743
    
    
    $
    4,743
    
    
    $
    
    
    
    $
    U.S. government and agency
obligations
    
    
    16,745
    
    
    
    
    
    
    
    16,745
    
    
    
    U.S. corporate debt securities
    
    
    3,585
    
    
    
    
    
    
    
    3,585
    
    
    
    U.S. commercial paper
    
    
    7,295
    
    
    
    
    
    
    
    7,295
    
    
    
    U.S. certificates of deposit
    
    
    3,203
    
    
    
    
    
    
    
    3,203
    
    
    
    Foreign commercial paper
    
    
    1,600
    
    
    
    
    
    
    
    1,600
    
    
    
    Total
    
    $
    37,171
    
    
    $
    4,743
    
    
    $
    32,428
    
    
    $
    
 
 *
    
    There were no significant transfers between level 1 and level 2 investments for the three months
ended March 31, 2011 and 2010.      7




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4. Bayer Relationship
      8




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5. Commitments and Contingencies
  6. Long-term Debt
  Notes Payable
    
    Capital LeaseYears ended December 31,2011 (remaining nine months of the year)
    
    $
    3,006
    
    
    $
    822012
    
    
    46
    
    
    
    452013
    
    
    45
    
    
    
    452014
    
    
    45
    
    
    
    452015
    
    
    19
    
    
    
    22Total
    
    
    3,161
    
    
    
    239Less unamortized discount
    
    
    (21
    )
    
    
    Less amount representing interest
    
    
    (550
    )
    
    
    (61
    )Total balance
    
    
    2,590
    
    
    
    178Less current portion
    
    
    (2,462
    )
    
    
    (70
    )Noncurrent portion of long-term debt
    
    $
    128
    
    
    $
    108
 7. Stockholders Equity
 Common Stock
   9




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Share-Based Compensation
  Three Months EndedMarch 31,2011
    
    
    2010Research and development
    
    $
    933
    
    
    $
    684General and administrative
    
    
    1,452
    
    
    
    929Share-based compensation expense included in operating expenses
    
    $
    2,385
    
    
    $
    1,613
   Options:
 March 31,2011
    
    2010Risk-free interest rate
    
    
    2.5
    %
    
    
    2.8
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    73.6
    %
    
    
    78.3
    %Expected life (years)
    
    
    5.5-6.1
    
    
    
    5.5-6.1
  8. Income Taxes
   9. Subsequent Events
  10




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis of our financial condition and results of operations
should be read together with our unaudited 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, 2010 included in our Annual Report on Form 10-K
for the year ended December 31, 2010 filed with the Securities and Exchange Commission, or SEC, on
March 11, 2011.
 This discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. The actual results may differ materially from those anticipated in
these forward-looking statements as a result of many factors, including, but not limited to, those
set forth under Risk Factors and elsewhere in this quarterly report on Form 10-Q . All
forward-looking statements included in this document are based on information available to us on
the date of this document and we assume no obligation to update any forward-looking statements
contained in this Form 10-Q .
 Overview and Business Strategy
  Product Portfolio
 Product Candidate
    
    Target Indication
    
    Development StatusLesinurad (RDEA594)
    
    Gout
    
    Phase 2 completed*Next-generation URAT1 inhibitors
    
    Gout
    
    Preclinical development ongoingBAY 86-9766 (RDEA119)
    
    Cancer
    
    Phase 2 ongoing
 
 *
    
    Phase 2 extension studies are ongoing GOUT
  ®
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
    
    Positive, top-line results from a Phase 2b study (Study 203) in 208
allopurinol-refractory gout patients demonstrated that adding lesinurad to allopurinol
produced highly statistically significant additional reductions in sUA of up to 30
percent over that observed on allopurinol alone. This resulted in a response rate of
79 percent for the 600 mg dose using the more rigorous intent-to-treat (ITT)
analysis, which considers all patients without efficacy results at week 4 as
non-responders, including those who discontinue for any reason. Using a last
observation carried forward (LOCF) analysis, which was the method utilized for the
U.S. approval of febuxostat, 89 percent of patients taking the combination reached the
medically recommended target of reducing sUA to below 6 mg/dL at the highest dose
tested. Response rates on this study increased in a dose-related manner and were
highly clinically and statistically significant at all dose levels when compared to
allopurinol alone. The combination of lesinurad and allopurinol was also well
tolerated, with no serious adverse events and only two discontinuations due to adverse
events on the combination.
    
    In a Phase 1b clinical pharmacology study evaluating the use of lesinurad in
combination with febuxostat (Study 111) in 21 gout patients with hyperuricemia (sUA
greater than or equal to 8 mg/dL), 100 percent of patients receiving the combination of
lesinurad and febuxostat achieved sUA levels below the medically recommended target
level of 6 mg/dL, compared to 67 percent and 56 percent for patients receiving 40 mg
and 80 mg, respectively, of febuxostat alone. At the highest combination doses tested
(600 mg lesinurad combined with 80 mg febuxostat), 100 percent of patients reached sUA
levels below 4 mg/dL, with 58 percent achieving levels below 3 mg/dL. No patient
achieved these reduced sUA levels on either dose of febuxostat alone. The combination
of lesinurad and febuxostat was also well tolerated, with no serious adverse events or
discontinuations due to adverse events and no clinically relevant drug interactions
observed between lesinurad and febuxostat.
    
    In a 20-patient Phase 1b clinical pharmacology study evaluating the use of
lesinurad in combination with 300 mg of allopurinol (Study 110) in gout patients with
hyperuricemia (sUA greater than or equal to 8mg/dL), 100 percent of patients at all
combination doses evaluated achieved sUA levels below the target of 6 mg/dL, compared
to 20 percent of patients on allopurinol alone. The combination of lesinurad and
allopurinol was well tolerated, with no serious adverse events or discontinuations that
were considered possibly related to lesinurad or the combination.
    
    When administered as a single agent in a Phase 2b study (Study 202),
lesinurad was well tolerated and produced significant reductions in uric acid in the
blood. In this randomized, double-blind, placebo-controlled, dose-escalation study of
123 gout patients with hyperuricemia, uric acid levels decreased and response rates
increased in a dose-related manner and were highly clinically and statistically
significant at the two highest doses tested. At the highest dose, the response rate was
60 percent, compared to 0 percent for placebo (p < 0.0001). Lesinurad was also well
tolerated in this study, with no serious adverse events and only two discontinuations
due to adverse events on lesinurad.
    
    Results from multiple studies have indicated that the activity of lesinurad
is not diminished in patients with mild renal impairment. A smaller dataset from Study
202 indicate that after 4 weeks of monotherapy with lesinurad, patients with moderate
renal impairment had similar reductions in sUA as compared to patients with no renal
impairment.
    
    Based on findings thus far, single and multiple doses of lesinurad from 5 mg to
600 mg appear to be well tolerated and safe both alone and in combination with
allopurinol or febuxostat.
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CANCER
  in vitro in vivo. in vitro in vivo ®
    Bayer Relationship
  13




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Valeant Relationship
  Critical Accounting Policies and Estimates
   Revenue Recognition
   14




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Accrued Clinical Liabilities
  Share-Based Compensation
    Recent Accounting Pronouncements
  Results of Operations
 Three Months Ended March 31, 2011 and 2010
 Revenues
  15




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Research and Development Expense
  General and Administrative Expense
  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
  18




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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, 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, 2010 and our
subsequent filings with the SEC. Risk factors containing such revisions are marked with an
asterisk.
 Risks Related to Our Business
 Our success depends substantially on our most advanced product candidate, lesinurad (previously
called RDEA594). We cannot be certain that this product candidate will receive regulatory approval
or be successfully commercialized.*
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
    
    not deem a product candidate safe and effective;
    
    not find the data from preclinical studies and clinical trials sufficient to support approval;
    
    not agree with our interpretation and characterization of efficacy and safety data from
our clinical trials;
    
    require additional preclinical or clinical studies;
    
    not approve of our third-party manufacturers processes and facilities; or
    
    change its approval policies, adopt new regulations, or provide new guidance or change
its view regarding guidance previously provided.
    Development of our products will take years; we may never attain product sales; and we expect to
continue to incur net operating losses.
  20




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We are not currently profitable and may never become profitable.
  Because the results of preclinical studies and early clinical trials are not necessarily predictive
of future results, we can provide no assurances that lesinurad, BAY 86-9766 (RDEA119) or any other
of our product candidates will have favorable results in future 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.*
   
    
    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 IND from 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.
  21




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Once clinical testing of lesinurad, BAY 86-9766 (RDEA119) and other potential product candidates
has commenced, the termination, or delays in the completion, of clinical testing 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 FDA requests 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 clinical trials protocols;
    
    failure on the part of clinical investigators or contract research organizations to
properly carry out their contractual obligations, adhere to clinical protocols or meet
expected deadlines;
    
    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 efforts to develop and commercialize lesinurad 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.
  
    
    our inability 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; or
    
    we may be unable to identify suitable products or product candidates within, or
complementary to, our areas of interest or capabilities.
  22




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If we successfully complete clinical trials for lesinurad or any other 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;
    
    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
    
    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 may 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.
  
    
    establish and maintain manufacturing, sales and marketing operations;
    
    commercialize lesinurad or other product candidates, if any, that receive regulatory approval; and
    
    acquire rights to products or product candidates, technologies or businesses.
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
    
    the rate of progress and cost of our research and 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;
    
    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 additional collaboration and licensing
arrangements may cause dilution to existing stockholders, restrict our operations or require us to
relinquish proprietary rights.
  We have experienced periods of significant growth as well as reductions in the size of our
organization and may experiences similar fluctuations again in the future, and we may experience
difficulties in managing these organizational changes.*
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The investment of our cash balance and investments in marketable securities are subject to risks
that may cause losses and affect the liquidity of these investments.
  We depend on collaborations with other parties to develop and commercialize selected product
candidates and to provide substantially all of our revenues.
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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 or license 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;
    
    slowing or cessation of a collaborators development or commercialization efforts with
respect to our product candidates; or
    
    costly and time-consuming litigation or dispute resolution.
 We depend on outside parties to conduct our preclinical and clinical trials, which may result in
costs and delays that prevent us from obtaining regulatory approval or successfully commercializing
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.
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If we are unable to establish sales and marketing capabilities or enter into agreements with other
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.
  Our quarterly results and stock price may fluctuate significantly.
  
    
    whether or not we achieve specified 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 the development and commercialization of
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 selection of additional compounds for development; and
    
    fluctuations in the stock prices of other companies in the biotechnology and
pharmaceuticals industries and in the financial markets generally.
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If we make 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 an 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;
    
    disagreements over interpretation of contractual terms in the acquisition agreements;
    
    higher than expected acquisition and integration costs;
    
    increased amortization expenses;
    
    negative effect on our earnings (or loss) per share;
    
    difficulties in combining and integrating the operations and personnel of any acquired
businesses with our operations and personnel;
    
    impairment of relationships with key suppliers, contractors or customers of any
acquired businesses due to changes in management and ownership; and
    
    inability to retain key employees of any acquired businesses.
  Earthquake damage to our facilities could delay our research and development efforts and adversely
affect our business.
  Our business and operations would suffer in the event of system failures.
  28




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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 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.
   29




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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 other
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 products 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 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.
  If our competitors develop treatments for gout or cancer that are approved faster, marketed better
or demonstrated to be safer or more effective than any products that we or our partners may
develop, our commercial opportunity will be reduced or eliminated.
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If we cannot establish favorable pricing of lesinurad and other product candidates acceptable to
the U.S. 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.
  Any claims relating to our improper handling, storage or disposal of biological, hazardous and
radioactive materials could be time-consuming and costly.
  33




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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.
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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)10.1
    
    Executive Employment Agreement, effective February 28, 2011, between
the Company and David T. Hagerty*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.*
    
    Management contract or compensatory plan, contract 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-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. 35




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##### Table of Contents



SIGNATURES
  Ardea Biosciences, Inc.Date:  May 9, 2011
    /s/ Barry D. QuartBarry D. Quart, Pharm.D.President and Chief Executive Officer
(On behalf of the Registrant)/s/ John W. BeckJohn W. BeckSenior Vice President, Finance and Operations
and Chief Financial Officer
(As Principal Financial and Accounting Officer) 36




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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)10.1
    
    Executive Employment Agreement, effective February 28, 2011, between
the Company and David T. Hagerty*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.*
    
    Management contract or compensatory plan, contract 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-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. 37