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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 September 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 1-33734
 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 NINE MONTHS ENDED SEPTEMBER 30, 2007
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006
    
    
    3Condensed Statements of Operations for the Three months and Nine months ended September 30, 2007
and 2006 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the Nine months ended September 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
    
    
    17Item 4. Controls and Procedures
    
    
    17PART II. OTHER INFORMATION
    
    
    18Item 1. Legal Proceedings
    
    
    18Item 1A. Risk Factors
    
    
    18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3. Defaults Upon Senior Securities
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    31SIGNATURES
    
    
    32EXHIBIT INDEX
    
    
    33EXHIBIT 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 amounts)
 September 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,903
    
    
    $
    14,779Short-term investments
    
    
    26,683
    
    
    
    33,890Prepaid expenses and other current assets
    
    
    1,561
    
    
    
    845Total current assets
    
    
    37,147
    
    
    
    49,514Property and equipment, net
    
    
    654
    
    
    
    726Total assets
    
    $
    37,801
    
    
    $
    50,240LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,028
    
    
    $
    234Accrued clinical liabilities
    
    
    507
    
    
    
    4Accrued employee liabilities
    
    
    382
    
    
    
    Other accrued liabilities
    
    
    264
    
    
    
    938Total current liabilities
    
    $
    3,181
    
    
    $
    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
September
30, 2007 and December 31, 2006
    
    $
    1,634
    
    
    $
    1,634Common stock, $0.001 par value:70,000,000 shares authorized at
September 30, 2007 and December 31, 2006; 10,187,822 and 9,362,191 shares
outstanding at September 30, 2007 and December 31, 2006, respectively
    
    
    10
    
    
    
    9Additional paid-in capital
    
    
    285,373
    
    
    
    283,594Accumulated other comprehensive income
    
    
    14
    
    
    
    4Accumulated deficit
    
    
    (252,411
    )
    
    
    (236,177
    )Total stockholders equity
    
    
    34,620
    
    
    
    49,064Total liabilities and stockholders equity
    
    $
    37,801
    
    
    $
    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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Sponsored Research Revenue
    
    $
    1,077
    
    
    $
    
    
    
    $
    2,827
    
    
    $
    Operating expenses:Research and development
    
    
    7,114
    
    
    
    
    
    
    
    15,843
    
    
    
    7General and administrative
    
    
    1,785
    
    
    
    463
    
    
    
    4,913
    
    
    
    1,677Total operating expenses
    
    
    8,899
    
    
    
    463
    
    
    
    20,756
    
    
    
    1,684Operating loss:
    
    
    (7,822
    )
    
    
    (463
    )
    
    
    (17,929
    )
    
    
    (1,684
    )Interest income
    
    
    509
    
    
    
    635
    
    
    
    1,688
    
    
    
    1,731Other income, net
    
    
    4
    
    
    
    4
    
    
    
    188
    
    
    
    2Net income (loss)
    
    
    (7,309
    )
    
    
    176
    
    
    
    (16,053
    )
    
    
    49Non-cash dividends on Series A preferred stock
    
    
    (60
    )
    
    
    (60
    )
    
    
    (180
    )
    
    
    (180
    )Net income/(loss) applicable to common stockholders
    
    $
    (7,369
    )
    
    $
    116
    
    
    $
    (16,233
    )
    
    $
    (131
    )Basic net
income/(loss) per share applicable to common stockholders
    
    $
    (0.72
    )
    
    $
    0.01
    
    
    $
    (1.67
    )
    
    $
    (0.01
    )Diluted net income/(loss) per share applicable to common
stockholders
    
    $
    (0.72
    )
    
    $
    0.01
    
    
    $
    (1.67
    )
    
    $
    (0.01
    )Weighted average shares used to compute basic net
income/(loss) per share applicable to common stockholders
    
    
    10,182
    
    
    
    9,334
    
    
    
    9,716
    
    
    
    9,316Weighted average shares used to compute diluted net
income/(loss) per share applicable to common stockholders
    
    
    10,182
    
    
    
    11,560
    
    
    
    9,716
    
    
    
    9,316
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ARDEA BIOSCIENCES, INC.
(formerly IntraBiotics Pharmaceuticals, Inc)
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (In thousands)
(Unaudited)
 Nine Months EndedSeptember 30,2007
    
    
    2006Operating activities:Net income/(loss)
    
    $
    (16,053
    )
    
    $
    49Adjustments to reconcile net income/(loss) to net cash used in operating activities:Stock compensationEmployees and Directors
    
    
    784
    
    
    
    393Consultants
    
    
    
    
    
    
    2Depreciation and amortization
    
    
    183
    
    
    
    Gain on disposal of property and equipment
    
    
    (184
    )
    
    
    Change in assets and liabilities:Prepaid expenses and other current assets
    
    
    (716
    )
    
    
    (124
    )Accounts payable
    
    
    1,794
    
    
    
    (39
    )Accrued clinical liabilities
    
    
    503
    
    
    
    (92
    )Accrued employee liabilities
    
    
    382
    
    
    
    Other accrued liabilities
    
    
    (674
    )
    
    
    (5
    )Net cash provided by (used in) operating activities
    
    
    (13,981
    )
    
    
    184Investing activities:Purchase of
property and equipment
    
    
    (110
    )
    
    
    Proceeds from sale of property and equipment
    
    
    184
    
    
    
    Purchase of short-term investments
    
    
    (30,981
    )
    
    
    (156,069
    )Proceeds from sale or maturity of short-term investments
    
    
    38,197
    
    
    
    165,269Net cash provided by investing activities
    
    
    7,290
    
    
    
    9,200Financing activity:Proceeds from issuance of common stock upon exercise of warrants
    
    
    815
    
    
    
    Net cash provided by financing activity
    
    
    815
    
    
    
    Net increase/(decrease) in cash and cash equivalents
    
    
    (5,876
    )
    
    
    9,384Cash and cash equivalents at beginning of period
    
    
    14,779
    
    
    
    2,772Cash and cash equivalents at end of period
    
    $
    8,903
    
    
    $
    12,156Supplemental disclosure of non-cash information:Issuance of common stock dividend on Series A preferred stock
    
    $
    (180
    )
    
    $
    (180
    )
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ARDEA BIOSCIENCES, INC.
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)
 Note 1. Basis of Presentation
   Note 2. Summary of Significant Accounting Policies
 Revenue Recognition
  Stock-Based Compensation
  Use of Estimates
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Note 3. Stock-Based Compensation
 Stock Compensation Expense
    Determining Fair Value
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Risk-free interest rate
    
    
    4.20
    %
    
    
    n/a
    
    
    
    4.62
    %
    
    
    4.60
    %Volatility
    
    
    71
    %
    
    
    n/a
    
    
    
    72
    %
    
    
    20
    %Dividend yield
    
    
    0.00
    %
    
    
    n/a
    
    
    
    0.00
    %
    
    
    0.00
    %Expected life of option
    
    
    6.25
    
    
    
    n/a
    
    
    
    6.25
    
    
    
    6.20
  2000 Employee Stock Purchase Plan
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st .
 Note 4. Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In Thousands)
    
    
    (In Thousands)Net income (loss)
    
    $
    (7,309
    )
    
    $
    176
    
    
    $
    (16,053
    )
    
    $
    49Unrealized
gain on available-for-sale securities
    
    
    37
    
    
    
    6
    
    
    
    10
    
    
    
    31Comprehensive income (loss)
    
    $
    (7,272
    )
    
    $
    182
    
    
    $
    (16,043
    )
    
    $
    80
 Note 5. Net Income (Loss) Per Share
 Earnings Per Share,
 Note 6. Stockholders Equity
   Conversion of Warrants
  Note 7. Acquisition
  8




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
    
    Fixed assets of approximately $4.3 million,
    
    Intangible assets of approximately $300,000, and
    
    Goodwill of approximately $500,000.
  Note 8. Commitments and contingencies
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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. We adopted FIN 48 effective January 1, 2007, and
it did not have any material impact on our financial condition or result 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 (SFAS 159), The Fair Value Option for
Financial Assets and Financial Liabilities, SFAS No. 159 amends SFAS 115 and permits fair
value measurement of financial instruments and certain other items. SFAS No. 159 is
effective beginning the first fiscal year that begins after November 15, 2007. We are
currently evaluating the impact of SFAS No. 159 on our financial position and results of
operations.
 Note 11. Income Taxes
 Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109,
   
 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 .
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Overview and Business Strategy
  §
    
    RDEA806.RDEA806 is our lead non-nucleoside reverse transcriptase inhibitor (NNRTI) for
the potential treatment of HIV. In vitropreclinical tests have shown RDEA806 to be a
potent inhibitor of a wide range of HIV viral isolates, including isolates that are
resistant to efavirenz (Sustiva®, Bristol-Myers Squibb), the most widely prescribed NNRTI,
in addition to other currently available NNRTIs. Based on both preclinical and clinical
data, we anticipate that this compound could be amenable to a patient-friendly oral dosing
regimen, may have limited pharmacokinetic interactions with other drugs, and may be readily
co-formulated with other HIV antiviral drugs.We successfully completed Phase 1 single-ascending-dose, multiple-ascending-dose, food
effect, and drug-interaction clinical studies of RDEA806 in August 2007 and plan to
initiate Phase 2a proof-of-concept trials in the fourth quarter of 2007.§
    
    NNRTI Back-up Program.The compounds in our NNRTI Back-up Program are from a chemical
class that is distinct from the RDEA806 chemical class. Based on early preclinical data, we
believe that the compounds in our NNRTI Back-up Program may have the potential to share
certain of the positive attributes of RDEA806, 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 first-in-human micro-dosing clinical study in the fourth quarter
of 2007. We plan to select a clinical candidate from this program in the first half of
2008.§
    
    RDEA119.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 and
anti-inflammatory activity. Preclinical data also suggest that RDEA119 may have favorable
pharmaceutical properties, including the potential for convenient oral dosing.The U.S. Food and Drug Administration (FDA) granted safe-to-proceed status to the
Investigated New Drug (IND) application for RDEA119. We plan to initiate a Phase 1 advanced
cancer clinical study of RDEA119 in the fourth quarter of 2007.We also plan to initiate a
program to evaluate RDEA119 in inflammatory diseases in the first half of 2008.§
    
    MEK Inhibitor (MEKI) Back-up Program.The compounds in our MEKI Back-up Program are
from several chemical classes that are distinct from the RDEA119 chemical class. Based on
early preclinical data, we believe that the compounds in our MEKI Back-up Program may have
the potential to share certain of the positive attributes of RDEA119, but also appear to
have even greater potency. A MEKI back-up compound will be assessed
in a first-in-human micro-dosing clinical study in the fourth quarter of 2007. We plan to select a clinical
candidate from this program in the first half of 2008.
 Market Opportunity
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Company History
    Transaction with Valeant
     12




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Financial Outlook
   Recent Accounting Pronouncements
  Critical Accounting Policies and Estimates
    13




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Stock-Based Compensation
   Contract Accruals
  Results of Operations
 Three Months and Nine Months Ended September 30, 2007 and 2006
 Sponsored Research Revenues
  Research and Development
  14




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General and Administrative
  Interest Income
  Loss Applicable to Common Stockholders
  Liquidity and Capital Resources
      15




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Contractual Obligations
      Off-Balance Sheet Arrangements
  Indemnifications
  16




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ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
  
 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.
  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.
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
    
    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.
  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.
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*Our quarterly results and stock price may fluctuate significantly.
  
    
    whether or not we achieve specified research or commercialization milestones under any
agreement that we enter into with collaborators and the timely payment by potential
commercial collaborators of any amounts payable to us or by us to Valeant or any other
party, including the milestone payments that we may make to Valeant;
    
    whether Valeant terminates our research services agreement after the first year;
    
    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.
  
    
    exposure to unknown liabilities;
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
    
    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 in anticipation of 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;
    
    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;
 25




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
    
    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
 *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
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
   Nominee
    
    Affirmative Votes
    
    Votes WithheldJack S. Remington, M.D.
    
    
    10,807,704
    
    
    
    1,812Kevin C. Tang
    
    
    10,807,704
    
    
    
    1,812
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§
    
    the right of any stockholder who holds in excess of 15% of
the issued and outstanding shares of our voting stock on an as converted basis to request that a special meeting of
stockholders be called, which special meeting must be held within 60 days of our receipt of
notice of the stockholders request;§
    
    the right of the stockholders to remove a director with or without cause by an
affirmative vote of a majority of the issued and outstanding shares of our voting stock on
an as converted basis entitled to elect such director;§
    
    the elimination of the supermajority votes required to amend our Certificate of
Incorporation and Bylaws;§
    
    the limitation of the Board of Directors ability to set the number of directors by
resolution to allow the Board of Directors to determine the size of the Board of Directors
within a range of 5 to 11 directors; and§
    
    additional miscellaneous clarifying and administrative revisions to our Certificate of
Incorporation and Bylaws.
   
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
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SIGNATURES
   By:
    /s/ BARRY D. QUART, PHARM.D.Barry D. Quart, Pharm.D.Chief Executive OfficerBy:
    /s/ DENIS HICKEYDenis HickeyChief Financial Officer 32




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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)3.6
    
    Certificate of Amendment to Amended and Restated Certificate of Incorporation.(3)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
    
    Ardea Biosciences, Inc. 2000 Employee Stock Purchase 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 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-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.(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. 000-1103390) filed with the Securities
and Exchange Commission on October 15, 2007. 33