##### Table of Contents



UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, DC
    20549
      Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file number:
    001-33103
  CADENCE PHARMACEUTICALS,
    INC.
 (Exact Name of Registrant as
    Specified in its Charter)
  Delaware

41-2142317(State or Other Jurisdiction
    of
    Incorporation or Organization)

(I.R.S. Employer
    Identification No.)12481 High Bluff Drive,
    Suite 200,
    San Diego, California

92130(Zip Code)(Address of Principal Executive
    Offices)   (858) 436-1400 (Registrants
    Telephone Number, Including Area Code)
  Securities registered pursuant to Section 12(b) of the
    Act:
   Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, par value
    $0.0001 per share

The NASDAQ Global Market   Securities registered pursuant to Section 12(g) of the
    Act:
    None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 o o þ
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-




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##### 



CADENCE
    PHARMACEUTICALS, INC.FORM 10-K 
    ANNUAL REPORT
    For the Fiscal Year Ended December 31, 2006
    Table of Contents
  
  PagePART IItem 1


Business


3Item 1A


Risk
    Factors


27Item 1B


Unresolved Staff
    Comments


49Item 2


Properties


49Item 3


Legal
    Proceedings


49Item 4


Submission of
    Matters to a Vote of Security Holders


49PART IIItem 5


Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


49Item 6


Selected
    Consolidated Financial Data


53Item 7


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


54Item 7A


Quantitative and
    Qualitative Disclosures About Market Risk


61Item 8


Financial
    Statements and Supplementary Data


62Item 9


Changes in and
    Disagreements With Accountants on Accounting and Financial
    Disclosure


79Item 9A


Controls and
    Procedures


79Item 9B


Other
    Information


79PART IIIItem 10


Directors,
    Executive Officers and Corporate Governance


79Item 11


Executive
    Compensation


79Item 12


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


79Item 13


Certain
    Relationships and Related Transactions, and Director
    Independence


80Item 14


Principal
    Accounting Fees and Services


80PART IVItem 15


Exhibits and
    Financial Statement Schedules


80Signatures


82EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1   2




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PART I  Forward-Looking
    Statements
  This Annual Report on
    Form 10-K,
    or Annual Report, includes forward-looking statements that are
    subject to risks and uncertainties, many of which are beyond our
    control. Our actual results will differ from those anticipated
    in these forward looking statements as a result of various
    factors, including those set forth below under the caption
    Item 1A.  Risk Factors and the
    differences may be material. Forward-looking statements discuss
    matters that are not historical facts. Forward-looking
    statements include, but are not limited to, discussions
    regarding our operating strategy, growth strategy, acquisition
    strategy, cost savings initiatives, industry, economic
    conditions, financial condition, liquidity and capital resources
    and results of operations. In this Annual Report, for example,
    we make forward-looking statements regarding the potential
    for IV APAP and Omigard to receive regulatory approval for
    one or more indications on a timely basis or at all; the results
    of pending clinical trials for IV APAP and Omigard;
    unexpected adverse side effects or inadequate therapeutic
    efficacy of IV APAP or Omigard that could delay or prevent
    regulatory approval or commercialization, or that could result
    in recalls or product liability claims; other difficulties or
    delays in development, testing, manufacturing and marketing of
    and obtaining regulatory approval for IV APAP or Omigard;
    the scope and validity of patent protection for IV APAP or
    Omigard; the market potential for pain, fever, local catheter
    site infections and other target markets, and our ability to
    compete; the potential to attract a strategic collaborator and
    terms of any related transaction; intense competititon if either
    of IV APAP or Omigard is ever commercialized; and our
    ability to raise sufficient capital when needed, or at all. Such
    statements include, but are not limited to, statements preceded
    by, followed by or that otherwise include the words
    believes, expects,
    anticipates, intends,
    estimates, projects, can,
    could, may, will,
    would or similar expressions. For those statements,
    we claim the protection of the safe harbor for forward-looking
    statements contained in the Private Securities Litigation Reform
    Act of 1995. You should not rely unduly on these forward-looking
    statements, which speak only as of the date on which they were
    made. We undertake no obligation to update publicly or revise
    any forward-looking statements, whether as a result of new
    information, future events or otherwise, unless required by
    law.
  Item 1.
    Business  Overview
  tm
    
    IV APAP for the treatment of acute pain and
    fever.  We are developing IV APAP in the
    U.S. market for the treatment of acute pain and fever.
    According to IMS Health, Inc., or IMS, an independent marketing
    research 3




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firm, over 251 million units of injectable analgesics,
    typically used to treat pain, were sold in the United States in
    2005. Opioids such as morphine, meperdine, hydromorphone and
    fentanyl represent the majority of unit volume in the market but
    are associated with a variety of unwanted side effects including
    sedation, nausea, vomiting, constipation, cognitive impairment
    and respiratory depression. Ketorolac, a non-steroidal
    anti-inflammatory drug, or NSAID, is the only non-opioid
    injectable analgesic available for the treatment of acute pain
    in the United States. However, ketorolac carries strong warnings
    from the FDA for various side effects, including an increased
    risk of bleeding  a particularly troubling
    side-effect in the surgical setting. In March 2006, we
    in-licensed the patents and the exclusive development and
    commercialization rights to IV APAP in the United States
    and Canada from BMS. IV APAP has been marketed outside the
    United States for approximately five years. Since its
    introduction in Europe in mid-2002, over 200 million doses
    of IV APAP have been distributed, and it has become the
    market and unit share leader among injectable analgesics with
    2006 sales in excess of $159 million. With approval in over
    50 countries, the addition of IV APAP to our product
    pipeline is consistent with our strategy to in-license and
    develop pharmaceutical candidates with well-understood risk
    profiles. In the fourth quarter of 2006 we initiated the
    Phase III clinical program agreed to by the FDA at the End
    of Phase II meeting in August 2006. We expect the results
    from the Phase III clinical program to be available in the
    first half of 2008., If positive, we anticipate submitting a new
    drug application, or NDA, in the second half of 2008.  
    Omigard for the prevention of intravascular catheter-related
    infections.  We are developing Omigard for the
    prevention of intravascular catheter-related infections in the
    United States and Europe. According to the February 2004
    Catheter: Global Markets & Technologiesreport
    from Theta Reports, eight million central venous catheters, or
    CVCs, were sold in the United States in 2003, and unit sales are
    projected to grow to 11 million by 2007. Although CVCs have
    become an important part of medical care, they can give rise to
    dangerous and costly complications, including: LCSIs, which are
    infections at the catheter insertion site; catheter
    colonization, which is the growth of microorganisms on the
    portion of the catheter below the skin surface; and
    catheter-related bloodstream infections, or CRBSIs, which are
    infections in the bloodstream caused by microorganisms
    associated with the catheter. The Centers for Disease Control
    and Prevention, or CDC, estimates that there are 250,000 CRBSIs
    each year in the United States. The attributable mortality rate
    of CRBSIs is approximately 12% to 25% with an average marginal
    cost to the healthcare system of $25,000 per infection.
    Currently, topical antiseptics are the primary agent used to
    prevent catheter infections, and they are used to cleanse the
    skin surface around the catheter insertion site prior to
    insertion and at dressing changes. However, the utility of these
    antiseptics is limited, principally due to the relatively short
    duration of antimicrobial activity. Omigard is a topical
    antimicrobial that has been demonstrated to be rapidly
    bactericidal and fungicidal with prolonged duration of activity
    against all microorganisms commonly found on the skin surface
    including multi-drug resistant microorganisms such as
    methicillin-resistant staphylococcus aureus,or MRSA.
    Importantly, resistance to Omigard has not been induced in the
    laboratory after extensive study nor has Omigard demonstrated
    potential to induce cross-resistance to other antimicrobial
    therapeutics. In July 2004, we in-licensed the patents and the
    exclusive development and commercialization rights to Omigard in
    North America and Europe for the prevention of device-related,
    surgical wound-related and burn-related infections. Omigard has
    previously been studied in a large, completed Phase III
    trial that demonstrated statistically significant outcomes for
    two pre-specified secondary endpoints, the prevention of LCSIs
    and and the prevention of catheter colonization. The presence of
    an LCSI may result in replacement of the catheter
    and/or
    administration of antibiotics, both of which create additional
    costs to hospitals and have the potential for adverse safety
    outcomes. In addition, catheter colonization is well correlated
    with CRBSIs, according to a published review of clinical trials.
    In August 2005, we initiated a confirmatory Phase III
    clinical trial with a primary endpoint, the prevention of LCSIs.
    We reached agreement with the FDA on the trial design, endpoints
    and statistical analysis plan through the special protocol
    assessment, or SPA, process. We expect these Phase III
    results to be available in the second half of 2007 and, if
    positive, we expect to subsequently submit an NDA for Omigard in
    the first half of 2008.
    Other product candidates.  We are also
    exploring the opportunity to develop new formulations of
    omiganan pentahydrochloride for the prevention and treatment of
    other device-related, surgical wound-related and burn-related
    infections. We are currently preparing preclinical experiments
    in animal models prior to initiating human clinical trials. 4




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Our
    Strategy
    
    Obtain regulatory approval for our Phase III hospital
    product candidates, IV APAP and Omigard.  We are
    applying the expertise of our development teams to conduct and
    successfully complete the Phase III clinical trials
    associated with each product candidate. We have designed our
    Phase III clinical programs in an effort to reduce clinical
    development risk, facilitate regulatory approval and optimize
    marketing claims. To that end, in the fourth quarter of 2006 we
    resumed the U.S. Phase III program for IV APAP
    previously initiated by BMS, and we expect to submit an NDA in
    the second half of 2008 based on the trials previously completed
    by BMS in the U.S. and Europe and any further trials that
    may be required by the FDA. In addition, we have reached a
    written agreement with the FDA through the SPA process for a
    single confirmatory Phase III study of Omigard for the
    prevention of LCSIs.
    Build a highly leverageable sales organization targeting
    hospitals.  We intend to build a commercial
    organization focused on promoting our products principally to
    hospitals in the United States. We believe that both IV
    APAP and Omigard can be effectively promoted by our own sales
    force targeting key hospitals in the United States. Importantly,
    the number of institutions comprising the hospital marketplace
    is relatively limited and we believe a small number of these
    institutions account for a substantial portion of the
    prescribing activity. The concentrated nature of this market
    creates the opportunity for significant marketing synergies as
    we intend to leverage our sales force across multiple
    therapeutic categories in the hospital. Outside the United
    States, we intend to establish strategic partnerships for the
    commercialization of our products where we have
    commercialization rights.
    Expand our product portfolio through acquiring or
    in-licensing additional late-stage, hospital-focused products
    with well-understood risk profiles.  We will seek
    additional opportunities to acquire or in-license products to
    more fully exploit our clinical, regulatory, manufacturing,
    sales and marketing capabilities. We believe that our focus on
    the hospital market enables us to evaluate a broader range of
    products across multiple therapeutic areas for possible
    acquisition. In addition, competition from large pharmaceutical
    companies has generally diminished in the hospital marketplace
    as greater emphasis has shifted toward larger opportunities in
    the primary care setting. To reduce the
    time-to-
    market and the risks and costs of clinical development, we focus
    on products that are in late-stages of development, currently
    commercialized outside the United States or approved in the
    United States but with significant commercial potential for
    proprietary new uses or formulations.
    Pursue additional indications and commercial opportunities
    for our product candidates.  We will seek to
    maximize the value of IV APAP, Omigard and any other
    product candidates we may in-license, acquire or develop by
    pursuing other indications and commercial opportunities for such
    candidates. For example, we have rights to develop and
    commercialize omiganan pentahydrochloride for additional
    indications related to the prevention and treatment of
    device-related, surgical wound-related and burn-related
    infections.  The
    Hospital Market
   5




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direct-to-consumer
         6




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Our
    Product Development Programs
    DevelopmentStage in the

Development

CadenceProduct Candidate

Indication

United States

Stage in Europe

Commercial RightsIV APAP(1)

Treatment of acute post-surgical
    pain  adults

Phase III

Marketed (by BMS)

United States, CanadaTreatment of acute
    pain  pediatrics

Phase III

Marketed (by BMS)

United States, CanadaTreatment of fever 
    adults

Phase III

Marketed (by BMS)

United States, CanadaTreatment of fever 
    pediatrics

Phase III

Marketed (by BMS)

United States, CanadaOmigard

Prevention of local catheter site
    infections

Phase III

Phase III

North America, Europe     (1)
    
    In March 2006, we in-licensed the patents and the exclusive
    development and commercialization rights to IV APAP in the
    United States and Canada from BMS. BMS has completed
    Phase III trials with respect to the above indications,
    excluding the treatment of fever in adults, for IV APAP in
    Europe and the United States, which we intend to use in our NDA
    filing following agreement with the FDA on additional clinical
    trials needed in the United States for approval. Because the
    Phase III clinical trial requirements differ in the United
    States compared to Europe, we are required to complete
    additional Phase III trials, particularly to demonstrate
    safety and efficacy from multiple day dosing in additional
    patient populations, including patients undergoing soft tissue
    surgery, such as abdominal hysterectomy, and patients with
    fever. In the fourth quarter of 2006, we initiated the remaining
    Phase III clinical trial requirements for submission in the
    United States. We expect the Phase III clinical trial
    results to be available in the first half of 2008 and, if
    positive, to submit an NDA in the second half of 2008.  IV
    APAP for the Treatment of Acute Pain and Fever
  Acute
    Pain Background
         7




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Market
    for Injectable Analgesics
        Limitations
    of Current Therapies
          cyclooxygenase-1,
 8




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Fever
         9




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IV
    APAP
    over-the-counter
        ready-to-use
 10




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15-minute
  country-by-country
      Clinical
    Development History
  Clinical Overview.
  Clinical Studies for Post-Operative Pain in
    Adults. moderate-to-severe p-value<
  cause-and-effect
 11




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Outcome Measure

Result

p-valueMedian time to morphine rescue

3.0 hours for IV APAP
    vs. 0.8 hours for placebo


<0.001Reduction in morphine consumption
    over the
    24-hour
    period

33% reduction (19.1mg) for IV
    APAP compared to placebo


<0.01     moderate-to-severe p-value<
  moderate-to-severe
  mild-to-moderate 24-hour
  Clinical Studies for Post-Operative Pain in
    Children. moderate-to-severe
 12




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Clinical Studies for Fever in Children.
  Safety Summary.
    Opioid Sparing Summary.
  Clinical
    Development Plan
      
    Phase III trial in female patients with
    moderate-to-severe
    pain following gynecologic surgery: this trial will be a
    randomized, placebo-controlled, double-blind, multi-center study
    to assess the efficacy and safety of single and multiple doses
    of IV APAP.
    Phase III trial in adults with fever: this trial will be a
    randomized, controlled, double-blind, double-dummy study to
    assess the efficacy and safety of a single dose of IV or
    oral APAP vs. placebo.
    Pharmacokinetic study in adult subjects: this trial will be a
    randomized, single-center study to assess the pharmacokinetics
    of single and multiple doses of IV APAP compared to oral
    acetaminophen in adults. This trial was fully enrolled in
    December 2006 and we expect data to be available in the first
    half of 2007. 13




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
    Pharmacokinetic study in pediatric subjects: this trial will be
    a randomized, single-center study to assess the population
    pharmacokinetics of single and multiple doses of IV APAP
    compared to oral acetaminophen in children.
    Safety study in adult subjects: this trial will be an
    open-label, multi-center,
    multi-day
    study to assess the safety of repeated doses of IV APAP
    over at least 5 days in at least 50 adults.
    Safety study in pediatric subjects: this trial will be an
    open-label, multi-center,
    multi-day
    study to assess the safety of repeated doses of IV APAP
    over at least 5 days in at least 50 children.    Omigard
    for the Prevention of Intravascular Catheter-Related
    Infections
  Intravascular
    Catheter-Related Infections Background
    and/or
       14




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Market
    for Antimicrobials to Prevent Intravascular Catheter
    Infections
        Limitations
    of Current Therapies
      72-96 hours),
 15




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Omigard
      
    broad spectrum bactericidal and fungicidal activity;
    activity against resistant strains, including MRSA and
    vancomycin resistant enterococci, or VRE;
    rapid and prolonged duration of effect;
    resistance to Omigard has not been induced in the laboratory;
    no demonstrated ability to generate cross-resistance to other
    antimicrobials;
    excellent safety profile; and
    convenient application.     16




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unit-of-use
  Clinical
    Development History
    and/or
  p-value
  Treatment ArmVariable

10% povidone-iodine


Omigard


p-valueCatheter colonization present


232/583 (39.8
)%


180/578 (31.1
)%


0.002   p-value intent-to-treat p-value
  Treatment ArmVariable

10% povidone-iodine


Omigard


p-valueLCSI present


48/699 (6.9
)%


24/693 (3.5
)%


0.004   intent-to-treat
  17




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Treatment ArmOutcome

10% povidone-iodine


Omigard


p-valueFailure


18/699 (2.6
)%


15/693 (2.2
)%


0.622Success


635/699 (90.8
)%


630/693 (90.9
)%Indeterminate


46/699 (6.6
)%


48/693 (6.9
)%       Clinical
    Development Plan
    and/or
       18




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Additional
    Indications
      Commercialization
    Strategy
    75-100 people
  150-200 people
  Licensing
    Agreements
  IV
    APAP Agreement
     19




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country-by-country
    Omigard
    Agreement
        Intellectual
    Property
  IV
    APAP
   20




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Omigard
    Manufacturing
      Competition
   21




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IV
    APAP
    Injectable
    opioids
  
    Morphine is the leading product for the treatment of acute
    post-operative pain, and is available generically from several
    manufacturers;
    DepoDur, is an extended release injectable (epidural)
    formulation of morphine; and
    other injectable opioids, including fentanyl, meperidine and
    hydromorphone, each of which is available generically from
    several manufacturers.  Injectable
    NSAIDs
  
    Ketorolac, an injectable NSAID, is available generically from
    several manufacturers.  Product
    Candidates
    Omigard
    
    topical antiseptics such as povidone-iodine and chlorhexidine,
    each of which is available generically from several
    manufacturers;
    Neosporin, a topical antibacterial ointment containing
    polymyxin, neomycin and bacitracin, available generically from
    several manufacturers;
    Bactroban, a topical antibacterial containing mupirocin,
    available generically from several manufacturers; and
    BioPatch, a chlorhexidine-impregnated foam dressing, from
    Johnson & Johnson that is approved both for wound
    dressing and the prevention of catheter-related infections.    Government
    Regulation
   22




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FDA
    Approval Process
          Special
    Protocol Assessment Process
   23




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45-day end-of-Phase II
  Section 505(b)(2)
    New Drug Applications
      30-month
 24




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45-day 30-month
    Fast
    Track Designation
    The
    Hatch-Waxman Act
  30-month
  Other
    Regulatory Requirements
     25




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Third-Party
    Reimbursement and Pricing Controls
     26




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Employees
    Item 1A.
    Risk
    Factors  Certain factors may have a material adverse effect on our
    business, financial condition and results of operations, and you
    should carefully consider them. Accordingly, in evaluating our
    business, we encourage you to consider the following discussion
    of risk factors, in its entirety, in addition to other
    information contained in this report as well as our other public
    filings with the Securities and Exchange Commission.
  In the near-term, the success of our business will depend on
    many factors, including the following risks:
  
    we are largely dependent on the success of our only two
    product candidates, IV APAP and Omigard, and we cannot be
    certain that our planned clinical development programs will be
    sufficient to support NDA submissions or that either product
    candidate will receive regulatory approval or be successfully
    commercialized;
    delays in the commencement, enrollment or completion of
    clinical testing for either of our product candidates could
    result in increased costs to us and delay or limit our ability
    to obtain regulatory approval;
    even if our product candidates are approved by regulatory
    authorities, we expect intense competition in the hospital
    marketplace for our targeted indications;
    the patent rights that we have in-licensed covering IV
    APAP are limited to a specific intravenous formulation of
    acetaminophen, and our market opportunity for this product
    candidate may be limited by the lack of patent protection for
    the active ingredient itself and other formulations that may be
    developed by competitors; and
    we will require substantial additional funding and may be
    unable to raise capital when needed, which would force us to
    delay, reduce or eliminate our development programs and
    commercialization efforts.  Each of these factors, as well as other factors that may
    impact our business, are described in more detail in the
    following discussion. Although the factors highlighted above are
    among the most significant, any of the following factors could
    materially adversely affect our business or cause our actual
    results to differ materially from those contained in
    forward-looking statements we have made in this report and those
    we may make from time to time, and you should consider all of
    the factors described when evaluating our business.
  Risks
    Related to Our Business and Industry
  We are
    largely dependent on the success of our two product candidates,
    IV APAP and Omigard, and we cannot be certain that either of
    these product candidates will receive regulatory approval or be
    successfully commercialized.
     27




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tm
  If
    clinical trials of our current or future product candidates do
    not produce results necessary to support regulatory approval in
    the United States or elsewhere, we will be unable to
    commercialize these products.
  and/or
      Because
    the results of earlier clinical trials are not necessarily
    predictive of future results, IV APAP, Omigard or any other
    product candidate we advance into clinical trials may not have
    favorable results in later clinical trials or receive regulatory
    approval.
     28




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Delays
    in the commencement or completion of clinical testing could
    result in increased costs to us and delay or limit our ability
    to obtain regulatory approval for our product
    candidates.
  still-to-be-initiated
  
    reaching agreements on acceptable terms with prospective
    clinical research organizations, or CROs, and trial sites, the
    terms of which can be subject to extensive negotiation and may
    vary significantly among different CROs and trial sites;
    obtaining regulatory approval to commence a clinical trial; 29




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
    obtaining institutional review board approval to conduct a
    clinical trial at a prospective site;
    recruiting and enrolling patients to participate in clinical
    trials for a variety of reasons, including competition from
    other clinical trial programs for the same indication as our
    product candidates; and
    retaining patients who have initiated a clinical trial but may
    be prone to withdraw due to the treatment protocol, lack of
    efficacy, personal issues, side effects from the therapy or who
    are lost to further
    follow-up.    
    failure to conduct the clinical trial in accordance with
    regulatory requirements or our clinical protocols;
    inspection of the clinical trial operations or trial sites by
    the FDA or other regulatory authorities resulting in the
    imposition of a clinical hold;
    new information suggesting unacceptable risk to subjects, or
    unforeseen safety issues or any determination that a trial
    presents unacceptable health risks; or
    lack of adequate funding to continue the clinical trial,
    including the incurrence of unforeseen costs due to enrollment
    delays, requirements to conduct additional trials and studies
    and increased expenses associated with the services of our CROs
    and other third parties.    We
    expect intense competition in the territories in which we have
    rights to our product candidates, and new products may emerge
    that provide different or better therapeutic alternatives for
    our targeted indications.
       30




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
    capital resources;
    development resources, including personnel and technology;
    clinical trial experience;
    regulatory experience;
    expertise in prosecution of intellectual property
    rights; and
    manufacturing, distribution and sales and marketing experience.    If any
    of our product candidates for which we receive regulatory
    approval do not achieve broad market acceptance, the revenues
    that we generate from their sales will be limited.
    
    limitations or warnings contained in a products
    FDA-approved labeling, including potential limitations or
    warnings for IV APAP that may be more restrictive than oral
    formulations of acetaminophen;
    changes in the standard of care for the targeted indications for
    either of our product candidates could reduce the marketing
    impact of any superiority claims that we could make following
    FDA approval;
    limitations inherent in the approved indication for either of
    our product candidates compared to more commonly-understood or
    addressed conditions, including, in the case of Omigard, the
    ability to promote Omigard to hospitals and physicians who may
    be more focused on an indication specifically for the prevention
    of CRBSIs compared to the prevention of LCSIs, the primary
    endpoint in our ongoing Phase III clinical trial; and
    potential advantages over, and availability of, alternative
    treatments, including, in the case of IV APAP, a number of
    products already used to treat acute pain in the hospital
    setting, and in the case of Omigard, a number of competitive
    topical products as well as a device that has been approved for
    wound dressing and prevention of catheter-related infections.   31




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##### Table of Contents



The
    decreasing use of the comparator product in our clinical trial
    for Omigard may limit our ability to complete the trial in a
    timely manner and hinder the competitive profile of this product
    candidate.
    Even
    if our product candidates receive regulatory approval, they may
    still face future development and regulatory
    difficulties.
      
    issue warning letters or untitled letters;
    require us to enter into a consent decree, which can include
    imposition of various fines, reimbursements for inspection
    costs, required due dates for specific actions and penalties for
    noncompliance;
    impose other civil or criminal penalties; 32




---



##### Table of Contents




    suspend regulatory approval;
    suspend any ongoing clinical trials;
    refuse to approve pending applications or supplements to
    approved applications filed by us;
    impose restrictions on operations, including costly new
    manufacturing requirements; or
    seize or detain products or require a product recall.  Even
    if our product candidates receive regulatory approval in the
    United States, we may never receive approval or commercialize
    our products outside of the United States.
  follow-up
  We
    have never marketed a drug before, and if we are unable to
    establish an effective sales and marketing infrastructure, we
    will not be able to successfully commercialize our product
    candidates.
    Our
    product candidates may have undesirable side effects that could
    delay or prevent their regulatory approval or
    commercialization.
   33




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##### Table of Contents




    regulatory authorities may require the addition of labeling
    statements, specific warnings or a contraindication;
    regulatory authorities may withdraw their approval of the
    product;
    we may be required to change the way the product is
    administered, conduct additional clinical trials or change the
    labeling of the product; and
    our reputation may suffer.    If the
    government or third-party payors fail to provide coverage and
    adequate coverage and payment rates for our future products, if
    any, or if hospitals choose to use therapies that are less
    expensive, our revenue and prospects for profitability will be
    limited.
     34




---



##### Table of Contents



If we
    breach any of the agreements under which we license rights to
    our product candidates from others, we could lose the ability to
    continue the development and commercialization of our product
    candidates.
    If BMS
    breaches the underlying agreement under which we sublicense the
    rights to our IV APAP product candidate, we could lose the
    ability to develop and commercialize IV APAP.
    We
    rely on third parties to conduct our clinical trials, including
    our ongoing Phase III clinical program for IV APAP and
    our ongoing Phase III clinical trial for Omigard. If these
    third parties do not successfully carry out their contractual
    duties or meet expected deadlines, we may not be able to obtain
    regulatory approval for or commercialize our product candidates
    on our anticipated timeline or at all.
   35




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##### Table of Contents



If the
    manufacturers upon whom we rely fail to produce our product
    candidates in the volumes that we require on a timely basis, or
    to comply with stringent regulations applicable to
    pharmaceutical drug manufacturers, we may face delays in the
    development and commercialization of, or be unable to meet
    demand for, our products and may lose potential
    revenues.
        Our
    future growth depends on our ability to identify and acquire or
    in-license products and if we do not successfully identify and
    acquire or in-license related product candidates or integrate
    them into our operations, we may have limited growth
    opportunities.
    
    exposure to unknown liabilities; 36




---



##### Table of Contents




    disruption of our business and diversion of our
    managements time and attention to develop 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;
    difficulty and cost in combining the operations and personnel of
    any acquired businesses with our operations and personnel;
    impairment of relationships with key suppliers or customers of
    any acquired businesses due to changes in management and
    ownership; and
    inability to retain key employees of any acquired businesses.    We
    will need to increase the size of our organization, and we may
    experience difficulties in managing growth.
    
    manage our clinical trials effectively, including our planned
    Phase III clinical program for IV APAP, which will be
    conducted at numerous clinical trial sites, and our ongoing
    Phase III clinical trial for Omigard, which is being
    conducted at numerous clinical sites;
    manage our internal development efforts effectively while
    carrying out our contractual obligations to licensors and other
    third parties; and
    continue to improve our operational, financial and management
    controls, reporting systems and procedures.    We may
    not be able to manage our business effectively if we are unable
    to attract and retain key personnel.
     37




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##### Table of Contents



We
    face potential product liability exposure, and if successful
    claims are brought against us, we may incur substantial
    liability for a product candidate and may have to limit its
    commercialization.
    
    withdrawal of clinical trial participants;
    termination of clinical trial sites or entire trial programs;
    decreased demand for our product candidates;
    impairment of our business reputation;
    costs of related litigation;
    substantial monetary awards to patients or other claimants;
    loss of revenues; and
    the inability to commercialize our product candidates.    Recent
    proposed legislation may permit re-importation of drugs from
    foreign countries into the United States, including foreign
    countries where the drugs are sold at lower prices than in the
    United States, which could materially adversely affect our
    operating results and our overall financial
    condition.
   38




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##### Table of Contents



Our
    business involves the use of hazardous materials and we and our
    third-party manufacturers must comply with environmental laws
    and regulations, which can be expensive and restrict how we do
    business.
    Our
    business and operations would suffer in the event of system
    failures.
    Risks
    Related to Intellectual Property
  The
    patent rights that we have in-licensed covering IV APAP are
    limited to a specific intravenous formulation of acetaminophen,
    and our market opportunity for this product candidate may be
    limited by the lack of patent protection for the active
    ingredient itself and other formulations that may be developed
    by competitors.
   39




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##### Table of Contents



The
    patent rights that we have in-licensed covering Omigard are
    limited in scope and limited to specific
    territories.
      We
    depend on our licensors for the maintenance and enforcement of
    our intellectual property and have limited control, if any, over
    the amount or timing of resources that our licensors devote on
    our behalf.
     40




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##### Table of Contents



Because
    it is difficult and costly to protect our proprietary rights, we
    may not be able to ensure their protection.
        
    our licensors might not have been the first to make the
    inventions covered by each of our pending patent applications
    and issued patents;
    our licensors might not have been the first to file patent
    applications for these inventions; 41




---



##### Table of Contents




    others may independently develop similar or alternative
    technologies or duplicate any of our product candidates or
    technologies;
    it is possible that none of the pending patent applications
    licensed to us will result in issued patents;
    the issued patents covering our product candidates may not
    provide a basis for commercially viable active products, may not
    provide us with any competitive advantages, or may be challenged
    by third parties;
    we may not develop additional proprietary technologies that are
    patentable; or
    patents of others may have an adverse effect on our business.          If we
    are sued for infringing intellectual property rights of third
    parties, it will be costly and time consuming, and an
    unfavorable outcome in any litigation would harm our
    business.
   42




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##### Table of Contents




    infringement and other intellectual property claims which, with
    or without merit, can be expensive and time consuming to
    litigate and can divert managements attention from our
    core business;
    substantial damages for past infringement which we may have to
    pay if a court decides that our product infringes on a
    competitors patent;
    a court prohibiting us from selling or licensing our product
    unless the patent holder licenses the patent to us, which it is
    not required to do;
    if a license is available from a patent holder, we may have to
    pay substantial royalties or grant cross licenses to our
    patents; and
    redesigning our processes so they do not infringe, which may not
    be possible or could require substantial funds and time.  We may
    be subject to claims that our employees have wrongfully used or
    disclosed alleged trade secrets of their former
    employers.
    Risks
    Related to Our Finances and Capital Requirements
  We
    have incurred significant operating losses since our inception
    and anticipate that we will incur continued losses for the
    foreseeable future.
   43




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##### Table of Contents



We
    currently have no source of revenue and may never be
    profitable.
    
    successfully complete our ongoing and planned clinical trials
    for IV APAP and Omigard;
    obtain regulatory approval for either of our two product
    candidates;
    assuming these regulatory approvals are received, manufacture
    commercial quantities of our product candidates at acceptable
    cost levels; and
    successfully market and sell any approved products.    Our
    short operating history makes it difficult to evaluate our
    business and prospects.
    We
    will need additional funding and may be unable to raise capital
    when needed, which would force us to delay, reduce or eliminate
    our product development programs or commercialization
    efforts.
    
    fund our operations and continue to conduct adequate and
    well-controlled clinical trials to provide clinical data to
    support regulatory approval of marketing applications;
    continue our development activities;
    qualify and outsource the commercial-scale manufacturing of our
    products under cGMP; and
    commercialize IV APAP, Omigard or any other product
    candidates that we may in-license or acquire, if any of these
    product candidates receive regulatory approval.   44




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##### Table of Contents




    the rate of progress and cost of our clinical trials and other
    product development programs for IV APAP, Omigard and any
    other product candidates that we may in-license or acquire;
    the costs of filing, prosecuting, defending and enforcing any
    patent claims and other intellectual property rights associated
    with our product candidates;
    the cost and timing of completion of an outsourced commercial
    manufacturing supply for each product candidate;
    the costs and timing of regulatory approval;
    the costs of establishing sales, marketing and distribution
    capabilities;
    the effect of competing technological and market
    developments; and
    the terms and timing of any collaborative, licensing,
    co-promotion or other arrangements that we may establish.      Our
    quarterly operating results may fluctuate
    significantly.
    
    the timing of milestone payments required under our license
    agreements for IV APAP and Omigard;
    our execution of other collaborative, licensing or similar
    arrangements, and the timing of payments we may make or receive
    under these arrangements;
    our addition or termination of clinical trials or funding
    support;
    variations in the level of expenses related to our two existing
    product candidates or future development programs;
    any intellectual property infringement lawsuit in which we may
    become involved;
    regulatory developments affecting our product candidates or
    those of our competitors; and
    if either of our product candidates receives regulatory
    approval, the level of underlying hospital demand for our
    product candidates and wholesalers buying patterns.   45




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##### Table of Contents



Raising
    additional funds by issuing securities may cause dilution to
    existing stockholders and raising funds through lending and
    licensing arrangements may restrict our operations or require us
    to relinquish proprietary rights.
    We
    will continue to incur significant increased costs as a result
    of operating as a public company, and our management will be
    required to devote substantial time to new compliance
    initiatives.
      Risks
    Relating to Securities Markets and Investment in Our
    Stock
  There
    may not be a viable public market for our common
    stock.
   46




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##### Table of Contents



Future
    sales of our common stock may cause our stock price to
    decline.
    Rule 10b5-1
  We
    expect that the price of our common stock will fluctuate
    substantially.
    
    the results from our clinical trial programs, including our
    planned Phase III clinical program for IV APAP and our
    ongoing Phase III clinical trial for Omigard;
    the results of clinical trial programs for IV APAP and
    Omigard being performed by others;
    FDA or international regulatory actions, including failure to
    receive regulatory approval for any of our product candidates;
    failure of any of our product candidates, if approved, to
    achieve commercial success;
    announcements of the introduction of new products by us or our
    competitors;
    market conditions in the pharmaceutical and biotechnology
    sectors;
    developments concerning product development results or
    intellectual property rights of others;
    litigation or public concern about the safety of our potential
    products;
    actual and anticipated fluctuations in our quarterly operating
    results;
    deviations in our operating results from the estimates of
    securities analysts or other analyst comments;
    additions or departures of key personnel;
    third-party coverage and reimbursement policies;
    developments concerning current or future strategic
    collaborations; and
    discussion of us or our stock price by the financial and
    scientific press and in online investor communities. 47




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##### Table of Contents



Our
    executive officers and directors and their affiliates may
    exercise control over stockholder voting matters in a manner
    that may not be in the best interests of all of our
    stockholders.
    Anti-takeover
    provisions under our charter documents and Delaware law could
    delay or prevent a change of control which could limit the
    market price of our common stock and may prevent or frustrate
    attempts by our stockholders to replace or remove our current
    management.
    
    a board of directors divided into three classes serving
    staggered three-year terms, such that not all members of the
    board will be elected at one time;
    a prohibition on stockholder action through written consent;
    a requirement that special meetings of stockholders be called
    only by the chairman of the board of directors, the chief
    executive officer, the president or by a majority of the total
    number of authorized directors;
    advance notice requirements for stockholder proposals and
    nominations;
    a requirement of approval of not less than
    662/3%
    of all outstanding shares of our capital stock entitled to vote
    to amend any bylaws by stockholder action, or to amend specific
    provisions of our certificate of incorporation; and
    the authority of the board of directors to issue preferred stock
    on terms determined by the board of directors without
    stockholder approval.    We
    have never paid dividends on our capital stock, and we do not
    anticipate paying any cash dividends in the foreseeable
    future.
   48




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##### Table of Contents



We may
    become involved in securities class action litigation that could
    divert managements attention and harm our
    business.
    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    of Matters to a Vote of Security Holders  1-for-4
 PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Market
    Information
    Year Ended December 31, 2006

High


LowFourth quarter (beginning
    October 25, 2006)


13.25



9.25     Dividend
    Policy
   49




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##### Table of Contents



Use of
    Proceeds
  Form S-1 (File No. 333-135821)
      Recent
    Sales of Unregistered Securities
    Series A-2
  Series A-3 Series A-3
     50




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##### Table of Contents



Issuer
    Repurchases of Equity Securities
    Securities
    Authorized for Issuance under Equity Compensation
    Plans
    Number ofShares Issuable


Weighted


SecuritiesUpon Exercise


Average


Available forof Outstanding


Exercise


FutureAwards


Price


IssuanceEquity compensation plans
    approved by security holders:2004 Equity Incentive Award Plan


1,651,867


$
1.97



2006 Equity Incentive Award Plan


13,100


$
11.34



2,177,672Equity compensation plans not
    approved by security holders:None    51




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##### Table of Contents



Performance
    Graph
    Comparison
    of Cumulative Total Return on Investment
    Since October 25, 2006
  
  10/25/06


12/29/06Cadence Pharmaceuticals, Inc.


$
100



$
131Nasdaq Composite Index


$
100



$
102Nasdaq Biotechnology Index


$
100



$
100  52




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##### Table of Contents



Item 6.
    Selected
    Financial Data.    Period from


Period fromMay 26, 2004


May 26, 2004(Inception)


(Inception)through


throughYears Ended December 31,


December 31,


December 31,2006


2005


2004


2006Statement of Operations
    Data:Operating expenses:Research and development

$
47,827


$
6,126


$
1,883


$
55,836Marketing


810



240



41



1,091General and administrative


4,946



1,412



877



7,235Total operating expenses


53,583



7,778



2,801



64,162Loss from operations


(53,583
)


(7,778
)


(2,801
)


(64,162
)Other income (expense):Interest income


1,945



255



9



2,209Interest expense


(498
)










(498
)Other expense


(37
)


(183
)


(45
)


(265
)Total other income (expense)


1,410



72



(36
)


1,446Net loss

$
(52,173
)

$
(7,706
)

$
(2,837
)

$
(62,716
)Basic and diluted net loss per
    share

$
(10.07
)

$
(6.67
)

$
(3.10
)Shares used to compute basic and
    diluted net loss per share


5,182



1,156



915   As of December 31,2006


2005


2004Balance Sheet Data:Cash, cash equivalents and
    securities
    available-for-sale

$
86,826


$
15,025


$
4,271Working capital


76,203



14,405



4,161Total assets


93,322



15,891



4,841Long-term debt, less current
    portion


4,662







Deficit accumulated during the
    development stage


(62,716
)


(10,543
)


(2,837
)Total stockholders equity


75,409



14,745



4,727  53




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##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.  You should read the following discussion and analysis
    together with Item 6  Selected Financial
    Data and the financial statements and related notes
    included elsewhere in this
    Form 10-K.
    This discussion may contain forward-looking statements that
    involve risks and uncertainties. Our actual results could differ
    materially from those anticipated in any forward-looking
    statements as a result of many factors, including those set
    forth in our filings with the Securities and Exchange
    Commission.
  Overview
  Background
  tm
          Revenues
    Research
    and Development Expenses
   54




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##### Table of Contents



Period from May 26,2004 (Inception)Year Ended December 31,


through December 31,Product Candidate

2006


2005


2006IV APAP

$
28,052


$



$
28,052Omigard


14,343



4,802



20,796Other supporting costs


5,432



1,324



6,988$
47,827


$
6,126


$
55,836       Marketing
    General
    and Administrative
   55




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##### Table of Contents



Interest
    and Other Income
  other-than-temporary available-for-sale
  Income
    Taxes
    Critical
    Accounting Policies and Estimates
      Research
    and Development Expenses
    Stock-Based
    Compensation
  Share-Based Payment Accounting for Stock-Based
    Compensation Accounting for Stock Issued to
    Employees.
 56




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##### Table of Contents



Valuation of
    Privately-Held-Company Equity Securities Issued as
    Compensation start-up,
      96-18, Accounting for Equity Instruments That are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling
    Goods and Services
 57




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##### Table of Contents



Research and development

$
561,257Marketing


1,171General and administrative


1,572,530Total stock-based compensation

$
2,134,958   Form 10-K,
  Results
    of Operations
  Comparison
    of the years ended December 31, 2006 and 2005
  Research and Development Expenses.
  
    an increase of $28.1 million in our IV APAP program
    primarily as a result of a $25.3 million initial license
    fee which was immediately expensed as in-process research and
    development;
    an increase of $9.5 million in our Omigard program as a
    result of clinical trial and related costs for a Phase III
    clinical trial initiated in August 2005; and
    an increase of $4.1 million in other supporting costs as a
    result of increased salaries and related personnel costs
    (including stock-based compensation) from increased research and
    development staff to support our clinical and regulatory efforts
    related to both Omigard and IV APAP.  Marketing Expenses.
  General and Administrative Expenses.
  Interest Income.
  Interest Expense.
  Other income (expense). other-than-temporary.
 58




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##### Table of Contents



Comparison
    of year ended December 31, 2005 to the period from
    May 26, 2004 (inception) through December 31,
    2004
  Research and Development Expenses.
  
    an increase of $3.1 million in our Omigard program as a
    result of clinical trial and related costs offset by a decrease
    in license fees; and
    an increase of $1.1 million in unallocated expenses as a
    result of increased salaries and related personnel costs from
    increased research and development staff to support our initial
    clinical and regulatory efforts.  Marketing Expenses.
  General and Administrative Expenses.
  Interest Income.
  Other Expense. other-than-temporary.
  Liquidity
    and Capital Resources
    
    from July 2004 to December 2006 (excluding our initial public
    offering), we issued and sold a total of 2,285,115 shares
    of common stock for aggregate net proceeds of $0.8 million;
    from July 2004 to August 2004, we issued and sold a total of
    8,085,108 shares of
    Series A-1
    preferred stock for aggregate net proceeds of $7.5 million;
    from June 2005 to September 2005, we issued and sold
    17,675,347 shares of
    Series A-2
    preferred stock for aggregate net proceeds of
    $17.6 million; and
    in March 2006, we issued and sold a total of
    53,870,000 shares of
    Series A-3
    preferred stock for aggregate net proceeds of
    $53.8 million; and
    in the fourth quarter of 2006, we completed our initial public
    offering in which we issued and sold a total of
    6,900,000 shares of our common stock for an aggregate of
    $55.9 million.   59




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##### Table of Contents



Series A-2
  available-for-sale
        
    the progress of our clinical trials, including expenses to
    support the trials and milestone payments that may become
    payable to BMS or Migenix;
    our ability to establish and maintain strategic collaborations,
    including licensing and other arrangements;
    the costs and timing of regulatory approvals;
    the costs involved in enforcing or defending patent claims or
    other intellectual property rights;
    the costs of establishing sales or distribution capabilities;
    the success of the commercialization of our products; and
    the extent to which we in-license, acquire or invest in other
    indications, products, technologies and businesses.     60




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##### Table of Contents



Contractual
    Obligations and Commitments
    Payments Due by PeriodLess Than


One to


Four toTotal


One Year


Three Years


Five Years


Thereafter(In thousands)Long-term debt obligations

$
7,000


$
2,338


$
4,662


$



$
Operating lease obligations


6,401



952



2,187



2,344



918License obligations(1)


















Total

$
13,401


$
3,290


$
6,849


$
2,344


$
918     (1)
    
    License obligations do not include additional payments of up to
    $77.0 million due upon the occurrence of certain milestones
    related to regulatory or commercial events. We may also be
    required to pay royalties on any net sales of the licensed
    products. License payments may be increased based on the timing
    of various milestones and the extent to which the licensed
    technologies are pursued for other indications. These milestone
    payments and royalty payments under our license agreements are
    not included in the table above because we cannot, at this time,
    determine when or if the related milestones will be achieved or
    the events triggering the commencement of payment obligations
    will occur.    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk  available-for-sale available-for-sale available-for-sale
 61




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##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data Report of
    Independent Registered Public Accounting Firm            
    62




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##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    BALANCE SHEETS  December 31,2006


2005ASSETSCurrent assets:Cash and cash equivalents

$
86,825,526


$
8,025,285Securities
    available-for-sale






7,000,000Prepaid expenses and other current
    assets


1,168,160



526,173Total current assets


87,993,686



15,551,458Property and equipment, net


3,558,618



117,740Restricted cash


1,233,281



Other assets


536,042



222,000Total assets

$
93,321,627


$
15,891,198LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
2,073,726


$
715,781Accrued liabilities


7,378,750



430,220Current portion of long-term debt


2,338,010



Total current liabilities


11,790,486



1,146,001Deferred rent


1,460,109



Long-term debt, less current
    portion


4,661,990



CommitmentsStockholders equity:Preferred stock, $0.0001 par
    value; 10,000,000 shares authorized; no shares and
    25,760,455 shares issued and outstanding at
    December 31, 2006 and 2005, respectively






2,576Common stock, $0.0001 par
    value; 100,000,000 shares authorized;
    29,092,720 shares and 1,904,000 shares issued and
    outstanding at December 31, 2006 and December 31,
    2005, respectively


2,909



190Additional paid-in capital


138,057,890



25,285,280Accumulated other comprehensive
    income


64,033



Deficit accumulated during the
    development stage


(62,715,790
)


(10,542,849
)Total stockholders equity


75,409,042



14,745,197Total liabilities and
    stockholders equity

$
93,321,627


$
15,891,198    63




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##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    STATEMENTS OF OPERATIONS  Period from May 26,


Period from May 26,2004 (Inception)


2004 (Inception)Years Ended December 31,


through December 31,


through December 31,2006


2005


2004


2006Operating expenses:Research and development

$
47,826,761


$
6,126,226


$
1,883,357


$
55,836,344Marketing


810,315



240,361



41,114



1,091,790General and administrative


4,946,121



1,411,810



877,146



7,235,077Total operating expenses


53,583,197



7,778,397



2,801,617



64,163,211Loss from operations


(53,583,197
)


(7,778,397
)


(2,801,617
)


(64,163,211
)Other income (expense):Interest income


1,944,908



255,785



9,380



2,210,073Interest expense


(497,617
)










(497,617
)Other expense


(37,035
)


(183,000
)


(45,000
)


(265,035
)Total other income (expense)


1,410,256



72,785



(35,620
)


1,447,421Net loss

$
(52,172,941
)

$
(7,705,612
)

$
(2,837,237
)

$
(62,715,790
)Basic and diluted net loss per
    share

$
(10.07
)

$
(6.67
)

$
(3.10
)Shares used to compute basic and
    diluted net loss per share


5,181,920



1,155,879



914,589    64




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##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    STATEMENTS OF STOCKHOLDERS EQUITY
    For the Period from May 26, 2004 (inception) through
    December 31, 2006  DeficitAccumulated


AccumulatedSeries A-1 to A-3








Additional


Other


During the


TotalConvertible Preferred Stock


Common Stock


Paid-in


Comprehensive


Development


StockholdersShares


Amount


Shares


Amount


Capital


Income


Stage


EquityIssuance of common stock to
    founders for cash at $0.004 per share in July





$




1,125,000


$
112


$
4,388


$



$



$
4,500Exercise of common stock options
    for cash at $0.40 per share in December










45,000



5



17,995











18,000Issuance of
    Series A-1
    preferred stock for cash at $0.94 per share, net of $59,573
    of offering costs, in July and August


8,085,108



809











7,539,620











7,540,429Issuance of common stock options
    for consulting services in November


















811











811Net loss and comprehensive loss


























(2,837,237
)


(2,837,237
)Balance at December 31, 2004


8,085,108



809



1,170,000



117



7,562,814







(2,837,237
)


4,726,503Exercise of common stock options at
    $0.40 per share in February, June and December, net of the
    repurchase of 7,500 shares at $0.40 per share










734,000



73



105,927











106,000Issuance of
    Series A-2
    preferred stock for cash at $1.00 per share, net of $57,041
    of offering costs, in June and September


17,675,347



1,767











17,616,539











17,618,306Net loss and comprehensive loss


























(7,705,612
)


(7,705,612
)Balance at December 31, 2005


25,760,455



2,576



1,904,000



190



25,285,280







(10,542,849
)


14,745,197Exercise of common stock options
    for cash between $0.40 and $3.20 per share










353,361



36



466,426











466,462Cashless warrant exercise










27,754



3



(3
)










Collection of stock subscription
    receivable


















187,600











187,600Issuance of
    Series A-3
    preferred stock for cash at $1.00 per share, net of $94,987
    of offering costs, in March


53,870,000



5,387











53,769,626











53,775,013Issuance of warrants in connection
    with loan and security agreement in February


















313,572











313,572Automatic conversion of preferred
    stock in connection with initial public offering


(79,630,455
)


(7,963
)


19,907,605



1,990



5,973











Initial public offering of common
    stock at $9.00 per share in October (including
    over-allotment exercise), net of $6,204,852 of offering costs










6,900,000



690



55,894,458











55,895,148Employee stock-based compensation
    recognized under SFAS No. 123(R)


















2,134,958











2,134,958Other comprehensive income:Unrealized gain on investment
    securities






















64,033







64,033Net loss


























(52,172,941
)


(52,172,941
)Total comprehensive loss






























(52,108,908
)Balance at December 31, 2006





$




29,092,720


$
2,909


$
138,057,890


$
64,033


$
(62,715,790
)

$
75,409,042    65




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##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    STATEMENTS OF CASH FLOWS  Period from May 26,


Period from May 26,2004 (Inception)


2004 (Inception)Years Ended December 31,


through December 31,


Through December 31,2006


2005


2004


2006Operating
    activitiesNet loss

$
(52,172,941
)

$
(7,705,612
)

$
(2,837,237
)

$
(62,715,790
)Adjustments to reconcile net loss
    to net cash used in operating activities:Depreciation


221,681



36,876



8,389



266,946Loss on disposal of assets


37,034











37,034Stock-based compensation


2,134,958







811



2,135,769Non-cash interest expense and
    impairment charges


91,663



183,000



45,000



319,663Changes in operating assets and
    liabilities:














Prepaid expenses and other current
    assets


(322,238
)


(470,160
)


(56,013
)


(848,411
)Accounts payable, accrued
    liabilities and deferred rent


8,297,581



1,031,527



114,474



9,443,582Net cash used in operating
    activities


(41,712,262
)


(6,924,369
)


(2,724,576
)


(51,361,207
)Investing
    activitiesPurchases of marketable securities






(7,000,000
)


(450,000
)


(7,450,000
)Maturities of marketable securities


7,000,000











7,000,000Increase in restricted cash


(1,581,130
)










(1,581,130
)Purchases of property and equipment


(2,509,063
)


(45,881
)


(117,124
)


(2,672,068
)Net cash provided by (used in)
    investing activities


2,909,807



(7,045,881
)


(567,124
)


(4,703,198
)Financing
    activitiesProceeds from issuance of common
    stock, net


56,827,683



106,000



22,500



56,956,183Proceeds from sale of preferred
    stock, net


53,775,013



17,618,306



7,540,429



78,933,748Borrowings under debt agreements


7,000,000











7,000,000Net cash provided by financing
    activities


117,602,696



17,724,306



7,562,929



142,889,931Net increase in cash and cash
    equivalents


78,800,241



3,754,056



4,271,229



86,825,526Cash and cash equivalents at
    beginning of period


8,025,285



4,271,229







Cash and cash equivalents at end
    of period

$
86,825,526


$
8,025,285


$
4,271,229


$
86,825,526Supplemental schedule of
    non-cash investing and financing activities:Issuance of warrants in connection
    with loan and security agreement

$
313,572


$



$



$
313,572Assets acquired through lease
    concessions

$
1,190,530


$



$



$
1,190,530Unrealized gain on investment
    securities

$
64,033


$



$



$
64,033    66




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##### Table of Contents



Cadence
    Pharmaceuticals, Inc.
    (a development stage company)
    NOTES TO FINANCIAL STATEMENTS



Cadence
    Pharmaceuticals, Inc.
    (a development stage company)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)  1.
    The
    Company and Summary of Significant Accounting Policies  The
    Company and Basis of Presentation
      Use of
    Estimates
    Cash
    and Cash Equivalents
    Investment
    Securities
    Available-for-Sale
  Accounting for Certain
    Investments in Debt and Equity Securities available-for-sale, available-for-sale
  Fair
    Value of Financial Instruments
  available-for-sale
  Concentration
    of Credit Risk
  available-for-sale.
 67




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##### Table of Contents



Property
    and Equipment
    Impairment
    of Long-Lived Assets
  Accounting for the
    Impairment or Disposal of Long-Lived Assets
  Research
    and Development
  Accounting for Research
    and Development Costs.
  Income
    Taxes
    Stock-Based
    Compensation
  Share-Based Payment,
 68




---



##### Table of Contents



Accounting for Stock
    issued to Employees Accounting for
    Stock-Based Compensation.
    Research and development

$
561,257Marketing


1,171General and administrative


1,572,530Total stock-based compensation

$
2,134,958Stock-based compensation per
    share, basic and diluted

$
0.41     Employee Stock
    OptionsRisk-free interest rate


4.36 - 5.08
%Dividend yield


0.00
%Expected life of options (years)


5.81 - 6.08Volatility


70.00
%          69




---



##### Table of Contents



Accounting for Certain
    Transactions involving Stock Compensation  an
    interpretation of APB Opinion No. 25
    96-18, Accounting for Equity Instruments That are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling
    Goods and Services
  Comprehensive
    Loss
  Reporting
    Comprehensive Income
  Net
    Loss Per Share
    70




---



##### Table of Contents



Period from May 26, 2004(Inception) throughYears Ended December 31,


December 31,2006


2005


2004Numerator:Net loss

$
(52,172,941
)

$
(7,705,612
)

$
(2,837,237
)Denominator:Weighted average common shares
    outstanding


5,958,035



1,319,367



920,137Weighted average unvested common
    shares subject to repurchase


(776,115
)


(163,488
)


(5,548
)Denominator for basic and diluted
    earnings per share


5,181,920



1,155,879



914,589Basic and diluted net loss per
    share

$
(10.07
)

$
(6.67
)

$
(3.10
)Outstanding anti-dilutive
    securities not included in diluted net loss per share
    calculationPreferred stock (as converted)






6,440,107



2,021,271Preferred stock warrants (as
    converted)


48,125







Common stock options


1,664,967



289,000



261,250Common stock subject to repurchase


746,260



691,969



42,1882,459,352



7,421,076



2,324,709   2.
    Securities
    Available-for-Sale      other-than-temporary, other-than-temporary,
 71




---



##### Table of Contents



3.
    Property
    and Equipment    December 31,Useful Lives


2006


2005Leasehold improvements


2 years


$
1,572,690


$
1,146Computer equipment and software


3 years



373,502



63,972Furniture and equipment


5 years



399,480



94,982Manufacturing equipment


7 years



122,500



Construction in-process






1,317,852



3,786,024



160,100Less accumulated depreciation






(227,406
)


(42,360
)$
3,558,618


$
117,740   4.
    Accrued
    Liabilities    December 31,2006


2005Clinical trial and related costs

$
6,067,927


$
364,030Wages and related costs


889,391



Professional fees


146,005



17,134Other


275,427



49,056$
7,378,750


$
430,220   5.
    Related
    Party Transactions    Accounting for Expenses or
    Liabilities Paid by Principal Stockholder(s) Series A-1 Series A-1 Series A-1
 72




---



##### Table of Contents



6.
    Commitments  Loan
    and Security Agreement
    Series A-2
  Facility
    Leases
    Severance
    Obligations
   73




---



##### Table of Contents



7.
    License
    Agreements and Acquired Development and Commercialization
    Rights      8.
    Stockholders
    Equity  Stock
    Split
  one-for-four
  Initial
    Public Offering
    Stock
    Options
   74




---



##### Table of Contents



10-year
     75




---



##### Table of Contents



Options OutstandingWeightedAverageWeighted


Remaining


AggregateNumber of


Average Exercise


Contractual


IntrinsicShares


Price per Share


Term (Years)


ValueOptions granted


306,250


$
0.40Options exercised


(45,000
)

$
0.40Balance at December 31, 2004


261,250


$
0.40Options granted


769,250


$
0.40Options exercised


(741,500
)

$
0.40Balance at December 31, 2005


289,000


$
0.40Options granted


1,812,402


$
2.11Options cancelled


(83,074
)

$
0.96Options exercised


(353,361
)

$
1.32Balance at December 31, 2006


1,664,967


$
2.04



9.31


$
17,100,000Exercisable at December 31,
    2006


1,519,731


$
1.96



9.31


$
15,700,000        76




---



##### Table of Contents



Shares Reserved
    For Future Issuance
    December 31,2006Common stock options granted and
    outstanding


1,664,967Common stock issuable upon the
    exercise of outstanding warrants


48,125Common stock options reserved for
    future issuance


2,177,6723,890,764   9.
    Income
    Taxes    December 31,


December 31,2006


2005Deferred tax assets:Net operating loss carryforwards

$
13,089,000


$
3,528,000Tax credit carryforwards


1,405,000



359,000Capitalized research and
    development


10,269,000



520,000Other, net


1,799,000



111,000Total deferred tax assets


26,562,000



4,518,000Valuation allowance for deferred
    tax assets


(26,562,000
)


(4,518,000
)Net deferred taxes

$



$
       10.
    Employee
    Benefit Plan   77




---



##### Table of Contents



11.
    Quarterly
    Financial Data (Unaudited)    Year Ended December 31, 2006(1)1st Quarter


2nd Quarter


3rd Quarter


4th QuarterSelected quarterly financial
    data:Total operating expenses

$
29,368,353


$
6,580,138


$
7,994,458


$
9,640,248Net loss


(29,241,080
)


(6,198,805
)


(7,782,841
)


(8,950,215
)Basic and diluted net loss per
    common share

$
(23.84
)

$
(4.92
)

$
(6.01
)

$
(0.53
)   Year Ended December 31, 2005(1)1st Quarter


2nd Quarter


3rd Quarter


4th QuarterSelected quarterly financial
    data:Total operating expenses

$
970,292


$
2,113,712


$
2,464,560


$
2,229,833Net loss


(999,658
)


(2,253,350
)


(2,361,709
)


(2,090,895
)Basic and diluted net loss per
    common share

$
(0.88
)

$
(1.99
)

$
(2.04
)

$
(1.74
)     (1)
    
    Loss per share is computed independently for each of the
    quarters presented. Therefore, the sum of the quarterly net loss
    per share will not necessarily equal the total for the year.  12.
    Subsequent
    Events  Letter
    of Credit
   78




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements With Accountants on Accounting and
    Financial Disclosures    Item 9A.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
    Rule 13a-15(b),
    Item 9B.
    Other
    Information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance    www.cadencepharm.com S-K.
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters   79




---



##### Table of Contents



Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accounting Fees and Services   PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Documents filed as part of this report.
  Financial Statements:
  PageReport of
    Independent Registered Public Accounting Firm


62Balance
    Sheets


63Statements of
    Operations


64Statements of
    Stockholders Equity


65Statements of Cash
    Flows


66Notes to Financial
    Statements


67   Financial Statements Schedules:
    Regulation S-K.
  Exhibits filed as part of this report.
    ExhibitNumber

Description3
.1(1)

Amended and Restated Certificate
    of Incorporation of the Registrant3
.2(1)

Amended and Restated Bylaws of the
    Registrant4
.1(1)

Form of the Registrants
    Common Stock Certificate4
.2(2)

Amended and Restated Investor
    Rights Agreement dated February 21, 20064
.3(2)

Warrant issued by Registrant in
    February 2006 to Silicon Valley Bank4
.4(2)

Warrant issued by Registrant in
    February 2006 to Oxford Finance Corporation10
.1#(3)

Form of Director and Executive
    Officer Indemnification Agreement10
.2#(3)

Form of Executive Officer
    Employment Agreement10
.3#(4)

2004 Equity Incentive Award Plan
    and forms of option agreements thereunder10
.4#(3)

Director Compensation Policy10
.5#(4)

2006 Equity Incentive Award Plan
    and forms of option and restricted stock agreements thereunder10
.6(3)

Form of Amended and Restated
    Restricted Common Stock Purchase Agreement10
.7#(3)

2006 Corporate Bonus Plan10
.8(2)

Lease dated May 12, 2006 by
    and between the Registrant and Prentiss/Collins Del Mar Heights
    LLC10
.9(5)

Collaboration and License
    Agreement dated July 30, 2004 by and between the Registrant
    and Migenix Inc. (formerly Micrologix Biotech Inc.) 80




---



##### Table of Contents



ExhibitNumber

Description10
.10(5)

IV APAP Agreement (US and Canada)
    dated February 21, 2006 by and between the Registrant and
    Bristol-Myers Squibb Company10
.11(5)

License Agreement dated
    December 23, 2002 by and among SCR Pharmatop and
    Bristol-Myers Squibb Company10
.12(2)

Loan and Security Agreement dated
    February 17, 2006 by and among the Registrant, Silicon
    Valley Bank and Oxford Finance Corporation10
.13(5)

Clinical Supply Agreement dated
    February 21, 2006 by and between the Registrant and
    Lawrence Laboratories10
.14(5)

Engagement Letter dated
    May 19, 2005 by and between the Registrant and Clearview
    Projects, Inc.10
.15(6)

Amendment No. 1 dated
    October 6, 2006 to Collaboration and License Agreement
    dated July 30, 2004 by and between the Registrant and
    Migenix Inc. (formerly Micrologix Biotech Inc.)31
.1

Certification of Chief Executive
    Officer pursuant to
    Rule 13a-14
    and
    Rule 15d-14
    of the Securities Exchange Act of 1934, as amended31
.2

Certification of Chief Financial
    Officer pursuant to
    Rule 13a-14
    and
    Rule 15d-14
    of the Securities Exchange Act of 1934, as amended32
.1*

Certification of Chief Executive
    Officer and Chief Financial Officer pursuant to 18 U.S.C.
    1350, as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002     #
    
    Indicates management contract or compensatory plan.
    
    Confidential treatment has been granted as to certain portions,
    which portions have been omitted and filed separately with the
    Securities and Exchange Commission.*
    
    These certifications are being furnished solely to accompany
    this annual report pursuant to 18 U.S.C. Section 1350,
    and are not being filed for purposes of Section 18 of the
    Securities Exchange Act of 1934, as amended, and are not to be
    incorporated by reference into any filing of Cadence
    Pharmaceuticals, Inc., whether made before or after the date
    hereof, regardless of any general incorporation language in such
    filing.(1)
    
    Filed with the Registrants Quarterly Report on
    Form 10-Q
    on November 30, 2006 for the quarter ended
    September 30, 2006.(2)
    
    Filed with the Registrants Registration Statement on
    Form S-1
    on July 17, 2006.(3)
    
    Filed with Amendment No. 1 to the Registrants
    Registration Statement on
    Form S-1
    on August 30, 2006.(4)
    
    Filed with the Registrants Registration Statement on
    Form S-8
    on October 26, 2006.(5)
    
    Filed with Amendment No. 2 to the Registrants
    Registration Statement on
    Form S-1
    on September 25, 2006.(6)
    
    Filed with Amendment No. 3 to the Registrants
    Registration Statement on
    Form S-1
    on October 10, 2006. 81




---



##### Table of Contents



SIGNATURES  Form 10-K
    By:
    /s/  Theodore
    R. Schroeder   President and Chief Executive Officer
      Signature

Title

Date/s/  Theodore
    R. SchroederTheodore
    R. Schroeder

President, Chief Executive Officer
    and Director (Principal Executive Officer)

March 28, 2007/s/  William
    R. LaRueWilliam
    R. LaRue

Senior Vice President, Chief
    Financial Officer, Treasurer and Secretary (Principal Financial
    and Accounting Officer)

March 28, 2007/s/  Cam
    L. GarnerCam
    L. Garner

Chairman of the Board of Directors

March 28, 2007/s/  Brian
    G. AtwoodBrian
    G. Atwood

Director

March 28, 2007/s/  Samuel
    L.
    Barker, Ph.D.Samuel
    L. Barker, Ph.D.

Director

March 28, 2007/s/  Michael
    A.
    Berman, M.D.Michael
    A. Berman, M.D.

Director

March 28, 2007/s/  James
    C.
    Blair, Ph.D.James
    C. Blair, Ph.D.

Director

March 28, 2007/s/  Alan
    D. FrazierAlan
    D. Frazier

Director

March 28, 2007/s/  Alain
    B.
    Schreiber, M.D.Alain
    B. Schreiber, M.D.

Director

March 28, 2007/s/  Christopher
    J. TwomeyChristopher
    J. Twomey

Director

March 28, 2007  82