##### Table of Contents





UNITED
    STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C.
    20549
 Form 10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2007oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   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
    (858) 436-1400
 (Address, Including Zip Code,
    and Telephone Number, Including Area Code, of Principal
    Executive Offices)
  Securities registered pursuant to Section 12(b) of the
    Act:
  Common Stock, $0.0001 par value per share

NASDAQ Global Market(Title of class)

(Name of exchange on which registered)   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
  Large accelerated
    filer o

Accelerated
    filer þ

Non-accelerated
    filer o

Smaller reporting
    company o(Do not check if a smaller reporting company)   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




---



##### 





CADENCE
    PHARMACEUTICALS, INC.
    ANNUAL REPORT ON
    FORM 10-K
    For the Fiscal Year Ended December 31, 2007
  Table of
    Contents
   
 PART IItem 1.


Business


3Item 1A.


Risk Factors


28Item 1B.


Unresolved Staff Comments


53Item 2.


Properties


53Item 3.


Legal Proceedings


54Item 4.


Submission of Matters to a Vote of Security
    Holders


54PART IIItem 5.


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


54Item 6.


Selected Financial Data


57Item 7.


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


58Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk


67Item 8.


Financial Statements and Supplementary Data


68Item 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


89Item 9A.


Controls and Procedures


89Item 9B.


Other Information


91PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


91Item 11.


Executive Compensation


91Item 12.


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


91Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


91Item 14.


Principal Accounting Fees and Services


91PART IVItem 15.


Exhibits and Financial Statement Schedules


92SIGNATURES AND CERTIFICATIONSSignatures


95EXHIBIT 10.22EXHIBIT 10.23EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1    2




---



##### Table of Contents



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
    Acetavance and Omigard to receive regulatory approval for one or
    more indications on a timely basis or at all; the progress and
    results of pending clinical trials for Acetavance and Omigard,
    including any delays in commencing or completing enrollment for
    our ongoing or planned clinical trials; unexpected adverse side
    effects or inadequate therapeutic efficacy of Acetavance 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 Acetavance or Omigard; the scope and validity of
    patent protection for Acetavance 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 competition if either of Acetavance 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 Section 21E of 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  Company
    Overview
  tm ® tm
  (858) 436-1400. Form 10-K. 1-800-SEC-0330.
 3




---



##### Table of Contents



tm tm tm ® ® ® ® ® ® ® ® ®
  Our
    Product Candidates
    
    Acetavance.  We are developing Acetavance in
    the U.S. market for the treatment of acute pain and fever.
    According to IMS Health, Inc., or IMS, an independent marketing
    research firm, 286 million units of injectable analgesics,
    typically used to treat pain, were sold in the U.S. in
    2007. 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 U.S. 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
    intravenous acetaminophen in the U.S. and Canada from BMS.
    Perfalgan has been marketed outside the U.S. for
    approximately six years, and has been approved in over 60
    countries. Since its introduction in Europe in mid-2002, nearly
    300 million doses of Perfalgan have been distributed, and
    it has become the market and unit share leader among injectable
    analgesics with approximately 80 million units sold in 2007.  48-hour
    
    Omigard.  We are developing Omigard for the
    prevention of intravascular catheter-related infections in the
    U.S. 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 U.S. in 2003, and unit sales are
    projected to grow to 12 million by the end of 2008.
    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 4




---



##### Table of Contents



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
    325,000 CRBSIs each year in the U.S. 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
    clinical trial that demonstrated statistically significant
    outcomes for two pre-specified secondary endpoints, the
    prevention of LCSIs 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. In July 2007, prompted by our
    planned re-analysis of data from the initial Phase III
    clinical trial of Omigard, we announced that the FDA agreed with
    our proposal to increase the number of patients to be enrolled
    in our ongoing Phase III clinical trial of Omigard from
    1,250 to 1,850 patients. We currently anticipate completing
    enrollment in this trial in the second quarter of 2008 and, if
    the results of the trial are positive, we expect to submit an
    NDA for Omigard in the first half of 2009.  
    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.  Our
    Strategy
    
    Obtain regulatory approval for our Phase III hospital
    product candidates, Acetavance 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 and
    continue to review our Phase III clinical programs as new
    information is received in an effort to reduce clinical
    development risk, facilitate regulatory approval and optimize
    marketing claims. We currently expect to submit an NDA for
    Acetavance in the first half of 2009 based on the trials
    previously completed by BMS in the U.S. and Europe, our own
    clinical trials of this product candidate in the U.S., and other
    published studies of intravenous acetaminophen. 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 and, if the results of the
    trial are positive, we anticipate submitting an NDA for Omigard
    in the first half of 2009.
    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 U.S. We believe that both Acetavance and
    Omigard can be effectively promoted by our own sales force
    targeting key hospitals in the U.S. Importantly, 5




---



##### Table of Contents



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 U.S., 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 U.S. or approved in the U.S. 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 Acetavance, 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 or treatment of
    device-related, surgical wound-related and burn-related
    infections.  The
    Hospital Market
         6




---



##### Table of Contents



Our
    Product Pipeline
    Development

DevelopmentProduct



Stage in the

Stage in

CadenceCandidate

Indication

United States

Europe

Commercial RightsAcetavance

Treatment of acute pain  adults

Phase III

Marketed by
    BMS(1)

United States, CanadaTreatment of acute pain  pediatrics

Phase III

Marketed by
    BMS(1)

United States, CanadaTreatment of fever  adults

Phase III

Marketed by
    BMS(1)

United States, CanadaTreatment of
    fever  pediatrics

Phase III

Marketed by
    BMS(1)

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 for Acetavance in the
    U.S. and Canada from BMS. BMS has completed Phase III
    clinical trials with respect to the above indications, excluding
    the treatment of fever in adults, for intravenous acetaminophen
    in Europe and the U.S., which we intend to use in our NDA
    filing, along with the results of our own clinical trials of
    this product candidate. Because the Phase III clinical
    trial requirements differ in the U.S. compared to Europe, we are
    required to complete additional Phase III clinical 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. Assuming successful completion of all
    of our planned clinical trials for Acetavance, we currently plan
    to submit a 505(b)(2) NDA to the FDA in the first half of 2009. 7




---



##### Table of Contents



Acetavance
    for the Treatment of Acute Pain and Fever
  Acute
    Pain Background
            Market
    for Injectable Analgesics
        Limitations
    of Current Therapies
   8




---



##### Table of Contents



Fever
     9




---



##### Table of Contents



Acetavance
         10




---



##### Table of Contents



country-by-country
      Clinical
    Development History
  Clinical Overview.
  Clinical Studies for Post-Operative Pain in
    Adults.
  cause-and-effect
 11




---



##### Table of Contents



Summary
    of Analgesic Efficacy Scores over 6 Hours (Intent to Treat
    Population)
  IV acetaminophen

IV placebo


p-valueWeighted sums of pain relief over 6 hours using 5-point
    categorical scale [TOTPAR6] *

6.6


2.2



0.0001Weighted sums of pain intensity differences over 6 hours
    using
    5-point
    categorical scale [SPID6] *

2.3


(0.6
)


0.0001Pain intensity differences over 6 Hours using 100mm visual
    analog scale [SPAID6] *

104.7


(27.7
)


0.0001Good/excellent global evaluation at 24 hours

41%


23
%


<0.01Rescue medication (morphine) consumption over 24 hours (mg)

38.3 (33% decrease)


57.4



<0.001Median time-to-rescue (hours)

3.0


0.8



0.0001Safety

IV acetaminophen not significantly different than placebo     *
    
    mean values  p-value<
   12




---



##### Table of Contents



24-hour
  Clinical Studies for Post-Operative Pain in
    Children.
  Clinical Studies for Fever in Children.
  Safety Summary.
    Opioid Sparing Summary.
  Clinical
    Development Plan
   13




---



##### Table of Contents




    Pivotal, Phase III clinical trial in adults with
    moderate-to-severe pain following total knee and hip replacement
    surgery: This trial, which was completed by BMS, was a
    randomized, placebo-controlled, double-blind, multi-center
    Phase III study to assess the efficacy and safety of
    multiple doses of intravenous acetaminophen versus intravenous
    propacetamol or placebo. The primary efficacy endpoint of
    time-specific pain relief scores from 0.25 to 6 hours was
    statistically significant in favor of intravenous acetaminophen
    over placebo at all time points. Key secondary endpoints of
    time-specific pain intensity differences through 6 hours,
    weighted sum of pain intensity differences over 6 hours,
    weighted sum of pain relief differences over 6 hours, time
    to first rescue, patient global evaluation at 24 hours, and
    rescue medication consumption over 24 hours, were all
    statistically significant in favor of intravenous acetaminophen
    over placebo.
    Pivotal, Phase III clinical trial in female patients with
    moderate-to-severe pain following gynecologic surgery: This
    trial was a randomized, placebo-controlled, double-blind,
    multi-center study to assess the efficacy and safety of single
    and multiple doses of Acetavance. In January 2008, we announced
    that the study did not meet its primary endpoint of
    demonstrating a statistically significant reduction in
    patients pain intensity scores over 48 hours compared
    to placebo. We believe that the study missed its primary
    endpoint due to the much higher than predicted variability of
    the initial pain assessments, particularly in subjects who were
    randomized closer to the end of their surgery. This variability
    had a large, negative impact on the baseline-dependent
    statistical measurements. However, several secondary endpoints,
    which were not as dependent on a single baseline pain
    measurement, were successfully achieved, including the sum of
    pain relief scores over 24 and 48 hours, global patient
    satisfaction at 24 and 48 hours and time to administration
    of first rescue medication. The study also demonstrated a safety
    profile for Acetavance that was no different than placebo,
    including the evaluation of eight doses over a
    48-hour
    period.
    Pivotal, Phase III clinical trial in adult patients with
    moderate pain following abdominal laparoscopic surgery: This
    trial, which commenced enrollment in the fourth quarter of 2007,
    is a randomized, placebo-controlled, double-blind, multi-center
    study to assess the efficacy and safety of single and multiple
    doses of Acetavance. We have recently implemented several design
    modifications to this study, including tightening patient
    eligibility criteria, performing more frequent pain assessments
    and further standardizing opioid rescue medications prior to and
    during the treatment period. We currently anticipate completing
    enrollment in this clinical trial in the third quarter of 2008,
    and announcing top-line data in the second half of 2008.
    Pivotal, Phase III clinical trial in adults with fever
    versus placebo: This trial was a randomized, controlled,
    double-blind, double-dummy study to assess the efficacy and
    safety of a single dose of Acetavance compared to placebo. In
    January 2008, we announced that this study successfully met the
    primary endpoint, demonstrating a statistically significant
    reduction of fever over six hours compared to placebo.
    Phase III clinical trial in adults with fever versus oral
    acetaminophen: This trial was a randomized, controlled,
    double-blind, double-dummy study to assess the onset of action
    of a single dose of Acetavance vs. oral acetaminophen.
    Enrollment was completed in October 2007, and we currently
    anticipate announcing results of this study in the second
    quarter of 2008.
    Pharmacokinetic study in adult subjects: This trial, which was a
    randomized, single-center study to assess the pharmacokinetics
    of single and multiple doses of Acetavance compared to oral
    acetaminophen in adults, was completed in December 2006. The
    results of this study were presented at the April 2007 meeting
    of the American Society of Regional Anesthesia and Pain.
    Consistent with data from prior pharmacokinetic trials with
    intravenous acetaminophen and the medical literature,
    intravenous acetaminophen produced a mean first dose maximum
    plasma concentration approximately 70 to 75% higher than oral
    acetaminophen 14




---



##### Table of Contents



(p <0.0001). The time to maximum plasma concentration
    for intravenous acetaminophen occurred near the end of the 15
    minute infusion and was 30 minutes earlier than the observed
    value for oral acetaminophen. The elimination half-life, area
    under the curve, and volume of distribution values were
    comparable and were not significantly different across treatment
    groups. The oral acetaminophen area under the curve averaged
    93.7% of that calculated for intravenous administration. Steady
    state levels were achieved rapidly as no drug accumulation
    occurred from 12 to 48 hours with repeated dosing. Neither
    intravenous acetaminophen nor oral acetaminophen had a
    significant effect on platelet aggregation when administered to
    a maximum daily dose of 4 grams. There were no statistically
    significant differences in any adverse event, including hepatic
    events, observed between the treatment groups.  
    Pharmacokinetic study in pediatric subjects: We have commenced
    enrollment in this trial, which is a randomized, single-center
    study to assess the population pharmacokinetics of single and
    multiple doses of intravenous acetaminophen in children.
    Safety study in adult subjects: We have commenced enrollment in
    this trial, which is an open-label, multi-center,
    multi-day
    study to assess the safety of repeated doses of intravenous
    acetaminophen over at least five days in at least 50 adults.
    Safety study in pediatric subjects: We except that we will
    commence enrollment in this trial, which is an open-label,
    multi-center,
    multi-day
    study to assess the safety of repeated doses of intravenous
    acetaminophen over at least five days in at least 50 children in
    the second quarter of 2008.    Omigard
    for the Prevention of Intravascular Catheter-Related
    Infections
  Intravascular
    Catheter-Related Infections Background
    and/or
     15




---



##### Table of Contents



Market
    for Antimicrobials to Prevent Intravascular Catheter
    Infections
        Limitations
    of Current Therapies
     16




---



##### Table of Contents



72-96 hours),
        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.   17




---



##### Table of Contents



Clinical
    Development History
    and/or
      Treatment ArmOutcome

10% povidone-iodine


Omigard


p-valueFailure


62/693 (8.9
)%


64/682 (9.4
)%


0.780Microbiologically proven CRBSI


18/693 (2.6
)%


15/682 (2.2
)%Success


631/693 (91.1
)%


618/682 (90.6
)%    18




---



##### Table of Contents



p-value
  Treatment ArmEndpoint

10% povidone-iodine


Omigard


p-valueLCSI present


42/693 (6.1
)%


24/693 (3.5
)%


0.032     Treatment ArmEndpoint

10% povidone-iodine

Omigard

p-valueCatheter colonization present


230/693 (40.1
)%


179/682 (31.7
)%


0.002     Clinical
    Development Plan
    and/or
     19




---



##### Table of Contents



Additional
    Indications
      Commercialization
    Strategy
    150-200 people
   20




---



##### Table of Contents



Licensing
    Agreements
  Acetavance
      country-by-country
    Omigard
       21




---



##### Table of Contents



Intellectual
    Property
  Acetavance
      Omigard
    Manufacturing
  Acetavance
  per-unit
  Omigard
   22




---



##### Table of Contents



Competition
    Acetavance
    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, available
    from Johnson & Johnson that is approved both for wound
    dressing and the prevention of catheter-related infections. 23




---



##### Table of Contents



Government
    Regulation
      FDA
    Approval Process
         24




---



##### Table of Contents



Special
    Protocol Assessment Process
  45-day
  Section 505(b)(2)
    New Drug Applications
       25




---



##### Table of Contents



30-month 45-day 30-month
    Fast
    Track Designation
    The
    Hatch-Waxman Act
  30-month
  Other
    Regulatory Requirements
   26




---



##### Table of Contents



Third-Party
    Reimbursement and Pricing Controls
     27




---



##### Table of Contents



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, Acetavance and Omigard, and we cannot be
    certain that our ongoing and planned clinical development
    programs will be successful, or sufficient to support new drug
    applications, or NDAs, 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, or
    significant issues regarding the adequacy of our clinical trial
    designs or the execution or success of our clinical trials,
    could result in increased costs to us and delay or limit our
    ability to obtain regulatory approval;
    the outcome of final analyses of data from our clinical
    trials of Acetavance or Omigard may vary from our initial
    analyses, and the U.S. Food and Drug Administration, or
    FDA, may not agree with our interpretation of these results;
    ongoing or planned clinical trials of Acetavance or Omigard
    may produce negative or inconclusive results, or may be
    inconsistent with previous clinical trial results, and we may
    decide, or the FDA may require us, to conduct additional
    clinical trials or to modify our ongoing clinical trials;
    even if our product candidates are approved by regulatory
    authorities, the market potential for pain, fever, local
    catheter site infections and other target markets may be less
    than anticipated, and we expect intense competition in the
    hospital marketplace for our targeted indications;
    unexpected adverse side effects or inadequate therapeutic
    efficacy of Acetavance or Omigard could delay or prevent
    regulatory approval or commercialization of our product
    candidates, or result in recalls or product liability claims
    against us;
    delays or quality issues with respect to the completion of
    required pre-commercialization manufacturing development
    activities for our product candidates, including the completion
    of adequate stability data, could result in increased costs to
    us and delay or limit our clinical trials and our ability to
    obtain regulatory approval;
    the patent rights that we have in-licensed covering
    Acetavance 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;
    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; and
    we may not be able to maintain patent protection for our
    products and to commercialize our products without infringing
    the patent rights of others. 28




---



##### Table of Contents



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,
    Acetavance and Omigard, and we cannot be certain that either of
    these product candidates will receive regulatory approval or be
    successfully commercialized.
         29




---



##### Table of Contents



If
    clinical trials of our current or future product candidates do
    not produce results necessary to support regulatory approval in
    the U.S. or elsewhere, we will be unable to commercialize these
    products.
  and/or
     30




---



##### Table of Contents



Because
    the results of earlier clinical trials are not necessarily
    predictive of future results, Acetavance, Omigard or any other
    product candidate we advance into clinical trials may not have
    favorable results in later clinical trials or receive regulatory
    approval.
         31




---



##### Table of Contents



Delays
    in the commencement or completion of clinical trials, or
    significant issues regarding the adequacy of our clinical trial
    designs or the success or execution of our clinical trials,
    could result in increased costs to us and delay or limit our
    ability to obtain regulatory approval for our product
    candidates.
     32




---



##### Table of Contents




    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 or amend a clinical
    trial;
    obtaining institutional review board approval to commence or
    amend 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 who
    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;
    inspections of our own clinical trial operations, the operations
    of our CROs, or our clinical trial sites by the FDA or other
    regulatory authorities, which may result in the imposition of a
    clinical hold or, potentially, prevent us from using some of the
    data generated from our clinical trials to support requests for
    regulatory approval of our product candidates;
    new information suggesting unacceptable risk to subjects, or
    unforeseen safety issues or any determination that a trial
    presents unacceptable health risks;
    new information suggesting that the target condition occurs too
    infrequently for the product candidate to demonstrate
    efficacy; 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.   33




---



##### Table of Contents



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.
          
    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.   34




---



##### Table of Contents



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 Acetavance 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 for 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 Acetavance, a number of
    products already used to treat acute pain in the hospital
    setting, and in the case for 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.    The
    decreasing use of the comparator product in our clinical trial
    of Omigard and improvements in hospital infection control
    practices that lower catheter infection rates may limit our
    ability to complete the trial in a timely manner and hinder the
    competitive profile of this product candidate.
   35




---



##### Table of Contents



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;
    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
    U.S., we may never receive approval or commercialize our
    products outside of the U.S.
   36




---



##### Table of Contents



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.
    We
    will need to obtain FDA approval of our proposed product names,
    Acetavance and Omigard, and any failure or delay associated with
    such approval may adversely impact our business.
  and/or
  Our
    product candidates may have undesirable side effects that could
    delay or prevent their regulatory approval or
    commercialization.
   37




---



##### Table of Contents




    regulatory authorities may require the addition of labeling
    statements, specific warnings or a contraindication;
    regulatory authorities may suspend or withdraw their approval of
    the product, or require it to be removed from the market;
    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.
      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.
   38




---



##### Table of Contents



If BMS
    breaches the underlying agreement under which we sublicense the
    rights to our Acetavance product candidate, we could lose the
    ability to develop and commercialize Acetavance.
    We
    rely on third parties to conduct our clinical trials, including
    our ongoing Phase III clinical program for Acetavance and
    our ongoing Phase III clinical trial of 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.
    If the
    manufacturers upon whom we rely fail to complete required
    pre-commercialization manufacturing development activities on
    time, we may face delays in the development of, or in obtaining
    regulatory approvals for, our product candidates, which would
    result in increased costs and the loss of potential
    revenues.
   39




---



##### Table of Contents



If the
    manufacturers upon whom we rely terminate our supply agreements
    or fail to produce our product candidates in the volumes we
    require on a timely basis, or to comply with stringent
    regulations applicable to pharmaceutical manufacturers, we may
    face delays in the development and commercialization of, or be
    unable to meet demand for, our product candidates and may lose
    potential revenues.
       40




---



##### Table of Contents



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;
    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 ongoing
    Phase III clinical program for Acetavance, which will be
    conducted at numerous clinical trial sites in the U.S., and our
    ongoing Phase III clinical trial of Omigard, which is being
    conducted at numerous clinical sites in the U.S. and Europe;
    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. 41




---



##### Table of Contents



We may
    not be able to manage our business effectively if we are unable
    to attract and retain key personnel.
        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.   42




---



##### Table of Contents



Recent
    proposed legislation may permit re-importation of drugs from
    foreign countries into the U.S., including foreign countries
    where the drugs are sold at lower prices than in the U.S., which
    could materially adversely affect our operating results and our
    overall financial condition.
    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.
   43




---



##### Table of Contents



Risks
    Related to Intellectual Property
  The
    patent rights that we have in-licensed covering Acetavance 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.
      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.
   44




---



##### Table of Contents



45




---



##### 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;
    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.       46




---



##### Table of Contents



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.
      
    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. 47




---



##### Table of Contents



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.
    We
    currently have no source of revenue and may never be
    profitable.
    
    successfully complete our ongoing and future clinical trials for
    Acetavance and Omigard;
    obtain regulatory approval for either of our two product
    candidates or any other product candidate that we may in-license
    or acquire;
    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.
   48




---



##### Table of Contents



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 Acetavance, Omigard or any other product
    candidates that we may in-license or acquire, if any of these
    product candidates receive regulatory approval.    
    the rate of progress and cost of our clinical trials and other
    product development programs for Acetavance, 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.     49




---



##### Table of Contents



Our
    quarterly operating results may fluctuate
    significantly.
    
    the timing of milestone payments required under our license
    agreements for Acetavance 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.    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.
   50




---



##### Table of Contents



Risks
    Relating to Securities Markets and Investment in Our
    Stock
  There
    may not be a viable public market for our common
    stock.
    Future
    sales of our common stock may cause our stock price to
    decline.
    Rule 10b5-1
 51




---



##### Table of Contents



We
    expect that the price of our common stock will fluctuate
    substantially.
    
    the results from our clinical trial programs, including our
    ongoing Phase III clinical program for Acetavance and our
    ongoing Phase III clinical trial of Omigard;
    the results of clinical trial programs for Acetavance 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.    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; 52




---



##### Table of Contents




    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.
    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   53




---



##### Table of Contents



Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    of Matters to a Vote of Security Holders   PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Market
    Information
    High


LowYear Ended December 31, 2006Fourth Quarter (beginning October 25, 2006)

$
13.25


$
9.25Year Ended December 31, 2007First Quarter

$
15.65


$
11.72Second Quarter

$
17.32


$
12.01Third Quarter

$
14.75


$
11.94Fourth Quarter

$
14.86


$
11.97   Dividend
    Policy
   54




---



##### Table of Contents



Securities
    Authorized for Issuance under Equity Compensation
    Plans
  Form 10-K
  Equity
    Compensation Plan Information
  Number of SecuritiesRemaining Available forNumber of Securities





Future Issuance Underto be Issued Upon


Weighted Average


Equity CompensationExercise of


Exercise Price of


Plans (ExcludingOutstanding Options,


Outstanding Options,


Securities Reflected inWarrants and Rights


Warrants and Rights


Column (a))Equity compensation plans approved by security holders


2,466,825
(1)

$
6.51



1,391,104
(2)Equity compensation plans not approved by security holders










Total


2,466,825


$
6.51



1,391,104
(2)   ­
    ­
  (1)
    
    Of these shares of Common stock, 869,175 shares were
    subject to outstanding options under the 2006 Equity Incentive
    Award Plan and 1,597,650 shares were subject to outstanding
    options under the 2004 Equity Incentive Award Plan.(2)
    
    The 2006 Equity Incentive Award Plan contains an
    evergreen provision which allows for annual
    increases in the number of shares available for future issuance
    on January 1 of each year during the ten-year term of the plan,
    beginning on January 1, 2008. The annual increase in the
    number of shares shall be equal to the lesser of (i) 4% of
    our outstanding common stock on the applicable January 1 or
    (ii) such lesser amount determined by our board of
    directors. 55




---



##### Table of Contents



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


12/29/2006


12/31/2007Cadence Pharmaceuticals, Inc


$
100



$
131



$
158NASDAQ Composite Index


$
100



$
102



$
113NASDAQ Biotechnology Index


$
100



$
100



$
104   ­
    ­
  *
    
    No cash dividends have been declared or paid on our common
    stock. Stockholder returns over the indicated period should not
    be considered indicative of future stockholder returns.  Use of
    Proceeds
  Form S-1 No. 333-135821)
   56




---



##### Table of Contents



Issuer
    Repurchases of Equity Securities
    Item 6.
    Selected
    Financial Data  Form 10-K. Form 10-K.
  Form 10-K.
  Period fromMay 26, 2004(Inception) throughYears Ended December 31,


December 31,2007


2006


2005


2004Statement of Operations Data:Research and development

$
41,781


$
47,827


$
6,126


$
1,883Marketing


2,866



810



240



41General and administrative


9,587



4,946



1,412



877Loss from operations


(54,234
)


(53,583
)


(7,778
)


(2,801
)Interest income


3,404



1,945



255



9Interest expense


(867
)


(498
)






Other expense


(17
)


(37
)


(183
)


(45
)Net loss

$
(51,714
)

$
(52,173
)

$
(7,706
)

$
(2,837
)Basic and diluted net loss per
    share(1)

$
(1.81
)

$
(10.07
)

$
(6.67
)

$
(3.10
)     (1)
    
    As a result of the issuance of 6,900,000 shares of common
    stock in the Companys initial public offering in the
    fourth quarter of 2006 and the conversion of the Companys
    preferred stock into 19,907,605 shares of common stock upon
    completion of the Companys initial public offering, there
    is a lack of comparability in the per share amounts between the
    periods presented. Please see Note 2 to the Notes to
    Financial Statements in Item 8 of this Annual Report on
    Form 10-K
    for further discussion.  57




---



##### Table of Contents



As of December 31,2007


2006


2005


2004Balance Sheet Data:Cash, cash equivalents and marketable securities

$
55,393


$
86,826


$
15,025


$
4,271Working capital


36,839



76,203



14,405



4,161Total assets


64,612



93,092



15,891



4,841Long-term debt, less current portion and discount


13,412



4,433







Deficit accumulated during the development stage


(114,429
)


(62,716
)


(10,543
)


(2,837
)Total stockholders equity


28,458



75,409



14,745



4,727   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 in Item 8  Financial Statements
    and Supplementary Data in this Annual Report on
    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 ® tm burn-related
         58




---



##### Table of Contents



Revenues
    Research
    and Development Expenses
  know-how
      Period fromMay 26, 2004(Inception) throughYears Ended December 31,


December 31,2007


2006


2005


2007Acetavance

$
14,107


$
28,052


$



$
42,159Omigard


20,191



14,343



4,802



40,987Other supporting costs


7,483



5,432



1,324



14,471$
41,781


$
47,827


$
6,126


$
97,617    59




---



##### Table of Contents



Marketing
    Expenses
    General
    and Administrative Expenses
    Interest
    and Other Income and Expense
  other-than-temporary available-for-sale
  Income
    Taxes
  Accounting for Uncertainty
    in Income Taxes  An Interpretation of FASB Statement
    No. 109 Accounting for
    Income Taxes
 60




---



##### Table of Contents



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
 61




---



##### Table of Contents



96-18, Accounting for Equity Instruments That are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling
    Goods and Services Form 10-K.
    Period fromMay 26, 2004(Inception) throughYears Ended December 31,


December 31,2007


2006


2007Research and development

$
1,243


$
561


$
1,804Marketing


33



1



34General and administrative


3,064



1,573



4,638Stock-based compensation expense included in operating expenses


4,340



2,135



6,476Total stock-based compensation expense included in loss from
    operations

$
4,340


$
2,135


$
6,476   Results
    of Operations
  Years
    ended December 31, 2007 and 2006
  Operating
    Expenses
  Research and Development Expenses.
  
    an increase of $11.4 million in our Acetavance program,
    primarily as a result of costs related to the progress of our
    Phase III clinical trials and pre-commercialization
    manufacturing development activities;
    an increase of $5.8 million in our Omigard program as a
    result of costs related to our Phase III clinical trial of
    this product candidate due to higher enrollment rates and
    pre-commercialization manufacturing development
    activities; and
    an increase of $2.1 million in other supporting costs as a
    result of increased salaries and related personnel costs from
    the addition of research and development staff hired to support
    our clinical and regulatory efforts related to both Omigard and
    Acetavance. This increase includes $0.7 million of
    additional stock-based compensation charges in 2007 as compared
    to 2006. 62




---



##### Table of Contents



Marketing Expenses.
  General and Administrative Expenses.
  Interest Income.
  Interest Expense.
  Years
    ended December 31, 2006 and 2005
  Operating
    expenses
  Research and Development Expenses. in-process
  
    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;
    an increase of $4.1 million in other supporting costs as a
    result of increased salaries and related personnel costs
    (including an increase of $0.6 million in stock-based
    compensation expenses) from increased research and development
    staff to support our clinical and regulatory efforts related to
    both Omigard and Acetavance; and
    an increase of $2.8 million from activities related to the
    launch of our Acetavance program, which initiated a
    Phase III clinical trial in the fourth quarter of 2006.  Marketing Expenses.
  General and Administrative Expenses.
 63




---



##### Table of Contents



Interest Income.
  Interest Expense.
  Other expense. other-than-temporary.
  Liquidity
    and Capital Resources
      
    the progress of our clinical trials, including expenses to
    support the trials and milestone payments that may become
    payable to BMS or Migenix;
    the potential need to conduct additional clinical trials of our
    product candidates, or to increase the number of patients
    enrolled in our ongoing clinical trials;
    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 manufacturing, sales or distribution
    capabilities;
    the success of the commercialization of our products; and
    the extent to which we may in-license, acquire or invest in
    other indications, products, technologies and businesses.     64




---



##### Table of Contents



Sources
    of Liquidity
    
    from July 2004 to December 2007 (excluding our initial public
    offering), we issued and sold a total of 2,305,150 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 a total of
    17,675,347 shares of
    Series A-2
    preferred stock for aggregate net proceeds of $17.6 million;
    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 aggregate net
    proceeds of $55.9 million.     65




---



##### Table of Contents



Form 10-K
  Capital
    Resources
  available-for-sale
 66




---



##### Table of Contents



Other
    Significant Cash and Contractual Obligations
    Payments Due By PeriodLess than








More thanTotal


1 Year


1-3 Years


3-5 Years


5 YearsLong-term debt obligations, including interest

$
22,603


$
7,100


$
15,503


$



$
Operating
    leases(1)


5,483



1,096



2,277



2,110



Process development and facility
    upgrades(2)


3,575



3,075



500







License
    obligations(3)


















Total(4)

$
31,661


$
11,271


$
18,280


$
2,110


$
     (1)
    
    The amounts presented represent commitments for minimum lease
    payments related to leases of office space and certain equipment
    under non-cancelable operating leases. The amounts have not been
    reduced by future commitments under sublease agreements.(2)
    
    The amounts presented represent our commitments for the
    completion of pre-commercialization manufacturing development
    activities related to our development and supply agreement for
    Acetavance with Baxter Healthcare Corporation, or Baxter. Our
    agreement with Baxter also requires that we purchase a minimum
    number of units each year following regulatory approval of
    Acetavance, or pay Baxter an amount equal to the
    per-unit
    purchase price multiplied by the amount of the shortfall.
    However, as our purchase commitment under this agreement is
    dependent upon the progress of our development program and the
    timing of the potential regulatory approval of Acetavance, we
    are unable to estimate with certainty the purchase obligations,
    if any, we will incur under this agreement.(3)
    
    Under our license agreements, we may be required to make future
    payments of up to $67.0 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 under those agreements. 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 at this time we cannot determine when, or if, the
    related milestones will be achieved or the events triggering the
    commencement of payment obligations will occur.(4)
    
    We also enter into agreements with third parties to manufacture
    our product candidates, conduct our clinical trials and perform
    data collection and analysis. Our payment obligations under
    these agreements depend upon the progress of our development
    programs. Therefore, we are unable at this time to estimate with
    certainty the future costs we will incur under these agreements.  Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk  available-for-sale available-for-sale available-for-sale
 67




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data Report of
    Independent Registered Public Accounting Firm              
    68




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)BALANCE SHEETS
  December 31,2007


2006ASSETSCurrent assets:Cash and cash equivalents

$
55,392,921


$
86,825,526Restricted cash


1,981,848



347,849Prepaid expenses


751,046



424,551Other current assets


208,275



395,760Total current assets


58,334,090



87,993,686Property and equipment, net


5,139,538



3,558,618Restricted cash


885,434



1,233,281Other non-current assets


252,963



306,598Total assets

$
64,612,025


$
93,092,183LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,974,991


$
2,073,726Accrued liabilities


13,901,770



7,378,750Current portion of long-term debt


5,617,928



2,338,010Total current liabilities


21,494,689



11,790,486Deferred rent


1,224,869



1,460,109Long-term debt, less current portion and discount of $642,130
    and $229,444 respectively


13,412,349



4,432,546Other long-term liabilities


22,048



Total liabilities


36,153,955



17,683,141Commitments and contingencies (Note 7)Stockholders equity :Preferred stock, $0.0001 par value; 10,000,000 shares
    authorized, no shares issued and outstanding at
    December 31, 2007 and 2006, respectively






Common stock, $0.0001 par value; 100,000,000 shares
    authorized, 29,112,755 shares and 29,092,720 shares issued
    and outstanding at December 31, 2007 and 2006, respectively


2,911



2,909Additional paid-in capital


142,879,979



138,057,890Accumulated other comprehensive income


4,524



64,033Deficit accumulated during the development stage


(114,429,344
)


(62,715,790
)Total stockholders equity


28,458,070



75,409,042Total liabilities and stockholders equity

$
64,612,025


$
93,092,183    69




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)STATEMENTS OF OPERATIONS
  Period from May 26,2004 (Inception)Years Ended December 31,


through December 31,2007


2006


2005


2007Operating expenses:Research and development

$
41,781,357


$
47,826,761


$
6,126,226


$
97,617,701Marketing


2,865,804



810,315



240,361



3,957,594General and administrative


9,586,705



4,946,121



1,411,810



16,821,782Total operating expenses


54,233,866



53,583,197



7,778,397



118,397,077Loss from operations


(54,233,866
)


(53,583,197
)


(7,778,397
)


(118,397,077
)Other income (expense):Interest income


3,404,447



1,944,908



255,785



5,614,520Interest expense


(867,524
)


(497,617
)






(1,365,141
)Other expense


(16,611
)


(37,035
)


(183,000
)


(281,646
)Total other income, net


2,520,312



1,410,256



72,785



3,967,733Loss before income tax


(51,713,554
)


(52,172,941
)


(7,705,612
)


(114,429,344
)Net loss

$
(51,713,554
)

$
(52,172,941
)

$
(7,705,612
)

$
(114,429,344
)Basic and diluted net loss per
    share(1)

$
(1.81
)

$
(10.07
)

$
(6.67
)Shares used to compute basic and diluted net loss per
    share(1)


28,572,883



5,181,920



1,155,879     (1)
    
    As a result of the issuance of 6,900,000 shares of common
    stock in the Companys initial public offering in the
    fourth quarter of 2006 and the conversion of the Companys
    preferred stock into 19,907,605 shares of common stock upon
    completion of the Companys initial public offering, there
    is a lack of comparability in the per share amounts between the
    2007, 2006 and 2005 periods presented. Please see Note 2 of
    the Notes to Financial statements for further discussion.   70




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)STATEMENTS OF STOCKHOLDERS EQUITY
  DeficitSeries A-1 to A-3











Accumulated


AccumulatedConvertible Preferred








Additional


Other


During the


TotalStock


Common Stock


Paid-in


Comprehensive


Development


StockholdersShares


Amount


Shares


Amount


Capital


Income


Stage


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





$




1,125,000


$
112


$
4,388


$



$



$
4,500Issuance of
    Series A-1
    preferred stock, net of $59,573 offering costs, in December at
    $0.94 per share


8,085,108



809











7,539,620











7,540,429Issuance of common stock from option exercises under equity
    compensation plans










45,000



5



17,995











18,000Issuance of common stock options for consulting services in
    November


















811











811Net 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
)


4,726,503Issuance of
    Series A-2
    preferred stock, net of $57,041 offering costs, in June and
    September at $1.00 per share


17,675,347



1,767











17,616,539











17,618,306Issuance of common stock from option exercises under equity
    compensation plans










734,000



73



105,927











106,000Net 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
)


14,745,197Issuance of
    Series A-3
    preferred stock, net of $94,987 offering costs, in March at
    $1.00 per share


53,870,000



5,387











53,769,626











53,775,013Conversion of preferred stock in connection with initial public
    offering in October


(79,630,455
)


(7,963
)


19,907,605



1,990



5,973











Initial public offering of common stock, net of $6,204,852
    offering costs, in October at $9.00 per share










6,900,000



690



55,894,458











55,895,148Issuance of warrants in February to purchase 385,000 shares
    of common stock at $1.00 per share


















313,572











313,572Cashless warrant exercise in November at $9.45 per share










27,754



3



(3
)










Issuance of common stock from option exercises under equity
    compensation plans










353,361



36



466,426











466,462Collection of stock subscription receivable


















187,600











187,600Stock-based compensation


















2,134,958











2,134,958Unrealized gain on investment securities






















64,033







64,033Net Loss


























(52,172,941
)


(52,172,941
)Balance at December 31, 2006










29,092,720



2,909



138,057,890



64,033



(62,715,790
)


75,409,042Issuance of warrants in November to purchase 50,331 shares
    of common stock at $12.67 per share


















473,876











473,876Cashless warrant exercise in March at $15.04 per share










35,325



4



(4
)










Net repurchase of common stock from option repurchases under
    equity compensation plans










(15,290
)


(2
)


7,912











7,910Stock-based compensation


















4,340,305











4,340,305Unrealized gain on investment securities






















(59,509
)






(59,509
)Net Loss


























(51,713,554
)


(51,713,554
)Balance at December 31, 2007





$




29,112,755


$
2,911


$
142,879,979


$
4,524


$
(114,429,344
)

$
28,458,070    71




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)STATEMENTS OF CASH FLOWS
  Period fromMay 26, 2004(Inception) throughYears Ended December 31,


December 31,2007


2006


2005


2007Operating activitiesNet loss

$
(51,713,554
)

$
(52,172,941
)

$
(7,705,612
)

$
(114,429,344
)Adjustments to reconcile net loss to net cash used in operating
    activities:Depreciation


515,763



221,681



36,876



782,709Loss on disposal of assets






37,034







37,034Stock-based compensation


4,340,305



2,134,958







6,476,074Non-cash interest expense and impairment charges


8,622



7,535



183,000



244,158Amortization of discount on note payable


106,190



84,128







190,317Changes in operating assets and liabilities:Prepaid expenses and other current assets


(153,505
)


(322,238
)


(470,160
)


(1,001,916
)Accounts payable


(98,735
)


1,087,289



647,272



1,704,336Accrued liabilities and other liabilities


6,320,244



7,210,292



384,255



13,960,755Net cash used in operating activities


(40,674,670
)


(41,712,262
)


(6,924,369
)


(92,035,877
)Investing activitiesPurchases of
    available-for-sale
    securities










(7,000,000
)


(7,450,000
)Maturities of
    available-for-sale
    securities






7,000,000







7,000,000Restricted cash


(1,286,152
)


(1,581,130
)






(2,867,282
)Purchases of property and equipment


(2,096,683
)


(2,509,063
)


(45,881
)


(4,768,751
)Net cash (used in) provided by investing activities


(3,382,835
)


2,909,807



(7,045,881
)


(8,086,033
)Financing activitiesProceeds from issuance of common stock


7,910



56,827,683



106,000



56,964,093Proceeds from sale of preferred stock, net






53,775,013



17,618,306



78,933,748Borrowings under debt agreements


14,955,000



7,000,000







21,955,000Payments under debt agreements


(2,338,010
)










(2,338,010
)Net cash provided by financing activities


12,624,900



117,602,696



17,724,306



155,514,831Net (decrease) increase in cash and cash equivalents


(31,432,605
)


78,800,241



3,754,056



55,392,921Cash and cash equivalents at beginning of period


86,825,526



8,025,285



4,271,229



Cash and cash equivalents at end of period

$
55,392,921


$
86,825,526


$
8,025,285


$
55,392,921Supplemental disclosuresIssuance of warrants in connection with loan and security
    agreement

$
473,876


$
313,572


$



$
787,448Assets acquired through lease concessions

$



$
1,190,530


$



$
1,190,530Unrealized (loss) gain on investment securities

$
(59,509
)

$
64,033


$



$
4,524Cash paid for interest and fees

$
693,288


$
339,002


$



$
1,032,290    72




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)NOTES TO FINANCIAL STATEMENTS
  1.
    The
    Company  tm tm Accounting and Reporting by
    Development Stage Enterprises
  2.
    Summary
    of Significant Accounting Policies  Reclassifications
    Management
    Estimates
    Fair
    Value of Financial Instruments
    Cash
    Equivalents
   73




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Marketable
    Securities
    Accounting for
    Certain Investments in Debt and Equity Securities
  Concentration
    of Credit Risk
    Segment
    Information
    Property
    and Equipment
     74




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  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
    Accounting for Uncertainty in
    Income Taxes  An Interpretation of FASB Statement
    No. 109 Accounting for Income Taxes
 75




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Stock-Based
    Compensation
  Share-Based Payment, Accounting for Stock issued to Employees Accounting for Stock-Based
    Compensation. Share-Based Payment,
    Years Ended December 31,2007


2006Risk free interest rates


4.6
%


5.0
%Expected life in years


6.0



6.1Expected dividend yield


0.0
%


0.0
%Expected volatility


66.2
%


70.0
%    76




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
        Period fromMay 26, 2004(Inception) throughYears Ended December 31,


December 31,2007


2006


2007Research and development

$
1,243,173


$
561,257


$
1,804,430Marketing


32,808



1,171



33,979General and administrative


3,064,324



1,572,530



4,637,665Stock-based compensation expense included in operating expenses


4,340,305



2,134,958



6,476,074Total stock-based compensation expense included in loss from
    operations

$
4,340,305


$
2,134,958


$
6,476,074      77




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Comprehensive
    Loss
  Reporting
    Comprehensive Income,
  Period fromMay 26, 2004(Inception) throughYears Ended December 31,


December 31,2007


2006


2005


2007Net loss

$
(51,713,554
)

$
(52,172,941
)

$
(7,705,612
)

$
(114,429,344
)Other comprehensive income:Net unrealized (loss) gain on available for sale investments


(59,509
)


64,033







4,524Comprehensive loss

$
(51,773,063
)

$
(52,108,908
)

$
(7,705,612
)

$
(114,424,820
)   Net
    Loss Per Share
     78




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2007


2006


2005Shares for basic and dilutive net loss per share:Weighted average common shares outstanding


29,107,093



5,958,035



1,319,367Weighted average unvested common shares subject to repurchase


(534,210
)


(776,115
)


(163,488
)Denominator for basic and diluted earnings per share


28,572,883



5,181,920



1,155,879       Recent
    Accounting Pronouncements
  Business Combinations
  No. 07-03, Accounting for Nonrefundable Advance Payments for Goods or
    Services to Be Used in Future Research and Development
    Activities No. 07-03 No. 07-03 No. 07-03
  The
    Fair Value Option for Financial Assets and Financial
    Liabilities, Fair Value Measurements.
  Fair Value Measurement
 79




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    3.
    Available-for-Sale
    Securities      Gross


GrossAdjusted


Unrealized


UnrealizedCost Basis


Holding Gains


Holding Losses


Fair ValueAt December 31, 2007Available-for-sale:Equity securities

$
222,000


$
4,524


$



$
226,524At December 31, 2006Available-for-sale:Equity securities

$
222,000


$
64,033


$



$
286,033    80




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  4.
    Selected
    Financial Statement Data  December 31,2007


2006Property and equipment:Leasehold improvements

$
1,580,336


$
1,572,690Computer equipment and software


544,273



373,502Furniture and fixtures


421,178



399,480Manufacturing equipment


123,303



122,500Construction in-process


3,213,617



1,317,8525,882,707



3,786,024Accumulated depreciation


(743,169
)


(227,406
)$
5,139,538


$
3,558,618Accrued liabilities:Accrued patient costs

$
4,284,550


$
3,794,763Accrued clinical research costs


2,893,214



1,226,041Accrued manufacturing costs and equipment purchases


4,323,539



925,803Accrued personnel costs


1,127,582



889,391Other accrued liabilities


1,272,885



542,752$
13,901,770


$
7,378,750   5.
    Loan and
    Security Agreement     81




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Warrants
  Series A-2
    6.
    Related
    Party Transactions  Accounting for Expenses or
    Liabilities Paid by Principal Stockholder(s) Series A-1 Series A-1 Series A-1
  7.
    Commitments
    and Contingencies  Leases
   82




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
      2008

$
1,096,2942009


1,125,4022010


1,151,8292011


1,191,8512012


917,676Thereafter


$
5,483,052     Supply
    Agreement
  per-unit
   83




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    8.
    License
    Agreements and Acquired Development and Commercialization
    Rights      9.
    Stockholders
    Equity  Stock
    Split
    Initial
    Public Offering
   84




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Stock
    Options
  and/or
  10-year
    Authorized(1)


Available


Outstanding2004 Equity Incentive Plan


2,714,721







1,597,6502006 Equity Incentive Plan


2,260,279



1,391,104



869,1754,975,000



1,391,104



2,466,825     (1)
    
    In connection with the Companys initial public in the
    fourth quarter of 2006, the 2004 Equity Incentive Plan was
    discontinued and the 90,772 shares of common stock that
    remained available for issuance under the 2004 Plan were
    transferred to the 2006 Plan. Further, options to purchase
    69,507 shares of common stock previously granted under the
    2004 Plan that were either repurchased, forfeited or cancelled
    subsequent to the discontinuance of the 2004 Plan have also been
    transferred to the 2006 Plan.   85




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2007


2006


2005Weighted-





Weighted-





Weighted-Average





Average





AverageShares


Exercise Price


Shares


Exercise Price


Shares


Exercise PriceOptions outstanding at beginning of period


1,664,967


$
2.04



289,000


$
0.40



261,250


$
0.40Granted


914,450


$
14.92



1,812,402


$
2.11



769,250


$
0.40Exercised


(24,898
)

$
1.96



(353,361
)

$
0.96



(741,500
)

$
0.40Cancelled


(87,694
)

$
10.67



(83,074
)

$
1.32






$
0.40Options outstanding at end of period


2,466,825


$
6.51



1,664,967


$
2.04



289,000


$
0.40Exercisable at end of period


1,570,407


$
2.22



1,519,731


$
1.96



159,880


$
0.40       Options Outstanding

Option ExercisableWeighted-AverageRemaining

Weighted-



Weighted-Range of

Number

Contractual

Average

Number

AverageExercise Price

Outstanding

Life - Years

Exercise Price

Exercisable

Exercise Price$ 0.40 - $ 5.00


1,597,650



8.32


$
1.96



1,531,124


$
1.96$ 5.01 - $10.00


8,100



8.88


$
9.45



2,287


$
9.45$10.01 - $15.00


349,575



9.55


$
13.63



36,996


$
12.31$15.01 - $17.32


511,500



9.27


$
15.83







NA$ 0.40 - $17.32


2,466,825



8.69


$
6.51



1,570,407


$
2.22
   10.
    Income
    Taxes  and/or and/or and/or
 86




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
        December 31,2007


2006Deferred tax assets:Net operating loss carryforwards

$



$
13,089,000Tax credit carryforwards






1,405,000Capitalized research and development


9,514,000



10,269,000Other, net


2,765,000



1,799,00012,279,000



26,562,000Valuation allowance for deferred tax assets


(12,279,000
)


(26,562,000
)Net deferred taxes

$



$
     11.
    Employee
    Benefit Plan   87




---



##### Table of Contents



CADENCE
    PHARMACEUTICALS, INC.
    (a development stage company)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  12.
    Summarized
    Quarterly Data (Unaudited)    Fiscal Year 2007 Quarters1st


2nd


3rd


4th


TotalTotal operating expenses

$
10,371,579


$
15,657,285


$
13,602,799


$
14,602,203


$
54,233,866Net loss


(9,559,698
)


(14,934,589
)


(12,986,435
)


(14,232,832
)

$
(51,713,554
)Basic and diluted net loss per
    share(1)(3)

$
(0.34
)

$
(0.52
)

$
(0.45
)

$
(0.50
)

$
(1.81
)   Fiscal Year 2006 Quarters1st(2)


2nd


3rd


4th


TotalTotal operating expenses

$
29,368,353


$
6,580,138


$
7,994,458


$
9,640,248


$
53,583,197Net loss

$
(29,241,080
)

$
(6,198,805
)

$
(7,782,841
)

$
(8,950,215
)

$
(52,172,941
)Basic and diluted net loss per
    share(1)(3)

$
(23.84
)

$
(4.92
)

$
(6.01
)

$
(0.53
)

$
(10.07
)   ­
    ­
  (1)
    
    Loss per share is computed independently for each of the
    quarters presented. Therefore, the sum of the quarterly net loss
    per share may not necessarily equal the total for the year.(2)
    
    In the first quarter of 2006, the Company acquired the
    in-license rights to Acetavance. At this time the Company
    expensed and paid an upfront fee and related costs of
    approximately $25,300,000.(3)
    
    In the fourth quarter of 2006, the Company completed its initial
    public offering whereby the Company sold 6,900,000 shares
    of common stock at $9.00 per share and received net proceeds of
    $55,895,148 (after underwriting discounts and offering costs).
    As a result of the issuance of 6,900,000 shares of common
    stock in the Companys initial public offering in the
    fourth quarter of 2006 and the conversion of the Companys
    preferred stock into 19,907,605 shares of common stock upon
    completion of the Companys initial public offering, there
    is a lack of comparability in the basic and diluted net loss per
    share amounts for the periods presented.  13.
    Subsequent
    Events   88




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Form 10-K.
  Managements
    Report on Internal Control Over Financial Reporting
  Rule 13a-15(f)
  
    pertain to the maintenance of records that, in reasonable
    detail, accurately and fairly reflect the transactions and
    dispositions of the assets of the company;
    provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles, and
    that receipts and expenditures of the company are being made
    only in accordance with authorizations of management and
    directors of the company; and
    provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of the
    companys assets that could have a material effect on the
    companys financial statements.       89




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
    INTERNAL CONTROL OVER FINANCIAL REPORTING
                 
    90




---



##### Table of Contents



Item 9B.
    Other
    Information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance  Election of Directors, Executive Compensation and
    Other Information, Section 16(a) Beneficial Ownership
    Reporting Compliance, and Committees of the Board Regulation S-K. Form 10-K.
  Item 11.
    Executive
    Compensation  Executive Compensation and Other Information
  Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters  Security Ownership of Certain Beneficial Owners and
    Management
  Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence  Certain Relationships and Related Transactions, and
    Board Independence
  Item 14.
    Principal
    Accounting Fees and Services  Ratification of Selection of Independent Registered
    Public Accounting Firm
 91




---



##### Table of Contents



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Documents filed as part of this report:
  Financial Statements. Form 10-K, :
  PageReport of Independent Registered Public
    Accounting Firm


68Balance Sheets at December 31, 2007 and
    2006


69Statements of Operation for the years ended
    December 31, 2007, 2006 and 2005, and for the period from
    May 26, 2004 (inception) through December 31, 2007


70Statements of Stockholders Equity for the
    years ended December 31, 2007, 2006 and 2005, and for the
    period from May 26, 2004 (inception) through
    December 31, 2004


71Statements of Cash Flows for the years ended
    December 31, 2007, 2006 and 2005, and for the period from
    May 26, 2004 (inception) through December 31, 2007


72Notes to Financial Statements


73   Financial Statements Schedules.
  Exhibits
  ExhibitNumber

Description of Exhibit3
.1

Amended and Restated Certificate of Incorporation of the
    Registrant, incorporated herein by reference to the
    corresponding exhibit to the Registrants Quarterly Report
    on
    Form 10-Q
    (File
    No. 001-33103)
    for the period ended September 30, 2006 as filed with the
    SEC on November 30, 20063
.2

Amended and Restated Bylaws of the Registrant, incorporated
    herein by reference to the corresponding exhibit to the
    Registrants Quarterly Report on
    Form 10-Q
    (File
    No. 001-33103)
    for the period ended September 30, 2006 as filed with the
    SEC on November 30, 20063
.2.1

Amendment of Amended and Restated Bylaws of the Registrant,
    incorporated herein by reference to the corresponding exhibit to
    the Registrants Current Report on
    Form 8-K
    (File
    No. 001-33103)
    as filed with the SEC on December 17, 20074
.1

Form of the Registrants Common Stock Certificate,
    incorporated herein by reference to the corresponding exhibit to
    the Registrants Quarterly Report on
    Form 10-Q
    (File
    No. 001-33103)
    for the period ended September 30, 2006 as filed with the
    SEC on November 30, 20064
.2

Amended and Restated Investor Rights Agreement dated
    February 21, 2006, incorporated herein by reference to the
    corresponding exhibit to the Registrants Registration
    Statement on
    Form S-1
    (File
    No. 333-135821)
    as filed with the SEC on July 17, 20064
.5

Registration Rights Waiver and Amendment dated November 29,
    2007, incorporated herein by reference to the corresponding
    exhibit to the Registrants Current Report on
    Form 8-K
    (File
    No. 001-33103)
    as filed with the SEC on December 3, 20074
.6

Form of Warrant to Purchase Stock issued to Silicon Valley Bank
    on November 30, 2007, incorporated herein by reference to
    the corresponding exhibit to the Registrants Current
    Report on
    Form 8-K
    (File
    No. 001-33103)
    as filed with the SEC on December 3, 20074
.7

Form of Warrant to Purchase Stock issued to Oxford Finance
    Corporation on November 30, 2007, incorporated herein by
    reference to the corresponding exhibit to the Registrants
    Current Report on
    Form 8-K
    (File
    No. 001-33103)
    as filed with the SEC on December 3, 2007 92




---



##### Table of Contents



ExhibitNumber

Description of Exhibit4
.8

Form of Warrant to Purchase Stock issued to Merrill Lynch
    Capital, a Division of Merrill Lynch Business Financial Services
    Inc., on November 30, 2007, incorporated herein by
    reference to the corresponding exhibit to the Registrants
    Current Report on
    Form 8-K
    (File
    No. 001-33103)
    as filed with the SEC on December 3, 200710
.1#

Form of Director and Executive Officer Indemnification
    Agreement, incorporated herein by reference to the corresponding
    exhibit to Amendment No. 1 of the Registrants
    Registration Statement on
    Form S-1
    (File
    No. 333-135821)
    as filed with the SEC on August 30, 200610
.3#

2004 Equity Incentive Award Plan and forms of option agreements
    thereunder, incorporated herein by reference to the
    corresponding exhibit to the Registrants Registration
    Statement on
    Form S-8
    (File
    No. 333-138226)
    as filed with the SEC on October 26, 200610
.5#

2006 Equity Incentive Award Plan and forms of option and
    restricted stock agreements thereunder, incorporated herein by
    reference to the corresponding exhibit to the Registrants
    Registration Statement on
    Form S-8
    (File
    No. 333-138226)
    as filed with the SEC on October 26, 200610
.6

Form of Amended and Restated Restricted Common Stock Purchase
    Agreement, incorporated herein by reference to the corresponding
    exhibit to Amendment No. 1 of the Registrants
    Registration Statement on
    Form S-1
    (File
    No. 333-135821)
    as filed with the SEC on August 30, 200610
.9

Lease dated May 12, 2006 by and between the Registrant and
    Prentiss/Collins Del Mar Heights LLC, incorporated herein by
    reference to the corresponding exhibit to the Registrants
    Registration Statement on
    Form S-1
    (File
    No. 333-135821)
    as filed with the SEC on July 17, 200610
.10

Collaboration and License Agreement dated July 30, 2004 by
    and between the Registrant and Migenix Inc. (formerly Micrologix
    Biotech Inc.) , incorporated herein by reference to the
    corresponding exhibit to Amendment No. 2 of the
    Registrants Registration Statement on
    Form S-1
    (File
    No. 333-135821)
    as filed with the SEC on September 25, 200610
.11

IV APAP Agreement (U.S. and Canada) dated February 21, 2006
    by and between the Registrant and Bristol-Myers Squibb Company,
    incorporated herein by reference to the corresponding exhibit to
    Amendment No. 2 of the Registrants Registration
    Statement on
    Form S-1
    (File
    No. 333-135821)
    as filed with the SEC on September 25, 200610
.12

License Agreement dated December 23, 2002 by and among SCR
    Pharmatop and Bristol-Myers Squibb Company, incorporated herein
    by reference to the corresponding exhibit to Amendment
    No. 2 of the Registrants Registration Statement on
    Form S-1
    (File
    No. 333-135821)
    as filed with the SEC on September 25, 200610
.13

Loan and Security Agreement dated February 17, 2006 by and
    among the Registrant, Silicon Valley Bank and Oxford Finance
    Corporation, incorporated herein by reference to the
    corresponding exhibit to the Registrants Registration
    Statement on
    Form S-1
    (File
    No. 333-135821)
    as filed with the SEC on July 17, 200610
.15

Engagement Letter dated May 19, 2005 by and between the
    Registrant and Clearview Projects, Inc., incorporated herein by
    reference to the corresponding exhibit to Amendment No. 2
    of the Registrants Registration Statement on
    Form S-1
    (File
    No. 333-135821)
    as filed with the SEC on September 25, 200610
.16

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.), incorporated herein by reference to the corresponding
    exhibit to Amendment No. 3 of the Registrants
    Registration Statement on
    Form S-1
    (File
    No. 333-135821)
    as filed with the SEC on October 10, 200610
.17

Development and Supply Agreement by and between Cadence
    Pharmaceuticals, Inc. and Baxter Healthcare Corporation dated
    July 18, 2007. incorporated herein by reference to the
    corresponding exhibit to the Registrants Current Report on
    Form 8-K
    (File
    No. 001-33103)
    as filed with the SEC on July 23, 200710
.18#

Form of Amended and Restated Employment Agreement, incorporated
    herein by reference to the corresponding exhibit to the
    Registrants Quarterly Report on
    Form 10-Q
    (File
    No. 001-33103)
    for the period ended September 30, 2007 as filed with the
    SEC on November 17, 2007 93




---



##### Table of Contents



ExhibitNumber

Description of Exhibit10
.19#

Amended and Restated Director Compensation Policy, incorporated
    herein by reference to the corresponding exhibit to the
    Registrants Quarterly Report on
    Form 10-Q
    (File
    No. 001-33103)
    for the period ended September 30, 2007 as filed with the
    SEC on November 17, 200710
.20

Second Amendment to Loan and Security Agreement dated
    November 30, 2007 by and among the Company and Oxford
    Finance Corporation, Silicon Valley Bank and Merrill Lynch
    Capital, a Division of Merrill Lynch Business Financial Services
    Inc., incorporated herein by reference to the corresponding
    exhibit to the Registrants Current Report on
    Form 8-K
    (File
    No. 001-33103)
    as filed with the SEC on December 3, 200710
.21

Common Stock Purchase Agreement dated February 14, 2008,
    incorporated herein by reference to the corresponding exhibit to
    the Registrants Current Report on
    Form 8-K
    (File
    No. 001-33103)
    as filed with the SEC on February 15, 200810
.22#±

2007 Corporate Bonus Plan10
.23#±

2008 Corporate Bonus Plan23
.1±

Report and Consent of Independent Registered Public Accounting
    Firm31
.1±

Certification of Chief Executive Officer pursuant to
    Rule 13a  14(a) and 15d-14(a), as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 200231
.2±

Certification of Chief Financial Officer pursuant to
    Rule 13a  14(a) and 15d-14(a), as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
.1±

Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to 18.U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes Oxley Act of 2002     ±
    
    Included in this Report.#
    
    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. 94




---



##### Table of Contents



SIGNATURES  Form 10-K
    By:
    /s/  Theodore
    R. Schroeder   President, Chief Executive Officer and Director
    (Principal Executive Officer)
      Signature

Title

Date/s/  Theodore
    R. SchroederTheodore
    R. Schroeder

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

March 13, 2008/s/  William
    R. LaRueWilliam
    R. LaRue

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

March 13, 2008/s/  Cam
    L. GarnerCam
    L. Garner

Chairman of the Board of Directors

March 13, 2008/s/  Brian
    G. AtwoodBrian
    G. Atwood

Director

March 13, 2008/s/  Samuel
    L. Barker, Ph.D.Samuel
    L. Barker, Ph.D.

Director

March 13, 2008/s/  Michael
    A. Berman, M.D.Michael
    A. Berman, M.D.

Director

March 13, 2008/s/  James
    C. Blair, Ph.D.James
    C. Blair, Ph.D.

Director

March 13, 2008/s/  Alan
    D. FrazierAlan
    D. Frazier

Director

March 13, 2008/s/  Christopher
    J. TwomeyChristopher
    J. Twomey

Director

March 13, 2008  95