##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission file number 001-33103
 CADENCE PHARMACEUTICALS, INC.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    41-2142317
(I.R.S. Employer
Identification No.)
 12481 High Bluff Drive, Suite 200
San Diego, CA 92130
 (858) 436-1400
 N/A
 o þ
  o o þ
 o þ




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##### 



CADENCE PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 2006
 TABLE OF CONTENTS
 PART IFINANCIAL INFORMATIONItem 1.
    
    Financial StatementsBalance Sheets as of September 30, 2006 (unaudited) and December 31, 2005
    
    
    3Unaudited Statements of Operations for the three and nine months ended September 30, 2006 and 2005
    
    
    4Unaudited Statements of Cash Flows for the nine months ended September 30, 2006 and 2005
    
    
    5Notes to Unaudited Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    21PART IIOTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    22Item 1A.
    
    Risk Factors
    
    
    22Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3.
    
    Defaults Upon Senior Securities
    
    
    41Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    41Item 5.
    
    Other Information
    
    
    42Item 6.
    
    Exhibits
    
    
    42SIGNATURES
    
    
    43EXHIBIT 3.1EXHIBIT 3.2EXHIBIT 4.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 CADENCE PHARMACEUTICALS, INC.
(a development stage company)
 
 BALANCE SHEETS
 Pro FormaSeptember 30,
    
    
    December 31,
    
    
    September 30,2006
    
    
    2005
    
    
    2006(unaudited)
    
    
    
    
    
    
    (unaudited)(See Note 1)AssetsCurrent assets:Cash and cash equivalents
    
    $
    38,186,823
    
    
    $
    8,025,285
    
    
    $
    95,412,823Securities available-for-sale
    
    
    
    
    
    
    7,000,000
    
    
    
    Prepaid expenses and other current assets
    
    
    605,556
    
    
    
    526,173
    
    
    
    605,556Total current assets
    
    
    38,792,379
    
    
    
    15,551,458
    
    
    
    96,018,379Property and equipment, net
    
    
    2,854,549
    
    
    
    117,740
    
    
    
    2,854,549Restricted cash
    
    
    1,581,130
    
    
    
    
    
    
    
    1,581,130Other assets
    
    
    1,834,549
    
    
    
    222,000
    
    
    
    601,549Total assets
    
    $
    45,062,607
    
    
    $
    15,891,198
    
    
    $
    101,055,607Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    3,694,566
    
    
    $
    715,781
    
    
    $
    3,694,566Accrued liabilities
    
    
    5,068,886
    
    
    
    430,220
    
    
    
    5,068,886Current portion of long-term debt
    
    
    1,675,919
    
    
    
    
    
    
    
    1,675,919Total current liabilities
    
    
    10,439,371
    
    
    
    1,146,001
    
    
    
    10,439,371Deferred rent
    
    
    1,516,629
    
    
    
    
    
    
    
    1,516,629Long-term debt, less current portion
    
    
    5,324,081
    
    
    
    
    
    
    
    5,324,081CommitmentsStockholders equity :Preferred stock, $0.0001 par value:Series A-1 convertible preferred stock,
8,085,108 shares authorized, issued and
outstanding at September 30, 2006 and
December 31, 2005; aggregate liquidation
preference of $7,600,002
    
    
    809
    
    
    
    809
    
    
    
    Series A-2 convertible preferred stock,
18,060,347 shares and 17,675,347 shares
authorized at September 30, 2006 and
December 31, 2005, respectively;
17,675,347 shares issued and outstanding at
September 30, 2006 and December 31, 2005;
aggregate liquidation preference of $17,675,347
    
    
    1,767
    
    
    
    1,767
    
    
    
    Series A-3 convertible preferred stock,
53,870,000 shares authorized issued and
outstanding at September 30, 2006;
aggregate liquidation preference of $53,870,000
    
    
    5,387
    
    
    
    
    
    
    
    Common stock, $0.0001 par value; 100,000,000
shares and 40,000,000 shares authorized at
September 30, 2006 and December 31, 2005,
respectively; 2,177,935 shares and 1,904,000
shares issued and outstanding at September 30,
2006 and December 31, 2005, respectively;
28,985,540 shares issued and outstanding pro
forma
    
    
    218
    
    
    
    190
    
    
    
    2,899Additional paid-in capital
    
    
    81,435,380
    
    
    
    25,472,880
    
    
    
    137,433,662Stock subscription receivable
    
    
    
    
    
    
    (187,600
    )
    
    
    Accumulated other comprehensive income
    
    
    104,540
    
    
    
    
    
    
    
    104,540Deficit accumulated during the development stage
    
    
    (53,765,575
    )
    
    
    (10,542,849
    )
    
    
    (53,765,575
    )Total stockholders equity
    
    
    27,782,526
    
    
    
    14,745,197
    
    
    
    83,775,526Total liabilities and stockholders equity
    
    $
    45,062,607
    
    
    $
    15,891,198
    
    
    $
    101,055,607
  3




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##### Table of Contents



CADENCE PHARMACEUTICALS, INC.
(a development stage company)
 
 STATEMENTS OF OPERATIONS
 (unaudited)
 Period fromMay 26, 2004(Inception)Three Months Ended
    
    
    Nine Months Ended
    
    
    ThroughSeptember 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006Operating expenses:Research and development
    
    $
    6,387,623
    
    
    $
    2,038,497
    
    
    $
    40,051,593
    
    
    $
    4,440,086
    
    
    $
    48,061,176Marketing
    
    
    244,284
    
    
    
    17,782
    
    
    
    560,825
    
    
    
    160,283
    
    
    
    842,300General and administrative
    
    
    1,362,551
    
    
    
    408,281
    
    
    
    3,330,531
    
    
    
    948,195
    
    
    
    5,619,487Total operating expenses
    
    
    7,994,458
    
    
    
    2,464,560
    
    
    
    43,942,949
    
    
    
    5,548,564
    
    
    
    54,522,963Loss from operations
    
    
    (7,994,458
    )
    
    
    (2,464,560
    )
    
    
    (43,942,949
    )
    
    
    (5,548,564
    )
    
    
    (54,522,963
    )Other income (expense):Interest income
    
    
    479,500
    
    
    
    102,851
    
    
    
    1,032,001
    
    
    
    116,847
    
    
    
    1,297,166Interest expense
    
    
    (227,954
    )
    
    
    
    
    
    
    (271,849
    )
    
    
    
    
    
    
    (271,849
    )Other expense
    
    
    (39,929
    )
    
    
    
    
    
    
    (39,929
    )
    
    
    (183,000
    )
    
    
    (267,929
    )Total other income (expense)
    
    
    211,617
    
    
    
    102,851
    
    
    
    720,223
    
    
    
    (66,153
    )
    
    
    757,388Net loss
    
    $
    (7,782,841
    )
    
    $
    (2,361,709
    )
    
    $
    (43,222,726
    )
    
    $
    (5,614,717
    )
    
    $
    (53,765,575
    )Basic and diluted net loss per share
    
    $
    (6.01
    )
    
    $
    (2.04
    )
    
    $
    (34.27
    )
    
    $
    (4.92
    )Shares used to compute basic and
diluted net loss per share
    
    
    1,295,807
    
    
    
    1,160,469
    
    
    
    1,261,127
    
    
    
    1,141,406
  4




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##### Table of Contents



CADENCE PHARMACEUTICALS, INC.
(a development stage company)
 
 STATEMENTS OF CASH FLOWS
 (Unaudited)
 Period fromMay 26, 2004(Inception)Nine Months Ended
    
    
    ThroughSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006Operating activitiesNet loss
    
    $
    (43,222,726
    )
    
    $
    (5,614,717
    )
    
    $
    (53,765,575
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation
    
    
    76,195
    
    
    
    26,757
    
    
    
    121,460Loss on disposal of assets
    
    
    39,929
    
    
    
    
    
    
    
    39,929Stock-based compensation
    
    
    1,470,138
    
    
    
    
    
    
    
    1,470,949Non-cash interest expense and impairment charges
    
    
    41,665
    
    
    
    183,000
    
    
    
    269,665Changes in operating assets and liabilities:Prepaid expenses and other current assets
    
    
    (82,484
    )
    
    
    (531,894
    )
    
    
    (608,657
    )Accounts payable, accrued liabilities and deferred rent
    
    
    7,104,572
    
    
    
    917,488
    
    
    
    8,250,573Net cash used in operating activities
    
    
    (34,572,711
    )
    
    
    (5,019,366
    )
    
    
    (44,221,656
    )Investing activitiesPurchases of marketable securities
    
    
    
    
    
    
    (7,000,000
    )
    
    
    (7,450,000
    )Maturities of marketable securities
    
    
    7,000,000
    
    
    
    
    
    
    
    7,000,000Restricted cash
    
    
    (1,581,130
    )
    
    
    
    
    
    
    (1,581,130
    )Purchases of property and equipment
    
    
    (1,662,403
    )
    
    
    (43,385
    )
    
    
    (1,825,408
    )Net cash provided by (used in) investing activities
    
    
    3,756,467
    
    
    
    (7,043,385
    )
    
    
    (3,856,538
    )Financing activitiesProceeds from issuance of common stock, net
    
    
    202,769
    
    
    
    109,000
    
    
    
    331,269Proceeds from sale of preferred stock, net
    
    
    53,775,013
    
    
    
    14,023,380
    
    
    
    78,933,748Borrowings under debt agreements
    
    
    7,000,000
    
    
    
    
    
    
    
    7,000,000Net cash provided by financing activities
    
    
    60,977,782
    
    
    
    14,132,380
    
    
    
    86,265,017Net increase in cash and cash equivalents
    
    
    30,161,538
    
    
    
    2,069,629
    
    
    
    38,186,823Cash and cash equivalents at beginning of period
    
    
    8,025,285
    
    
    
    4,271,229
    
    
    
    Cash and cash equivalents at end of period
    
    $
    38,186,823
    
    
    $
    6,340,858
    
    
    $
    38,186,823
  5




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##### Table of Contents



CADENCE PHARMACEUTICALS, INC.
(a development stage company)
 
 NOTES TO UNAUDITED FINANCIAL STATEMENTS
 1. The Company and Summary of Significant Accounting Policies
 The Company
   Basis of Presentation
  Use of Estimates
  Stock Split
  Unaudited Pro Forma Balance Sheet
  
    
    On October 30, 2006, the Company completed an IPO whereby it sold 6,000,000 shares of
common stock at $9.00 per share and received net proceeds of $48,460,000 (after
underwriting discounts  and offering costs);
    
    On October 19, 2006, the automatic conversion of the 79,630,455 outstanding shares of
convertible preferred stock into 19,907,605 shares of common stock in connection with the
Companys IPO; and
    
    On November 13, 2006, the Company completed the sale of 900,000 shares of common stock
at $9.00 per share and received net proceeds of $7,500,000 (after underwriting discounts).
 The sale of these shares was the result of the underwriters full
exercise of the over-allotment option the Company granted them in connection with the Companys IPO.
 6




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##### Table of Contents



Comprehensive Loss
 Reporting Comprehensive Income,
 Stock-Based Compensation
 Share-Based
Payment, Accounting
for Stock issued to Employees, Accounting for Stock-Based Compensation.
  Period fromMay 26, 2004(Inception)Three Months Ended
    
    
    Nine Months Ended
    
    
    ThroughSeptember 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2006
    
    
    2006Research and development
    
    $
    280,077
    
    
    $
    390,416
    
    
    $
    390,416Marketing
    
    
    766
    
    
    
    850
    
    
    
    850General and administrative
    
    
    502,434
    
    
    
    1,078,872
    
    
    
    1,078,872Total stock-based compensation
    
    $
    783,277
    
    
    $
    1,470,138
    
    
    $
    1,470,138Stock-based compensation per
share, basic and diluted
    
    $
    0.60
    
    
    $
    1.17
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2006Employee Stock OptionsRisk-free interest rate
    
    
    4.68 - 5.05
    %
    
    
    4.36 - 5.08
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Expected life of options (years)
    
    
    5.81 - 6.08
    
    
    
    5.81 - 6.08Volatility
    
    
    70.00
    %
    
    
    70.00
    %
 7




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##### Table of Contents



Accounting for Certain Transactions involving
Stock Compensation  an interpretation of APB Opinion No. 25
  Accounting for
Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods and Services,
 Net Loss Per Share
  8




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005HistoricalNumerator:Net Loss
    
    $
    (7,782,841
    )
    
    $
    (2,361,709
    )
    
    $
    (43,222,726
    )
    
    $
    (5,614,717
    )Denominator:Weighted average common shares outstanding
    
    
    2,166,576
    
    
    
    1,442,500
    
    
    
    2,027,432
    
    
    
    1,276,758Weighted
average unvested common shares subject to repurchase
    
    
    (870,769
    )
    
    
    (282,031
    )
    
    
    (766,304
    )
    
    
    (135,353
    )Weighted average common shares outstanding
    
    
    1,295,807
    
    
    
    1,160,469
    
    
    
    1,261,128
    
    
    
    1,141,405Basic and diluted net loss per share
    
    $
    (6.01
    )
    
    $
    (2.04
    )
    
    $
    (34.27
    )
    
    $
    (4.92
    )Historical outstanding anti-dilutive securities
not included in diluted net loss per sharePreferred stock (as converted)
    
    
    19,907,605
    
    
    
    6,440,107
    
    
    
    19,907,605
    
    
    
    6,440,107Preferred stock warrants (as converted)
    
    
    96,250
    
    
    
    
    
    
    
    96,250
    
    
    
    Common stock options
    
    
    1,731,293
    
    
    
    289,000
    
    
    
    1,731,293
    
    
    
    289,000Common stock subject to repurchase
    
    
    864,192
    
    
    
    256,875
    
    
    
    864,192
    
    
    
    256,87522,599,340
    
    
    
    6,985,982
    
    
    
    22,599,340
    
    
    
    6,985,982
 Recent Accounting Pronouncements
 Fair Value Measurements
 Considering the Effects on Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements.
 2. Composition of Certain Balance Sheet Items
  Useful Lives
    
    
    September 30,
    
    
    December 31,(in years)
    
    
    2006
    
    
    2005Leasehold improvements
    
    
    2 - 6
    
    
    $
    1,518,781
    
    
    $
    1,146Computer equipment and software
    
    
    3
    
    
    
    289,326
    
    
    
    63,972Furniture and equipment
    
    
    5
    
    
    
    331,294
    
    
    
    94,982Manufacturing equipment
    
    
    7
    
    
    
    122,500
    
    
    
    Construction in-process
    
    
    
    
    
    
    680,192
    
    
    
    2,942,093
    
    
    
    160,100Less accumulated depreciation
    
    
    
    
    
    
    (87,544
    )
    
    
    (42,360
    )Total
    
    
    
    
    
    $
    2,854,549
    
    
    $
    117,740
 9




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##### Table of Contents



3. Commitments
 Loan and Security Agreement
   Facility Leases
  Severance Obligations
  4. License Agreements and Acquired Development and Commercialization Rights
  10




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##### Table of Contents



5. Stockholders Equity
 Stock Options
  Valuation of Privately-Held-Company Equity
Securities Issued as Compensation,
   WeightedOptions
    
    AverageOutstanding
    
    Exercise PriceBalance at December 31, 2005
    
    
    289,000
    
    
    $
    0.40Granted
    
    
    1,799,302
    
    
    $
    2.04Exercised
    
    
    (273,935
    )
    
    $
    1.49Cancelled
    
    
    (83,074
    )
    
    $
    0.96Balance at September 30, 2006
    
    
    1,731,293
    
    
    $
    1.91
 11




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##### Table of Contents



September 30, 2006Options Outstanding
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    
    
    
    AverageRemaining
    
    Weighted
    
    
    
    
    
    Remaining
    
    WeightedExercise
    
    Number
    
    Contractual Life
    
    Average
    
    Number
    
    Contractual Life
    
    AveragePrice
    
    Outstanding
    
    (in years)
    
    Exercise Price
    
    Exercisable
    
    (in years)
    
    Exercise Price$0.40
    
    
    219,614
    
    
    
    8.45
    
    
    $
    0.40
    
    
    
    185,246
    
    
    
    8.42
    
    
    $
    0.40$1.36
    
    
    880,179
    
    
    
    9.61
    
    
    $
    1.36
    
    
    
    842,004
    
    
    
    9.61
    
    
    $
    1.36$3.20
    
    
    631,500
    
    
    
    9.80
    
    
    $
    3.20
    
    
    
    568,750
    
    
    
    9.80
    
    
    $
    3.201,731,293
    
    
    
    9.53
    
    
    $
    1.91
    
    
    
    1,596,000
    
    
    
    9.54
    
    
    $
    1.90
     Shares Reserved For Future Issuance
  Conversion of preferred stock
    
    
    19,907,605Common stock options granted and outstanding
    
    
    1,731,293Preferred stock warrants outstanding
    
    
    96,250Common stock options reserved for future issuance
    
    
    90,77221,825,920
 6. Subsequent Events
 Stock Options
  12




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion contains forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set forth below under
Part II, Item 1A, Risk Factors. The interim financial statements and this Managements Discussion
and Analysis of Financial Condition and Results of Operations should be read in conjunction with
the financial statements and notes thereto for the year ended December 31, 2005 and the related
Managements Discussion and Analysis of Financial Condition and Results of Operations, both of
which are contained in our Registration Statement on Form S-1 , as amended.
 Overview
 Background
 TM
     Revenues
  13




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##### Table of Contents



Research and Development Expenses
     Period fromMay 26, 2004(Inception)Three Months Ended
    
    
    Nine Months Ended
    
    
    ThroughSeptember 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006Product Candidate
    
    (in thousands)IV APAP
    
    $
    207
    
    
    $
    
    
    
    $
    25,905
    
    
    $
    
    
    
    $
    25,905Omigard
    
    
    4,008
    
    
    
    1,689
    
    
    
    10,246
    
    
    
    3,539
    
    
    
    16,699Other supporting costs
    
    
    2,173
    
    
    
    349
    
    
    
    3,901
    
    
    
    901
    
    
    
    5,457$
    6,388
    
    
    $
    2,038
    
    
    $
    40,052
    
    
    $
    4,440
    
    
    $
    48,061
   Marketing
  14




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General and Administrative
  Interest and Other Income
  Income Taxes
  Critical Accounting Policies and Estimates
   Research and Development Expenses
  Stock-Based Compensation
 Share-Based Payment, Accounting for Stock-Based
Compensation Accounting for
Stock Issued to Employees.
  15




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Valuation of Privately-Held-Company Equity Securities Issued as
Compensation,
    16




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Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling
Goods and Services,
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    

2006Research and development
    
    $
    280,077
    
    
    $
    390,416Marketing
    
    
    766
    
    
    
    850General and administrative
    
    
    502,434
    
    
    
    1,078,872Total stock-based compensation
    
    $
    783,277
    
    
    $
    1,470,138
 Results of Operations
 Comparison of three months ended September 30, 2006 and 2005
 Research and Development Expenses.
 
    
    an increase of $0.2 million in our IV APAP program primarily as a result of
increased clinical and regulatory spending in 2006 after we licensed the rights to the
product in March 2006;
    
    an increase of $2.3 million in our Omigard program as a result of clinical trial and
related costs for a Phase III clinical trial initiated in August 2005; and
    
    an increase of $1.9 million in other supporting costs as a result of increased
salaries and related personnel costs from increased research and development staff to
support our clinical and regulatory efforts related to both Omigard and IV APAP.
 Marketing Expenses.
 17




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General and Administrative Expenses.
 Interest Income.
 Interest Expense.
 Comparison of nine months ended September 30, 2006 and 2005
 Research and Development Expenses.
 
    
    an increase of $25.9 million in our IV APAP program primarily as a result of a $25.0
million initial license fee which was immediately expensed as in-process research and
development;
    
    an increase of $6.7 million in our Omigard program as a result of clinical trial and
related costs for a Phase III clinical trial initiated in August 2005; and
    
    an increase of $3.0 million in other supporting costs as a result of increased
salaries and related personnel costs from increased research and development staff to
support our clinical and regulatory efforts related to both Omigard and IV APAP.
 Marketing Expenses.
 General and Administrative Expenses.
 Interest Income.
 Interest Expense.
 Other income (expense).
 Liquidity and Capital Resources
  
    
    from July 2004 to September 2006, we issued and sold a total of 2,177,935 shares of
common stock for aggregate net proceeds of $0.7 million;
 18




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
    
    from July 2004 to August 2004, we issued and sold a total of 8,085,108 shares of Series
A-1 preferred stock for aggregate net proceeds of $7.5 million;
    
    from June 2005 to September 2005, we issued and sold 17,675,347 shares of Series A-2
preferred stock for aggregate net proceeds of $17.6 million; and
    
    in March 2006, we issued and sold a total of 53,870,000 shares of Series A-3 preferred
stock for aggregate net proceeds of $53.8 million.
         
    
    the progress of our clinical trials, including expenses to support the trials and
milestone payments that may become payable to BMS or Migenix;
    
    our ability to establish and maintain strategic collaborations, including licensing and other arrangements;
    
    the costs involved in enforcing or defending patent claims or other intellectual property rights;
    
    the costs and timing of regulatory approvals;
    
    the costs of establishing sales or distribution capabilities;
    
    the success of the commercialization of our products; and
    
    the extent to which we in-license, acquire or invest in other indications, products, technologies and businesses.
 
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Contractual Obligations and Commitments
  Payments Due by PeriodLess ThanTotal
    
    
    1 Year
    
    
    1 - 3 Years
    
    
    4-5 Years
    
    
    After 5 Years(In thousands)Long-term debt obligations(1)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating lease obligations(2)
    
    
    147
    
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    License obligations(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    147
    
    
    $
    147
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Long-term debt obligations do not include $7.0 million of indebtedness
incurred in June 2006 under our loan and security agreement with
Silicon Valley Bank and Oxford Finance Corporation.(2)
    
    In May 2006, we entered into a six-year operating lease for 23,494
square feet of office space. Operating lease obligations do not
include $6.7 million of non-cancelable operating lease payments
related to this lease. Future minimum payments under the operating
lease total $0.2 million, $1.0 million, $1.1 million, $1.1 million,
$1.2 million, $1.2 million and $0.9 million for the years ending
December 31, 2006, 2007, 2008, 2009, 2010, 2011 and 2012,
respectively.(3)
    
    License obligations do not include additional payments of up to $77.0
million due upon the occurrence of certain milestones related to
regulatory or commercial events. We may also be required to pay
royalties on any net sales of the licensed products. License payments
may be increased based on the timing of various milestones and the
extent to which the licensed technologies are pursued for other
indications. These milestone payments and royalty payments under our
license agreements are not included in the table above because we
cannot, at this time, determine when or if the related milestones will
be achieved or the events triggering the commencement of payment
obligations will occur.  20




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Caution on Forward-Looking Statements
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures.
    21




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 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, which has been
updated since the filing of our registration statement on Form S-1, in its entirety, in addition to
other information contained in this report as well as our other public filings with the Securities
and Exchange Commission.
 In the near-term, the success of our business will depend on many factors, including the
following risks:
 
    
    we are largely dependent on the success of our only two product candidates, IV
APAP and Omigard, and we cannot be certain that our planned clinical development
programs will be sufficient to support NDA submissions or that either product
candidate will receive regulatory approval or be successfully commercialized;
    
    delays in the commencement, enrollment or completion of clinical testing for
either of our product candidates could result in increased costs to us and delay or
limit our ability to obtain regulatory approval;
    
    even if our product candidates are approved by regulatory authorities, we expect
intense competition in the hospital marketplace for our targeted indications;
    
    the patent rights that we have in-licensed covering IV APAP are limited to a
specific intravenous formulation of acetaminophen, and our market opportunity for
this product candidate may be limited by the lack of patent protection for the
active ingredient itself and other formulations that may be developed by
competitors; and
    
    we will require substantial additional funding and may be unable to raise capital
when needed, which would force us to delay, reduce or eliminate our development
programs and commercialization efforts.
 Each of these factors, as well as other factors that may impact our business, are described in
more detail in the following discussion. Although the factors highlighted above are among the most
significant, any of the following factors could materially adversely affect our business or cause
our actual results to differ materially from those contained in forward-looking statements we have
made in this report and those we may make from time to time, and you should consider all of the
factors described when evaluating our business.
 Risks Related to Our Business and Industry
 We are largely dependent on the success of our two product candidates, IV APAP and Omigard,
and we cannot be certain that either of these product candidates will receive regulatory approval
or be successfully commercialized.
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If clinical trials of our current or future product candidates do not produce results
necessary to support regulatory approval in the United States or elsewhere, we will be unable to
commercialize these products.
    Because the results of earlier clinical trials are not necessarily predictive of future
results, IV APAP, Omigard or any other product candidate we advance into clinical trials may not
have favorable results in later clinical trials or receive regulatory approval.
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Delays in the commencement or completion of clinical testing could result in increased costs
to us and delay or limit our ability to obtain regulatory approval for our product candidates.
  
    
    reaching agreements on acceptable terms with prospective clinical research
organizations, or CROs, and trial sites, the terms of which can be subject to extensive
negotiation and may vary significantly among different CROs and trial sites;
    
    obtaining regulatory approval to commence a clinical trial;
    
    obtaining institutional review board approval to conduct a clinical trial at a prospective site;
    
    recruiting and enrolling patients to participate in clinical trials for a variety of
reasons, including competition from other clinical trial programs for the same indication
as our product candidates; and
    
    retaining patients who have initiated a clinical trial but may be prone to withdraw due
to the treatment protocol, lack of efficacy, personal issues, side effects from the therapy
or who are lost to further follow-up.
  
    
    failure to conduct the clinical trial in accordance with regulatory requirements or our
clinical protocols;
    
    inspection of the clinical trial operations or trial sites by the FDA or other
regulatory authorities resulting in the imposition of a clinical hold;
    
    unforeseen safety issues or any determination that a trial presents unacceptable health
risks; or
    
    lack of adequate funding to continue the clinical trial, including the incurrence of
unforeseen costs due to enrollment delays, requirements to conduct additional trials and
studies and increased expenses associated with the services of our CROs and other third
parties.
  24




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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.
  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.
  25




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
    
    limitations or warnings contained in a products FDA-approved labeling, including
potential limitations or warnings for IV APAP that may be more restrictive than oral
formulations of acetaminophen;
    
    changes in the standard of care for the targeted indications for either of our product
candidates could reduce the marketing impact of any superiority claims that we could make
following FDA approval;
    
    limitations inherent in the approved indication for either of our product candidates
compared to more commonly-understood or addressed conditions, including, in the case of
Omigard, the ability to promote Omigard to hospitals and physicians who may be more focused
on an indication specifically for the prevention of CRBSIs compared to the prevention of
LCSIs, the primary endpoint in our ongoing Phase III clinical trial; and
    
    potential advantages over, and availability of, alternative treatments, including, in
the case of IV APAP, a number of products already used to treat acute pain in the hospital
setting, and in the case of Omigard, a number of competitive topical products as well as a
device that has been approved for wound dressing and prevention of catheter-related
infections.
  The decreasing use of the comparator product in our clinical trial for Omigard may limit our
ability to complete the trial in a timely manner and hinder the competitive profile of this product
candidate.
  Even if our product candidates receive regulatory approval, they may still face future
development and regulatory difficulties.
   26




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
    
    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 United States, we may never
receive approval or commercialize our products outside of the United States.
  We have never marketed a drug before, and if we are unable to establish an effective sales and
marketing infrastructure, we will not be able to successfully commercialize our product candidates.
  Our product candidates may have undesirable side effects that could delay or prevent their
regulatory approval or commercialization.
  27




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
    
    regulatory authorities may require the addition of labeling statements, specific warnings or a contraindication;
    
    regulatory authorities may withdraw their approval of the product;
    
    we may be required to change the way the product is administered, conduct additional
clinical trials or change the labeling of the product; and
    
    our reputation may suffer.
  If the government or third-party payors fail to provide coverage and adequate coverage and
payment rates for our future products, if any, or if hospitals choose to use therapies that are
less expensive, our revenue and prospects for profitability will be limited.
   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.
  28




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If BMS breaches the underlying agreement under which we sublicense the rights to our IV APAP
product candidate, we could lose the ability to develop and commercialize IV APAP.
  We rely on third parties to conduct our clinical trials, including our Phase III
clinical program for IV APAP and our ongoing Phase III clinical trial for Omigard. If these third
parties do not successfully carry out their contractual duties or meet expected deadlines, we may
not be able to obtain regulatory approval for or commercialize our product candidates on our
anticipated timeline or at all.
  If the manufacturers upon whom we rely fail to produce our product candidates in the volumes
that we require on a timely basis, or to comply with stringent regulations applicable to
pharmaceutical drug manufacturers, we may face delays in the development and commercialization of,
or be unable to meet demand for, our products and may lose potential revenues.
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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.
  30




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
    
    manage our clinical trials effectively, including our planned Phase III clinical program
for IV APAP, which will be conducted at numerous clinical trial sites, and our ongoing
Phase III clinical trial for Omigard, which is being conducted at numerous clinical sites;
    
    manage our internal development efforts effectively while carrying out our contractual
obligations to licensors and other third parties; and
    
    continue to improve our operational, financial and management controls, reporting
systems and procedures.
  We may not be able to manage our business effectively if we are unable to attract and retain
key personnel.
    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.
  31




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Recent proposed legislation may permit re-importation of drugs from foreign countries into the
United States, including foreign countries where the drugs are sold at lower prices than in the
United States, which could materially adversely affect our operating results and our overall
financial condition.
  Our business involves the use of hazardous materials and we and our third-party manufacturers
must comply with environmental laws and regulations, which can be expensive and restrict how we do
business.
  Our business and operations would suffer in the event of system failures.
  Risks Related to Intellectual Property
 The patent rights that we have in-licensed covering IV APAP are limited to a specific
intravenous formulation of acetaminophen, and our market opportunity for this product candidate may
be limited by the lack of patent protection for the active ingredient itself and other formulations
that may be developed by competitors.
  32




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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.
    33




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##### Table of Contents



Because it is difficult and costly to protect our proprietary rights, we may not be able to
ensure their protection.
    
    
    our licensors might not have been the first to make the inventions covered by each of
our pending patent applications and issued patents;
    
    our licensors might not have been the first to file patent applications for these
inventions;
    
    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.
  34




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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.
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##### 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 planned clinical trials for IV APAP and Omigard;
    
    obtain regulatory approval for either of our two product candidates;
    
    assuming these regulatory approvals are received, manufacture commercial quantities of our
product candidates at acceptable cost levels; and
    
    successfully market and sell any approved products.
  Our short operating history makes it difficult to evaluate our business and prospects.
  36




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We will need additional funding and may be unable to raise capital when needed, which would
force us to delay, reduce or eliminate our product development programs or commercialization
efforts.
  
    
    fund our operations and continue to conduct adequate and well-controlled clinical trials to
provide clinical data to support regulatory approval of marketing applications;
    
    continue our development activities;
    
    qualify and outsource the commercial-scale manufacturing of our products under cGMP; and
    
    commercialize IV APAP, Omigard or any other product candidates that we may in-license or
acquire, if any of these product candidates receive regulatory approval.
  
    
    the rate of progress and cost of our clinical trials and other product development programs
for IV APAP, Omigard and any other product candidates that we may in-license or acquire;
    
    the costs of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights associated with our product candidates;
    
    the cost and timing of completion of an outsourced commercial manufacturing supply for each product candidate;
    
    the costs and timing of regulatory approval;
    
    the costs of establishing sales, marketing and distribution capabilities;
    
    the effect of competing technological and market developments; and
    
    the terms and timing of any collaborative, licensing, co-promotion or other arrangements that we may establish.
   Our quarterly operating results may fluctuate significantly.
  
    
    the timing of milestone payments required under our license agreements for IV APAP and
Omigard;
    
    our execution of other collaborative, licensing or similar arrangements, and the timing of
payments we may make or receive under these arrangements;
    
    our addition or termination of clinical trials or funding support;
    
    variations in the level of expenses related to our two existing product candidates or future development programs;
    
    any intellectual property infringement lawsuit in which we may become involved;
    
    regulatory developments affecting our product candidates or those of our competitors; and
    
    if either of our product candidates receives regulatory approval, the level of underlying
hospital demand for our product candidates and wholesalers buying patterns.
  37




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##### Table of Contents



Raising additional funds by issuing securities may cause dilution to existing stockholders and
raising funds through lending and licensing arrangements may restrict our operations or require us
to relinquish proprietary rights.
  We will incur significant increased costs as a result of operating as a public company, and
our management will be required to devote substantial time to new compliance initiatives.
   Risks Relating to Securities Markets and Investment in Our Stock
 There may not be a viable public market for our common stock.
  38




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##### Table of Contents



Future sales of our common stock may cause our stock price to decline.
   We expect that the price of our common stock will fluctuate substantially.
  
    
    the results from our clinical trial programs, including our planned Phase III clinical
program for IV APAP and our ongoing Phase III clinical trial for Omigard;
    
    the results of clinical trial programs for IV APAP and Omigard being performed by others;
    
    FDA or international regulatory actions, including failure to receive regulatory approval
for any of our product candidates;
    
    failure of any of our product candidates, if approved, to achieve commercial success;
    
    announcements of the introduction of new products by us or our competitors;
    
    market conditions in the pharmaceutical and biotechnology sectors;
    
    developments concerning product development results or intellectual property rights of others;
    
    litigation or public concern about the safety of our potential products;
    
    actual and anticipated fluctuations in our quarterly operating results;
    
    deviations in our operating results from the estimates of securities analysts or other analyst comments;
    
    additions or departures of key personnel;
    
    third-party coverage and reimbursement policies;
    
    developments concerning current or future strategic collaborations; and
    
    discussion of us or our stock price by the financial and scientific press and in online investor communities.
  Our management team may invest or spend the proceeds from our initial public offering in ways in
which our stockholders may not agree or in ways which may not yield a return.
  
    
    to fund clinical trials for IV APAP and Omigard and other research and development activities;
    
    to fund capital expenditures, primarily including equipment associated with the manufacturing of IV APAP; and
    
    to fund working capital and other general corporate purposes.
  39




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##### Table of Contents



Our executive officers and directors and their affiliates will exercise control over stockholder
voting matters in a manner that may not be in the best interests of all of our stockholders.
  Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a
change of control which could limit the market price of our common stock and may prevent or
frustrate attempts by our stockholders to replace or remove our current management.
  
    
    a board of directors divided into three classes serving staggered three-year terms, such
that not all members of the board will be elected at one time;
    
    a prohibition on stockholder action through written consent;
    
    a requirement that special meetings of stockholders be called only by the chairman of the
board of directors, the chief executive officer, the president or by a majority of the total
number of authorized directors;
    
    advance notice requirements for stockholder proposals and nominations;
    
    a requirement of approval of not less than 66 2/3% 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.
  40




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Recent Sales of Unregistered Securities
   Use of Proceeds
    
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
    
    effective immediately,
 
    
    an amendment to our restated certificate of incorporation which increased
the size of our Board of Directors to nine persons;
 41




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##### Table of Contents




    
    appointment of Samuel L. Barker, Ph.D. as a director;
    
    amendment of our voting agreement to reflect Dr. Barkers appointment as a director;
    
    amendment of our amended and restated bylaws to authorize consent by
electronic transmission with respect to actions taken by our Board of
Directors without a meeting; and
    
    the implementation of indemnification agreements for our officers and directors.
 
    
    contingent upon the closing of our initial public offering,
 
    
    filing of an amended and restated certificate of incorporation to provide
for, among other things, authorized capital stock of 100,000,000 shares of
common stock and 10,000,000 shares of undesignated preferred stock;
    
    adoption of amended and restated bylaws;
    
    classification of our Board of Directors into three classes; and
    
    adoption of our 2006 equity incentive award plan.
 
    
    effective on the public trading date, adoption of a director compensation policy.
  
 Item 5. Other Information
  
 Item 6. Exhibits
 
 EXHIBIT INDEX
 ExhibitNumber
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of the Registrant3.2
    
    Amended and Restated Bylaws of the Registrant4.1
    
    Form of the Registrants Common Stock Certificate4.2 (1)
    
    Amended and Restated Investor Rights Agreement dated February 21, 20064.3 (1)
    
    Warrant issued by Registrant in February 2006 to Silicon Valley Bank4.4 (1)
    
    Warrant issued by Registrant in February 2006 to Oxford Finance Corporation31.1 *
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14 and Rule
15d-14 of the Securities Exchange Act of 1934, as amended31.2 *
    
    Certification of the Chief Financial Officer Pursuant to Rule 13a-14 and
Rule 15d-14 of the Securities Exchange Act of 1934, as amended32.1 *
    
    Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated by reference to the Registrants Registration Statement on Form S-1 (No.
333-135821) filed with the Securities and Exchange Commission on July 17, 2006.*
    
    These certifications are being furnished solely to accompany this quarterly report pursuant
to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of
Cadence Pharmaceuticals, Inc., whether made before or after the date hereof, regardless of any
general incorporation language in such filing. 42




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SIGNATURES
  CADENCE PHARMACEUTICALS, INC.Date: November 30, 2006
    By:
    /s/ William R. LaRueWilliam R. LaRueSenior Vice President, Chief
Financial Officer, Treasurer and
Secretary
(Duly Authorized Officer and
Principal Financial Officer) 43