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

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file
    number: 1-33734
 Ardea Biosciences,
    Inc.
 (Exact name of Registrant as
    specified in its charter)
  Delaware

94-3200380(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)4939 Directors Place
    San Diego, CA

92121(Zip Code)(Address of principal executive
    offices)   Registrants telephone number, including area code:
 (858) 652-6500
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Each Class:

Name of Each Exchange on Which Registered:Common Stock, par value $0.001 per share

The Nasdaq Global Market   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 Large accelerated filer
    o

Accelerated filer
    þ

Non-accelerated filer
    o
    (Do not check if a smaller reporting company)

Smaller reporting company
    o   Rule 12b-2 o þ
    Documents Incorporated by Reference




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##### 





TABLE OF
    CONTENTS
   
 PART IItem 1.


Business


1Item 1A.


Risk Factors


8Item 1B.


Unresolved Staff Comments


21Item 2.


Properties


21Item 3.


Legal Proceedings


21Item 4.


Submission of Matters to a Vote of Security
    Holders


21PART IIItem 5.


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


22Item 6.


Selected Financial Data


24Item 7.


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


25Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk


32Item 8.


Financial Statements and Supplementary Data


32Item 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


32Item 9A.


Controls and Procedures


32Item 9B.


Other Information


34PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


34Item 11.


Executive Compensation


34Item 12.


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


34Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


34Item 14.


Principal Accountant Fees and Services


35PART IVItem 15.


Exhibits, Financial Statement Schedules


35Signatures


38EX-4.3EX-10.2EX-10.3EX-10.6EX-10.14EX-23.1EX-31.1EX-31.2EX-32.1   i




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FORWARD-LOOKING
    STATEMENTS
    and/or
   ii




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PART I    ITEM 1.
    BUSINESS.  Overview
    and Business Strategy
    Product
    Portfolio
  Product Candidate

Target Indication

Development StatusRDEA594

Gout

Phase 1 ongoingRDEA806

HIV

Phase 2a completedRDEA427

HIV

Phase 0* completedRDEA119

Cancer

Phase 1 and Phase 1/2 ongoingRDEA119

Inflammation

Phase 1 completedRDEA436

Inflammation

Phase 0* completed     *
    
    First-in-human
    micro-dose pharmacokinetic study in normal healthy volunteers.  GOUT
  RDEA594
    HIV
  RDEA806
  In vitro ® ® In vitro In vivo
 1




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®
  10 African-Americans. African-Americans, ®
  RDEA427
    CANCER
  RDEA119
  In vivo
    in vitro in vivo ®
  INFLAMMATION
  RDEA119
  In vivo
  RDEA436
   2




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Market
    Opportunity
    1988-2005
  African-Americans, African-Americans African-Americans
    Valeant
    Relationship
   3




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Research
    and Development Expenses
    Clinical
    Supplies and Manufacturing
    Sales and
    Marketing
    Customers
    and Distribution
    Competition
   4




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Intellectual
    Property
    
    obtain and maintain international and domestic patent and other
    legal protections for the proprietary technology, inventions and
    improvements we consider important to our business;
    prosecute and defend our patents;
    preserve our trade secrets; and
    operate without infringing the patents and proprietary rights of
    third parties.          Government
    Regulation
  Pharmaceutical
    Regulation
     5




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Regulation
    in the United States
    
    preclinical studies;
    submission of an Investigational New Drug application, or IND,
    for clinical trials;
    adequate and well-controlled human clinical trials to establish
    safety and efficacy of the product;
    review of a NDA; and
    inspection of the facilities used in the manufacturing of the
    drug to assess compliance with the FDAs current Good
    Manufacturing Practices, or cGMP, regulations.                follow-up follow-up
 6




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follow-up
      and/or
  Regulation Outside
    the United States
    Additional
    Regulation
  Third-Party
    Reimbursement
    country-by-country
  Fraud and
    Abuse Laws
   7




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HIPAA
    Other
    Laws
    Employees
    Company
    Information
  (858) 652-6500. Form 10-K, Form 10-Q, Form 8-K,
  ITEM 1A.
    RISK
    FACTORS.  You should carefully consider the following information about
    risks and uncertainties that may affect us or our business,
    together with the other information appearing elsewhere in this
    annual report on
    Form 10-K.
    If any of the following events described as risks actually
    occur, our business, financial condition, results of operations
    and future growth prospects would likely be materially and
    adversely affected. In these circumstances, the market price of
    our common stock could decline, and you may lose all or part of
    your investment in our securities. An investment in our
    securities is speculative and involves a high degree of risk.
    You should not invest in our securities if you cannot bear the
    economic risk of your investment for an indefinite period of
    time and cannot afford to lose your entire investment.
 8




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Risks
    Related to Our Business
  Development
    of our products will take years; we may never attain product
    sales; and we expect to continue to incur net operating
    losses.
    We are
    not currently profitable and may never become
    profitable.
    Because
    the results of preclinical studies are not necessarily
    predictive of future results, we can provide no assurances that,
    even if our product candidates are successful in preclinical
    studies, such product candidates will have favorable results in
    clinical trials or receive regulatory approval.
    Delays
    in the commencement of clinical testing of our current and
    potential product candidates could result in increased costs to
    us and delay our ability to generate revenues.
      
    delays in demonstrating sufficient safety and efficacy to obtain
    regulatory approval to commence a clinical trial; 9




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
    delays in reaching agreement on acceptable terms with
    prospective contract research organizations and clinical trial
    sites;
    delays in manufacturing quantities of a product candidate
    sufficient for clinical trials;
    delays in obtaining approval of a IND from the FDA or similar
    foreign approval;
    delays in obtaining institutional review board approval to
    conduct a clinical trial at a prospective site; and
    insufficient financial resources.    Delays
    in the completion of, or the termination of, clinical testing of
    our current and potential product candidates could result in
    increased costs to us and delay or prevent us from generating
    revenues.
    
    ongoing discussions with the FDA or other regulatory authorities
    regarding the scope or design of our clinical trials;
    failure to conduct clinical trials in accordance with regulatory
    requirements;
    lower than anticipated retention rate of patients in clinical
    trials;
    the imposition of a clinical hold;
    lack of adequate funding to continue clinical trials;
    negative results of clinical trials;
    insufficient supply or deficient quality of product candidates
    or other materials necessary for the conduct of our clinical
    trials; or
    serious adverse events or other undesirable drug-related side
    effects experienced by clinical trial participants.    If our
    internal discovery and development efforts are unsuccessful, we
    will be required to obtain rights to new products or product
    candidates from third parties, which we may not be able to
    do.
    
    we may be unable to purchase or license products or product
    candidates on terms that would allow us to make a sufficient
    financial return from resulting products; 10




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
    competitors may be unwilling to assign or license products or
    product candidate rights to us (in particular, if we are not
    able to successfully advance the further development of the
    product candidates we acquired from Valeant); or
    we may be unable to identify suitable products or product
    candidates within, or complementary to, our areas of interest
    relating to the treatment of gout, HIV, cancer and inflammatory
    diseases.    Even
    if we successfully initiate and complete clinical trials for any
    product candidate, there are no assurances that we will be able
    to submit or obtain regulatory approval of a new drug
    application.
    If we
    successfully develop products, but those products do not achieve
    and maintain market acceptance, our business will not be
    profitable.
    
    our ability to provide acceptable evidence of safety and
    efficacy of our products;
    relative convenience and ease of administration of products;
    the prevalence and severity of any adverse side effects from the
    products;
    the availability of alternative treatments;
    pricing and cost effectiveness of products; and
    our ability to obtain sufficient third-party insurance coverage
    or reimbursement.    
    new products or technologies are introduced that are more
    favorably received than our potential future products, are more
    cost effective or render our potential future products
    obsolete; or
    complications arise with respect to use of our potential future
    products.  We
    will need substantial additional funding and may be unable to
    raise capital when needed, or at all, which would force us to
    delay, reduce or eliminate our research and development programs
    or commercialization efforts.
   11




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
    fund our research, discovery and development programs;
    advance our product candidates into and through clinical trials
    and the regulatory review and approval process;
    establish and maintain manufacturing, sales and marketing
    operations;
    commercialize our product candidates, if any, that receive
    regulatory approval; and
    acquire rights to products or product candidates, technologies
    or businesses.    
    the rate of progress and cost of our research and development
    activities;
    the scope, prioritization and number of preclinical studies and
    clinical trials we pursue;
    the costs of filing, prosecuting, defending and enforcing any
    patent claims and other intellectual property rights;
    the costs and timing of regulatory approval;
    the costs of establishing or contracting for manufacturing,
    sales and marketing capabilities;
    the effects of competing technological and market developments;
    the terms and timing of any collaborative, licensing and other
    arrangements that we may establish; and
    the extent to which we acquire or license new technologies,
    products or product candidates.    We may
    need to decrease the size of our organization, and we may
    experience difficulties in managing those organizational
    changes.
     12




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Raising
    additional funds by issuing securities or through collaboration
    and licensing arrangements may cause dilution to existing
    stockholders, restrict our operations or require us to
    relinquish proprietary rights.
    The
    investment of our cash balance and investments in marketable
    securities are subject to risks which may cause losses and
    affect the liquidity of these investments.
    We do
    not have internal manufacturing capabilities, and if we fail to
    develop and maintain internal capabilities or supply
    relationships with collaborators or other outside manufacturers,
    we may be unable to develop or commercialize any
    products.
    If we
    are unable to establish sales and marketing capabilities or
    enter into agreements with third parties to sell and market any
    products we may develop, we may be unable to generate product
    revenue.
   13




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If we
    are unable to attract and retain key management and scientific
    staff, we may be unable to successfully develop or commercialize
    our product candidates.
    Our
    quarterly results and stock price may fluctuate
    significantly.
    
    whether or not we achieve specified research or
    commercialization milestones under any agreement that we enter
    into with collaborators and the timely payment by potential
    commercial collaborators of any amounts payable to us or by us
    to Valeant or any other party, including the milestone payments
    that we may make to Valeant;
    the addition or termination of research or development programs
    or funding support;
    the status of development of our product candidates, including
    results of preclinical studies and any future clinical trials;
    variations in the level of expenses related to our product
    candidates or potential product candidates during any given
    period;
    our execution of collaborative, licensing or other arrangements,
    and the timing and accounting treatment of payments we make or
    receive under these arrangements;
    our recommendation of additional compounds for preclinical
    development; and
    fluctuations in the stock prices of other companies in the
    biotechnology and pharmaceuticals industries and in the
    financial markets generally.   14




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If we
    engage in any acquisition, we will incur a variety of costs, and
    we may never realize the anticipated benefits of the
    acquisition.
    
    assumption and exposure to unknown liabilities of the acquired
    business;
    disruption of our business and diversion of our
    managements time and attention to acquiring and developing
    acquired products or technologies;
    incurrence of substantial debt or dilutive issuances of
    securities to pay for acquisitions;
    higher than expected acquisition and integration costs;
    increased amortization expenses;
    negative effect on our earnings (or loss) per share;
    difficulty and cost in combining and integrating the operations
    and personnel of any acquired businesses with our operations and
    personnel;
    impairment of relationships with key suppliers, contractors or
    customers of any acquired businesses due to changes in
    management and ownership; and
    inability to retain key employees of any acquired businesses.    Earthquake
    damage to our facilities could delay our research and
    development efforts and adversely affect our
    business.
    Valeants
    exercise of its option to repurchase commercialization rights in
    territories outside the United States and Canada (the
    Valeant Territories) could limit the market for our
    first NNRTI product and adversely affect our
    business.
   15




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Failure
    to comply with our minimum commitments under the asset purchase
    agreement with Valeant could expose us to potential liability or
    otherwise adversely affect our business.
    Failure
    to achieve and maintain effective internal controls in
    accordance with Section 404 of the Sarbanes-Oxley Act could
    have a material adverse effect on our business and stock
    price.
     16




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Risks
    Related to Our Industry
  Because
    our product candidates and development and collaboration efforts
    depend on our intellectual property rights, adverse events
    affecting our intellectual property rights will harm our ability
    to commercialize products.
      
    we might not have been the first to make, conceive or reduce to
    practice the inventions covered by any or all of our pending
    patent applications;
    we might not have been the first to file patent applications for
    these inventions;
    others may independently develop similar or alternative
    technologies or duplicate any of our technologies;
    it is possible that none of our pending patent applications will
    result in issued patents;
    our issued or acquired patents may not provide a basis for
    commercially viable products, may not provide us with any
    competitive advantages, or may be challenged by other parties;
    our issued patents may not be valid or enforceable; or
    the patents of others may have an adverse effect on our business.        and/or
 17




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Our
    business depends upon not infringing the rights of
    others.
      
    cease selling, incorporating or using any of our product
    candidates that incorporate the challenged intellectual property;
    obtain a license from the holder of the infringed intellectual
    property right, which license may be costly or may not be
    available on reasonable terms, if at all; or
    redesign our processes so that they do not infringe, which could
    be costly and time-consuming and may not be possible.      Confidentiality
    agreements with employees and others may not adequately prevent
    disclosure of trade secrets and other proprietary information
    and may not adequately protect our intellectual
    property.
   18




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Many
    of our competitors have significantly more resources and
    experience, which may harm our commercial
    opportunity.
    
    research and development;
    preclinical testing;
    clinical trials;
    regulatory approvals;
    manufacturing; and
    sales and marketing of approved products.    If our
    competitors develop treatments for gout, HIV, cancer or
    inflammatory diseases that are approved faster, marketed better
    or demonstrated to be safer or more effective than any products
    that we may develop, our commercial opportunity will be reduced
    or eliminated.
    If we
    cannot establish pricing of our product candidates acceptable to
    the United States or foreign governments, insurance companies,
    managed care organizations and other payors, or arrange for
    favorable reimbursement policies, any product sales will be
    severely hindered.
     19




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Product
    liability claims may damage our reputation and, if insurance
    proves inadequate, the product liability claims may harm our
    results of operations.
    Any
    claims relating to our improper handling, storage or disposal of
    biological, hazardous and radioactive materials could be
    time-consuming and costly.
    Our
    business and operations would suffer in the event of system
    failures.
    Risks
    Related to Our Common Stock
  Directors,
    executive officers, principal stockholders and affiliated
    entities beneficially own or control a significant majority of
    our outstanding voting common stock and together control our
    activities.
    Future
    sales of our common stock may cause our stock price to
    decline.
   20




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Anti-takeover
    provisions in our charter documents and under Delaware law may
    make it more difficult to acquire us.
    
    allow the authorized number of directors to be changed only by
    resolution of our Board of Directors;
    require that stockholder actions must be effected at a duly
    called stockholder meeting and prohibit stockholder action by
    written consent;
    establish advance notice requirements for nominations to our
    Board of Directors or for proposals that can be acted on at
    stockholder meetings;
    authorize our Board of Directors to issue blank check preferred
    stock to increase the number of outstanding shares; and
    limit who may call stockholder meetings.    We
    have never paid cash dividends on our common stock and we do not
    anticipate paying dividends in the foreseeable
    future.
    ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS.    ITEM 2.
    PROPERTIES.    ITEM 3.
    LEGAL
    PROCEEDINGS.    ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS.   21




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PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES.  Information
    About Our Common Stock
    High


LowYear Ended December 31, 2008First Quarter

$
16.25


$
11.20Second Quarter

$
15.30


$
12.36Third Quarter

$
15.07


$
9.26Fourth Quarter

$
14.16


$
6.29   High


LowYear Ended December 31, 2007First Quarter

$
6.50


$
4.15Second Quarter

$
6.05


$
4.60Third Quarter

$
9.20


$
5.00Fourth Quarter

$
15.50


$
7.00   Holders
    Dividend
    Policy
      Information
    About Our Equity Compensation Plans
  Form 10-K.
 22




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Stock
    Performance Graph
      
 23




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ITEM 6.
    SELECTED
    FINANCIAL DATA.  page F-2 Form 10-K.
  Year Ended December 31,2008


2007


2006


2005


2004(In thousands, except per share amounts)Consolidated Statements of Operations Data:Collaboration revenues

$
304


$
3,095


$



$



$
Expenses:Research and development


44,858



23,103



72



255



11,519General and administrative


11,921



7,566



2,674



2,980



4,819Restructuring and other charges














648



858Loss from operations


(56,475
)


(27,574
)


(2,746
)


(3,883
)


(17,196
)Interest income


1,524



2,128



2,377



1,502



700Other income, net


(44
)


375



2



(1
)


(204
)Change in fair value on revaluation of warrants














(789
)


Net Loss


(54,995
)


(25,071
)


(367
)


(3,171
)


(16,700
)Non-cash dividends on Series A preferred stock


(60
)


(240
)


(240
)


(240
)


(260
)Net loss applicable to common stockholders

$
(55,055
)

$
(25,311
)

$
(607
)

$
(3,411
)

$
(16,960
)Basis and diluted net loss per share applicable to common
    stockholders

$
(3.79
)

$
(2.55
)

$
(0.07
)

$
(0.37
)

$
(2.24
)Shares used in computing basic and diluted net loss per share
    applicable to common stockholders


14,544



9,934



9,326



9,134



7,559Balance Sheet Data:Cash, cash equivalents and short-term investments

$
57,743


$
66,215


$
48,669


$
48,830


$
50,743Working capital

$
49,463


$
62,548


$
48,338


$
48,820


$
50,462Total assets

$
61,475


$
68,840


$
50,240


$
49,171


$
51,185Noncurrent portion of obligations under capital leases and notes
    payable

$
6,132


$



$



$



$
Accumulated deficit

$
(316,543
)

$
(261,488
)

$
(236,177
)

$
(235,570
)

$
(232,159
)Total stockholders equity

$
45,958


$
63,739


$
49,064


$
48,820


$
50,508  24




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ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS.  Introduction
    
    Overview.  This section provides a general
    description of our business and operating expenses.
    Recent developments.  This section provides a
    general description of recent events and significant
    transactions that we believe are important in understanding our
    financial condition and results of operations.
    Critical accounting policies and
    estimates.  This section contains a discussion of
    the accounting policies that we believe are important to our
    financial condition and results of operations and that require
    significant judgment and estimates on the part of management in
    their application. In addition, all of our significant
    accounting policies, including the critical accounting policies
    and estimates, are summarized in Note 2 to the accompanying
    consolidated financial statements.
    Results of operations.  This section provides
    an analysis of our results of operations presented in the
    accompanying consolidated statements of operations by comparing
    the results for the year ended December 31, 2008 to
    the results for the year ended December 31, 2007 and
    comparing the results for the year ended December 31, 2007
    to the results for the year ended December 31, 2006.
    Liquidity and capital resources.  This section
    provides an analysis of our cash flows and a discussion of our
    outstanding commitments and contingencies that existed as of
    December 31, 2008. Included in this discussion is our
    financial capacity to fund our future commitments and a
    discussion of other financing arrangements.  Overview
    
    RDEA594:  An inhibitor of the URAT1 kidney
    transporter for the treatment of hyperuricemia and gout;
    RDEA806:  A non-nucleoside reverse
    transcriptase inhibitor (NNRTI) for the treatment of
    HIV. RDEA806, the prodrug of RDEA594, is also being evaluated in
    a pilot Phase 2a proof-of-concept study in gout patients to
    provide an early confirmation of RDEA594s activity in the
    target population.
    RDEA427:  A next generation NNRTI for the
    treatment of HIV;
    RDEA119:  An inhibitor of mitogen-activated ERK
    kinase (MEK) for the treatment of cancer and
    inflammatory diseases; and
    RDEA436:  A next generation inhibitor of MEK
    for the treatment of cancer and inflammatory diseases.    Research
    and Development Expense
     25




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General
    and Administrative Expense
    Other
    Income, net
    Recent
    Developments
  
    In December 2008, we completed a single ascending dose Phase 1
    clinical study of RDEA594 in normal healthy volunteers,
    demonstrating that single doses of up to 600 mg of RDEA594
    were well tolerated, with linear increases in drug levels
    observed throughout the dose ranges investigated, and with up to
    an 11-hour
    elimination half life. A dose-related decrease in serum uric
    acid was observed, with overall reductions compared to placebo
    of up to 30% over the first 24 hours, which is about twice
    that observed in prior studies with a single 800 mg dose of
    RDEA806, RDEA594s prodrug, given as an enteric-coated
    tablet;
    In December 2008, we completed a $30.6 million gross
    proceeds private placement of 2,737,336 newly issued shares of
    common stock and warrants to purchase 684,332 shares of
    common stock at a total purchase price of $11.17 per unit, with
    each unit consisting of one share of common stock and one
    warrant to purchase 0.25 shares of common stock;
    In November 2008, we received an $8.0 million growth
    capital loan from Oxford Finance Corporation and Silicon Valley
    Bank;
    In October 2008, based on positive in vitro synergy data,
    we initiated a Phase 1/2 study of RDEA119 in combination
    with sorafenib
    (Nexavar®,

    Onyx Pharmaceuticals and Bayer HealthCare) in advanced cancer
    patients; and
    We have continued to prepare RDEA806 for further clinical
    development by obtaining additional regulatory approvals to
    conduct our planned international Phase 2b HIV study and by
    successfully completing a number of important safety and
    toxicology studies including a Thorough QT study. Results from
    the Thorough QT study demonstrated that QTc intervals were not
    increased by any dose of RDEA806 tested. In addition, the study
    provided information on the lack of pharmacokinetic differences
    between Caucasians and
    African-Americans.
    These results provide further support for RDEA806s cardiac
    safety profile as well as its potential to improve current
    standard-of-care therapy as ethnicity-based differences in
    metabolism, which can lead to increased side effects in
    African-Americans,
    have been documented with efavirenz
    (Sustiva®,

    Bristol-Myers Squibb).  Critical
    Accounting Policies and Estimates
   26




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Accrued
    Clinical Liabilities
    Share-Based
    Compensation
  Share-Based
    Payment
  Share-Based Payments
    New
    Accounting Pronouncements
  Fair Value
    Measurements
 27




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The
    Fair Value Option for Financial Assets and Financial
    Liabilities  Including an amendment of FASB Statement
    No. 115
  No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
    Services to Be Used in Future Research and Development
    Activities EITF 07-3 EITF 07-3, EITF 07-3 EITF 07-3,
  No. 07-1, Accounting for Collaborative Arrangements EITF 07-1 No. 99-19, Reporting Revenue Gross as a Principal versus Net as an
    Agent The Equity Method of Accounting for Investments
    in Common Stock EITF 07-1 EITF 07-1
  The
    Hierarchy of Generally Accepted Accounting Principles The Meaning of Present Fairly in Conformity
    With Generally Accepted Accounting Principles
  Results
    of Operations
  Year
    Ended December 31, 2008 and 2007
  Revenues
   28




---



##### Table of Contents



Research
    and Development Expense
    General
    and Administrative Expense
    Other
    Income, net
    Year
    Ended December 31, 2007 and 2006
  Revenues
    Research
    and Development Expense
    General
    and Administrative Expense
   29




---



##### Table of Contents



Other
    Income, net
    Liquidity
    and Capital Resources
               30




---



##### Table of Contents



Payment Due by PeriodLess than








More thanTotal


1 Year


1-3 Years


3-5 Years


5 Years(In thousands)Long-term debt obligations

$
9,963


$
2,858


$
6,950


$
91


$
64Operating lease obligations


6,529



984



2,055



2,166



1,324Capital lease obligations


300



116



184







Purchase Obligations


1,291



1,188



103







Other long-term liabilities


400







400







Total

$
18,483


$
5,146


$
9,692


$
2,257


$
1,388          31




---



##### Table of Contents



Off-Balance
    Sheet Arrangements
    ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.    ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA.  Form 10-K.
  ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE.    ITEM 9A.
    CONTROLS
    AND PROCEDURES.  (a) Disclosure Controls and Procedures; Changes in
    Internal Control Over Financial Reporting
  Rules 13a-15(e) 15d-15(e)
    (b)
    Management Report on Internal Control Over Financial
    Reporting  Rule 13a-15(f) Rule 15d-15(f)
  
    Pertain to the maintenance of records that in reasonable detail
    accurately and fairly reflect the transactions and dispositions
    of our assets; 32




---



##### Table of Contents




    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 are being made only in accordance
    with authorizations of our management and directors; and
    Provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of our
    assets that could have a material effect on our financial
    statements.        Form 10-K
  (c) Report of Independent Registered Public Accounting
    Firm
            33




---



##### Table of Contents



ITEM 9B.
    OTHER
    INFORMATION.   PART III  ITEM 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.      ITEM 11.
    EXECUTIVE
    COMPENSATION.    ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS.    ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE.   34




---



##### Table of Contents



ITEM 14.
    PRINCIPAL
    ACCOUNTANT FEES AND SERVICES.   PART IV  ITEM 15.
    EXHIBITS,
    FINANCIAL STATEMENT SCHEDULES.    1.
    The following consolidated financial statements of Ardea
    Biosciences, Inc. are filed as part of this report under
    Item 8  Financial Statements and Supplementary
    Data:  Report of Independent Registered Public
    Accounting Firm


F-1Consolidated Balance Sheets at December 31,
    2008 and 2007


F-2Consolidated Statements of Operations for the
    years ended December 31, 2008, 2007 and 2006


F-3Consolidated Statements of Stockholders
    Equity for the years ended December 31, 2008, 2007 and
    2006


F-4Consolidated Statements of Cash Flows for the
    years ended December 31, 2008, 2007 and 2006


F-5Notes to Consolidated Financial Statements


F-6   2.
    Financial Statement Schedules.    3.
    Exhibits.   35




---



##### Table of Contents



Exhibit

Document Description2
.1

Asset Purchase Agreement with Valeant Research &
    Development and Valeant Pharmaceuticals International dated
    December 21, 2006(1)3
.1

Restated Certificate of Incorporation filed with the Delaware
    Secretary of State on September 10, 2008(2)3
.2

Amended and Restated Bylaws(3)4
.1

Registration Rights Agreement, dated December 19, 2007, by
    and among Ardea Biosciences, Inc. and the Purchasers listed on
    the signature pages thereto(4)4
.2

Registration Rights Agreement, dated January 4, 2008, by
    and among Ardea Biosciences, Inc. and the stockholders listed on
    the signature pages thereto(5)4
.3

Form of Warrant issued by the Company pursuant to the Loan and
    Security Agreement dated November 12, 20084
.4

Form of Warrant issued by the Company pursuant to the Securities
    Purchase Agreement dated December 17, 2008(6)4
.5

Registration Rights Agreement, dated December 17, 2008, by
    and among Ardea Biosciences, Inc. and the Purchasers listed on
    the signature pages thereto(7)10
.1

Form of Indemnity Agreement(8)10
.2*

Senior Executive Severance Benefit Plan, as amended and restated
    on November 7, 200810
.3*

Executive Severance Benefit Plan, as amended and restated on
    November 7, 200810
.4*

2002 Non-Officer Equity Incentive Plan and related documents, as
    amended on February 3, 2003(9)10
.5

Noncompetition Agreement with Valeant Research &
    Development dated December 21, 2006(1)10
.6*

Amended and Restated Executive Employment Agreement, effective
    November 7, 2008, between the Company and Barry Quart10
.7*

Executive Employment Agreement, effective December 21,
    2006, between the Company and Kimberly J. Manhard(1)10
.8*

Ardea Biosciences, Inc. 2000 Employee Stock Purchase Plan(10)10
.9*

Executive Employment Agreement, effective March 22, 2007,
    between the Company and Christopher W. Krueger(11)10
.10*

Amended and Restated 2004 Stock Incentive Plan(12)10
.11

Securities Purchase Agreement, dated December 19, 2007, by
    and among Ardea Biosciences, Inc. and the Purchasers listed on
    the signature pages thereto(4)10
.12

Sublease by and between Verenium Corporation and the Company
    dated October 2007(13)10
.13*

Executive Employment Agreement, effective as of May 27,
    2008, between the Company and John W. Beck(14)10
.14

Loan and Security Agreement, dated November 12, 2008, by
    and among Ardea Biosciences, Inc. and Oxford Finance Corporation
    and Silicon Valley Bank10
.15

Securities Purchase Agreement, dated December 17, 2008, by
    and among Ardea Biosciences, Inc. and the Purchasers listed on
    the signature pages thereto(7)23
.1

Consent of Independent Registered Public Accounting Firm31
.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 200231
.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 200232
.1

Certification Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002     *
    
    Management contract or compensatory plan, contract or
    arrangement.
    
    Confidential treatment request has been granted with respect to
    certain portions of this exhibit. Omitted portions have been
    filed separately with the Securities and Exchange Commission.(1)
    
    Incorporated by reference to our
    Form 8-K
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    December 28, 2006. 36




---



##### Table of Contents



(2)
    
    Incorporated by reference to our
    Form 10-Q
    (File
    No. 001-33734)
    filed with the Securities and Exchange Commission on
    November 13, 2008.(3)
    
    Incorporated by reference to our
    Form 8-K
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    August 2, 2007.(4)
    
    Incorporated by reference to our
    Form 8-K
    (File
    No. 001-33734)
    filed with the Securities and Exchange Commission on
    December 20, 2007.(5)
    
    Incorporated by reference to our
    Form 8-K
    (File
    No. 001-33734)
    filed with the Securities and Exchange Commission on
    January 10, 2008.(6)
    
    Incorporated by reference to our
    Form 8-K
    (File
    No. 001-33734)
    filed with the Securities and Exchange Commission on
    December 19, 2008.(7)
    
    Incorporated by reference to our
    Form 8-K
    (File
    No. 001-33734)
    filed with the Securities and Exchange Commission on
    December 22, 2008.(8)
    
    Incorporated by reference to our Registration Statement on
    Form S-1
    (File
    No. 333-95461)
    initially filed with the Securities and Exchange Commission on
    January 27, 2000 as subsequently amended.(9)
    
    Incorporated by reference to our
    Form 10-K
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    March 31, 2003.(10)
    
    Incorporated by reference to our
    Form 8-K
    (File
    No. 001-33734)
    filed with the Securities and Exchange Commission on
    October 15, 2007.(11)
    
    Incorporated by reference to our
    Form 10-Q
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on May 8,
    2007.(12)
    
    Incorporated by reference to our
    Form 8-K
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    July 3, 2007.(13)
    
    Incorporated by reference to our
    Form 10-K
    (File
    No. 001-33734)
    filed with the Securities and Exchange Commission on
    March 24, 2008.(14)
    
    Incorporated by reference to our
    Form 8-K
    (File
    No. 001-33734)
    filed with the Securities and Exchange Commission on
    May 13, 2008. 37




---



##### Table of Contents



SIGNATURES      BY:
    /s/  BARRY
    D. QUART       Signature

Title

Date/s/  BARRY
    D. QUARTBarry
    D. Quart, Pharm. D.

President and Chief Executive Officer(Principal Executive Officer)

March 13, 2009/s/  JOHN
    W. BECKJohn
    W. Beck, C.P.A.

Senior Vice President, Finance and
    Operations and Chief Financial Officer(Principal Financial and
    Accounting Officer)

March 13, 2009/s/  HENRY
    J. FUCHSHenry
    J. Fuchs, M.D.

Director

March 13, 2009/s/  CRAIG
    A. JOHNSONCraig
    A. Johnson

Director

March 13, 2009/s/  JOHN
    POYHONENJohn
    Poyhonen

Director

March 13, 2009/s/  JACK
    S. REMINGTONJack
    S. Remington, M.D.

Director

March 13, 2009/s/  KEVIN
    C. TANGKevin
    C. Tang

Director

March 13, 2009  38




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  TO THE
    STOCKHOLDERS AND BOARD OF DIRECTORS OF
    ARDEA BIOSCIENCES, INC. (Formerly IntraBiotics Pharmaceuticals,
    Inc.)
             
 F-1




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (formerly IntraBiotics Pharmaceuticals, Inc.)
 CONSOLIDATED
    BALANCE SHEETS  December 31,


December 31,2008


2007(In thousands, except per share and par value amounts)ASSETSCurrent assets:Cash and cash equivalents

$
41,551


$
46,384Short-term investments, available-for-sale


16,192



19,831Receivables


384



1,224Prepaids and other current assets


237



210Total current assets


58,364



67,649Property and equipment, net


2,310



879Other assets


801



312Total assets

$
61,475


$
68,840LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
2,260


$
2,200Accrued clinical liabilities


2,278



456Accrued payroll and employee liabilities


1,758



1,612Other accrued liabilities


545



833Current portion of obligations under capital lease


102



Current portion of obligations under notes payable


1,958



Total current liabilities


8,901



5,101Deferred rent


84



Non-current portion of obligations under capital lease


175



Non-current portion of obligations under notes payable


5,957



Other long-term liabilities


400



Commitments and contingencies (see Note 5)Stockholders equity:Convertible preferred stock, $0.001 par value:
    5,000,000 shares authorized; no shares outstanding at
    December 31, 2008 and 300 shares outstanding and
    $3,000 aggregate liquidation preference at December 31, 2007






1,634Common stock, $0.001 par value: 70,000,000 shares
    authorized; 17,835,734 and 13,312,686 shares issued and
    outstanding at December 31, 2008 and 2007, respectively


17



13Additional paid-in capital


362,345



323,566Accumulated other comprehensive income


139



14Accumulated deficit


(316,543
)


(261,488
)Total stockholders equity


45,958



63,739Total liabilities and stockholders equity

$
61,475


$
68,840    F-2




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (formerly IntraBiotics Pharmaceuticals, Inc.)
 CONSOLIDATED
    STATEMENTS OF OPERATIONS  Year Ended December 31,2008


2007


2006(In thousands, exceptper share amounts)Collaboration revenues

$
304


$
3,095


$
Operating expenses:Research and development


44,858



23,103



72General and administrative


11,921



7,566



2,674Total operating expenses


56,779



30,669



2,746Loss from operations


(56,475
)


(27,574
)


(2,746
)Other income, net:Interest income


1,524



2,128



2,377Interest expense


(215
)






Other income, net


171



375



2Total other income, net


1,480



2,503



2,379Net loss


(54,995
)


(25,071
)


(367
)Non-cash dividends on Series A preferred stock


(60
)


(240
)


(240
)Net loss applicable to common stockholders

$
(55,055
)

$
(25,311
)

$
(607
)Basic and diluted net loss per share applicable to common
    stockholders

$
(3.79
)

$
(2.55
)

$
(0.07
)Shares used in computing basic and diluted net loss per share
    applicable to common stockholders


14,544



9,934



9,326    F-3




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (formerly IntraBiotics Pharmaceuticals, Inc.)
 CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY  Convertible














AccumulatedPreferred








Additional


Deferred


Other





TotalStock


Common Stock


Paid-In


Stock


Comprehensive


Accumulated


StockholdersAmount


Shares


Amount


Capital


Compensation


Income (Loss)


Deficit


Equity(In thousands)Balances at December 31, 2005

$
1,634



9,288


$
9


$
282,828


$
(45
)

$
(36
)

$
(235,570
)

$
48,820Issuance of common stock upon exercise of stock options






8







20















20Issuance of common stock as dividend on series A preferred
    stock






66







240











(240
)


Share-based compensation














551















551Amortization of deferred stock compensation














(45
)


45











Comprehensive loss:Net loss


























(367
)


(367
)Unrealized gain on securities






















40







40Comprehensive loss






























(327
)Balances at December 31, 2006

$
1,634



9,362


$
9


$
283,594


$



$
4


$
(236,177
)

$
49,064Issuance of common stock in private offering, net






3,019



3



37,225















37,228Issuance of common stock upon exercise of stock options






99







282















282Issuance of common stock upon exercise of warrants






789



1



815















816Issuance of common stock as dividend on series A preferred
    stock






44







240











(240
)


Share-based compensation














1,410















1,410Comprehensive loss:Net loss


























(25,071
)


(25,071
)Unrealized gain on securities






















10







10Comprehensive loss






























(25,061
)Balances at December 31, 2007

$
1,634



13,313


$
13


$
323,566


$



$
14


$
(261,488
)

$
63,739Conversion of series A preferred stock


(1,634
)


1,578



2



1,632















Issuance of common stock and warrants in private placement, net






2,737



2



30,539















30,541Issuance of common stock under Employee Stock Purchase Plan






62







491















491Issuance of common stock upon exercise of stock options






117







544















544Issuance of common stock upon exercise of warrants






20























Issuance of common stock as dividend on series A preferred
    stock






9







120











(60
)


60Issuance of warrants in connection with debt financing














343















343Share-based compensation expense














5,110















5,110Comprehensive loss:Net loss


























(54,995
)


(54,995
)Unrealized gain on securities






















125







125Comprehensive loss






























(54,870
)Balances at December 31, 2008

$




17,836


$
17


$
362,345


$



$
139


$
(316,543
)

$
45,958    F-4




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (formerly IntraBiotics Pharmaceuticals, Inc.)
 CONSOLIDATED
    STATEMENTS OF CASH FLOWS  Year Ended December 31,2008


2007


2006(In thousands)Operating activities:Net loss

$
(54,995
)

$
(25,071
)

$
(367
)Adjustments to reconcile net loss to net cash used for operating
    activities:Share-based compensation


5,110



1,410



551Depreciation


535



249



Amortization of debt discount and debt issuance costs


62







Gain on disposal of property and equipment


(28
)


(332
)


Deferred rent


84







Amortization of premium/(accretion of discount) on short-term
    investments


79



215



Change in operating assets and liabilities:Receivables


840



(819
)


(188
)Prepaids and other current assets


(27
)


230



(316
)Other assets






(312
)


Accounts payable


60



1,966



176Accrued clinical liabilities


1,822



452



(95
)Accrued payroll and employee liabilities


146



1,392



219Other accrued liabilities


(228
)


115



525Net cash (used for) provided by operating activities


(46,540
)


(20,505
)


505Investing activities:Purchases of short-term investments


(33,920
)


(48,579
)


(200,024
)Proceeds from sale or maturity of short-term investments


37,605



62,432



212,232Proceeds from sale of property and equipment


80



332



Purchases of property and equipment


(1,700
)


(401
)


(726
)Net cash provided by investing activities


2,065



13,784



11,482Financing activities:Net proceeds from issuance of notes payable


8,250







Payments of debt issuance costs


(127
)






Payments on capital lease and note payable obligations


(57
)






Net proceeds from issuance of common stock


31,576



38,326



20Net cash provided by financing activities


39,642



38,326



20Net (decrease) increase in cash and cash equivalents


(4,833
)


31,605



12,007Cash and cash equivalents at beginning of year


46,384



14,779



2,772Cash and cash equivalents at end of year

$
41,551


$
46,384


$
14,779Supplemental disclosure of cash flow information:Interest paid

$
134


$



$
Supplemental schedule of non-cash information:Capital lease obligations incurred for property and equipment

$
318


$



$
Net unrealized gain on short-term investments

$
125


$
10


$
40Accrued debt issuance costs

$
400


$



$
Issuance of common stock dividend on Series A preferred
    stock

$
(60
)

$
(240
)

$
(240
)Issuance of warrants in connection with note payable obligation

$
343


$



$
    F-5




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (formerly IntraBiotics Pharmaceuticals, Inc.)
 NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS  1.
    Organization
    and Business    2.
    Summary
    of Significant Accounting Policies  Principles
    of Consolidation
    Use of
    Estimates
    Reclassification
    Cash,
    Cash Equivalents and Short-Term Investments
    Accounting for Certain
    Investments in Debt and Equity Securities
  Fair
    Value of Financial Instruments
  Fair Value
    Measurements
 F-6




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Concentration
    of Credit Risk
    Property
    and Equipment
    Impairment
    of Long-Lived Assets
  Accounting for the
    Impairment or Disposal of Long-Lived Assets
  Revenue
    Recognition
  Revenue
    Recognition
  Research
    and Development Expenses
   F-7




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Share-Based
    Compensation Expense
  Share-Based Payment Accounting and Disclosure of
    Stock-Based Compensation Accounting for Stock Issued to Employees
    No. 96-18, Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services
       F-8




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Valuation
    and Expense Information Under SFAS 123R
    December 31,2008


2007


2006Research and development

$
2,098


$
665


$
General and administrative


3,012



745



558Share-based compensation expense included in operating expenses

$
5,110


$
1,410


$
558     Options:
  December 31,2008


2007


2006Risk-free interest rate


3.1
%


4.2
%


4.7
%Dividend yield


0.0
%


0.0
%


0.0
%Volatility


74.0
%


71.7
%


24.8
%Expected life (years)


5.2-6.3



6.25



2.0-6.1   ESPP:
  December 31,2008


2007


2006Risk-free interest rate


2.1
%


4.20
%


Dividend yield


0.0
%


0.0
%


Volatility


90.6
%


71.0
%


Expected life (years)


1.22



1.25



          F-9




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Warrants
  No. 00-19, Accounting for Derivative Financial Instruments Indexed to
    and Potentially Settled in a Companys Own Stock (EITF 00-19). EITF 00-19
  Net
    Loss per Share
  Earnings per Share,
    Comprehensive
    Loss
  , Reporting Comprehensive Income
  Recent
    Accounting Pronouncements
    The
    Fair Value Option for Financial Assets and Financial
    Liabilities  Including an amendment of FASB Statement
    No. 115
 F-10




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
    Services to Be Used in Future Research and Development
    Activities (EITF 07-3). EITF 07-3 EITF 07-3, EITF 07-3 EITF 07-3,
  No. 07-1, Accounting for Collaborative Arrangements (EITF 07-1). EITF 07-1 No. 99-19, Reporting Revenue Gross as a Principal versus Net as an
    Agent The Equity Method
    of Accounting for Investments in Common Stock EITF 07-1 EITF 07-1
  The
    Hierarchy of Generally Accepted Accounting Principles The Meaning of Present Fairly in Conformity With Generally
    Accepted Accounting Principles
  3.
    Fair
    Value of Financial Instruments  Accounting for Leases
  FAS 157-2, Effective Date of FASB Statement No. 157
 F-11




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
      
    Level 1  Quoted prices in active markets for
    identical assets or liabilities.
    Level 2  Inputs other than Level 1 that are
    observable, either directly or indirectly, such as quoted prices
    for similar assets or liabilities; quoted prices in markets that
    are not active; or other inputs that are observable or can be
    corroborated by observable market data for substantially the
    full term of the assets or liabilities.
    Level 3  Unobservable inputs that are supported
    by little or no market activity and that are significant to the
    fair value of the assets or liabilities.    Fair Value Measurements at Reporting Date UsingQuoted Prices in


SignificantActive Markets


Other


SignificantBalance at


for Identical


Observable


UnobservableDecember 31,


Assets


Inputs


Inputs2008


(Level 1)


(Level 2)


(Level 3)Money market funds

$
7,911


$
7,911


$



$
United States Government agency securities


14,692







14,692



Municipal bonds


1,500







1,500



Total

$
24,103


$
7,911


$
16,192


$
    F-12




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  4.
    Balance
    Sheet Details  Cash
    Equivalents and Short-Term Investments
    December 31, 2008Gross


Gross


EstimatedAmortized


Unrealized


Unrealized


FairCost


Gains


Losses


ValueUnited Stated Government agency securities

$
14,552


$
140


$



$
14,692Municipal bonds


1,501







(1
)


1,500Total

$
16,053


$
140


$
(1
)

$
16,192   December 31, 2007Gross


Gross


EstimatedAmortized


Unrealized


Unrealized


FairCost


Gains


Losses


ValueUnited States Government agency securities

$
17,829


$
14


$



$
17,843Corporate bonds


1,988











1,988Total

$
19,817


$
14


$



$
19,831     Property
    and Equipment
    December 31,2008


2007Laboratory equipment

$
1,331


$
581Computer equipment and software


577



289Furniture and fixtures


183



Leasehold improvements


952



2583,043



1,128Less: accumulated depreciation and amortization


(733
)


(249
)$
2,310


$
879    F-13




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Accrued
    Liabilities and Accrued Payroll and Employee
    Liabilities
    December 31,2008


2007Accrued professional fees

$
86


$
365Accrued dividends on Series A convertible stock






60Accrued legal fees


232



232Accrued accounts payable


101



128Accrued interest


81



Other accrued liabilities


45



48Total Accrued Liabilities

$
545


$
833Accrued employee salaries and benefits

$
786


$
809Accrued bonuses


972



803Total Accrued Payroll and Employee Liabilities

$
1,758


$
1,612   5.
    Commitments
    and Contingencies  Leases
     F-14




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Operating Leases


Capital LeaseYears ended December 31, 2009

$
984


$
1162010


1,015



1162011


1,040



682012


1,067



2013


1,099



Thereafter


1,324



Total

$
6,529



300Less amount representing interest






(23
)Present value of net minimum lease payments






277Less current portion






(102
)Noncurrent portion of capital lease obligation





$
175     Notes
    Payable
       F-15




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  EITF 00-19,
    Notes PayableYears ended December 31, 2009

$
2,8582010


3,4752011


3,4752012


462013


45Thereafter


64Total


9,963Less unamortized discount


(319
)Less amount representing interest


(1,729
)Present value of net minimum notes payable payments


7,915Less current portion


(1,958
)Noncurrent portion of notes payable

$
5,957   Executive
    Severance Agreements
      Clinical
    Development Agreements
   F-16




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Purchase
    Obligations
    6.
    Valeant
    Transaction          
    Fixed assets of approximately $4,300,000,
    Intangible assets of approximately $300,000, and
    Goodwill of approximately $500,000.   F-17




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Business
    Combinations
  7.
    Stockholders
    Equity  Preferred
    Stock
        Common
    Stock
     F-18




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Common
    Stock Reserved for Future Issuance
    Warrants


740,342Stock option plans


4,156,669Employee stock purchase plan


287,097Total shares reserved for future issuance


5,184,108   Warrants
      EITF 00-19,
  Stock
    Option Plans
  10-year
  10-year
   F-19




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
      Outstanding OptionsWeighted-Options





AverageAvailable for


Number of


ExerciseGrant


Shares


PriceBalance at December 31, 2005


2,008,798



536,917


$
9.05Additional shares authorized


543,302







Granted


(902,500
)


902,500


$
3.88Exercised






(8,333
)

$
2.40Cancelled


85,250



(85,250
)

$
11.89Balance at December 31, 2006


1,734,850



1,345,834


$
5.45Additional shares authorized


547,027







Granted


(1,479,500
)


1,479,500


$
5.51Exercised






(98,941
)

$
2.85Cancelled


545,500



(545,500
)

$
4.76Balance at December 31, 2007


1,347,877



2,180,893


$
5.78Additional shares authorized


744,552







Granted


(1,793,875
)


1,793,875


$
13.62Exercised






(116,653
)

$
4.66Cancelled


182,026



(182,026
)

$
7.96Balance at December 31, 2008


480,580



3,676,089


$
9.54      F-20




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2008


2007


2006Weighted-





Weighted-





Weighted-Average





Average





AverageExercise





Exercise





ExerciseOptions


Price


Options


Price


Options


PriceExercisable at end of year


1,092,025


$
6.54



541,058


$
7.76



385,410


$
7.78Weighted-average fair value of options granted during the year

$
9.21






$
3.72






$
1.35     Weighted-Weighted-








AverageAverage


Weighted-





ExerciseRemaining


Average





Price ofOptions


Range of


Contractual


Exercise


Options


OptionsOutstanding


Exercise Prices


Life (in years)


Price


Exercisable


Exercisable696,893


$
2.76 - $ 3.90



7.29


$
3.69



409,393


$
3.55244,196


$
3.90 - $ 4.24



7.85


$
4.23



116,055


$
4.21457,500


$
4.24 - $ 5.20



8.22


$
5.08



218,124


$
5.01265,625


$
5.20 - $ 8.90



8.56


$
6.49



109,288


$
6.28583,375


$
8.90 - $10.68



9.92


$
10.61



5,812


$
9.10333,500


$
10.68 - $14.10



7.59


$
13.25



147,812


$
13.29369,000


$
14.10 - $14.42



9.34


$
14.27



5,541


$
14.39726,000


$
14.42 - $16.49



8.58


$
15.88



80,000


$
16.493,676,089


$
2.76 - $16.49



8.44


$
9.54



1,092,025


$
6.54     Employee
    Stock Purchase Plan
       F-21




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    8.
    Income
    Taxes  Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
        and/or and/or
   F-22




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    December 31,2008


2007Deferred tax assets:Net operating loss carryforwards

$
29,570


$
9,360Research and development credits


2,770



Capitalized research and development costs






Intangibles


870



980Share-based compensation


1,720



690Other, net


350



470Total deferred tax assets


35,280



11,500Valuation allowance for deferred tax assets


(35,280
)


(11,500
)Net deferred taxes

$



$
     December 31,2008


2007


2006U.S. federal tax (benefit) at statutory rate

$
(18,698
)

$
(8,524
)

$
(124
)State










Unutilized net operating losses


18,093



8,405



115Share-based compensation


591



110



9Non-deductible warrant expense










Other


14



9



Total

$



$



$
   9.
    Employee
    Benefit Plan   F-23




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  10.
    Summary
    of Quarterly Financial Data (unaudited)    2008


2007First


Second


Third


Fourth


First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter


Quarter


Quarter


Quarter


Quarter(In thousands, except per share amounts)Collaboration revenues

$
260


$



$



$
44


$
893


$
857


$
1,077


$
268Expenses:Research and development


9,745



13,006



11,396



10,711



3,513



5,216



7,114



7,260General and administrative


3,632



3,190



3,105



1,994



1,544



1,584



1,785



2,653Loss from operations


(13,117
)


(16,196
)


(14,501
)


(12,661
)


(4,164
)


(5,943
)


(7,822
)


(9,645
)Interest income


607



414



293



210



611



568



509



440Other income, net


135



51



(15
)


(215
)


184







4



187Net Loss


(12,375
)


(15,731
)


(14,223
)


(12,666
)


(3,369
)


(5,375
)


(7,309
)


(9,018
)Non-cash dividends on Series A preferred stock


(60
)














(60
)


(60
)


(60
)


(60
)Net loss applicable to common stockholders

$
(12,435
)

$
(15,731
)

$
(14,223
)

$
(12,666
)

$
(3,429
)

$
(5,435
)

$
(7,369
)

$
(9,078
)Basis and diluted net loss per share applicable to common
    stockholders

$
(0.93
)

$
(1.10
)

$
(0.95
)

$
(0.82
)

$
(0.37
)

$
(0.57
)

$
(0.72
)

$
(0.86
)  F-24