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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, 2009oro

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-T o o
  Regulation S-K Form 10-K Form 10-K. þ
  12b-2
  Large
    accelerated
    filer o
    Accelerated
    filer þ
    Non-accelerated
    filer o
    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


22Item 2.


Properties


22Item 3.


Legal Proceedings


22Item 4.


Reserved


22PART IIItem 5.


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


22Item 6.


Selected Financial Data


25Item 7.


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


26Item 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


33Item 9B.


Other Information


34PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


34Item 11.


Executive Compensation


35Item 12.


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


35Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


35Item 14.


Principal Accountant Fees and Services


35PART IVItem 15.


Exhibits, Financial Statement Schedules


35Signatures


38EX-10.10EX-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 2b ongoingRDEA684

Gout

Preclinical development ongoingRDEA119

Cancer

Phase 1 and Phase 1/2 ongoingRDEA806

HIV

Phase 2a completedRDEA427

HIV

Phase 0* completed     *
    
    First-in-human
    micro-dose pharmacokinetic study in normal healthy volunteers.  GOUT
    ® ®
    
    When administered as a single agent, RDEA594 was well-tolerated
    and produced significant reductions in sUA levels in gout
    patients with hyperuricemia, including those with mild to
    moderate renal impairment. The reductions observed with RDEA594
    were comparable to those achieved with approved doses of
    allopurinol and febuxostat.
    The combination of RDEA594 and allopurinol in gout patients was
    well tolerated and reduced sUA levels an additional
    24 percent compared to allopurinol alone.
    The combination of RDEA594 and febuxostat in healthy volunteers
    was well tolerated and resulted in sUA reductions of
    approximately 70 to 80 percent from baseline.   1




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CANCER
  In vivo in vitro in vivo ®
  1 2
  1 2
  HIV
  proof-of-concept 10
      Market
    Opportunity
      1540-48
 2




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Bayer
    Relationship
    Valeant
    Relationship
      Research
    and Development Expenses
   3




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Clinical
    Supplies and Manufacturing
    Sales and
    Marketing
    Customers
    and Distribution
    Competition
      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.       4




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Government
    Regulation
  Pharmaceutical
    Regulation
      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.       5




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follow-up follow-up follow-up
    direct-to-consumer
  and/or
  Regulation Outside
    the United States
   6




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Additional
    Regulation
  Third-Party
    Reimbursement
    country-by-country
  Fraud and
    Abuse Laws
    HIPAA
    Other
    Laws
    Employees
   7




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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.
  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.
   8




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Delays
    in the commencement of clinical testing of our current and
    potential product candidates could result in increased costs to
    us and delay our ability to generate revenues.
      
    delays in demonstrating sufficient safety and efficacy to obtain
    regulatory approval to commence a clinical trial;
    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 an 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.    The
    termination, or delays in the completion, 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 or FDA
    requests for supplemental information with respect to our
    clinical trial results;
    failure to conduct clinical trials in accordance with regulatory
    requirements;
    lower than anticipated recruitment rate or 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;
    changes to clinical trials protocols; 9




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
    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 research and development efforts are unsuccessful, we
    may 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;
    competitors may be unwilling to assign or license products or
    product candidate rights to us; 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, cancer and HIV.    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; 10




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
    the prevalence and severity of any adverse side effects from the
    products;
    the availability of alternative treatments;
    pricing and cost effectiveness of products; and
    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.
    
    fund our research 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. 11




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We
    have decreased the size of our organization and may need to do
    so again in the future, and we may experience difficulties in
    managing these organizational changes.
      Raising
    additional funds by issuing securities or through additional
    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.
  sub-prime
 12




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We
    depend on collaborations with other parties to develop and
    commercialize selected product candidates and to provide
    substantially all of our revenues.
          Conflicts
    may arise between us and any of our collaborators that could
    delay or prevent the development or commercialization of our
    product candidates.
    
    unwillingness on the part of a collaborator to pay us milestone
    payments or royalties we believe are due to us under our
    collaboration or license agreement;
    unwillingness on the part of a collaborator to keep us informed
    regarding the progress of its development and commercialization
    activities or to permit public disclosure of the results of
    those activities; or
    slowing or cessation of a collaborators development or
    commercialization efforts with respect to our product candidates. 13




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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 other parties to sell and market any
    products we may develop, we may be unable to generate product
    revenue.
    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.
   14




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Our
    quarterly results and stock price may fluctuate
    significantly.
    
    whether or not we achieve specified 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 the development
    and commercialization of 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 selection of additional compounds for development; and
    fluctuations in the stock prices of other companies in the
    biotechnology and pharmaceuticals industries and in the
    financial markets generally.    If we
    engage in any acquisition, we will incur a variety of costs, and
    we may never realize the anticipated benefits of the
    acquisition.
    
    assumption and exposure to unknown liabilities of an 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;
    difficulties 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. 15




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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.
    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 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; 17




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
    our issued or acquired patents may not provide a basis for
    commercially viable products, may not provide us with any
    competitive advantages, or may be challenged by 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
  Our
    business depends upon not infringing the rights of
    others.
     18




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
    cease selling, incorporating or using any of our products 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.
    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.   19




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If our
    competitors develop treatments for gout, cancer or HIV 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.
      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.
   20




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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.
    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; 21




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
    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.  sub-lease sub-lease sub-lease
  ITEM 3.
    LEGAL
    PROCEEDINGS.    ITEM 4.
    RESERVED. PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES.  Unregistered
    Sales of Equity Securities and Use of Proceeds
   22




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Information
    About Our Common Stock
    High


LowYear Ended December 31, 2009First Quarter

$
15.00


$
10.00Second Quarter

$
16.75


$
8.78Third Quarter

$
21.35


$
15.85Fourth Quarter

$
18.93


$
12.18   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   Holders
    Dividend
    Policy
      Information
    About Our Equity Compensation Plans
  Form 10-K.
 23




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Stock
    Performance Graph
      
  12/31/2004

12/31/2005

12/31/2006

12/31/2007

12/31/2008

12/31/2009Ardea Biosciences, Inc.

$
100


$
88.48


$
106.86


$
375.00


$
293.38


$
343.14Nasdaq  US

$
100


$
102.13


$
112.19


$
121.68


$
58.64


$
84.28Nasdaq-Pharmaceuticals

$
100


$
110.12


$
107.79


$
113.36


$
105.48


$
118.52  24




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ITEM 6.
    SELECTED
    FINANCIAL DATA.  page F-2 Form 10-K.
  Year Ended December 31,2009


2008


2007


2006


2005(In thousands, except per share amounts)Consolidated Statements of Operations Data:Revenues:License fees

$
20,442


$



$



$



$
Sponsored research






304



3,095







Reimbursable research and development costs


2,494















Total revenues


22,936



304



3,095







Operating expenses:Research and development


42,198



44,858



23,103



72



255General and administrative


10,689



11,921



7,566



2,674



2,980Restructuring and other charges


















648Loss from operations


(29,951
)


(56,475
)


(27,574
)


(2,746
)


(3,883
)Interest income


386



1,524



2,128



2,377



1,502Interest expense


(1,323
)


(215
)










Other income (expense)


21



171



375



2



(1
)Change in fair value on revaluation of warrants


















(789
)Net Loss


(30,867
)


(54,995
)


(25,071
)


(367
)


(3,171
)Non-cash dividends on Series A preferred stock






(60
)


(240
)


(240
)


(240
)Net loss applicable to common stockholders

$
(30,867
)

$
(55,055
)

$
(25,311
)

$
(607
)

$
(3,411
)Basis and diluted net loss per share applicable to common
    stockholders

$
(1.70
)

$
(3.79
)

$
(2.55
)

$
(0.07
)

$
(0.37
)Shares used in computing basic and diluted net loss per share
    applicable to common stockholders


18,158



14,544



9,934



9,326



9,134Balance Sheet Data:Cash, cash equivalents and short-term investments

$
50,891


$
57,743


$
66,215


$
48,669


$
48,830Working capital

$
30,943


$
49,463


$
62,548


$
48,338


$
48,820Total assets

$
55,065


$
61,475


$
68,840


$
50,240


$
49,171Noncurrent portion of obligations under capital leases and notes
    payable

$
3,315


$
6,132


$



$



$
Accumulated deficit

$
(347,410
)

$
(316,543
)

$
(261,488
)

$
(236,177
)

$
(235,570
)Total stockholders equity

$
24,741


$
45,958


$
63,739


$
49,064


$
48,820  25




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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, 2009 to the
    results for the year ended December 31, 2008 and comparing
    the results for the year ended December 31, 2008 to the
    results for the year ended December 31, 2007.
    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, 2009. 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;
    RDEA684:  A next generation URAT1 transporter
    inhibitor for the treatment of hyperuricemia and gout;
    RDEA119:  A MEK inhibitor for the treatment of
    cancer;
    RDEA806:  A NNRTI for the treatment of
    HIV; and
    RDEA427:  A next generation NNRTI for the
    treatment of HIV.  Research
    and Development Expense
     26




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General
    and Administrative Expense
    Other
    Income (Expense)
  available-for-sale,
  Recent
    Developments
    Critical
    Accounting Policies and Estimates
      Revenue
    Recognition
     27




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Accrued
    Clinical Liabilities
    Share-Based
    Compensation
        New
    Accounting Pronouncements
  Form 10-K.
  Results
    of Operations
  Years
    Ended December 31, 2009 and 2008
  Revenues
   28




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Research
    and Development Expense
    General
    and Administrative Expense
    Other
    Income (expense)
    Years
    Ended December 31, 2008 and 2007
  Revenues
    Research
    and Development Expense
   29




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General
    and Administrative Expense
    Other
    Income (expense)
    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

$
7,505


$
3,475


$
3,920


$
91


$
19Operating lease obligations


5,722



1,076



2,223



2,233



190Capital lease obligations


194



116



78







Purchase Obligations


1,682



1,644



38







Total

$
15,103


$
6,311


$
6,259


$
2,324


$
209    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.   32




---



##### Table of Contents



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;
    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
      Internal Control 
    Integrated Framework
 33




---



##### Table of Contents



Internal Control  Integrated
    Framework
    
     ITEM 9B.
    OTHER
    INFORMATION.   PART III  ITEM 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.   34




---



##### Table of Contents



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.    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,
    2009 and 2008


F-2Consolidated Statements of Operations for the
    years ended December 31, 2009, 2008 and 2007


F-3Consolidated Statements of Stockholders
    Equity for the years ended December 31, 2009, 2008 and
    2007


F-4Consolidated Statements of Cash Flows for the
    years ended December 31, 2009, 2008 and 2007


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, 2008(12)4
.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, 2008(12)10
.3*

Executive Severance Benefit Plan, as amended and restated on
    November 7, 2008(12)10
.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 Quart(12)10
.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 Plan10
.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 Bank(12)10
.15

Securities Purchase Agreement, dated December 17, 2008, by
    and among Ardea Biosciences, Inc. and the Purchasers listed on
    the signature pages thereto(7)10
.16

Development and Commercialization License Agreement, dated
    April 27, 2009, by and among Ardea Biosciences, Inc. and
    Bayer HealthCare AG(15)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. 36




---



##### Table of Contents



(1)
    
    Incorporated by reference to our
    Form 8-K
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    December 28, 2006.(2)
    
    Incorporated by reference to our
    Form 10-Q
    (File
    No. 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 10-K
    (File
    No. 001-33734)
    filed with the Securities and Exchange Commission on
    March 13, 2009.(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.(15)
    
    Incorporated by reference to our
    Form 10-Q
    (File
    No. 001-33734)
    filed with the Securities and Exchange Commission on
    August 7, 2009. 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 12, 2010/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 12, 2010/s/  FELIX
    J. BAKER, Ph.D.Felix
    J. Baker, Ph.D.

Director

March 12, 2010/s/  HENRY
    J. FUCHSHenry
    J. Fuchs, M.D.

Director

March 12, 2010/s/  CRAIG
    A. JOHNSONCraig
    A. Johnson

Director

March 12, 2010/s/  JOHN
    W. POYHONENJohn
    W. Poyhonen

Director

March 12, 2010/s/  JACK
    S. REMINGTONJack
    S. Remington, M.D.

Director

March 12, 2010/s/  KEVIN
    C. TANGKevin
    C. Tang

Director

March 12, 2010  38




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the
    Stockholders and Board of Directors of
    Ardea Biosciences, Inc.
        Internal Control  Integrated Framework
  
    F-1




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  CONSOLIDATED BALANCE SHEETS
   December 31,


December 31,2009


2008(In thousands, except per share and par value amounts)ASSETSCurrent assets:Cash and cash equivalents

$
11,562


$
41,551Short-term investments,
    available-for-sale


39,329



16,192Receivables


1,433



384Prepaids and other current assets


215



237Total current assets


52,539



58,364Property and equipment, net


1,961



2,310Other assets


565



801Total assets

$
55,065


$
61,475LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,916


$
2,260Accrued clinical liabilities


4,072



2,278Accrued payroll and employee liabilities


2,138



1,758Other accrued liabilities


769



545Current portion of deferred revenue


9,706



Current portion of obligations under capital lease


108



102Current portion of obligations under notes payable


2,887



1,958Total current liabilities


21,596



8,901Deferred rent


160



84Non-current portion of deferred revenue


4,853



Non-current portion of obligations under capital lease


76



175Non-current portion of obligations under notes payable


3,239



5,957Other long-term liabilities


400



400Commitments 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, 2009 and 2008






Common stock, $0.001 par value: 70,000,000 shares
    authorized; 18,504,898 and 17,835,734 shares issued and
    outstanding at December 31, 2009 and 2008, respectively


18



17Additional paid-in capital


372,091



362,345Accumulated other comprehensive income


42



139Accumulated deficit


(347,410
)


(316,543
)Total stockholders equity


24,741



45,958Total liabilities and stockholders equity

$
55,065


$
61,475    F-2




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  CONSOLIDATED STATEMENTS OF
    OPERATIONS
  Year Ended December 31,2009


2008


2007(In thousands, exceptper share amounts)Revenues:License fees

$
20,442


$



$
Sponsored research






304



3,095Reimbursable research and development costs


2,494







Total revenues


22,936



304



3,095Operating expenses:Research and development


42,198



44,858



23,103General and administrative


10,689



11,921



7,566Total operating expenses


52,887



56,779



30,669Loss from operations


(29,951
)


(56,475
)


(27,574
)Other income (expense)Interest income


386



1,524



2,128Interest expense


(1,323
)


(215
)


Other income, net


21



171



375Total other income (expense)


(916
)


1,480



2,503Net loss


(30,867
)


(54,995
)


(25,071
)Non-cash dividends on Series A preferred stock






(60
)


(240
)Net loss applicable to common stockholders

$
(30,867
)

$
(55,055
)

$
(25,311
)Basic and diluted net loss per share applicable to common
    stockholders

$
(1.70
)

$
(3.79
)

$
(2.55
)Shares used in computing basic and diluted net loss per share
    applicable to common stockholders


18,158



14,544



9,934    F-3




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.



CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY  Convertible











AccumulatedPreferred








Additional


Other





TotalStock


Common Stock


Paid-In


Comprehensive


Accumulated


StockholdersAmount


Shares


Amount


Capital


Income (Loss)


Deficit


EquityBalances 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
)

$
45,958Issuance of common stock under Employee Stock Purchase Plan






62







490











490Issuance of common stock upon exercise of stock options






595



1



3,477











3,478Issuance of common stock upon exercise of warrants






12



















Share-based compensation expense














5,779











5,779Comprehensive loss:Net loss






















(30,867
)


(30,867
)Unrealized gain (loss) on securities


















(97
)






(97
)Comprehensive loss


























(30,964
)Balances at December 31, 2009

$




18,505


$
18


$
372,091


$
42


$
(347,410
)

$
24,741    F-4




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  CONSOLIDATED STATEMENTS OF CASH
    FLOWS
  Year Ended December 31,2009


2008


2007(In thousands)Operating activities:Net loss

$
(30,867
)

$
(54,995
)

$
(25,071
)Adjustments to reconcile net loss to net cash used for operating
    activities:Share-based compensation


5,779



5,110



1,410Depreciation


668



535



249Amortization of debt discount and debt issuance costs


429



62



Loss (gain) on disposal of property and equipment


17



(28
)


(332
)Deferred rent


76



84



Amortization of premium on short-term investments


356



79



215Realized gain on short-term investments


(24
)






Change in operating assets and liabilities:Receivables


(1,049
)


840



(819
)Prepaids and other current assets


22



(27
)


230Other assets


(24
)






(312
)Accounts payable


(344
)


60



1,966Accrued clinical liabilities


1,794



1,822



452Accrued payroll and employee liabilities


380



146



1,392Other accrued liabilities


224



(228
)


115Deferred revenue


14,559







Net cash used for operating activities


(8,004
)


(46,540
)


(20,505
)Investing activities:Purchases of short-term investments


(56,632
)


(33,920
)


(48,579
)Proceeds from sale or maturity of short-term investments


33,066



37,605



62,432Proceeds from sale of property and equipment


10



80



332Purchases of property and equipment


(346
)


(1,700
)


(401
)Net cash (used for) provided by investing activities


(23,902
)


2,065



13,784Financing activities:Net proceeds from issuance of notes payable






8,250



Payments of debt issuance costs






(127
)


Payments on capital lease and note payable obligations


(2,051
)


(57
)


Net proceeds from issuance of common stock


3,968



31,576



38,326Net cash provided by financing activities


1,917



39,642



38,326Net (decrease) increase in cash and cash equivalents


(29,989
)


(4,833
)


31,605Cash and cash equivalents at beginning of year


41,551



46,384



14,779Cash and cash equivalents at end of year

$
11,562


$
41,551


$
46,384Supplemental disclosure of cash flow information:Interest paid

$
912


$
134


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

$



$
318


$
Net unrealized (loss) gain on short-term investments

$
(97
)

$
125


$
10Accrued debt issuance costs

$



$
400


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

$



$
(60
)

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

$



$
343


$
    F-5




---



##### Table of Contents



ARDEA
    BIOSCIENCES, 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
    available-for-sale Available-for-sale available-for-sale
  Fair
    Value of Financial Instruments
  available-for-sale
  Concentration
    of Credit Risk
   F-6




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Property
    and Equipment
    Impairment
    of Long-Lived Assets
    Revenue
    Recognition
      Research
    and Development Expenses
   F-7




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Patent
    Costs
    Share-Based
    Compensation Expense
        Valuation
    and Expense Information
    December 31,2009


2008


2007Research and development

$
2,386


$
2,098


$
665General and administrative


3,393



3,012



745Share-based compensation expense included in operating expenses

$
5,779


$
5,110


$
1,410     Options:
  December 31,2009

2008

2007Risk-free interest rate


2.5
%


3.1
%


4.2
%Dividend yield


0.0
%


0.0
%


0.0
%Volatility


77.1
%


74.0
%


71.7
%Expected life (years)


5.5-6.1



5.2-6.3



6.25  F-8




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  ESPP:
  December 31,2009

2008

2007Risk-free interest rate


0.6
%


2.1
%


4.20
%Dividend yield


0.0
%


0.0
%


0.0
%Volatility


83.0
%


90.6
%


71.0
%Expected life (years)


1.24



1.22



1.25             Warrants
    Net
    Loss per Share
      Comprehensive
    Loss
  available-for-sale
 F-9




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year EndedDecember 31,2009


2008


2007Net loss

$
(30,867
)

$
(54,995
)

$
(25,071
)Net unrealized gains (losses) on short-term investments


(97
)


125



10Comprehensive net loss

$
(30,964
)

$
(54,870
)

$
(25,061
)   Recent
    Accounting Pronouncements
  105-10, Generally Accepted Accounting Principles  Overall 105-10). 105-10 FASB Accounting Standards Codification
  820-10, Fair Value Measurements and Disclosures  Overall 820-10) 820-10-55, Fair Value Measurements and Disclosures  Overall
     Implementation Guidance and Illustrations 820-10 820-10
  320-10-65, Investments  Debt and Equity
    Securities  Overall  Transition and Open
    Effective Date Information 320-10-65). 320-10-65 other-than-temporary other-than-temporary 320-10-65, 320-10-65,
 F-10




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  320-10-65
  820-10-65, Fair Value Measurements and Disclosures 
    Overall  Transition and Open Effective Date
    Information 820-10-65). 820-10-65 820-10 820-10-65 820-10-65
  825-10-65, Financial Instruments  Overall 
    Transition and Open Effective Date Information 825-10-65). 825-10-65 825-10 270-10 825-10-65
  855-10, Subsequent Events  Overall 855-10). 855-10 855-10
  No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) 2009-05). 2009-05 820-10, Fair Value Measurements and Disclosures  Overall, 2009-05 2009-05 2009-05 2009-05
  No. 2010-06, Fair Value Measurements and Disclosures (Topic
    820)  Improving Disclosures about Fair Value
    Measurements No. 2010-06 2010-06
  3.
    Fair
    Value Measurements   F-11




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED 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


Inputs2009


(Level 1)


(Level 2)


(Level 3)Money market funds

$
8,397


$
8,397


$



$
United States government and agency obligations


27,096



6,577



20,519



United States corporate debt securities


11,634







11,634



Foreign commercial paper


3,598







3,598



Total

$
50,725


$
14,974


$
35,751


$
   available-for-sale held-to-maturity instrument-by-instrument
  available-for-sale.
   F-12




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   4.
    Balance
    Sheet Details  Short-Term
    Investments
  available-for-sale
  December 31, 2009Gross


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gains


Losses


Fair ValueUnited Stated Government agency obligations

$
24,077


$
20


$



$
24,097United States corporate debt


11,611



23







11,634Foreign commercial paper


3,598











3,598Total

$
39,286


$
43


$



$
39,329   December 31, 2008Gross


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gains


Losses


Fair ValueUnited States Government agency securities

$
14,552


$
140


$



$
14,692Municipal bonds


1,501







(1
)


1,500Total

$
16,053


$
140


$
(1
)

$
16,192   available-for-sale
  Receivables
    December 31,2009


2008Amounts due under collaboration arrangements

$
1,189


$
44Interest on short-term investments


195



173Vendor refunds






149Other


49



18Total Receivables

$
1,433


$
384  F-13




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Property
    and Equipment
    December 31,2009


2008Laboratory equipment

$
1,437


$
1,331Computer equipment and software


734



577Furniture and fixtures


183



183Leasehold improvements


969



9523,323



3,043Less: accumulated depreciation and amortization


(1,362
)


(733
)$
1,961


$
2,310     Accrued
    Payroll and Employee Liabilities and Other Accrued
    Liabilities
    December 31,2009


2008Accrued employee salaries and benefits

$
634


$
786Accrued bonuses


1,462



972Accrued restructuring


42



Total Accrued Payroll and Employee Liabilities

$
2,138


$
1,758   December 31,2009


2008Accrued professional fees

$
173


$
86Accrued legal fees


362



232Accrued accounts payable


130



101Accrued interest


62



81Other accrued liabilities


42



45Total Other Accrued Liabilities

$
769


$
545   5.
    Commitments
    and Contingencies  Leases
  sub-lease
 F-14




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  sub-lease sub-lease
        Operating Leases


Capital LeaseYears ended December 31,2010

$
1,076


$
1162011


1,101



782012


1,122



2013


1,099



2014


1,134



Thereafter


190



Total

$
5,722



194Less amount representing interest






(10
)Present value of net minimum lease payments






184Less current portion






(108
)Noncurrent portion of capital lease obligation





$
76     Notes
    Payable
  sub-lease
   F-15




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Notes PayableYears ended December 31,2010

$
3,4752011


3,8752012


452013


452014


46Thereafter


19Total


7,505Less unamortized discount


(150
)Less amount representing interest


(1,229
)Present value of net minimum notes payable payments


6,126Less current portion


(2,887
)Noncurrent portion of notes payable

$
3,239   Executive
    Severance Agreements
     F-16




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Clinical
    Development Agreements
    Purchase
    Obligations
    6.
    Restructuring        7.
    Valeant
    Transaction     F-17




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      8.
    Bayer
    Relationship         F-18




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    9.
    Stockholders
    Equity  Preferred
    Stock
        Common
    Stock
      Common
    Stock Reserved for Future Issuance
    Warrants


719,338Stock option plans


4,453,288Employee stock purchase plan


224,963Total shares reserved for future issuance


5,397,589  F-19




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Warrants
          Stock
    Option Plans
  10-year
  10-year
   F-20




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Outstanding OptionsWeighted-Options





AverageAvailable for


Number of


ExerciseGrant


Shares


PriceBalance at December 31, 2006


1,734,850



1,345,834


$
5.45Additional shares authorized


547,027







Granted


(1,479,500
)


1,479,500


$
5.52Exercised






(98,941
)

$
2.85Cancelled


545,500



(545,500
)

$
4.76Balance at December 31, 2007


1,347,877



2,180,893


$
5.79Additional shares authorized


744,552







Granted


(1,793,875
)


1,793,875


$
13.62Exercised






(116,653
)

$
4.66Cancelled


182,026



(182,026
)

$
7.97Balance at December 31, 2008


480,580



3,676,089


$
9.54Additional shares authorized


891,787







Granted


(557,350
)


557,350


$
14.19Exercised






(595,168
)

$
5.89Cancelled


246,476



(246,476
)

$
10.95Balance at December 31, 2009


1,061,493



3,391,795


$
10.84       Years Ended December 31,2009

2008

2007Weighted-



Weighted-



Weighted-Average



Average



AverageExercise



Exercise



ExerciseOptions

Price

Options

Price

Options

PriceExercisable at end of year


1,559,117


$
9.85



1,092,025


$
6.54



541,058


$
7.76Weighted-average fair value of options granted during the year

$
9.60






$
9.21






$
3.72  F-21




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Weighted-Weighted-








AverageAverage


Weighted-





ExerciseRemaining


Average





Price ofOptions


Range of


Contractual


Exercise


Options


OptionsOutstanding


Exercise Prices


Life (in years)


Price


Exercisable


Exercisable491,032


$
2.76 - $3.90



6.52


$
3.76



347,282


$
3.70426,100


$
4.08 -  $5.25



6.99


$
5.00



258,822


$
4.99211,792


$
5.85 -  $9.46



7.69


$
6.85



109,103


$
6.29497,390


$
10.68 - $10.68



8.95


$
10.68



116,642


$
10.68463,721


$
12.16 - $14.25



7.16


$
13.17



220,644


$
13.39633,558


$
14.26 - $14.95



9.33


$
14.68



100,874


$
14.29504,500


$
15.69 - $15.69



8.00


$
15.69



295,122


$
15.69163,702


$
16.20 - $20.37



5.87


$
16.59



110,628


$
16.413,391,795


$
2.76 - $20.37



7.81


$
10.84



1,559,117


$
9.85     Employee
    Stock Purchase Plan
       F-22




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   10.
    Income
    Taxes    December 31,2009Statutory federal income tax rate of 34% applies to earnings
    before income taxes and extraordinary items

$
(10,494
)States taxes  net of federal benefit


(2,224
)Meals and entertainment


9Share-based compensation


238Federal R&D credit


(872
)162(m) Executive compensation limitation


160NOL adjustment due to 382 study


(9,437
)R&D credit adjustment


334APIC valuation allowance


(39
)Change in valuation allowance


22,204Other


121$
     December 31,2009


2008Deferred tax assets:Net operating loss carryforwards

$
51,821


$
29,570Research and development credits


4,459



2,770Capitalized research and development costs






Intangibles


1,452



870Share-based compensation


3,052



1,720Other, net


961



350Total deferred tax assets


61,745



35,280Deferred tax liabilities:Deferred state taxes


(4,261
)


Net deferred tax assets


57,484



35,280Valuation allowance for net deferred tax assets


(57,484
)


(35,280
)Net deferred taxes

$



$
      F-23




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Compensation
  Income Taxes
    December 31,2009Balance at December 31, 2007

$
Gross increase (decrease)


Balance at December 31, 2008


Gross increase (decrease)


334Balance at December 31, 2009

$
334     and/or and/or
   F-24




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   11.
    Employee
    Benefit Plan    12.
    Subsequent
    Events    13.
    Summary
    of Quarterly Financial Data (unaudited)    2009First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter(In thousands, except per share amounts)Revenues:License fees

$



$
5,013


$
8,178


$
7,251Reimbursable research and development costs






499



991



1,004Total revenues






5,512



9,169



8,255Expenses:Research and development


10,996



10,725



8,999



11,478General and administrative


2,877



2,526



2,404



2,882Loss from operations


(13,873
)


(7,739
)


(2,234
)


(6,105
)Interest income


136



119



65



66Interest expense


(364
)


(348
)


(320
)


(291
)Other income, net


(2
)


5



18



Net Loss


(14,103
)


(7,963
)


(2,471
)


(6,330
)Basis and diluted net loss per share applicable to common
    stockholders

$
(0.79
)

$
(0.44
)

$
(0.13
)

$
(0.34
)   F-25




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  2008First


Second


Third


FourthQuarter


Quarter


Quarter


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

$
260


$



$



$
44Expenses:Research and development


9,969



12,923



11,459



10,507General and administrative


3,408



3,272



3,043



2,198Loss from operations


(13,117
)


(16,195
)


(14,502
)


(12,661
)Interest income


607



414



293



210Interest expense






(1
)


(10
)


(204
)Other income, net


135



51



(4
)


(11
)Net Loss


(12,375
)


(15,731
)


(14,223
)


(12,666
)Non-cash dividends on Series A preferred stock


(60
)










Net loss applicable to common stockholders

$
(12,435
)

$
(15,731
)

$
(14,223
)

$
(12,666
)Basis and diluted net loss per share applicable to common
    stockholders

$
(0.93
)

$
(1.10
)

$
(0.95
)

$
(0.82
)  F-26