##### Table of Contents



SECURITIES AND EXCHANGE
    COMMISSION
 Washington, DC 20549
  Form 10-K
  þ

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

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file
    number 0-29993
 Ardea Biosciences,
    Inc.
 (Exact name of Registrant as
    specified in its charter)
   Delaware

94-3200380(State or Other Jurisdiction
    of
    Incorporation or Organization)

(IRS Employer
    Identification No.)2131 Palomar Airport Rd., Suite
    300
    Carlsbad, CA.(Address of principal
    executive offices)

92011(Zip code)   Registrants telephone number, including area code:
 (760) 602-8422
  Securities registered under Section 12(b) of the
    Exchange Act:
 None.
  Securities registered under Section 12(g) of the
    Exchange Act:
 Common Stock, par value $.001 per share
 (Title of Class)
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 o o þ
  Rule 12b-2 o þ




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##### 



TABLE OF
    CONTENTS
  PagePART
    IItem 1.

Business


1Item 1A

Risk
    Factors


8Item 1B

Unresolved Staff
    Comments


22Item 2.

Property


22Item 3.

Legal
    Proceedings


22Item 4.

Submission of
    Matters to a Vote of Security Holders


22PART
    IIItem 5.

Market for
    Registrants Common Equity, Related Stockholder
    Matters


23Item 6.

Selected Financial
    Data


24Item 7.

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


25Item 7A.

Quantitative and
    Qualitative Disclosure About Market Risk


33Item 8.

Financial
    Statements and Supplementary Data


35Item 9.

Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


59Item 9A.

Controls and
    Procedures


59Item 9B.

Other
    Information


59PART
    IIIItem 10.

Directors and
    Executive Officers of the Registrant


60Item 11.

Executive
    Compensation


62Item 12.

Security Ownership
    of Certain Beneficial Owners and Management


69Item 13.

Certain
    Relationships and Related Transactions


73Item 14.

Principal
    Accountant Fees and Services


74PART
    IVItem 15.

Exhibits and
    Financial Statement Schedules


75EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1   i




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PART I



CAUTIONARY
    NOTE REGARDING FORWARD LOOKING STATEMENTS  Certain statements in this annual report on
    Form 10-K
    are forward-looking statements that involve a number of risks
    and uncertainties. In some cases, you can identify
    forward-looking statements by terminology such as
    may, might, will,
    should, intends, expects,
    plans, goals, projects,
    anticipates, believes,
    estimates, predicts,
    potential, or continue or the negative
    of these terms or other comparable terminology. Such
    forward-looking statements include statements about our plans
    for our research and development programs, the potential
    characteristics of our product candidates, the ability to
    co-formulate our product candidates with other drugs, our
    ability to initiate or complete clinical trials for any of our
    product candidates, our ability to progress product candidates
    through preclinical and clinical development and
    commercialization, our ability to select a development candidate
    from the 900 Series Program, our ability to file a U.S.
    Investigational New Drug application, or IND, or a similar
    filing with the applicable regulatory agency in a foreign
    country, or obtain regulatory approval for marketing of any
    product candidate, our ability to create a fully-integrated
    research and development organization, the expected benefits
    from our new management, the market opportunity for any products
    we may develop and the ability of those products to meet market
    needs or participate in such markets, the milestones or
    royalties payable to Valeant Research & Development,
    our receipt of payments from Valeant under the research services
    agreement, our research and development goals for 2007, our
    near- and long-term financial outlook, our anticipated cash
    usage and resources, the safety and efficacy of our product
    candidates and any potential products, our ability to develop
    and commercialize products, our ability to acquire additional
    product candidates, our ability to rapidly develop product
    candidates, our ability to manage the risks involved with drug
    discovery, our ability to generate internal product candidates,
    our ability to develop a commercialization capability or partner
    with other companies for the development or commercialization of
    product candidates, and other statements about our strategy,
    technologies, programs, and ability to develop compounds and
    commercialize drugs.
  For such statements, we claim the protection of the Private
    Securities Litigation Reform Act of 1995. These forward-looking
    statements are only predictions, are uncertain and involve
    substantial known and unknown risks, uncertainties and other
    factors which may cause our (or our industrys) actual
    results, levels of activity or performance to be materially
    different from any future results, levels of activity or
    performance expressed or implied by these forward-looking
    statements. Factors that could cause actual results to differ
    materially from those stated or implied by our forward-looking
    statements are included in Item 1A  Risk
    Factors of this annual report and disclosed in our other
    filings with the Securities and Exchange Commission. We cannot
    guarantee future results, level of activity or performance. You
    should not place undue reliance on these forward-looking
    statements. These forward-looking statements represent our
    judgment as of the time of this annual report. We disclaim any
    intent or obligation to update these forward-looking statements,
    other than as may be required under applicable law.
  Unless the context indicates otherwise, as used in this
    annual report, the terms Ardea, we,
    us and our refer to Ardea Biosciences,
    Inc., a Delaware corporation. Ardea recently changed its name
    from IntraBiotics Pharmaceuticals, Inc.
 ITEM 1.  BUSINESS  History
    and Overview
     1




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day-to-day
    Transaction
    with Valeant
    
    the 800 Series Program, which is directed toward the
    discovery of non-nucleoside reverse transcriptase inhibitors, or
    NNRTIs, for the potential treatment of HIV,
    the 900 Series Program, which is also directed toward the
    discovery of NNRTIs for the potential treatment of HIV but
    includes compounds from a chemical class that is distinct from
    the chemical class being investigated in the 800
    Series Program, and
    the 100 Series Program, which is directed toward the
    discovery of small-molecule kinase inhibitors for the potential
    treatment of cancer and inflammatory disease.  proof-of-concept
       2




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Business
    Strategy
  proof-of-concept
  Financial
    Outlook
    Development
    Programs
    
    800 Series Program.Our 800
    Series Program is our lead program and is directed toward
    the discovery of NNRTIs for the potential treatment of HIV. The
    lead product candidate from the program is RDEA806 (previously
    referred to as AR806). In vitropreclinical tests have
    shown RDEA806 to be a potent inhibitor of a wide range of HIV
    viral isolates, including isolates that are resistant to
    efavirenz
    (Sustiva®,
    Bristol-Myers Squibb) and other currently available NNRTIs.
    Based on early in vitroand in vivo preclinical
    data, we anticipate that this compound could be amenable to a
    patient-friendly oral dosing regimen, may have limited
    pharmacokinetic interactions with other drugs and may be readily
    co-formulated with other HIV antiviral drugs. We have initiated
    a Phase I clinical study of RDEA806 and plan to report
    initial results from this study in the third quarter of 2007.
    900 Series Program.Our 900
    Series Program, which is in preclinical development, is
    also directed toward the discovery of NNRTIs for the potential
    treatment of HIV. The compounds in our 900 Series Program
    are from a chemical class that is distinct from the chemical
    class being investigated in our 800 Series Program. Based
    on early preclinical data, we believe that the compounds in our
    900 Series Program may have the potential to share certain
    of the positive attributes of the compounds in our 800
    Series Program, but also appear to have even greater
    activity against a wide range of drug-resistant viral isolates.
    We plan to select a development candidate from this program in
    the second quarter of 2007 and to initiate a clinical study of
    this candidate in the fourth quarter of 2007.
    100 Series Program.Our 100
    Series Program, which is in preclinical development, is
    directed toward the discovery of small-molecule kinase
    inhibitors for the potential treatment of cancer and
    inflammation. RDEA119 is our lead development candidate from our
    100 Series Program. In early preclinical tests, RDEA119 has
    shown potential as a potent and selective inhibitor of
    mitogen-activated ERK kinase, or MEK, which is believed to play
    an important role in cancer cell proliferation, apoptosis and
    metastasis as well as inflammatory cell signaling. Preclinical
    data suggest that RDEA119 may have favorable pharmaceutical-like
    properties, including the potential for once-daily oral dosing.
    We plan to initiate a Phase I clinical study of RDEA119 in the
    third quarter of 2007.  Market
    Opportunity
   3




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Research
    and Development Expenses
    Clinical
    Supplies and Manufacturing
    Sales and
    Marketing
    Customers
    and Distribution
    Competition
  best-in-class
 4




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Intellectual
    Property
    
    obtain and maintain 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 IND (Investigational New Drug Application) for
    clinical trials;
    adequate and well-controlled human clinical trials to establish
    the safety and efficacy of the product;
    submission of a New Drug Application, or NDA, to obtain
    marketing approval;
    review of the NDA; and
    inspection of the facilities used in the manufacturing of the
    drug to assess compliance with the FDAs current Good
    Manufacturing Practice, or cGMP, regulations.                follow-up
 6




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follow-up follow-up
    direct-to-consumer
    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
  (760) 602-8422. (714) 729-5555.
 ITEM 1A 
    RISK FACTORS    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.
   8




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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.
      
    demonstrating sufficient safety and efficacy to obtain
    regulatory approval to commence a clinical trial;
    reaching agreement on acceptable terms with prospective contract
    research organizations and trial sites;
    manufacturing sufficient quantities of a product candidate;
    obtaining approval of an IND from the FDA or similar foreign
    approval; and
    obtaining institutional review board approval to conduct a
    clinical trial at a prospective site. 9




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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;
    inspection of the clinical trial operations or trial sites by
    the FDA or other regulatory authorities resulting in 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 drug 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 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 an appropriate
    return from resulting products;
    competitors may be unwilling to assign or license product 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 HIV, cancer and inflammatory
    diseases.   10




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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 FDA 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;
    relative convenience and ease of administration;
    the prevalence and severity of any adverse side effects;
    availability of alternative treatments;
    pricing and cost effectiveness; 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.
    
    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. 11




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
    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.    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.
    If we
    fail to establish additional research and development capability
    internally or through collaborations, we may not generate
    sufficient revenue to attain profitability.
   12




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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 third parties to sell and market any
    products we may develop, we may be able to generate
    product revenue.
    We
    will need to increase the size of our organization, and we may
    encounter difficulties managing our growth, which could
    adversely affect our
    results of operations.
    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.
   13




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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;
    our addition or termination of research 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.    If we
    engage in any acquisition, we will incur a variety of costs, and
    we may never realize the anticipated benefits of the
    acquisition.
    
    exposure to unknown liabilities;
    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; 14




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
    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 could limit the
    market for our products 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 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.
   15




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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 all or any 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 third parties;
    our issued patents may not be valid or enforceable; or
    the patents of others may have an adverse effect on our business.   16




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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.
   17




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Many
    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 HIV, cancer or inflammatory
    diseases that are approved faster, marketed better or
    demonstrated to be 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 government, insurance companies, managed care organizations
    and other payors, or arrange for favorable reimbursement
    policies, any product sales will be
    severely hindered.
   18




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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
  The
    delisting of our common stock in October 2005 may be adversely
    affecting the price and liquidity of our common
    stock.
   19




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Directors,
    executive officers principal stockholders and affiliated
    entities beneficially own or control at least 58% of our
    outstanding voting common and preferred stock and may be able to
    exert control over our activities, and the results of our
    operations and financial
    condition may suffer.
    Future
    sales of our common stock may cause our stock price to
    decline.
    The
    holders of our Series A preferred stock have a liquidation
    preference and other rights that are adverse to the interests of
    our common stockholders and could be detrimental
    to our business.
   20




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Anti-takeover
    provisions in our charter documents and under Delaware law may
    make it more difficult to acquire us.
    
    provide for a classified Board of Directors of which
    approximately one-third of the directors will be elected each
    year;
    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 capital stock and we do
    not anticipate paying dividends in the
    foreseeable future.
   21




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ITEM 1B.  UNRESOLVED
    STAFF COMMENTS   ITEM 2.  DESCRIPTION
    OF PROPERTY    6-month
 ITEM 3.  LEGAL
    PROCEEDINGS   ITEM 4.  SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   22




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PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES  Market
    for Common Equity
  Form 10-K.
  Holders
    Securities
    Authorized for Issuance Under Equity Compensation
    Plans
    Equity
    Compensation Plan Information
  Number of securitiesremaining available forNumber of securities to be





future issuance under equityissued upon exercise of


Weighted-average exercise


compensation plansoutstanding options,


price of outstanding options,


(excluding securities)warrants and rights


warrants and rights


reflected in column (a)Plan Category

(a)


(b)


(c)Equity compensation plans approved
    by security holders


1,345,834


$
5.45



2,283,587Equity compensation plans not
    approved by security holders










Total


1,345,834


$
5.45



2,283,587   Dividend
    Policy
   23




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ITEM 6.  SELECTED
    FINANCIAL DATA  Form 10-K Form 10-K. Form 10-K Form 10-K.
  Year Ended December 31,2006


2005


2004


2003


2002(In thousands, except share amounts)Statement of Operations
    Data:Operating expenses:Research and development

$
72


$
255


$
11,519


$
7,727


$
23,053General and administrative


2,674



2,980



4,819



5,782



8,617Restructuring and other charges






648



858







6,118Arbitration settlement


















(3,600
)Impairment of acquired workforce


















1,365Total operating expenses


2,746



3,883



17,196



13,509



35,553Operating loss


(2,746
)


(3,883
)


(17,196
)


(13,509
)


(35,553
)Interest income


2,377



1,502



700



166



703Interest expense


















(459
)Other income/(expense), net


2



(1
)


(204
)


31



856Change in fair value on
    revaluation of warrants






(789
)










Net loss


(367
)


(3,171
)


(16,700
)


(13,312
)


(34,453
)Non-cash deemed dividend related
    to beneficial conversion feature of Series A preferred stock














(1,436
)


Non-cash dividends on
    Series A preferred stock


(240
)


(240
)


(260
)


(182
)


Net loss applicable to common
    stockholders

$
(607
)

$
(3,411
)

$
(16,960
)

$
(14,930
)

$
(34,453
)Basic and diluted net loss per
    share applicable to common stockholders

$
(0.07
)

$
(0.37
)

$
(2.24
)

$
(4.01
)

$
(11.25
)Shares used to compute basic and
    diluted net loss per share applicable to common stockholders


9,326



9,134



7,559



3,720



3,064Balance Sheet Data:Cash, cash equivalents, restricted
    cash and short-term investments

$
48,669


$
48,830


$
50,743


$
26,644


$
13,315Working capital


48,338



48,820



50,462



25,424



15,191Total assets


50,240



49,171



51,185



27,326



16,226Long term obligations, less
    current portion


















Accumulated deficit


(236,177
)


(235,570
)


(232,159
)


(215,199
)


(200,269
)Total stockholders equity


49,064



48,820



50,508



25,628



15,480  24




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ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  The following discussion and analysis of our financial
    condition and results of operations should be read together with
    our financial statements and related notes appearing elsewhere
    in this
    Form 10-K.
    This discussion and analysis contains forward-looking statements
    that involve risks, uncertainties and assumptions. The actual
    results may differ materially from those anticipated in these
    forward-looking statements as a result of many factors,
    including but not limited to those set forth under Risk
    Factors. All forward-looking statements included in this
    document are based on information available to us on the date of
    this document and we assume no obligation to update any
    forward-looking statements contained in this
    Form 10-K.
  Overview
    day-to-day
    Recent
    Developments
     25




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##### Table of Contents



Capitalization
  Common
    Stock
    Preferred
    Stock
        Warrants
    
    Warrants to purchase 789,171 shares of our common stock at
    an exercise price of $1.033 per share expiring on May 1,
    2008;
    Warrants to purchase 354,800 shares of our common stock at
    an exercise price of $10.85 per share expiring on
    October 10, 2008; and
    Warrants to purchase 4,167 shares of our common stock at an
    exercise price of $3.48 per share expiring on December 31,
    2007.  Common
    Stock Reserved for Future Issuance
    Equity incentive plans


3,629,421Warrants


1,148,138Series A convertible
    preferred stock


1,578,346Total shares reserved for future
    issuance


6,355,905   Critical
    Accounting Policies and Estimates
   26




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##### Table of Contents



Stock-Based
    Compensation
  re-grant one-for-one
  re-granted Form 10-K.
  Accounting for
    Stock-Based Compensation Accounting for
    Stock-Based Compensation  Transition and
    Disclosure, one-for-one re-granted re-grant
 27




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##### Table of Contents



No. 96-18, Accounting for Equity Instruments That Are Issued to
    Other Than Employees for Acquiring, or in Conjunction with
    Selling, Goods or Services
  Clinical
    Trial Accruals
    Results
    of Operations
  Comparison
    of Years Ended December 31, 2006, 2005, and
    2004
  Revenues
   28




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##### Table of Contents



Expenses
  Research
    and Development
  2006


Change


Change


2005


Change


Change


2004$


%





$72



(183
)


−71.8%



255



(11,264
)


−97.8%



11,519         General
    and Administrative
  2006


Change


Change


2005


Change


Change


2004$


%





$2,674



(306
)


−10.3%



2,980



(1,839
)


−38.2%



4,819         Restructuring
    and Other Charges
  2006


Change


Change


2005


Change


Change


2004$


%





$



(648
)


−100.0%



648



(210
)


−24.5%



858    29




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##### Table of Contents



Accounting for Costs Associated with Exit or Disposal
    Activities.
    Interest
    Income and Expense
  2006


Change


Change


2005


Change


Change


2004$


%





$2,377



875



58.3%



1,502



802



114.6%



700     Other
    Income/(Expense), net
  2006


Change


2005


Change


2004(In thousands)Other income/(expense), net

$
2



300.0%


$
(1
)


−100.0
%

$
(204
)Change in fair value on
    revaluation of warrants

$




0.0%


$
789



N/A


$
     paid-in-capital
  Income
    Taxes
   30




---



##### Table of Contents



Form 10-K
  Liquidity
    and Capital Resources
  2006


Change


2005


Change


2004(Dollars in thousands)Cash, cash equivalents, restricted
    cash and short-term investments

$
48,669



−0.3%


$
48,830



−4
%

$
50,743     2006


2005


2004(In thousands)Net cash provided by (used) in
    operating activities

$
505


$
(2,460
)

$
(17,242
)Net cash provided by (used) in
    investing activities


11,482



2,981



(37,043
)Net cash provided by financing
    activities


20



496



41,754Net increase (decrease) in cash
    and cash equivalents

$
12,007


$
1,017


$
(12,531
)         
    In May 2004, in a public offering on
    Form S-1,
    the Company sold 3,450,000 shares of newly issued common
    stock, $0.001 par value, at $13.00 per share resulting in net
    cash proceeds of $41.5 million after issuance costs of
    $3.3 million.
    Cash proceeds from exercises of stock options were $20,000,
    $496,000, $242,000 for the years ended December 31, 2006,
    2005, and 2004, respectively.     31




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##### Table of Contents



Contractual
    Obligations
    Payments Due by PeriodLess than


1 to 3


4 to 5


More thanContractual Obligations

Total


1 Year


Years


Years


5 Years(In thousands)Operating lease obligations(1)

$
2,874,000


$
2,304,000


$
570,000


$
0


$
0Purchase obligations(2)

$
300,000


$
300,000


$
0


$
0


$
0Total

$
3,174,000


$
2,604,000


$
570,000


$
0


$
0     (1)
    
    Consists of estimated contractual lease obligations under our
    leases for our facilities in Costa Mesa and Carlsbad, California.(2)
    
    Amounts reflect open purchase obligations as of
    December 31, 2006.      Off-Balance
    Sheet Arrangements
  Regulation S-K)
  Indemnifications
   32




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##### Table of Contents



Future
    Capital Requirements
      Recent
    Accounting Pronouncements
    ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK   33




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##### Table of Contents



Total


Fair


AverageShort-term investments

Cost


Market Value


Interest RateDecember 31, 2006

$
48,548


$
48,552



5.27%December 31, 2005

$
46,903


$
46,058



4.06%December 31, 2004

$
49,055


$
48,988



2.39%   available-for-sale
  December 31, 2006Gross


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gains


Losses


Fair ValueGovernment agencies

$
31,876


$
2


$



$
31,878Commercial Paper


2,010



2







2,012Money market funds


14,662











14,662Total
    available-for-sale
    investments

$
48,548


$
4


$




48,552Less: amounts classified as cash
    equivalents














(14,662
)$
33,890   December 31, 2005Gross


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gains


Losses


Fair ValueUS government agencies

$
30,612


$



$
(31
)

$
30,581Commercial paper


15,482







(5
)


15,477Money market funds


2,638











2,638Total
    available-for-sale
    investments

$
48,732


$



$
(36
)


48,696Less: amounts classified as cash
    equivalents














(2,638
)$
46,058     available-for-sale
  December 31, 2006


December 31, 2005Amortized


Estimated


Amortized


EstimatedCost


Fair Value


Cost


Fair ValueDue in less than one year

$
48,548


$
48,552


$
48,732


$
48,696Due in one year or moreTotal
    available-for-sale
    investments

$
48,548


$
48,552


$
48,732


$
48,696  34




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##### Table of Contents



ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  ARDEA
    PHARMACEUTICALS, INC.
  INDEX TO
    FINANCIAL STATEMENTS
  Report of
    Stonefield Josephson, Inc., Independent Registered Public
    Accounting Firm


36Balance
    Sheets


37Statements of
    Operations


38Statements of
    Stockholders Equity


39Statements of Cash
    Flows


40Notes to Financial
    Statements


41  35




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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.)
              36




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##### Table of Contents



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


December 31,2006


2005(In thousands)ASSETSCurrent assets:Cash and cash equivalents

$
14,779


$
2,772Short-term investments


33,890



46,058Prepaid expenses and other current
    assets


845



341Total current assets


49,514



49,171Property and equipment, net


726



Total assets

$
50,240


$
49,171LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
234


$
58Accrued clinical liabilities


4



99Other accrued liabilities


938



194Total current liabilities


1,176



351Other Commitments and
    contingencies (Note 6)Stockholders equity:Convertible preferred stock,
    $0.001 par value: 5,000,000 shares authorized;
    300 shares outstanding and $3,000 aggregate liquidation
    preference at December 31, 2006 and December 31, 2005


1,634



1,634Common stock, $0.001 par value:
    70,000,000 shares authorized at December 31, 2006 and
    December 31, 2005; 9,362,191 and 9,287,685 shares
    outstanding at December 31, 2006 and December 31,
    2005, respectively


9



9Additional paid-in capital


283,594



282,828Deferred stock compensation






(45
)Accumulated other comprehensive
    income (loss)


4



(36
)Accumulated deficit


(236,177
)


(235,570
)Total stockholders equity


49,064



48,820Total liabilities and
    stockholders equity

$
50,240


$
49,171    37




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (formerly IntraBiotics Pharmaceuticals, Inc.)
 STATEMENTS
    OF OPERATIONS  Year Ended December 31,2006


2005


2004(In thousands,except per share amounts)Operating expenses:Research and development

$
72


$
255


$
11,519General and administrative


2,674



2,980



4,819Restructuring charge






648



858Total operating expenses


2,746



3,883



17,196Operating loss


(2,746
)


(3,883
)


(17,196
)Interest Income


2,377



1,502



700Other Income (expense), net


2



(1
)


(204
)Change in fair value on
    revaluation of warrants






(789
)


Net loss


(367
)


(3,171
)


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


(240
)


(240
)


(260
)Net loss applicable to common
    stockholders

$
(607
)

$
(3,411
)

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

$
(0.07
)

$
(0.37
)

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


9,326



9,134



7,559    38




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (formerly IntraBiotics Pharmaceuticals, Inc.)
 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,
    2003

$
1,771



5,298


$
5


$
239,237


$
(188
)

$
2


$
(215,199
)

$
25,628Issuance of common stock upon
    exercise of options for cash






87



1



241















242Issuance of common stock in a
    public offering, net of $3,337 issuance costs






3,450



3



41,509















41,512Issuance of common stock as
    dividend on series A preferred stock






41







260











(260
)


Issuance of common stock upon
    exercise of warrants






4























Amortization of deferred stock
    compensation


















61











61Stock compensation for variable
    option awards














(638
)














(638
)Stock compensation for consultant
    services














472















472Cancellation of stock options
    related to employee terminations














(13
)


13











Comprehensive loss:Net loss


























(16,700
)


(16,700
)Unrealized loss on securities






















(69
)






(69
)Comprehensive loss






























(16,769
)Balances at December 31,
    2004

$
1,771



8,880


$
9


$
281,068


$
(114
)

$
(67
)

$
(232,159
)

$
50,508Issuance of common stock upon
    exercise of options for cash






179







496















496Issuance of common stock as
    dividend on series A preferred stock






66







245











(240
)


5Issuance of common stock upon
    conversion of series A preferred stock


(137
)


132







137















Issuance of common stock upon
    exercise of warrants






31Change due to revaluation of
    warrants














789















789Amortization of deferred stock
    compensation


















50











50Stock compensation for variable
    option awards














(38
)














(38
)Stock compensation for consultant
    services














150















150Cancellation of stock options
    related to employee terminations














(19
)


19











Comprehensive loss:Net loss


























(3,171
)


(3,171
)Unrealized gain on securities






















31







31Comprehensive loss






























(3,140
)Balances at December 31,
    2005

$
1,634



9,288


$
9


$
282,828


$
(45
)

$
(36
)

$
(235,570
)

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






8







20















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






66







240











(240
)


Issuance of directors and employee
    stock compensation














558















558Amortization of deferred stock
    compensation














(45
)


45











Stock compensation  other














(7
)














(7
)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
)

$
49,064    39




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (formerly IntraBiotics Pharmaceuticals, Inc.)
 STATEMENTS
    OF CASH FLOWS  Year Ended December 31,2006


2005


2004(In thousands)Operating activitiesNet loss

$
(367
)

$
(3,171
)

$
(16,700
)Adjustments to reconcile net loss
    to net cash used in operating activities:Change due to revaluation of
    warrants






789



Stock compensation for employee
    services


558







Stock compensation for variable
    option awards


(9
)


(38
)


(638
)Amortization of deferred stock
    compensation






50



61Stock compensation for consultant
    services


2



150



472Depreciation and amortization






9



35Loss on disposal of property and
    equipment






27



33Change in assets and liabilities:Restricted cash










250Prepaid expenses and other current
    assets


(504
)


55



82Other assets










184Accounts payable


176



(96
)


13Accrued clinical liabilities


(95
)


(62
)


(885
)Accrued employee liabilities






(89
)


(12
)Accrued restructuring charges






(5
)


5Other accrued liabilities


744



(79
)


(142
)Net cash provided by (used) in
    operating activities


505



(2,460
)


(17,242
)Investing activitiesCapital expenditures


(726
)






(94
)Proceeds from sale of property and
    equipment






10Purchase of short term investments


(200,024
)


(193,022
)


(65,167
)Proceeds from sale or maturity of
    short-term investments


212,232



195,993



28,218Net cash provided by (used) in
    investing activities


11,482



2,981



(37,043
)Financing activityProceeds from issuance of common
    stock, net of issuance costs


20



496



41,754Net cash provided by financing
    activities


20



496



41,754Net increase (decrease) in cash
    and cash equivalents


12,007



1,017



(12,531
)Cash and cash equivalents at
    beginning of the year


2,772



1,755



14,286Cash and cash equivalents at end
    of the year

$
14,779


$
2,772


$
1,755Supplemental disclosure of
    non-cash information:Net deferred stock compensation
    (cancellations due to employee termination)

$



$
(19
)

$
(13
)Issuance of common stock dividend
    on Series A preferred stock

$
(240
)

$
(245
)

$
(260
)Issuance of common stock upon
    conversion of Series A preferred stock

$



$
(137
)

$
    40




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
 NOTES TO
    FINANCIAL STATEMENTS  1.  Description
    of Business
    day-to-day
        proof-of-concept
 41




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  2.  Summary
    of Significant Accounting Policies and Concentrations of
    Risk
  Use of
    Estimates
      Concentrations
    of Credit Risk and Fair Value of Financial
    Instruments
      Cash
    Equivalents and Short-Term Investments
  available-for-sale. available-for-sale available-for-sale
  Property
    and Equipment
    Research
    and Development
   42




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Restructuring
    Charges
    Clinical
    Trial Accruals
    Stock-Based
    Compensation
        one-for-one
 43




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    No. 96-18, Accounting for Equity Instruments That Are Issued to
    Other Than Employees for Acquiring, or in Conjunction with
    Selling, Goods or Services,
      Year Ended December 31,2005


2004(In thousands, except share amounts)Net loss applicable to common
    stockholders, as reported

$
(3,411
)

$
(16,960
)Add: Stock-based employee
    compensation expense (recovery) included in reported net loss
    applicable to common stockholders


12



(577
)Deduct: Total stock-based employee
    compensation expense determined under fair value based method
    for all awards


(1,824
)


(7,049
)Net loss applicable to common
    stockholders, pro forma

$
(5,223
)

$
(24,586
)Net loss per share applicable to
    common stockholders:Basic and diluted  as
    reported

$
(0.37
)

$
(2.24
)Basic and diluted  pro
    forma

$
(0.57
)

$
(3.25
)     Year Ended December 31,2005


2004Risk-free interest rate


3.79
%


3.55
%Volatility


0.25



1.00Dividend yield


0.00
%


0.00
%Expected life of option


6.1 years



5 years    44




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Comprehensive
    Loss
    Year Ended December 31,2006


2005


2004Net loss

$
(367
)

$
(3,171
)

$
(16,700
)Unrealized gain (loss) on
    available-for-sale
    securities


40



31



(69
)Comprehensive loss

$
(327
)

$
(3,140
)

$
(16,769
)   Net
    Loss Per Share
  Earnings Per Share
  Recent
    Accounting Pronouncements
      
    In February 2006, the Financial Accounting Standards Board
    (FASB) issued SFAS No. 155
    Accounting for Certain Hybrid Financial Instruments, an
    amendment of FASB Statements No. 133 and 140. SFAS
    No. 155 amends SFAS No. 133, Accounting for
    Derivative Instruments and Hedging Activities, and
    SFAS No. 140, Accounting for Transfers and
    Servicing of Financial Assets and Extinguishments of
    Liabilities. SFAS No. 155 resolves issues
    addressed in Statement 133 Implementation Issue No. D1,
    Application of Statement 133 to Beneficial Interests in
    Securitized Financial Assets. SFAS No. 155 permits
    fair value remeasurement for any hybrid financial instrument
    that contains an embedded derivative that otherwise would
    require bifurcation, clarifies which interest-only strips and
    principal-only strips are not subject to the requirements of
    SFAS No. 133, establishes a requirement to evaluate
    interests in securitized financial assets to identify interests
    that are freestanding derivatives or that are hybrid financial
    instruments that contain an embedded derivative requiring
    bifurcation, clarifies that concentrations of credit risk in the 45




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  form of subordination are not embedded derivatives and amends
    SFAS No. 140 to eliminate the prohibition on a
    qualifying special-purpose entity from holding a derivative
    financial instrument that pertains to a beneficial interest
    other than another derivative financial instrument.
    SFAS No. 155 is effective for all financial instruments
    acquired or issued after the beginning of the Companys
    first fiscal year that begins after September 15, 2006,
    with earlier adoption permitted. We do not anticipate that this
    SFAS will have any material impact on our financial condition or
    results of operations.  
    Effective February 3, 2006, the FASB decided to move
    forward with the issuance of a final FSP
    FAS 123R-4
    Classification of Options and Similar Instruments Issued as
    Employee Compensation that Allow for Cash Settlement upon the
    Occurrence of a Contingent Event. The guidance in this FSP
    FAS 123R-4
    amends paragraphs 32 and A229 of FASB Statement
    No. 123R to incorporate the concept articulated in footnote
    16 of FAS 123R. That is, a cash settlement feature that can
    be exercised only upon the occurrence of a contingent event that
    is outside the employees control does not meet the
    condition in paragraphs 32 and A229 until it becomes
    probable that the event will occur. Originally under
    FAS 123R, a provision in a share-based payment plan that
    required an entity to settle outstanding options in cash upon
    the occurrence of any contingent event required classification
    and accounting for the share based payment as a liability. This
    caused an issue under certain awards that require or permit, at
    the holders election, cash settlement of the option or
    similar instrument upon (a) a change in control or other
    liquidity event of the entity or (b) death or disability of
    the holder. With this new FSP, these types of cash settlement
    features will not require liability accounting so long as the
    feature can be exercised only upon the occurrence of a
    contingent event that is outside the employees control
    (such as an initial public offering) until it becomes probable
    that event will occur. The guidance in this FSP shall be applied
    upon initial adoption of Statement 123(R). An entity that
    adopted Statement 123(R) prior to the issuance of the FSP shall
    apply the guidance in the FSP in the first reporting period
    beginning after February 2006. Early application of FSP
    FAS 123R-4
    is permitted in periods for which financial statements have not
    yet been issued. We do not anticipate that this FAS will have
    any material impact on our financial condition or results of
    operations.
    In March 2006, the FASB issued SFAS No. 156
    (SFAS 156), Accounting for Servicing of
    Financial Assets  An Amendment of FASB Statement
    No. 140. Among other requirements, SFAS 156
    requires a company to recognize a servicing asset or servicing
    liability when it undertakes an obligation to service a
    financial asset by entering into a servicing contract under
    certain situations. Under SFAS 156 an election can also be
    made for subsequent fair value measurement of servicing assets
    and servicing liabilities by class, thus simplifying the
    accounting and provide for income statement recognition of
    potential offsetting changes in the fair value of servicing
    assets, servicing liabilities and related derivative
    instruments. SFAS No. 156 is effective for fiscal
    years beginning after September 15, 2006. We do not
    anticipate that this SFAS will have any material impact on our
    financial condition or results of operations.
    In July 2006, the FASB issued Financial Interpretation
    No. 48, Accounting for Uncertainty in Income Taxes-an
    interpretation of FASB Statement No. 109
    (FIN 48), which is a change in accounting for
    income taxes. FIN 48 specifies how tax benefits for
    uncertain tax positions are to be recognized, measured, and
    derecognized in financial statements; requires certain
    disclosures of uncertain tax matters; specifies how reserves for
    uncertain tax positions should be classified on the balance
    sheet; and provides transition and interim period guidance,
    among other provisions. FIN 48 is effective for fiscal
    years beginning after December 15, 2006. We do not
    anticipate that this FASB will have any material impact on our
    financial condition or results of operations.
    In September 2006, the FASB issued SFAS No. 157
    (SFAS 157), Fair Value
    Measurements. Among other requirements,
    SFAS No. 157 defines fair value and establishes a
    framework for measuring fair value and also expands disclosure
    about the use of fair value to measure assets and liabilities.
    SFAS No. 157 is 46




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  effective beginning the first fiscal year after
    November 15, 2007. The Company is currently evaluating the
    impact of SFAS No. 157 on its financial position and
    results of operations.  
    In September 2006, the SEC issued SAB No. 108,
    Considering the Effects of Prior Year Misstatements When
    Quantifying Misstatements in Current Year Financial
    Statements (SAB 108), which provides
    interpretive guidance on how the effects of the carryover or
    reversal of prior year misstatements should be considered in
    quantifying a current year misstatement. The guidance is
    applicable for fiscal years ending after November 15, 2006.
    We do not anticipate that this SAB will have any material impact
    on our financial condition or results of operations.
    In September, 2006, the FASB issued SFAS No 158,
    Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans (FAS 158).
    FAS 158 requires companies to fully recognize the
    obligations associated with single-employer defined benefit
    pension, retiree healthcare and other postretirement plans in
    their financial statements. As we do not have defined benefit
    pensions or other postretirement plans, FAS 158 will have
    no impact on our financial statements or results of operations.  3.  Available-For-Sale
    Investments
  available-for-sale
  December, 31 2006Gross


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gains


Losses


Fair ValueGovernment agencies

$
31,876


$
2


$



$
31,878Commercial Paper


2,010



2







2,012Money market funds


14,662











14,662Total
    available-for-sale
    investments

$
48,548


$
4


$




48,552Less: amounts classified as cash
    equivalents














(14,662
)$
33,890   December, 31 2005Gross


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gains


Losses


Fair ValueUS government agencies

$
30,612


$



$
(31
)

$
30,581Commercial paper


15,482







(5
)


15,477Money market funds


2,638











2,638Total
    available-for-sale
    investments

$
48,732


$



$
(36
)


48,696Less: amounts classified as cash
    equivalents














(2,638
)$
46,058    47




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  available-for-sale
  December 31, 2006


December 31, 2005Amortized


Estimated


Amortized


EstimatedCost


Fair Value


Cost


Fair ValueDue in less than one year

$
48,548


$
48,552


$
48,731


$
48,696Due in one year or more














Total
    available-for-sale
    investments

$
48,548


$
48,552


$
48,731


$
48,696   4.  Property
    and Equipment
    December 31,2006


2005Machinery and equipment

$
726


$
Less: Accumulated depreciation






Property and equipment, net

$
726


$
     5.  Other
    Accrued Liabilities
    December 31,2006


2005Accrued professional fees

$
28


$
104Accrued dividends on Series A
    convertible stock


60



60Legal fees


316



30Accrued payroll


219



Accrued accounts payable


237



Other accrued liabilities


78



Total other accrued liabilities

$
938


$
194   6.  Commitments
    and contingencies
  proof-of-concept
 48




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
        7.  Restructuring
    and Other Charges
  2004
    Restructuring
      2005
    Restructuring
    8.  Acquisition
     49




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  proof-of-concept
    
    Fixed assets of approximately $4.3 million,
    Intangible assets of approximately $300,000, and
    Goodwill of approximately $500,000.      9.  Stockholders
    Equity
  Preferred
    Stock
     50




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
            paid-in-capital
   51




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##### Table of Contents



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


3,629,421Warrants


1,148,138Series A convertible
    preferred stock


1,578,346Total shares reserved for future
    issuance


6,355,905     Warrants
       52




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  10.  Employee
    Benefit Plans
  Stock
    Option Plans and Stock-Based Compensation
          Adoption
    of SFAS No. 123 (R)
   53




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Stock
    Compensation Expense
        Determining
    Fair Value
  Valuation and amortization method
  Expected Term
  Expected Volatility
  Risk-Free Interest Rate
  Expected Dividend
 54




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  Estimated Forfeiture
    Year Ended December 31,2006


2005


2004Risk-free interest rate


4.66
%


3.79
%


3.55
%Volatility


0.25



0.25



1.00Dividend yield


0.00
%


0.00
%


0.00
%Expected life of option


6.1 years



6.1 years



5 years     Stock
    Options and Awards Activities
    Outstanding OptionsWeighted Average


AggregateNumber of


Exercise


Remaining


IntrinsicShares


Price


Contract Life


Value (000s)Balance at December 31, 2005


570,667


$
8.92



7.08



325,334Granted


902,500


$
3.88







430,150Exercised


(8,333
)

$
Forfeitures and cancellations


(119,000
)

$
10.10Balance at December 31, 2006


1,345,834


$
5.45



8.58


$
755,484Vested and expected to Vest at
    December 31, 2006


1,345,834


$
5.45



8.58


$
755,484Exercisable at December 31,
    2006


385,410


$
7.78



5.7


$
316,590   in-the-money in-the-money
 55




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##### Table of Contents



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





Options exercisableNumber of


Contractual Life


Weighted Average


Number of


Weighted-AverageRange of Exercise Prices

Shares


(years)


Exercise Price


Shares


Exercise Price$2.76


203,334



4.01



2.76



194,994


$
2.76$3.50


37,500



9.12



3.50






$
3.50$3.90


865,000



9.97



3.90



10,000


$
3.90$4.08


20,000



8.01



4.08



20,000


$
4.08$13.06


100,000



7.35



13.06



64,583


$
13.06$13.93


40,000



7.44



13.93



33,333


$
13.93$16.49


80,000



7.09



16.49



62,500


$
16.49Totals


1,345,834



8.58



5.45



385,410


$
7.78   Pro-forma
    Disclosures
    Year Ended December 31,2005


2004(In thousands, except share amounts)Net loss applicable to common
    stockholders, as reported

$
(3,411
)

$
(16,960
)Add: Stock-based employee
    compensation expense (recovery) included in reported net loss
    applicable to common stockholders


12



(577
)Deduct: Total stock-based employee
    compensation expense determined under fair value based method
    for all awards


(1,824
)


(7,049
)Net loss applicable to common
    stockholders, pro forma

$
(5,223
)

$
(24,586
)Net loss per share applicable to
    common stockholders:Basic and diluted  as
    reported

$
(0.37
)

$
(2.24
)Basic and diluted  pro
    forma

$
(0.57
)

$
(3.25
)     Retirement
    Savings Plan
   56




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
  11.  Income
    Taxes
    Year Ended December 31,2006


2005


2004U.S. federal taxes (benefit)at statutory rate

$
(124
)

$
(1,078
)

$
(5,678
)State










Unutilized (utilized) net
    operating losses


115



753



5,875Stock Based Compensation


9



55



(200
)Non-deductible warrant expense






268



Other


0



2



3Total

$



$



$
     Year Ended December 31,2005


2006Deferred Tax Assets:Net operating loss carryforwards

$
16,200


$
74,900Research and development credits


5,700



5,400Capitalized research and
    development costs


8,600



8,600Other, net


1,200



1,100Total Deferred Tax Assets


31,700



90,000Valuation Allowance

$
(31,700
)

$
(90,000
)Net Deferred Tax Assets

$



$
          57




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
    (Formerly IntraBiotics Pharmaceuticals, Inc.)
    NOTES TO FINANCIAL
    STATEMENTS  (Continued)
    12.  Legal
    Proceedings
    13.  Quarterly
    Financial Data (Unaudited)
  2006


2005First


Second


Third


Fourth


First


Second


Third


FourthOperating loss

$
(667
)

$
(554
)

$
(463
)

$
(1,062
)

$
(1,383
)

$
(1,585
)

$
(540
)

$
(375
)Net income (loss)


(150
)


23



176



(416
)


(1,074
)


(1,246
)


(144
)


(707
)Net income (loss) applicable to
    common stockholders


(210
)


(37
)


116



(476
)


(1,134
)


(1,306
)


(204
)


(767
)Basic and diluted income (loss)
    per share applicable to common stockholders

$
(0.02
)

$



$
0.01


$
(0.05
)

$
(0.13
)

$
(0.14
)

$
(0.02
)

$
(0.08
)Stock sales prices per share:High

$
3.70


$
3.70


$
3.99


$
4.37


$
4.07


$
3.62


$
3.75


$
3.95Low

$
3.35


$
3.42


$
3.46


$
3.70


$
3.57


$
3.34


$
3.40


$
3.40  58




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##### Table of Contents



ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE   ITEM 9A.  CONTROLS
    AND PROCEDURES  Section 13a-15(e)
    Disclosure
    Controls and Procedures
    Scope of
    the Controls Evaluation
  Form 10-Q Form 10-K.
 ITEM 9B.  OTHER
    INFORMATION   59




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##### Table of Contents



PART III  ITEM 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE  Executive
    Officers
    Name

Age


Position Held With ArdeaBarry D. Quart, Pharm.D


50


President and Chief Executive
    Officer and DirectorZhi Hong, Ph.D.


43


Executive Vice President of
    Research and Chief Scientific OfficerChristopher W. Krueger


39


Senior Vice President and Chief
    Business OfficerKimberly J. Manhard


47


Senior Vice President of
    Regulatory Affairs and OperationsDenis Hickey


62


Chief Financial OfficerHenry J. Fuchs, M.D.


49


DirectorJack S. Remington, M.D.


76


DirectorKevin C. Tang


40


Director   Barry D. Quart, Pharm.D. ® ® ® ®
  Zhi Hong, Ph.D.
  Christopher W. Krueger.
 60




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##### Table of Contents



Kimberly J. Manhard.
  Denis Hickey.
  Henry J. Fuchs, M.D. ® ®
  Jack S. Remington, M.D.
  Kevin C. Tang.
  Section 16(a)
    Beneficial Ownership Reporting Compliance
   61




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##### Table of Contents



Code
    of Ethics
  Regulation S-K.
  Board
    Committees and Meetings
      case-by-case
  ITEM 11.
    EXECUTIVE
    COMPENSATION  Compensation
    Discussion and Analysis
     62




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##### Table of Contents



Compensation
    Program Objectives and Rewards
    
    Attract, engage and retain the workforce that helps ensure our
    future success;
    Motivate and inspire employee behavior that fosters stockholder
    value; and
    Support overall business objectives approved by our Board.    
    Overall compensation should favor equity and discretionary
    rewards rather than base salary;
    Cash compensation should be paid in a way that motivates
    employees to achieve corporate goals; and
    Compensation programs should be simple to understand and
    administer.      
    Base salary and benefits are designed to attract and retain
    employees by satisfying basic needs and by paying them fairly
    within industry standards.
    Annual cash bonuses are designed to focus executives on
    achieving our current years objectives as defined in our
    business plan, which may change throughout the year.
    Long-term incentives, which consist of stock options, are
    designed to reward executives for long-term success over several
    years, as reflected in increases in our stock price.
    Severance and
    change-in-control
    arrangements are designed to attract and retain executives in a
    marketplace where such protections are commonly offered and
    ensure that employees continue to remain focused on our business
    in the event of rumored or actual fundamental corporate changes,
    particularly where their employment may be terminated.  Elements
    of Executive Compensation
  Base Salary.
  Performance Bonuses.
 63




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##### Table of Contents



Signing Bonuses.
  
    recognize that Dr. Quart and Ms. Manhard had their own
    businesses and all three officers had extensive experience in
    the development and registration of drugs for the treatment of
    HIV and cancer, and
    recognize the significant role that each contributed over a long
    period prior to their employment in completing the transaction
    with Valeant. In the case of Dr. Quart and
    Ms. Manhard, amounts that each earned as our consultants
    prior to their commencement of employment were also considered
    in determining the amount of their bonuses.  Stock Options.
  
    In early 2006 we had agreed with Dr. Quart that if he
    assisted us in the identification and successful acquisition of
    a pharmaceutical program, we would hire him as our Chief
    Executive Officer at the closing of the transaction and grant
    him an option on the date of hire. Our Board determined that it
    was important to keep this contractual obligation.
    Given the roles that Dr. Quart, Dr. Hong and
    Ms. Manhard had in ensuring the success of the Valeant
    transaction, the Board determined that it was equitable to grant
    all options on the same date.
    It was unclear to the Board whether the announcement of the
    acquisition would be perceived by our stockholders as a positive
    or negative event given our cash position and their likely
    expectations about our future.
    It was determined that the executives should bear some risk and
    be able to participate in some reward associated with any stock
    movement related to the announcement of the Valeant transaction.        Post Employment Compensation.
 64




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##### Table of Contents



Change-In-Control.
  Summary
    Compensation Table
    Summary
    Compensation Table(1)
  Option

All OtherName and Principal Position

Year

Salary

Bonus

Awards(4)

Compensation

Total($)

($)

($)

($)

($)Barry D. Quart, Pharm.D.


2006






$
250,000


$
553,400


$
256,000


$
1,059,400President, Chief Executive
    Officer and Director(2)Denis Hickey


2006















255,280



255,280Chief Financial
    Officer(3)


2005















96,000



96,000Zhi Hong, Ph.D.


2006


$
8,438



150,000



387,380







545,818Executive Vice President of
    Research
    and Chief Scientific Officer(2)Kimberly J. Manhard


2006







50,000



242,112



88,125



380,237Senior Vice President of
    Regulatory Affairs
    and Operations(2)     (1)
    
    In accordance with the rules of the SEC, the compensation
    described in this table does not include various perquisites and
    other benefits received by a named executive officer which do
    not exceed $10,000 in the aggregate.(2)
    
    Barry D. Quart, Pharm.D., Zhi Hong Ph.D. and Kimberly J.
    Manhard commenced employment on December 21, 2006.
    Dr. Quart and Ms. Manhard began receiving a salary on
    January 1, 2007. The amounts shown under the column
    All Other Compensation for Dr. Quart and
    Ms. Manhard represent consulting fees paid in 2006.(3)
    
    Denis Hickey, currently serving as our Chief Financial Officer,
    is a consultant to the Company and an employee of
    Hickey & Hill. The amount shown under the column
    All Other Compensation represents the aggregate
    amount we paid to Hickey & Hill for their services to
    us, which include the services of Mr. Hickey. For 2006,
    such amounts are comprised of (i) monthly fees in the
    aggregate amount of $152,400, (ii) a bonus in the amount of
    $60,000 and (iii) overtime hours in the aggregate of
    $42,880. For 2005, such amounts are comprised of (i) a one
    time fee of $20,000, (ii) monthly fees in the aggregate
    amount of $72,000 and (iii) a bonus in the amount of
    $10,000. Our agreement with Hickey & Hill is described
    under Employment Contracts and Termination of Employment
    and
    Change-in-Control
    Arrangements elsewhere in this Annual Report on Form
    10-K.(4)
    
    See footnote 10 to our financial statements included in this
    annual report for a discussion of the valuation of stock options
    under SFAS 123 (R). 65




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##### Table of Contents



Grants of
    Plan-Based Awards
    Grants of
    Plan-Based Awards in Fiscal 2006
  Estimated Future Payouts


Estimated Future PayoutsUnder Non-Equity Incentive


Under Equity Incentive


Exercise orGrant


Plan Awards (1)


Plan Awards (2)


Base Price ofName

Date


Threshold


Target


Maximum


Threshold


Target


Maximum


Option Awards($)


($)


($)


(#)


(#)


(#)


($/Sh)Barry D. Quart, Pharm.D


12/21/2006






$
140,000











400,000






$
3.90Denis Hickey


12/21/2006



















10,000







3.90Zhi Hong, Ph.D.


12/21/2006







112,000











280,000







3.90Kimberly J. Manhard


12/21/2006







75,000











175,000







3.90     (1)
    
    Amounts reflect target bonus amounts contained in each
    executives employment agreement. Bonuses are payable at
    the discretion of our Board based on the Boards evaluation
    of the executives performance for 2006. Because of the
    early nature of our operations, our Board has not yet set
    specific performance objectives for the executives for 2006.(2)
    
    Amounts reflect total number of shares underlying options
    granted in 2006. Such options are subject to vesting as set
    forth below, in Potential Payments Upon Termination Or
    Change-in-Control.  Outstanding
    Equity Awards at Fiscal Year-End.
    Outstanding
    Equity Awards At December 31, 2006
  Option AwardsNumber of


Number ofSecurities


Securities


Equity Incentive PlanUnderlying


Underlying


Awards: Number ofUnexercised


Unexercised


Securities Underlying


OptionOptions


Options


Unexercised Unearned


Exercise


Option(#)


(#)


Options


Price


ExpirationName

Exercisable


Unexercisable


(#)


($)


DateBarry D. Quart, Pharm.D






400,000






$
3.90



12/21/16Denis Hickey


10,000











3.90



12/21/16Zhi Hong, Ph.D.






280,000







3.90



12/21/16Kimberly J. Manhard






175,000







3.90



12/21/16   Option
    Exercises and Stock Vested
    Post-Employment
    Compensation  Pension Benefits.
    Deferred
    Compensation  Nonqualified Deferred Compensation for
    Fiscal 2006
   66




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##### Table of Contents



Potential
    Payments Upon Termination or
    Change-in-Control
         67




---



##### Table of Contents



Director
    Compensation
    Director
    Compensation for Fiscal 2006
  Fees Earnedor Paid


OptionName

in Cash


Awards


Total($)


($) (1)


($)Henry J. Fuchs, M.D.

$
20,000


$
6,921


$
26,921Jack S. Remington, M.D.


20,000



6,921



26,921Kevin C. Tang


20,000



6,921



26,921     (1)
    
    See footnote 10 to our financial statements included in this
    annual report for a discussion of the valuation of stock options
    under SFAS 123 (R).  Compensation
    Committee Interlocks and Insider Participation
    Compensation
    Committee Report
  Form 10-K. Form 10-K
  BARRY
    D. QUART, PHARM.D.
   HENRY
    J. FUCHS, M.D.
   JACK
    S. REMINGTON, M.D.
   KEVIN
    C. TANG
  68




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##### Table of Contents



ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS  Shares Available
    for Issuance Under Equity Compensation Plans
    Number of SecuritiesNumber of Securities





Remaining Availableto be Issued Upon


Weighted-average


for Issuance UnderExercise of


Exercise Price of


Equity CompensationOutstanding Options,


Outstanding Options,


Plans (ExcludingWarrants and


Warrants and


Securities ReflectedRights(a)


Rights(b)


in Column (a))Equity compensation plans
    approved by security holders2000 Employee Stock Purchase Plan


283,334


$
7.41



2004 Stock Incentive Plan


1,062,500


$
8.94



2,227,337Equity compensation plans not
    approved by security holders2002 Non-Officer Equity Incentive
    Plan





$
4.70



56,250Total


1,345,834


$
5.45



2,283,587     (1)
    
    Generally, on each December 31, the 2000 Employee Stock
    Purchase Plan share reserve will increase automatically by the
    lesser of (i) 1% of the outstanding Common Stock,
    (ii) 41,666 shares, or (iii) a lesser amount
    determined by the Board. However, this plan was suspended in
    March 2003, and consequently there are currently no securities
    reserved for issuance under this plan.(2)
    
    The number of shares of common stock reserved for issuance under
    the 2004 Stock Incentive Plan will automatically increase on the
    first trading day in January each calendar year, beginning in
    calendar year 2005, by an amount equal to five percent of the
    sum of the following share numbers, calculated as of the last
    trading day in December of the immediately preceding calendar
    year: (i) the total number of shares of our common stock
    outstanding on that date and (ii) the number of shares of
    common stock into which the outstanding shares of our preferred
    stock are convertible on that date. In no event will any such
    annual increase exceed 2,000,000 shares. Accordingly, the
    number of shares available for issuance increased by 547,027
    from the number shown in the table above, on January 3,
    2006.    2002
    Non-Officer Equity Incentive Plan
  General.
 69




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##### Table of Contents



Adjustment Provisions.
  Effect of Certain Corporate Transactions.
     70




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##### Table of Contents



Security
    Ownership Of
    Certain Beneficial Owners And Management
    Beneficial Ownership (1)Beneficial Owner

Number of Shares

Percent of TotalKevin C. Tang(2)


3,340,296



31.09%Tang Capital Partners, L.P.(3)
    4401 Eastgate Mall
    San Diego, CA 92121


3,014,913



28.23%Entities affiliated with Baker
    Biotech Funds(4)
    667 Madison Avenue, 17th Floor,
    New York, NY 10021


2,926,610



27.77%Entities affiliated with Andreeff
    Equity Advisors, L.L.C.(5)
    450 Laurel Street
    Suite 2105
    Baton Rouge, Louisiana 70801


1,203,848



12.84%Deutsche Bank AG
    Taunusanlage 12
    D-60325 Frankfurt am Main Federal
    Republic of Germany


897,642



9.57%Henry J. Fuchs, M.D.(6)


385,000



3.94%Jack S. Remington, M.D.(7)


68,334



*Denis Hickey(8)


14,200



*Barry D. Quart, Pharm.D.


0



0%Zhi Hong, Ph.D.


0



0%Kimberly J. Manhard


0



0%All executive officers and
    directors as a group (7 persons)(9)


3,729,100



33.54%     *
    
    Less than one percent of the outstanding common shares.(1)
    
    Unless otherwise indicated, the principal address of each of the
    stockholders named in this table is: c/o Ardea Biosciences,
    Inc., 2131 Palomar Airport Road, Suite 300, Carlsbad,
    California 92011. Applicable percentages are based on
    9,376,799 shares outstanding on February 15, 2007.
    Shares of common stock that (a) may be issued upon the
    conversion of Series A preferred stock, (b) may be
    issued upon the exercise of warrants and (c) are subject to
    options to purchase common stock which are currently exercisable
    or which will become exercisable within 60 days after
    February 15, 2007 are deemed outstanding for purposes of
    computing the percentage of the person or group holding such
    convertible stock, warrants or options, but are not deemed
    outstanding for computing the percentage of any other person or
    group.(2)
    
    Includes 3,014,913 shares owned of record or acquirable by
    Tang Capital Partners, L.P., for which Tang Capital Management,
    L.L.C., of which Mr. Tang serves as Managing Director,
    serves as General Partner. Mr. Tang shares voting and
    dispositive power over such shares with Tang Capital Management,
    L.L.C. and Tang Capital Partners, L.P. Also includes
    15,089 shares owned of record by Mr. Tang and
    65,000 shares that Mr. Tang can acquire within
    60 days of February 15, 2007 through the exercise of
    51,111 vested stock options and the early exercise of 13,889
    unvested stock options that are subject to early exercise. In
    the event that Mr. Tang early exercises his unvested stock
    options, the shares purchased would be subject to a right of
    repurchase by the 71




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##### Table of Contents



Company. With respect to the remaining 245,294 shares that
    Mr. Tang may be deemed to beneficially own, Mr. Tang
    has shared voting and dispositive power over
    129,242 shares, shared dispositive power and no voting
    power over 49,000 shares and sole voting and dispositive
    power over 67,052 shares. Mr. Tang disclaims
    beneficial ownership of all of the shares reflected herein
    except to the extent of his pecuniary interest therein.(3)
    
    Includes 1,712,451 shares held by Tang Capital Partners,
    L.P. and 1,302,462 shares that Tang Capital Partners, L.P.
    has a right to acquire upon exercise of warrants and conversion
    of Series A preferred stock it holds. Tang Capital
    Partners, L.P. shares voting and dispositive power over such
    shares with Tang Capital Management, L.L.C. and Kevin C. Tang.(4)
    
    Information is based upon the Schedule 13D/A filed by
    Baker/Tisch Investments on February 2, 2007. Comprises
    (i) 15,373 shares of common stock and
    63,134 shares of common stock that may be issued upon the
    conversion of Series A preferred stock and the exercise of
    warrants held by Baker/Tisch Investments, L.P., a limited
    partnership of which the sole general partner is Baker/Tisch
    Capital L.P., a limited partnership of which the sole general
    partner is Baker/Tisch Capital (GP), LLC;
    (ii) 48,567 shares of common stock and
    42,770 shares of common stock that may be issued upon the
    conversion of Series A preferred stock and the exercise of
    warrants held by Baker Bros. Investments, L.P., a limited
    partnership of which the sole general partner is Baker Bros.
    Capital L.P., a limited partnership of which the sole general
    partner is Baker Bros. Capital (GP), LLC;
    (iii) 54,600 shares of common stock and
    50,650 shares of common stock that may be issued upon the
    conversion of Series A preferred stock and the exercise of
    warrants held by Baker Bros. Investments II, L.P., a limited
    partnership of which the sole general partner is Baker Bros.
    Capital L.P., a limited partnership of which the sole general
    partner is Baker Bros. Capital (GP), LLC;
    (iv) 625,286 shares of common stock and
    474,521 shares of common stock that may be issued upon the
    conversion of Series A preferred stock and the exercise of
    warrants held by held by Baker Biotech Fund I, L.P., a
    limited partnership of which the sole general partner is Baker
    Biotech Capital, L.P., a limited partnership of which the sole
    general partner is Baker Biotech Capital (GP), LLC;
    (v) 1,000,989 shares of common stock and
    531,580 shares of common stock that may be issued upon the
    conversion of Series A preferred stock and the exercise of
    warrants held by Baker Brothers Life Sciences, L.P., a limited
    partnership of which the sole general partner is Baker Brothers
    Life Sciences Capital, L.P., a limited partnership of which the
    sole general partner is Baker Brothers Life Sciences Capital
    (GP), LLC; (vi) 19,140 shares held by 14159, L.P., a
    limited partnership of which the sole general partner is 14159
    Capital, L.P., a limited partnership of which the sole general
    partner is 14159 Capital (GP), LLC. Felix Baker and Julian Baker
    are the controlling members of Baker/Tisch Capital (GP), LLC,
    Baker Bros. Capital (GP), LLC, Baker Biotech Capital (GP), LLC,
    Baker Brothers Life Sciences Capital (GP), LLC, and 14159
    Capital (GP), LLC.(5)
    
    Includes shares held of record by Andreeff Equity Advisors,
    L.L.C., which shares beneficial ownership with the following
    affiliates of Andreeff Equity Advisors, L.L.C.: Maple Leaf
    Capital I, L.L.C., Maple Leaf Offshore, Ltd., Maple Leaf
    Partners, L.P., Maple Leaf Partners I, L.P. and Dane Andreeff.
    Dane Andreeff is the Managing Member of Andreeff Equity
    Advisors, L.L.C.(6)
    
    Includes 332,916 shares issuable upon exercise of options
    that are vested or will become vested within 60 days of
    February 15, 2007. The remaining 52,084 shares may be
    issued upon early exercise, but will be subject to repurchase by
    the Company until the options to purchase such shares have
    vested.(7)
    
    Includes 55,000 shares issuable upon exercise of options
    that are vested or will become vested within 60 days of
    February 15, 2007. The remaining 13,334 shares may be
    issued upon early exercise, but will be subject to repurchase by
    the Company until the options to purchase such shares have
    vested.(8)
    
    Includes 10,000 shares issuable upon exercise of options
    that are exercisable or will become exercisable within
    60 days of February 15, 2007.(9)
    
    Includes 438,188 shares issuable upon exercise of options
    that are exercisable or will become exercisable within
    60 days of February 15, 2007 and 1,302,462 shares
    of common stock issuable upon exercise of warrants and
    conversion of Series A preferred stock held by Tang Capital
    Partners. 72




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##### Table of Contents



ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE  Related-Person
    Transactions Policy and Procedures
    Certain
    Related-Person Transactions
    out-of-the-ordinary
    Change-In-Control
  Director
    Independence
     73




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##### Table of Contents



ITEM 14.  PRINCIPAL
    ACCOUNTING FEES AND SERVICES  Principal
    Accountant Fees and Services
      Fiscal Year Ended2006


2005Audit fees


125,823



123,000Audit-related feesTax fees






3,200All other fees






2,688$
125,823


$
128,888     Pre-Approval
    Policies and Procedures.
  case-by-case
   74




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##### Table of Contents



PART IV ITEM 15.  EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES  Financial Statements
  Form 10-K. Form 10-K.
  Financial Statement Schedules
  Form 10-K.
  Exhibit Index
  Form 10-K.
  Exhibits
  Form 10-K.
  Financial Statement Schedules
   75




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##### Table of Contents



SIGNATURES
      By:
    /s/  BARRY
    D. QUART, PHARM.D.     By:
    /s/  DENIS
    HICKEY     POWER OF
    ATTORNEY
  Form 10-K,
    Signature

Title

Date/s/  BARRY
    D. QUART,
    PHARM.D.Barry
    D. Quart, Pharm.D.

Chief Executive Officer(Principal Executive Officer)

April 2, 2007/s/  DENIS
    HICKEYDenis
    Hickey

Chief Financial Officer(Principal Financial and Accounting Officer)

April 2, 2007/s/  HENRY
    J. FUCHS,
    M.D.Henry
    J. Fuchs, M.D.

Director

April 2, 2007/s/  JACK
    S. REMINGTON,
    M.D.Jack
    S. Remington, M.D.

Director

April 2, 2007/s/  KEVIN
    C. TANGKevin
    C. Tang

Director

April 2, 2007  76




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##### Table of Contents



EXHIBIT INDEX
  Exhibit

Document Description2
.1

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

Certificate of Amendment of
    Amended and Restated Certificate of Incorporation; and Amended
    and Restated Certificate of Incorporation.(12)3
.2

Amended and Restated Bylaws.(16)3
.3

Certificate of Amendment to
    Amended and Restated Certificate of Incorporation.(15)3
.4

Certificate of Designation filed
    with the Delaware Secretary of State on May 1, 2003.(15)3
.5

Certificate of Ownership and
    Merger filed with the Delaware Secretary of State December 21,
    2006. (20)4
.1

Amended and Restated Investor
    Rights Agreement dated October 15, 1999.(1)4
.2

Form of Stock Purchase Agreement
    by and between the Company and each selling stockholder, dated
    January 29, 2002.(3)4
.3

Form of Preferred Stock and
    Warrant Purchase Agreement, dated February 5, 2003, as
    amended on February 11, 2003.(8)4
.4

Form of Second Amendment to
    Preferred Stock and Warrant Purchase Agreement of
    February 5, 2003, dated April 10, 2003.(10)4
.5

Form of Warrant issued by the
    Company pursuant to Preferred Stock and Warrant Purchase
    Agreement of February 5, 2003, as amended of
    February 11, 2003 and April 10, 2003.(10)4
.6

Form of Common Stock and Warrant
    Purchase Agreement, dated October 6, 2003.(11)4
.7

Form of Warrant issued by the
    Company pursuant to the Common Stock and Warrant Purchase
    Agreement of October 6, 2003.(11)10
.1

Form of Indemnity Agreement.(1)10
.2

Amended and Restated 1995 Stock
    Option Plan, as amended on November 16, 2002.(7)(9)10
.3

Amended and Restated Form of Stock
    Option Agreement and Notice of Grant of Stock Options and Option
    Agreement.(1)(7)10
.4

2000 Equity Incentive Plan, as
    amended on February 11, 2003.(7)(9)10
.5

2000 Employee Stock Purchase Plan
    and related documents.(1)(7)10
.6

Senior Executive Severance Benefit
    Plan, as amended and restated on August 1, 2002.(5)(7)10
.7

Executive Severance Benefit Plan,
    as amended and restated on August 1, 2002.(5)(7)10
.8

Summary of Officer Incentive Bonus
    Plan.(2)(7)10
.9

Release Agreement by and between
    the Company and Diversa Corporation dated July 27, 2001,
    including Warrant to Purchase Common Stock of the Company and
    Registration Rights Agreement.(4)10
.10

2002 Non-Officer Equity Incentive
    Plan and related documents, as amended on February 3,
    2003.(7)(9)10
.11

Lease Termination Agreement by and
    between the Company and EOP-Shoreline Technology Park, L.L.C.,
    dated November 22, 2002, including Common Stock Purchase
    Agreement.(6)10
.12

Amendment and Assignment of Lease,
    Release and Assumption Agreement by and among the Company,
    PolyFuel, Inc. and 1245 Terra Bella Partners, LLC, dated
    December 20, 2002, including Purchase Common Stock of the
    Company dated December 31, 2002.(9)10
.13

Common Stock and Warrant Purchase
    Agreement, dated October 6, 2003 (the Purchase
    Agreement) by and among the Company and each Investor as
    defined therein.(11)10
.14

Form of warrant issued by the
    Company in favor of each Investor, as defined in the Purchase
    Agreement.(11)10
.15

2004 Stock Incentive Plan.(7)10
.16

Services Agreement between the
    Company and Hickey & Hill.(7)(17) 77




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##### Table of Contents



Exhibit

Document Description10
.17

Amendment to Services Agreement,
    between the Company and Hickey & Hill, Inc.(18)10
.18

Third Amendment to Services
    Agreement, dated as of November 1, 2006, by and between
    IntraBiotics Pharmaceuticals, Inc. and Hickey & Hill,
    Inc.(19)10
.19

Master Services Agreement with
    Valeant Research & Development dated December 21,
    2006.(20)10
.20

Noncompetition Agreement with
    Valeant Research & Development dated December 21,
    2006.(20)10
.21

Lease Agreement with Valeant
    Pharmaceuticals North America dated December 21, 2006.(20)10
.22

Employment Agreement with Barry
    Quart, Pharm.D.(7)(20)10
.23

Employment Agreement with Zhi
    Hong.(7)(20)10
.24

Employment Agreement with
    Kimberly J Manhard.(7)(20)23
.1

Consent of Independent Registered
    Public Accounting Firm.24
.1

Power of Attorney (included in the
    signature page to this Form 10-K).31
.1

Certification of Chief Executive
    Officer pursuant to Section 302 of the Public Company
    Accounting Reform and Investor Protection Act of 2002
    (18 U.S.C. §1350, as adopted).31
.2

Certification of Chief Financial
    Officer pursuant to Section 302 of the Public Company
    Accounting Reform and Investor Protection Act of 2002
    (18 U.S.C. §1350, as adopted).32
.1

Certification of Chief Executive
    Officer and Chief Financial Officer pursuant to Section 906
    of the Public Company Accounting Reform and Investor Protection
    Act of 2002 (18 U.S.C. §1350, as adopted).     
    
    We have applied for confidential treatment of certain provisions
    of this exhibit with the Securities and Exchange Commission. The
    confidential portions of this exhibit are marked by an asterisk
    and have been omitted and filed separately with the Securities
    and Exchange Commission pursuant to our request for confidential
    treatment.
    
    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 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.(2)
    
    Incorporated by reference to our
    Form 10-Q
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    August 14, 2001.(3)
    
    Incorporated by reference to our Registration Statement on
    Form S-3
    (File
    No. 333-82934)
    filed with the Securities and Exchange Commission on
    February 15, 2002.(4)
    
    Incorporated by reference to our Registration Statement on
    Form S-3
    (File
    No. 333-89840)
    filed with the Securities and Exchange Commission on
    June 5, 2002.(5)
    
    Incorporated by reference to our
    Form 10-Q
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    November 14, 2002.(6)
    
    Incorporated by reference to our
    Form 8-K
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    November 27, 2002.(7)
    
    Management contract or compensatory plan, contract or
    arrangement.(8)
    
    Incorporated by reference to Appendix B to the Definitive
    Proxy Statement for the Special Meeting of Stockholders (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    March 3, 2003.(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 10-Q
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    May 14, 2003.(11)
    
    Incorporated by reference to our
    Form 8-K
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    October 9, 2003. 78




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##### Table of Contents



(12)
    
    Incorporated by reference to our
    Form 10-Q
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    November 12, 2003.(14)
    
    Incorporated by reference to our
    Form 8-K/A
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    November 18, 2004.(15)
    
    Incorporated by reference to our
    Form 10-K
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    March 10, 2005.(16)
    
    Incorporated by reference to our
    Form 10-Q
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    May 12, 2005.(17)
    
    Incorporated by reference to our
    Form 10-Q
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    July 21, 2005.(18)
    
    Incorporated by reference to our
    Form 8-K
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    June 29, 2006.(19)
    
    Incorporated by reference to our
    Form 10-Q
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    November 7, 2006.(20)
    
    Incorporated by reference to our
    Form 8-K
    (File
    No. 000-29993)
    filed with the Securities and Exchange Commission on
    December 28, 2006. 79