##### Table of Contents





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

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal
    year ended December 31, 2010oro

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

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

(I.R.S. Employer
    Identification No.)4939 Directors Place
    San Diego, CA(Address of principal
    executive offices)

92121(Zip
    Code)   Registrants telephone number, including area code:
 (858) 652-6500
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of each class:

Name of each exchange on which registered:Common Stock, par value $0.001 per share

The Nasdaq Global Select Market   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-T o o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  Large
    accelerated
    filer o
    Accelerated
    filer þ
    Non-accelerated
    filer o
    Smaller
    reporting
    company o   Rule 12b-2 o þ
    Documents Incorporated by Reference




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##### 





TABLE OF
    CONTENTS
   
 PART IItem 1.


Business


1Item 1A.


Risk Factors


8Item 1B.


Unresolved Staff Comments


24Item 2.


Properties


24Item 3.


Legal Proceedings


24Item 4.


Reserved


24PART IIItem 5.


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


24Item 6.


Selected Financial Data


27Item 7.


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


28Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk


34Item 8.


Financial Statements and Supplementary Data


35Item 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


35Item 9A.


Controls and Procedures


35Item 9B.


Other Information


37PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


37Item 11.


Executive Compensation


37Item 12.


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


37Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


37Item 14.


Principal Accountant Fees and Services


37PART IVItem 15.


Exhibits, Financial Statement Schedules


38Signatures


41EX-10.8EX-23.1EX-23.2EX-31.1EX-31.2EX-32.1   i




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FORWARD-LOOKING
    STATEMENTS
    and/or
   ii




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

Target Indication

Development StatusLesinurad (RDEA594)

Gout

Phase 2 completedNext-generation URAT1 inhibitors

Gout

Preclinical development ongoingBAY 86-9766
    (RDEA119)

Cancer

Phase 2 ongoing   GOUT
    lesinurad ®
  30-40 percent
    
    Positive, top-line results from a Phase 2b study (Study
    203) in 208 allopurinol-refractory gout patients
    demonstrated that adding lesinurad to allopurinol produced
    highly statistically significant additional reductions in sUA of
    up to 30 percent over that observed on allopurinol alone.
    This resulted in a response rate of 79 percent for the
    600 mg dose using the more rigorous
    intent-to-treat
    (ITT) analysis, which considers all patients without efficacy
    results at week 4 as non-responders, including those who
    discontinue for any reason. Using a last observation
    carried forward (LOCF) analysis, which was the method
    utilized 1




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for the U.S. approval of febuxostat, 89 percent of
    patients taking the combination reached the medically
    recommended target of reducing sUA to below 6 mg/dL at the
    highest dose tested. Response rates on this study increased in a
    dose-related manner and were highly clinically and statistically
    significant at all dose levels when compared to allopurinol
    alone. The combination of lesinurad and allopurinol was also
    well tolerated, with no serious adverse events and only two
    discontinuations due to adverse events on the combination.  
    In a Phase 1b clinical pharmacology study evaluating the use of
    lesinurad in combination with febuxostat (Study 111) in 21
    gout patients with hyperuricemia (sUA greater than or equal to
    8 mg/dL), 100 percent of patients receiving the
    combination of lesinurad and febuxostat achieved sUA levels
    below the medically recommended target level of 6 mg/dL,
    compared to 67 percent and 56 percent for patients
    receiving 40 mg and 80 mg, respectively, of febuxostat
    alone. At the highest combination doses tested (600 mg
    lesinurad combined with 80 mg febuxostat), 100 percent
    of patients reached sUA levels below 4 mg/dL, with
    58 percent achieving levels below 3 mg/dL. No patient
    achieved these reduced sUA levels on either dose of febuxostat
    alone. The combination of lesinurad and febuxostat was also well
    tolerated, with no serious adverse events or discontinuations
    due to adverse events and no clinically relevant drug
    interactions observed between lesinurad and febuxostat.
    In a 20-patient Phase 1b clinical pharmacology study evaluating
    the use of lesinurad in combination with 300 mg of
    allopurinol (Study 110) in gout patients with hyperuricemia
    (sUA greater than or equal to 8mg/dL), 100 percent of
    patients at all combination doses evaluated achieved sUA levels
    below the target of 6 mg/dL, compared to 20 percent of
    patients on allopurinol alone. The combination of lesinurad and
    allopurinol was well tolerated, with no serious adverse events
    or discontinuations that were considered possibly related to
    lesinurad or the combination.
    When administered as a single agent in a Phase 2b study (Study
    202), lesinurad was well tolerated and produced significant
    reductions in uric acid in the blood. In this randomized,
    double-blind, placebo-controlled, dose-escalation study of 123
    gout patients with hyperuricemia, uric acid levels decreased and
    response rates increased in a dose-related manner and were
    highly clinically and statistically significant at the two
    highest doses tested. At the highest dose, the response rate was
    60 percent, compared to 0 percent for placebo (p
    < 0.0001). Lesinurad was also well tolerated in this study,
    with no serious adverse events and only two discontinuations due
    to adverse events on lesinurad.
    Results from multiple studies have indicated that the activity
    of lesinurad is not diminished in patients with mild renal
    impairment. A smaller dataset from Study 202 indicate that after
    4 weeks of monotherapy with lesinurad, patients with
    moderate renal impairment had similar reductions in sUA as
    compared to patients with no renal impairment.
    Based on findings thus far, single and multiple doses of
    lesinurad from 5 mg to 600 mg appear to be well
    tolerated and safe both alone and in combination with
    allopurinol or febuxostat.      CANCER
  86-9766,
 2




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86-9766 86-9766 in vitro in vivo. in vitro in vivo 86-9766 ®
  86-9766
  86-9766 86-9766
  86-9766 86-9766 86-9766
  Market
    Opportunity
    1988-2005
    86-9766
  Bayer
    Relationship
  86-9766
 3




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86-9766 86-9766 86-9766
  Valeant
    Relationship
  86-9766 86-9766
  Clinical
    Supplies and Manufacturing
    Sales and
    Marketing
    Customers
    and Distribution
    Competition
   4




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




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Regulation
    in the United States
    
    preclinical studies;
    submission of an Investigational New Drug application, or IND,
    for clinical trials;
    adequate and well-controlled human clinical trials to establish
    safety and efficacy of the product;
    review of a New Drug Application, or NDA; and
    inspection of the facilities used in the manufacturing of the
    drug to assess compliance with the FDAs current Good
    Manufacturing Practices, or cGMP, regulations.    86-9766
            follow-up follow-up
 6




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follow-up
      direct-to-consumer
  and/or
  Regulation Outside
    the United States
    Additional
    Regulation
  Third-Party
    Reimbursement
    country-by-country
 7




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




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Risks
    Related to Our Business
  Our
    success depends substantially on our most advanced product
    candidate, lesinurad (previously called RDEA594). We cannot be
    certain that this product candidate will receive regulatory
    approval or be successfully commercialized.
        
    not deem a product candidate safe and effective;
    not find the data from preclinical studies and clinical trials
    sufficient to support approval;
    not agree with our interpretation and characterization of
    efficacy and safety data from our clinical trials;
    require additional preclinical or clinical studies;
    not approve of our third-party manufacturers processes and
    facilities; or
    change its approval policies, adopt new regulations, or provide
    new guidance or change its view regarding guidance previously
    provided.  end-of-Phase end-of-Phase
   9




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Development
    of our products will take years; we may never attain product
    sales; and we expect to continue to incur net operating
    losses.
  86-9766
  We are
    not currently profitable and may never become
    profitable.
    Because
    the results of preclinical studies and early clinical trials are
    not necessarily predictive of future results, we can provide no
    assurances that lesinurad, BAY
    86-9766
    (RDEA119) or any other of our product candidates will have
    favorable results in future clinical trials or receive
    regulatory approval.
  and/or and/or
  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.
   10




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
    delays in demonstrating sufficient safety and efficacy to obtain
    regulatory approval to commence a clinical trial;
    delays in reaching agreement on acceptable terms with
    prospective contract research organizations and clinical trial
    sites;
    delays in manufacturing quantities of a product candidate
    sufficient for clinical trials;
    delays in obtaining approval of an IND from the FDA or similar
    foreign approval;
    delays in obtaining institutional review board approval to
    conduct a clinical trial at a prospective site; and
    insufficient financial resources.    Once
    clinical testing of lesinurad, BAY
    86-9766
    (RDEA119) and other potential product candidates has commenced,
    the termination, or delays in the completion, of clinical
    testing could result in increased costs to us and delay or
    prevent us from generating revenues.
    
    ongoing discussions with the FDA or other regulatory authorities
    regarding the scope or design of our clinical trials or FDA
    requests for supplemental information with respect to our
    clinical trial results;
    failure to conduct clinical trials in accordance with regulatory
    requirements;
    lower than anticipated recruitment rate or retention rate of
    patients in clinical trials;
    the imposition of a clinical hold;
    lack of adequate funding to continue clinical trials;
    negative results of clinical trials;
    changes to clinical trials protocols;
    failure on the part of clinical investigators or contract
    research organizations to properly carry out their contractual
    obligations, adhere to clinical protocols or meet expected
    deadlines;
    insufficient supply or deficient quality of product candidates
    or other materials necessary for the conduct of our clinical
    trials; or
    serious adverse events or other undesirable drug-related side
    effects experienced by clinical trial participants.   11




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If our
    efforts to develop and commercialize lesinurad are unsuccessful,
    we may be required to obtain rights to new products or product
    candidates from third parties, which we may not be able to
    do.
    
    our inability to purchase or license products or product
    candidates on terms that would allow us to make a sufficient
    financial return from resulting products;
    competitors may be unwilling to assign or license products or
    product candidate rights to us; or
    we may be unable to identify suitable products or product
    candidates within, or complementary to, our areas of interest or
    capabilities.    If we
    successfully complete clinical trials for lesinurad or any other
    product candidate, there are no assurances that we will be able
    to submit, or obtain regulatory approval of, a new drug
    application.
    If we
    successfully develop products, but those products do not achieve
    and maintain market acceptance, our business will not be
    profitable.
  86-9766
  
    our ability to provide acceptable evidence of safety and
    efficacy of our products;
    relative convenience and ease of administration of products;
    the prevalence and severity of any adverse side effects from the
    products;
    the availability of alternative treatments;
    pricing and cost effectiveness of products; and
    sufficient third-party insurance coverage or reimbursement. 12




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
    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 may
    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.
    
    advance lesinurad and any other product candidates through the,
    development and regulatory review and approval process;
    establish and maintain manufacturing, sales and marketing
    operations;
    commercialize lesinurad or other product candidates, if any,
    that receive regulatory approval; and
    acquire rights to products or product candidates, technologies
    or businesses.    
    the rate of progress and cost of our research and development
    activities;
    the scope, prioritization and number of preclinical studies and
    clinical trials we pursue;
    the costs of filing, prosecuting, defending and enforcing any
    patent claims and other intellectual property rights;
    the costs and timing of regulatory approval;
    the costs of establishing or contracting for manufacturing,
    sales and marketing capabilities;
    the effects of competing technological and market developments;
    the terms and timing of any collaborative, licensing and other
    arrangements that we may establish; and
    the extent to which we acquire or license new technologies,
    products or product candidates.   13




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Raising
    additional funds by issuing securities or through additional
    collaboration and licensing arrangements may cause dilution to
    existing stockholders, restrict our operations or require us to
    relinquish proprietary rights.
    We
    have decreased the size of our organization and may need to do
    so again in the future, and we may experience difficulties in
    managing these organizational changes.
      The
    investment of our cash balance and investments in marketable
    securities are subject to risks which may cause losses and
    affect the liquidity of these investments.
  sub-prime
  We
    depend on collaborations with other parties to develop and
    commercialize selected product candidates and to provide
    substantially all of our revenues.
   14




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Conflicts
    may arise between us and any of our collaborators that could
    delay or prevent the development or commercialization of our
    product candidates.
    
    unwillingness on the part of a collaborator to pay us milestone
    payments or royalties we believe are due to us under our
    collaboration or license agreement;
    unwillingness on the part of a collaborator to keep us informed
    regarding the progress of its development and commercialization
    activities or to permit public disclosure of the results of
    those activities;
    slowing or cessation of a collaborators development or
    commercialization efforts with respect to our product
    candidates; or
    costly and time-consuming litigation or dispute resolution  We
    depend on outside parties to conduct our preclinical and
    clinical trials, which may result in costs and delays that
    prevent us from obtaining regulatory approval or successfully
    commercializing product candidates.
   15




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We do
    not have internal manufacturing capabilities, and if we fail to
    develop and maintain internal capabilities or supply
    relationships with collaborators or other outside manufacturers,
    we may be unable to develop or commercialize any
    products.
    If we
    are unable to establish sales and marketing capabilities or
    enter into agreements with other parties to sell and market any
    products we may develop, we may be unable to generate product
    revenue.
    If we
    are unable to attract and retain key management and scientific
    staff, we may be unable to successfully develop or commercialize
    our product candidates.
   16




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Our
    quarterly results and stock price may fluctuate
    significantly.
    
    whether or not we achieve specified milestones under any
    agreement that we enter into with collaborators and the timely
    payment by potential commercial collaborators of any amounts
    payable to us or by us to Valeant or any other party, including
    the milestone payments that we may make to Valeant;
    the addition or termination of research or development programs
    or funding support;
    the status of development of our product candidates, including
    results of preclinical studies and any future clinical trials;
    variations in the level of expenses related to the development
    and commercialization of our product candidates or potential
    product candidates during any given period;
    our execution of collaborative, licensing or other arrangements,
    and the timing and accounting treatment of payments we make or
    receive under these arrangements;
    our selection of additional compounds for development; and
    fluctuations in the stock prices of other companies in the
    biotechnology and pharmaceuticals industries and in the
    financial markets generally.    If we
    make any acquisition, we will incur a variety of costs, and we
    may never realize the anticipated benefits of the
    acquisition.
    
    assumption and exposure to unknown liabilities of an acquired
    business;
    disruption of our business and diversion of our
    managements time and attention to acquiring and developing
    acquired products or technologies;
    incurrence of substantial debt or dilutive issuances of
    securities to pay for acquisitions;
    disagreements over interpretation of contractual terms in the
    acquisition agreements;
    higher than expected acquisition and integration costs;
    increased amortization expenses;
    negative effect on our earnings (or loss) per share;
    difficulties in combining and integrating the operations and
    personnel of any acquired businesses with our operations and
    personnel; 17




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
    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.
    Our
    business and operations would suffer in the event of system
    failures.
    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.
  86-9766
  Failure
    to maintain effective internal controls in accordance with
    Section 404 of the Sarbanes-Oxley Act could have a material
    adverse effect on our business and stock price.
   18




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Risks
    Related to Our Industry
  Because
    our product candidates and development and collaboration efforts
    depend on our intellectual property rights, adverse events
    affecting our intellectual property rights will harm our ability
    to commercialize products.
      
    we might not have been the first to make, conceive or reduce to
    practice the inventions covered by any or all of our pending
    patent applications;
    we might not have been the first to file patent applications for
    these inventions;
    others may independently develop similar or alternative
    technologies or duplicate any of our technologies;
    it is possible that none of our pending patent applications will
    result in issued patents;
    our issued or acquired patents may not provide a basis for
    commercially viable products, may not provide us with any
    competitive advantages, or may be challenged by other parties; 19




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
    our issued patents may not be valid or enforceable; or
    the patents of others may have an adverse effect on our business.        and/or
  Our
    business depends upon not infringing the rights of
    others.
      
    cease selling, incorporating or using any of our products that
    incorporate the challenged intellectual property;
    obtain a license from the holder of the infringed intellectual
    property right, which license may be costly or may not be
    available on reasonable terms, if at all; or
    redesign our processes so that they do not infringe, which could
    be costly and time-consuming and may not be possible. 20




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Confidentiality
    agreements with employees and others may not adequately prevent
    disclosure of trade secrets and other proprietary information
    and may not adequately protect our intellectual
    property.
    Many
    of our competitors have significantly more resources and
    experience, which may harm our commercial
    opportunity.
    
    research and development;
    preclinical testing;
    clinical trials;
    regulatory approvals;
    manufacturing; and
    sales and marketing of approved products.    If our
    competitors develop treatments for gout or cancer that are
    approved faster, marketed better or demonstrated to be safer or
    more effective than any products that we or our partners may
    develop, our commercial opportunity will be reduced or
    eliminated.
   21




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If we
    cannot establish favorable pricing of lesinurad and other
    product candidates acceptable to the United States or foreign
    governments, insurance companies, managed care organizations and
    other payors, or arrange for favorable reimbursement policies,
    any product sales will be severely hindered.
        Product
    liability claims may damage our reputation and, if insurance
    proves inadequate, the product liability claims may harm our
    results of operations.
   22




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Any
    claims relating to our improper handling, storage or disposal of
    biological, hazardous and radioactive materials could be
    time-consuming and costly.
    Risks
    Related to Our Common Stock
  Directors,
    executive officers, principal stockholders and affiliated
    entities beneficially own or control a significant majority of
    our outstanding voting common stock and together control our
    activities.
    Future
    sales of our common stock may cause our stock price to
    decline.
    Anti-takeover
    provisions in our charter documents and under Delaware law may
    make it more difficult to acquire us.
    
    allow the authorized number of directors to be changed only by
    resolution of our Board of Directors;
    require that stockholder actions must be effected at a duly
    called stockholder meeting and prohibit stockholder action by
    written consent;
    establish advance notice requirements for nominations to our
    Board of Directors or for proposals that can be acted on at
    stockholder meetings;
    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.   23




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We
    have never paid cash dividends on our common stock and we do not
    anticipate paying dividends in the foreseeable
    future.
    ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS.    ITEM 2.
    PROPERTIES.  sub-lease sub-lease sub-lease
  ITEM 3.
    LEGAL
    PROCEEDINGS.    ITEM 4.
    RESERVED. PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES.  Unregistered
    Sales of Equity Securities and Use of Proceeds
   24




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Information
    About Our Common Stock
    High


LowYear Ended December 31, 2010First Quarter

$
19.43


$
13.77Second Quarter

$
27.78


$
19.58Third Quarter

$
24.97


$
17.80Fourth Quarter

$
26.97


$
20.75   High


LowYear Ended December 31, 2009First Quarter

$
15.00


$
10.00Second Quarter

$
16.75


$
8.78Third Quarter

$
21.35


$
15.85Fourth Quarter

$
18.93


$
12.18   Holders
    Dividend
    Policy
    Information
    About Our Equity Compensation Plans
  Form 10-K.
 25




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Stock
    Performance Graph
      
  12/31/2005


12/31/2006


12/31/2007


12/31/2008


12/31/2009


12/31/2010Ardea Biosciences, Inc.

$
100


$
120.78


$
423.82


$
331.58


$
387.81


$
720.22Nasdaq  US

$
100


$
109.84


$
119.14


$
57.41


$
82.53


$
97.95Nasdaq  Pharmaceuticals

$
100


$
97.88


$
102.94


$
95.78


$
107.62


$
116.66  26




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ITEM 6.
    SELECTED
    FINANCIAL DATA.  page F-3 Form 10-K.
  Year Ended December 31,2010


2009


2008


2007


2006(In thousands, except per share amounts)Consolidated Statements of Operations Data:Revenues:Milestones

$
15,000


$



$



$



$
License fees


8,100



20,442











Sponsored research


358







304



3,095



Reimbursable research and development costs


3,961



2,494











Total revenues


27,419



22,936



304



3,095



Operating expenses:Research and development


52,110



42,198



44,858



23,103



72General and administrative


16,452



10,689



11,921



7,566



2,674Loss from operations


(41,143
)


(29,951
)


(56,475
)


(27,574
)


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


364



386



1,524



2,128



2,377Interest expense


(866
)


(1,323
)


(215
)






Other income, net


14



21



171



375



2Total other income (expense)


(488
)


(916
)


1,480



2,503



2,379Net Loss


(41,631
)


(30,867
)


(54,995
)


(25,071
)


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










(60
)


(240
)


(240
)Net loss applicable to common stockholders

$
(41,631
)

$
(30,867
)

$
(55,055
)

$
(25,311
)

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

$
(1.91
)

$
(1.70
)

$
(3.79
)

$
(2.55
)

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


21,823



18,158



14,544



9,934



9,326Balance Sheet Data:Cash, cash equivalents and short-term investments

$
80,612


$
50,891


$
57,743


$
66,215


$
48,669Working capital

$
77,367


$
30,943


$
49,463


$
62,548


$
48,338Total assets

$
100,454


$
55,065


$
61,475


$
68,840


$
50,240Noncurrent portion of obligations under capital leases and notes
    payable

$
251


$
3,315


$
6,132


$



$
Accumulated deficit

$
(389,041
)

$
(347,410
)

$
(316,543
)

$
(261,488
)

$
(236,177
)Total stockholders equity

$
77,123


$
24,741


$
45,958


$
63,739


$
49,064  27




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##### Table of Contents



ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS.  Introduction
    
    Overview.  This section provides a general
    description of our business and operating expenses.
    Recent developments.  This section provides a
    general description of recent events and significant
    transactions that we believe are important in understanding our
    financial condition and results of operations.
    Critical accounting policies and
    estimates.  This section contains a discussion of
    the accounting policies that we believe are important to our
    financial condition and results of operations and that require
    significant judgment and estimates on the part of management in
    their application. In addition, all of our significant
    accounting policies, including the critical accounting policies
    and estimates, are summarized in Note 2 to the accompanying
    consolidated financial statements.
    Results of operations.  This section provides
    an analysis of our results of operations presented in the
    accompanying consolidated statements of operations by comparing
    the results for the year ended December 31, 2010 to the
    results for the year ended December 31, 2009 and comparing
    the results for the year ended December 31, 2009 to the
    results for the year ended December 31, 2008.
    Liquidity and capital resources.  This section
    provides an analysis of our cash flows and a discussion of our
    outstanding commitments and contingencies that existed as of
    December 31, 2010. Included in this discussion is our
    financial capacity to fund our future commitments and a
    discussion of other financing arrangements.  Overview
    
    Lesinurad (previously called RDEA594):  An
    inhibitor of the URAT1 kidney transporter for the treatment of
    hyperuricemia and gout;
    Next-generation URAT1 inhibitors:  Next
    generation URAT1 kidney transporter inhibitors for the treatment
    of hyperuricemia and gout; and
    BAY
    86-9766
    (formerly known as RDEA119):  A MEK inhibitor for
    the treatment of cancer.  Revenue
      Research
    and Development Expense
   28




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##### Table of Contents



General
    and Administrative Expense
    Other
    Income (Expense)
  available-for-sale,
  Recent
    Developments
  
    In December 2010, the United States Adopted Names Council (USAN)
    adopted lesinurad, pronounced le sin ure ad,
    as the USAN name for RDEA594.
    In January 2011, we announced positive, top-line results from a
    Phase 2b study (Study 203) in 208 allopurinol-refractory
    gout patients demonstrating that adding lesinurad to allopurinol
    produced highly statistically significant additional reductions
    in sUA of up to 30 percent over that observed on
    allopurinol alone. Using a last observation carried
    forward (LOCF) analysis, which was the method utilized for
    the U.S. approval of febuxostat, 89 percent of
    patients taking the combination achieved the medically
    recommended target of reducing sUA to below 6 mg/dL at the
    highest lesinurad dose tested. Response rates on this study
    increased in a dose-related manner and were highly clinically
    and statistically significant at all dose levels when compared
    to allopurinol alone. The combination of lesinurad and
    allopurinol was also well tolerated, with no serious adverse
    events and only two discontinuations due to adverse events on
    the combination.
    In February 2011, we completed an underwritten public offering
    of 3,162,500 shares of our common stock, including the full
    exercise of the overallotment option granted to the
    underwriters, at a price of $26.00 per share. Net proceeds from
    the sale of the shares, before expenses and after deducting
    underwriting discounts and commissions, were approximately
    $78.2 million.
    In January 2011, we received a $15 million milestone
    payment from Bayer Healthcare AG (Bayer) triggered by the
    initiation of a Phase 2 clinical study of BAY-86-9766 in
    combination with sorafenib
    (Nexavar®;

    Bayer, Onyx Pharmaceuticals) in patients with hepatocellular
    carcinoma or primary liver cancer. BAY
    86-9766,
    formerly known as RDEA119, is a potent, non-ATP competitive,
    highly selective inhibitor of mitogen-activated ERK kinase (MEK).  Critical
    Accounting Policies and Estimates
   29




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##### Table of Contents



Revenue
    Recognition
        Accrued
    Clinical Liabilities
    Share-Based
    Compensation
       30




---



##### Table of Contents



New
    Accounting Pronouncements
  Form 10-K.
  Results
    of Operations
  Years
    Ended December 31, 2010 and 2009
  Revenues
  86-9766 86-9766
  Research
    and Development Expense
    General
    and Administrative Expense
    Other
    Income (expense)
    Years
    Ended December 31, 2009 and 2008
  Revenues
   31




---



##### Table of Contents



Research
    and Development Expense
    General
    and Administrative Expense
    Other
    Income (expense)
    Liquidity
    and Capital Resources
         32




---



##### Table of Contents



33




---



##### Table of Contents



Payment due by periodLess than








More thanTotal


1 year


1-3 years


3-5 years


5 years(In thousands)Long-term debt obligations

$
4,030


$
3,875


$
91


$
64


$
Operating lease obligations


4,673



1,094



2,234



1,345



Capital lease obligations


279



122



90



67



Purchase Obligations


1,385



1,366



19







Total

$
10,367


$
6,457


$
2,434


$
1,476


$
         Off-Balance
    Sheet Arrangements
    ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.   34




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##### Table of Contents



ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA.  Form 10-K.
  ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE.    ITEM 9A.
    CONTROLS
    AND PROCEDURES.  (a) Disclosure Controls and Procedures; Changes in
    Internal Control Over Financial Reporting
  Rules 13a-15(e) 15d-15(e)
    (b) Management Report on Internal Control Over Financial
    Reporting
  Rule 13a-15(f) Rule 15d-15(f)
  
    pertain to the maintenance of records that in reasonable detail
    accurately and fairly reflect the transactions and dispositions
    of our assets;
    provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles, and
    that receipts and expenditures are being made only in accordance
    with authorizations of our management and directors; and
    provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of our
    assets that could have a material effect on our financial
    statements.       35




---



##### Table of Contents



Form 10-K
  (c) Report of Independent Registered Public Accounting
    Firm on Internal Control Over Financial Reporting
                 
    36




---



##### Table of Contents



ITEM 9B.
    OTHER
    INFORMATION.   PART III  ITEM 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.      ITEM 11.
    EXECUTIVE
    COMPENSATION.    ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS.    ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE.    ITEM 14.
    PRINCIPAL
    ACCOUNTANT FEES AND SERVICES.   37




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##### Table of Contents



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


F- 1Report of Independent Registered Public
    Accounting Firm (Stonefield Josephson, Inc.)


F- 2Consolidated Balance Sheets


F- 3Consolidated Statements of Operations


F- 4Consolidated Statements of Stockholders
    Equity


F- 5Consolidated Statements of Cash Flows


F- 6Notes to Consolidated Financial Statements


F- 7
   2.
    Financial Statement Schedules.    3.
    Exhibits.    Exhibit

Document Description2
.1

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

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

Amended and Restated Bylaws(3)4
.1

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

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

Form of Warrant issued by the Company pursuant to the Loan and
    Security Agreement dated November 12, 2008(11)4
.4

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

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

Form of Indemnity Agreement(8)10
.2*

Senior Executive Severance Benefit Plan, as amended and restated
    on November 7, 2008(11)10
.3*

Executive Severance Benefit Plan, as amended and restated on
    November 7, 2008(11)10
.4*

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

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

Amended and Restated Executive Employment Agreement, effective
    November 7, 2008, between the Company and Barry Quart(11)10
.7*

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

Ardea Biosciences, Inc. 2000 Employee Stock Purchase Plan10
.9*

Executive Employment Agreement, effective March 22, 2007,
    between the Company and Christopher W. Krueger(10) 38




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##### Table of Contents



Exhibit

Document Description10
.10*

Amended and Restated 2004 Stock Incentive Plan(17)10
.11

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

Sublease by and between Verenium Corporation and the Company
    dated October 2007(12)10
.13*

Executive Employment Agreement, effective as of May 27,
    2008, between the Company and John W. Beck(13)10
.14

Loan and Security Agreement, dated November 12, 2008, by
    and among Ardea Biosciences, Inc. and Oxford Finance Corporation
    and Silicon Valley Bank(11)10
.15

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

Development and Commercialization License Agreement, dated
    April 27, 2009, by and among Ardea Biosciences, Inc. and
    Bayer HealthCare AG(14)10
.17*

Executive Employment Agreement, effective April 6, 2010,
    between the Company and Stephen R. Davis(15)10
.18*

Form of Stock Issuance Agreement Under 2004 Stock Incentive
    Plan(16)23
.1

Consent of Independent Registered Public Accounting Firm (Marcum
    LLP)23
.2

Consent of Independent Registered Public Accounting Firm
    (Stonefield Josephson, Inc.)31
.1

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

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

Certification Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002     *
    
    Management contract or compensatory plan, contract or
    arrangement.
    
    Confidential treatment request has been granted with respect to
    certain portions of this exhibit. Omitted portions have been
    filed separately with the Securities and Exchange Commission.(1)
    
    Incorporated by reference to our
    Form 8-K
    (File No.
    000-29993)
    filed with the Securities and Exchange Commission on
    December 28, 2006.(2)
    
    Incorporated by reference to our
    Form 10-Q
    (File No.
    001-33734)
    filed with the Securities and Exchange Commission on
    November 13, 2008.(3)
    
    Incorporated by reference to our
    Form 8-K
    (File No.
    000-29993)
    filed with the Securities and Exchange Commission on
    August 2, 2007.(4)
    
    Incorporated by reference to our
    Form 8-K
    (File No.
    001-33734)
    filed with the Securities and Exchange Commission on
    December 20, 2007.(5)
    
    Incorporated by reference to our
    Form 8-K
    (File No.
    001-33734)
    filed with the Securities and Exchange Commission on
    January 10, 2008.(6)
    
    Incorporated by reference to our
    Form 8-K
    (File No.
    001-33734)
    filed with the Securities and Exchange Commission on
    December 19, 2008.(7)
    
    Incorporated by reference to our
    Form 8-K
    (File No.
    001-33734)
    filed with the Securities and Exchange Commission on
    December 22, 2008.(8)
    
    Incorporated by reference to our Registration Statement on
    Form S-1
    (File
    No. 333-95461)
    initially filed with the Securities and Exchange Commission on
    January 27, 2000 as subsequently amended.(9)
    
    Incorporated by reference to our
    Form 10-K
    (File No.
    000-29993)
    filed with the Securities and Exchange Commission on
    March 31, 2003.(10)
    
    Incorporated by reference to our
    Form 10-Q
    (File No.
    000-29993)
    filed with the Securities and Exchange Commission on May 8,
    2007.(11)
    
    Incorporated by reference to our
    Form 10-K
    (File No.
    001-33734)
    filed with the Securities and Exchange Commission on
    March 13, 2009. 39




---



##### Table of Contents



(12)
    
    Incorporated by reference to our
    Form 10-K
    (File No.
    001-33734)
    filed with the Securities and Exchange Commission on
    March 24, 2008.(13)
    
    Incorporated by reference to our
    Form 8-K
    (File No.
    001-33734)
    filed with the Securities and Exchange Commission on
    May 13, 2008.(14)
    
    Incorporated by reference to our
    Form 10-Q
    (File No.
    001-33734)
    filed with the Securities and Exchange Commission on
    August 7, 2009.(15)
    
    Incorporated by reference to our
    Form 10-Q
    (File No.
    001-33734)
    filed with the Securities and Exchange Commission on
    August 6, 2010.(16)
    
    Incorporated by reference to our
    Form 10-Q
    (File No.
    001-33734)
    filed with the Securities and Exchange Commission on
    November 9, 2010.(17)
    
    Incorporated by reference to our
    Form 10-K
    (File No. 001-33734) filed with the Securities and Exchange
    Commission on March 12, 2010. 40




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##### Table of Contents



SIGNATURES      BY:
    /s/  BARRY
    D. QUART       Signature

Title

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

President and Chief Executive Officer (Principal Executive
    Officer)

March 11, 2011/s/  JOHN
    W. BECKJohn
    W. Beck, C.P.A.

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

March 11, 2011/s/  FELIX
    J. BAKERFelix
    J. Baker, Ph.D.

Director

March 11, 2011/s/  HENRY
    J. FUCHSHenry
    J. Fuchs, M.D.

Director

March 11, 2011/s/  CRAIG
    A. JOHNSONCraig
    A. Johnson

Director

March 11, 2011/s/  JOHN
    W. POYHONENJohn
    W. Poyhonen

Director

March 11, 2011/s/  JACK
    S. REMINGTONJack
    S. Remington, M.D.

Director

March 11, 2011/s/  KEVIN
    C. TANGKevin
    C. Tang

Director

March 11, 2011  41




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM             
    F-1




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM           
    F-2




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  CONSOLIDATED BALANCE SHEETS
  December 31,


December 31,2010


2009(In thousands, except per share and par value amounts)ASSETSCurrent assets:Cash and cash equivalents

$
15,926


$
11,562Short-term investments,
    available-for-sale


64,686



39,329Receivables


16,959



1,433Prepaids and other current assets


518



215Total current assets


98,089



52,539Property and equipment, net


2,007



1,961Other assets


358



565Total assets

$
100,454


$
55,065LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
3,073


$
1,916Accrued clinical liabilities


5,681



4,072Accrued payroll and employee liabilities


2,802



2,138Other accrued liabilities


1,550



769Current portion of deferred revenue


4,306



9,706Current portion of obligations under capital lease


97



108Current portion of obligations under notes payable


3,213



2,887Total current liabilities


20,722



21,596Deferred rent


205



160Non-current portion of deferred revenue


2,153



4,853Non-current portion of obligations under capital lease


114



76Non-current portion of obligations under notes payable


137



3,239Other long-term liabilities






400Commitments and contingencies (see Note 5)Stockholders equity:Convertible preferred stock, $0.001 par value:
    5,000,000 shares authorized; no shares outstanding at
    December 31, 2010 and 2009






Common stock, $0.001 par value: 70,000,000 shares
    authorized; 23,366,979 and 18,504,898 shares issued and
    outstanding at December 31, 2010 and 2009, respectively


23



18Additional paid-in capital


466,110



372,091Accumulated other comprehensive income


31



42Accumulated deficit


(389,041
)


(347,410
)Total stockholders equity


77,123



24,741Total liabilities and stockholders equity

$
100,454


$
55,065    F-3




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  CONSOLIDATED STATEMENTS OF
    OPERATIONS
  Year Ended December 31,2010


2009


2008(In thousands, exceptper share amounts)Revenues:Milestones

$
15,000


$



$
License fees


8,100



20,442



Sponsored research


358







304Reimbursable research and development costs


3,961



2,494



Total revenues


27,419



22,936



304Operating expenses:Research and development


52,110



42,198



44,858General and administrative


16,452



10,689



11,921Total operating expenses


68,562



52,887



56,779Loss from operations


(41,143
)


(29,951
)


(56,475
)Other income (expense)Interest income


364



386



1,524Interest expense


(866
)


(1,323
)


(215
)Other income, net


14



21



171Total other income (expense)


(488
)


(916
)


1,480Net loss


(41,631
)


(30,867
)


(54,995
)Non-cash dividends on Series A preferred stock










(60
)Net loss applicable to common stockholders

$
(41,631
)

$
(30,867
)

$
(55,055
)Basic and diluted net loss per share applicable to common
    stockholders

$
(1.91
)

$
(1.70
)

$
(3.79
)Shares used in computing basic and diluted net loss per share
    applicable to common stockholders


21,823



18,158



14,544    F-4




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  CONSOLIDATED STATEMENTS OF STOCKHOLDERS
    EQUITY
  Convertible











AccumulatedPreferred








Additional


Other





TotalStock


Common Stock


Paid-In


Comprehensive


Accumulated


StockholdersAmount


Shares


Amount


Capital


Income (Loss)


Deficit


EquityBalances at December 31, 2007

$
1,634



13,313


$
13


$
323,566


$
14


$
(261,488
)

$
63,739Conversion of series A preferred stock


(1,634
)


1,578



2



1,632











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






2,737



2



30,539











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






62







491











491Issuance of common stock upon exercise of stock options






117







544











544Issuance of common stock upon exercise of warrants






20



















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






9







120







(60
)


60Issuance of warrants in connection with debt financing














343











343Share-based compensation expense














5,110











5,110Comprehensive loss:Net loss






















(54,995
)


(54,995
)Unrealized gain on securities


















125







125Comprehensive loss


























(54,870
)Balances at December 31, 2008

$




17,836


$
17


$
362,345


$
139


$
(316,543
)

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






62







490











490Issuance of common stock upon exercise of stock options






595



1



3,477











3,478Issuance of common stock upon exercise of warrants






12



















Share-based compensation expense














5,779











5,779Comprehensive loss:Net loss






















(30,867
)


(30,867
)Unrealized loss on securities


















(97
)






(97
)Comprehensive loss


























(30,964
)Balances at December 31, 2009

$




18,505


$
18


$
372,091


$
42


$
(347,410
)

$
24,741Issuance of common stock in a public offering, net






4,025



4



76,810











76,814Issuance of common stock under Employee Stock Purchase Plan






54







558











558Issuance of common stock upon exercise of stock options






739



1



5,890











5,891Issuance of common stock upon exercise of warrants






19



















Issuance of restricted stock






25



















Share-based compensation expense














10,761











10,761Comprehensive loss:Net loss






















(41,631
)


(41,631
)Unrealized loss on securities


















(11
)






(11
)Comprehensive loss


























(41,642
)Balances at December 31, 2010

$




23,367


$
23


$
466,110


$
31


$
(389,041
)

$
77,123    F-5




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##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  CONSOLIDATED STATEMENTS OF CASH
    FLOWS
  Year Ended December 31,2010


2009


2008(In thousands)Operating activities:Net loss

$
(41,631
)

$
(30,867
)

$
(54,995
)Adjustments to reconcile net loss to net cash used for operating
    activities:Share-based compensation


10,761



5,779



5,110Depreciation and amortization


599



668



535Amortization of debt discount and debt issuance costs


282



429



62Loss (gain) on disposal of property and equipment


22



17



(28
)Deferred rent


45



76



84Amortization of premium on short-term investments


942



356



79Realized gain on short-term investments


(23
)


(24
)


Change in operating assets and liabilities:Receivables


(15,526
)


(1,049
)


840Prepaids and other current assets


(303
)


22



(27
)Other assets


36



(24
)


Accounts payable


1,157



(344
)


60Accrued clinical liabilities


1,609



1,794



1,822Accrued payroll and employee liabilities


664



380



146Other accrued liabilities


381



224



(228
)Deferred revenue


(8,100
)


14,559



Net cash used for operating activities


(49,085
)


(8,004
)


(46,540
)Investing activities:Purchases of short-term investments


(109,625
)


(56,632
)


(33,920
)Proceeds from sale or maturity of short-term investments


83,338



33,066



37,605Proceeds from sale of property and equipment


40



10



80Purchases of property and equipment


(563
)


(346
)


(1,700
)Net cash (used for) provided by investing activities


(26,810
)


(23,902
)


2,065Financing activities:Net proceeds from issuance of notes payable










8,250Payments of debt issuance costs










(127
)Payments on capital lease and note payable obligations


(3,004
)


(2,051
)


(57
)Net proceeds from issuance of common stock


83,263



3,968



31,576Net cash provided by financing activities


80,259



1,917



39,642Net (decrease) increase in cash and cash equivalents


4,364



(29,989
)


(4,833
)Cash and cash equivalents at beginning of year


11,562



41,551



46,384Cash and cash equivalents at end of year

$
15,926


$
11,562


$
41,551Supplemental disclosure of cash flow information:Interest paid

$
610


$
912


$
134Supplemental schedule of non-cash information:Capital lease obligations incurred for property and equipment

$
144


$



$
318Net unrealized (loss) gain on short-term investments

$
(11
)

$
(97
)

$
125Accrued debt issuance costs

$



$



$
400Issuance of common stock dividend on Series A preferred
    stock

$



$



$
(60
)Issuance of warrants in connection with note payable obligation

$



$



$
343    F-6




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS
  1.
    Organization
    and Business    2.
    Summary
    of Significant Accounting Policies  Principles
    of Consolidation
    Use of
    Estimates
    Reclassification
    Cash,
    Cash Equivalents and Short-Term Investments
    available-for-sale Available-for-sale available-for-sale
  Fair
    Value of Financial Instruments
  available-for-sale
 F-7




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Concentration
    of Credit Risk
    Property
    and Equipment
    Impairment
    of Long-Lived Assets
    Revenue
    Recognition
        Research
    and Development Expenses
   F-8




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Patent
    Costs
    Share-Based
    Compensation Expense
      Valuation
    and Expense Information
    December 31,2010


2009


2008Research and development

$
3,546


$
2,386


$
2,098General and administrative


7,215



3,393



3,012Share-based compensation expense included in operating expenses

$
10,761


$
5,779


$
5,110    F-9




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Options:
  December 31,2010


2009


2008Risk-free interest rate


2.1
%


2.5
%


3.1
%Dividend yield



%



%



%Volatility


76.4
%


77.1
%


74.0
%Expected life (years)


5.5-6.1



5.5-6.1



5.2-6.3   ESPP:
  December 31,2010


2009


2008Risk-free interest rate


0.3
%


0.6
%


2.10
%Dividend yield



%



%



%Volatility


52.3
%


83.0
%


90.6
%Expected life (years)


1.16



1.24



1.22             Warrants
    Earnings
    per Share
   F-10




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Comprehensive
    Loss
  available-for-sale
  Year EndedDecember 31,2010


2009


2008Net loss

$
(41,631
)

$
(30,867
)

$
(54,995
)Net unrealized gains (losses) on short-term investments


(11
)


(97
)


125Comprehensive net loss

$
(41,642
)

$
(30,964
)

$
(54,870
)   Recent
    Accounting Pronouncements
  No. 2010-06, Fair Value Measurements and Disclosures (Topic
    820)  Improving Disclosures about Fair Value
    Measurements No. 2010-06 2010-06 2010-06
  No. 2010-17, Revenue Recognition  Milestone Method (Topic 605):
    Milestone Method of Revenue Recognition 2010-17 No. 08-9, 2010-17 2010-17
 F-11




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  2010-17.
  3.
    Fair
    Value Measurements    
    Level 1  Quoted prices in active markets for
    identical assets or liabilities.
    Level 2  Inputs other than Level 1 that are
    observable, either directly or indirectly, such as quoted prices
    for similar assets or liabilities; quoted prices in markets that
    are not active; or other inputs that are observable or can be
    corroborated by observable market data for substantially the
    full term of the assets or liabilities.
    Level 3  Unobservable inputs that are supported
    by little or no market activity and that are significant to the
    fair value of the assets or liabilities.    Fair Value Measurements at Reporting Date UsingQuoted Prices in


SignificantActive Markets


Other


SignificantBalance at


for Identical


Observable


UnobservableDecember 31,


Assets


Inputs


Inputs2010


(Level 1)*


(Level 2)*


(Level 3)Money market funds

$
9,909


$
9,909


$



$
United States government and agency obligations


51,431



4,998



46,433



United States corporate debt securities


8,257







8,257



United States commercial paper


5,497







5,497



Foreign commercial paper


5,299







5,299



Total

$
80,393


$
14,907


$
65,486


$
   Fair Value Measurements at Reporting Date UsingQuoted Prices in


SignificantActive Markets


Other


SignificantBalance at


for Identical


Observable


UnobservableDecember 31,


Assets


Inputs


Inputs2009


(Level 1)*


(Level 2)*


(Level 3)Money market funds

$
8,397


$
8,397


$



$
United States government and agency obligations


27,096



6,577



20,519



United States corporate debt securities


11,634







11,634



Foreign commercial paper


3,598







3,598



Total

$
50,725


$
14,974


$
35,751


$
     *
    
    There were no significant transfers between level 1 and
    level 2 investments for the years ended December 31,
    2010 and 2009. F-12




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   available-for-sale held-to-maturity instrument-by-instrument
  available-for-sale.
      4.
    Balance
    Sheet Details  Short-Term
    Investments
  available-for-sale
  December 31, 2010Gross


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gains


Losses


Fair ValueUnited States Government agency obligations

$
49,401


$
32


$
(1
)

$
49,432United States corporate debt


4,458











4,458United States commercial paper


5,497











5,497Foreign commercial paper


5,299











5,299Total

$
64,655


$
32


$
(1
)

$
64,686   F-13




---



##### Table of Contents



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


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gains


Losses


Fair ValueUnited States Government agency obligations

$
24,077


$
20


$



$
24,097United States corporate debt


11,612



22







11,634Foreign commercial paper


3,598











3,598Total

$
39,287


$
42


$



$
39,329   available-for-sale
    Receivables
    December 31,2010


2009Amounts due under collaboration arrangements for milestones

$
15,000


$
Amounts due for reimbursable research and development costs


1,196



1,189Amounts due for sponsored research


358



Interest on short-term investments


367



195Other


38



49Total Receivables

$
16,959


$
1,433   Property
    and Equipment
    December 31,2010


2009Laboratory equipment

$
1,595


$
1,437Computer equipment and software


1,016



734Furniture and fixtures


335



183Leasehold improvements


976



9693,922



3,323Less: accumulated depreciation and amortization


(1,915
)


(1,362
)$
2,007


$
1,961    F-14




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Accrued
    Payroll and Employee Liabilities and Other Accrued
    Liabilities
    December 31,2010


2009Accrued employee salaries and benefits

$
1,499


$
634Accrued bonuses


1,303



1,462Accrued restructuring






42Total Accrued Payroll and Employee Liabilities

$
2,802


$
2,138   December 31,2010


2009Accrued professional fees

$
441


$
173Accrued legal fees


242



362Accrued accounts payable


359



130Accrued interest


433



62Other accrued liabilities


75



42Total Other Accrued Liabilities

$
1,550


$
769   5.
    Commitments
    and Contingencies  Leases
  sub-lease sub-lease sub-lease
     F-15




---



##### Table of Contents



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


Capital LeaseYears ended December 31,2010

$
1,094


$
1222011


1,126



452012


1,108



452013


1,145



452014


200



22Thereafter






Total

$
4,673



279Less amount representing interest






(68
)Present value of net minimum lease payments






211Less current portion






(97
)Noncurrent portion of capital lease obligation





$
114     Notes
    Payable
  sub-lease
       F-16




---



##### Table of Contents



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

$
3,8752011


462012


452013


452014


19Thereafter


Total


4,030Less unamortized discount


(38
)Less amount representing interest


(642
)Present value of net minimum notes payable payments


3,350Less current portion


(3,213
)Noncurrent portion of notes payable

$
137   Executive
    Severance Agreements
      Clinical
    Development Agreements
    Purchase
    Obligations
   F-17




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    6.
    Restructuring      7.
    Valeant
    Transaction  86-9766
    86-9766 86-9766
  8.
    Bayer
    Relationship   F-18




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  86-9766
  86-9766
    86-9766
  86-9766 Revenue Recognition
     F-19




---



##### Table of Contents



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


684,332Stock Incentive plan


4,614,394Employee stock purchase plan


171,187Total shares reserved for future issuance


5,469,913  F-20




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Warrants
          Stock
    Option Plans
  10-year
  10-year
   F-21




---



##### Table of Contents



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





AverageAvailable for


Number of


ExerciseGrant


Shares


PriceBalance at December 31, 2007


1,347,877



2,180,893


$
5.79Additional shares authorized


744,552







Granted


(1,793,875
)


1,793,875


$
13.62Exercised






(116,653
)

$
4.66Cancelled


182,026



(182,026
)

$
7.97Balance at December 31, 2008


480,580



3,676,089


$
9.54Additional shares authorized


891,787







Granted


(557,350
)


557,350


$
14.19Exercised






(595,168
)

$
5.89Cancelled


246,476



(246,476
)

$
10.95Balance at December 31, 2009


1,061,493



3,391,795


$
10.84Additional shares authorized


925,245







Granted


(986,920
)


961,920


$
22.07Exercised






(739,139
)

$
7.97Cancelled


76,385



(76,385
)

$
12.70Balance at December 31, 2010


1,076,203



3,538,191


$
14.46       Years Ended December 31,2010


2009


2008Weighted-





Weighted-





Weighted-Average





Average





AverageExercise





Exercise





ExerciseOptions


Price


Options


Price


Options


PriceExercisable at end of year


1,768,985


$
10.89



1,559,117


$
9.85



1,092,025


$
6.54Weighted-average fair value of options granted during the year

$
14.81






$
9.60






$
9.21  F-22




---



##### Table of Contents



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








AverageAverage


Weighted-





ExerciseRemaining


Average





Price ofOptions


Range of


Contractual


Exercise


Options


OptionsOutstanding


Exercise Prices


Life (in years)


Price


Exercisable


Exercisable315,532


$
2.76 - $  4.08



5.42


$
3.75



315,532


$
3.75328,375


$
4.08 - $  9.46



6.41


$
5.79



272,107


$
5.52407,512


$
9.46 - $10.68



7.94


$
10.68



189,324


$
10.68376,143


$
12.16 - $14.25



6.12


$
13.10



301,565


$
12.98353,250


$
14.25 - $14.71



7.97


$
14.33



163,410


$
14.30350,669


$
14.71 - $15.26



8.93


$
14.96



81,468


$
14.95421,400


$
15.26 - $15.69



7.00


$
15.69



334,731


$
15.69370,390


$
16.20 - $22.88



7.71


$
19.58



110,848



16.58614,920


$
22.88 - $25.00



9.93


$
23.76






$
3,538,191


$
2.76 - $25.00



7.69


$
14.46



1,768,985


$
10.89     Employee
    Stock Purchase Plan
       F-23




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  10.
    Income
    Taxes    December 31,2010


2009


2008Statutory federal income tax rate of 34% applies to earnings
    before income taxes and extraordinary items

$
(14,155
)

$
(10,494
)

$
(18,698
)States taxes  net of federal benefit


(2,598
)


(2,224
)


(4,220
)Meals and entertainment


11



9



10Share-based compensation


676



238



833Federal research and development credit


(1,083
)


(872
)


(1,097
)162(m) Executive compensation limitation


1,186



160



NOL adjustment due to 382 study






(9,437
)


R&D credit adjustment






334



(665
)APIC valuation allowance


(4
)


(39
)


Change in valuation allowance


15,684



22,204



23,777Other


283



121



60$



$



$
     December 31,2010


2009Deferred tax assets:Net operating loss carryforwards

$
61,944


$
51,821Research and development credits


6,285



4,459Intangibles


1,440



1,452Share-based compensation


5,395



3,052Other, net


3,684



961Total deferred tax assets


78,748



61,745Deferred tax liabilities:Deferred state taxes


(5,598
)


(4,261
)Net deferred tax assets


73,150



57,484Valuation allowance for net deferred tax assets


(73,150
)


(57,484
)Net deferred taxes

$



$
      F-24




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Share-Based Compensation
  Income Taxes
    December 31,2010Balance at December 31, 2008

$
864Gross increase (decrease)


476Balance at December 31, 2009


1,340Gross increase (decrease)


657Balance at December 31, 2010

$
1,997    F-25




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  and/or and/or
      11.
    Employee
    Benefit Plan    12.
    Subsequent
    Events     F-26




---



##### Table of Contents



ARDEA
    BIOSCIENCES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  13.
    Summary
    of Quarterly Financial Data
    (unaudited)    2010First


Second


Third


FourthQuarter


Quarter


Quarter


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

$



$



$



$
15,000License fees


2,426



2,426



2,171



1,077Sponsored research














358Reimbursable research and development costs


847



1,095



1,123



896Total revenues


3,273



3,521



3,294



17,331Expenses:Research and development


10,251



12,884



14,687



14,288General and administrative


2,926



3,319



6,669



3,538Loss from operations


(9,904
)


(12,682
)


(18,062
)


(495
)Interest income


69



111



100



84Interest expense


(261
)


(229
)


(204
)


(172
)Other income, net


13



13



1



(13
)Net Loss

$
(10,083
)

$
(12,787
)

$
(18,165
)

$
(596
)Basis and diluted net loss per share

$
(0.54
)

$
(0.57
)

$
(0.79
)

$
(0.03
)   2009First


Second


Third


FourthQuarter


Quarter


Quarter


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

$



$
5,013


$
8,178


$
7,251Reimbursable research and development costs






499



991



1,004Total revenues






5,512



9,169



8,255Expenses:Research and development


10,996



10,725



8,999



11,478General and administrative


2,877



2,526



2,404



2,882Loss from operations


(13,873
)


(7,739
)


(2,234
)


(6,105
)Interest income


136



119



65



66Interest expense


(364
)


(348
)


(320
)


(291
)Other income, net


(2
)


5



18



Net Loss

$
(14,103
)

$
(7,963
)

$
(2,471
)

$
(6,330
)Basis and diluted net loss per share

$
(0.79
)

$
(0.44
)

$
(0.13
)

$
(0.34
)  F-27