e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended December 31, 2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number: 1-33734
ARDEA BIOSCIENCES,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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94-3200380
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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4939 Directors Place
San Diego, CA
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92121
(Zip Code)
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(Address of principal executive
offices)
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Registrants telephone number, including area code:
(858) 652-6500
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class:
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Name of each exchange on which registered:
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Common Stock, par value $0.001 per share
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The Nasdaq Global Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of voting and non-voting common stock
held by non-affiliates of the registrant as of June 30,
2009 totaled approximately $148,000,000 based on the closing
price of $15.74 as reported by the Nasdaq Global Market. As of
March 1, 2010, there were 18,576,456 shares of the
Companys common stock ($0.001 par value) outstanding.
Documents Incorporated by Reference
Portions of the proxy statement for the registrants 2010
annual meeting of stockholders are incorporated by reference
into Part III.
FORWARD-LOOKING
STATEMENTS
This annual report contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933,
as amended, or the Securities Act, and Section 21E of the
Exchange Act. These statements include, but are not limited to,
statements regarding our development programs, our capabilities,
our goals, the expected timeline for achievement of our clinical
milestones, the expected properties and benefits of our product
candidates, the results of clinical and other studies, the size
of the market for our products and our financial results. Any
statements about our expectations, beliefs, plans, objectives,
assumptions or future events or performance are not historical
facts and may be forward-looking. These statements are often,
but not always, made through the use of words or phrases such as
anticipate, estimate, plan,
project, continuing,
ongoing, expect, management
believes, we believe, we intend
and similar words or phrases. Accordingly, these statements
involve estimates, assumptions and uncertainties that could
cause actual results to differ materially from those expressed
or implied in them. Any forward-looking statements are qualified
in their entirety by reference to the factors discussed in this
report or incorporated by reference.
Because the factors discussed in this report, and even factors
of which we are not yet aware, could cause actual results or
outcomes to differ materially from those expressed in any
forward-looking statements made by or on behalf of us, you
should not place undue reliance on any such forward-looking
statements. These statements are subject to risks and
uncertainties, known and unknown, which could cause actual
results and developments to differ materially from those
expressed or implied in such statements. We have included
important factors in the cautionary statements included in this
report, particularly under Item 1A. Risk Factors, and in
our SEC filings that we believe could cause actual results or
events to differ materially from the forward-looking statements
that we make. These and other risks are also detailed and
occasionally modified or updated in our reports filed from time
to time under the Securities Act
and/or the
Exchange Act. You are encouraged to read these filings as they
are made.
Further, any forward-looking statement speaks only as of the
date on which it is made, and we undertake no obligation to
update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement
is made or to reflect the occurrence of unanticipated events.
New factors emerge from time to time, and it is not possible for
us to predict which factors will arise. In addition, we cannot
assess the impact of each factor on our business or the extent
to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any
forward-looking statements.
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PART I
In this report, all references to Ardea,
we, our, and us, refer to
Ardea Biosciences, Inc., a Delaware corporation, and our wholly
owned subsidiary. In December 2006, Ardea changed its name from
IntraBiotics Pharmaceuticals, Inc.
Overview
and Business Strategy
Ardea Biosciences, Inc., of San Diego, California, is a
biotechnology company focused on the development of
small-molecule therapeutics for the treatment of gout, cancer
and human immunodeficiency virus (HIV). The current
status of our development programs is as follows:
Product
Portfolio
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Product Candidate
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Target Indication
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Development Status
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RDEA594
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Gout
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Phase 2b ongoing
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RDEA684
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Gout
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Preclinical development ongoing
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RDEA119
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Cancer
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Phase 1 and Phase 1/2 ongoing
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RDEA806
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HIV
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Phase 2a completed
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RDEA427
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HIV
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Phase 0* completed
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First-in-human
micro-dose pharmacokinetic study in normal healthy volunteers. |
GOUT
Gout is a painful and debilitating disease caused by abnormally
elevated levels of uric acid in the blood stream. While gout is
a treatable condition, there are limited treatment options, and
a number of adverse effects are associated with most current
therapies.
Approximately 90 percent of gout patients are considered to
have a defect in their ability to excrete sufficient amounts of
uric acid and are classified as under-excreters of
uric acid, which leads to excessive levels of uric acid in the
blood (Rheumatology 2007; 46:215 219). Our most
advanced product candidate, RDEA594, is a selective inhibitor of
URAT1, a transporter in the kidney that regulates uric acid
excretion from the body. RDEA594 has been shown to normalize the
amount of uric acid excreted by gout patients. Since the
majority of gout patients are under-excreters,
normalizing uric acid excretion by moderating URAT1 transporter
activity with RDEA594 may provide the most physiologically
appropriate and effective means of reducing blood or serum uric
acid (sUA) levels when used alone or in combination with other
sUA lowering agents, such as allopurinol or febuxostat
(Uloric®,
Takeda Pharmaceutical Company Limited;
Adenuric®,
Ipsen and Menarini), which act by reducing the production of
uric acid in the body.
RDEA594 is currently being evaluated in a comprehensive Phase 2
development program designed to demonstrate its broad clinical
utility in a wide spectrum of gout patients. To date, results
from this program have shown the following:
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When administered as a single agent, RDEA594 was well-tolerated
and produced significant reductions in sUA levels in gout
patients with hyperuricemia, including those with mild to
moderate renal impairment. The reductions observed with RDEA594
were comparable to those achieved with approved doses of
allopurinol and febuxostat.
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The combination of RDEA594 and allopurinol in gout patients was
well tolerated and reduced sUA levels an additional
24 percent compared to allopurinol alone.
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The combination of RDEA594 and febuxostat in healthy volunteers
was well tolerated and resulted in sUA reductions of
approximately 70 to 80 percent from baseline.
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Ongoing studies in this program include a Phase 2b single-agent
dose-response study evaluating the safety and urate-lowering
effects of 200 mg, 400 mg and 600 mg of RDEA594,
a Phase 2b study evaluating 200 mg and 400 mg
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of RDEA594 as an add-on to allopurinol in patients that do not
respond adequately to allopurinol alone, and a study in subjects
with renal impairment.
RDEA684 is our next-generation inhibitor of the URAT1
transporter for the treatment of gout patients with
hyperuricemia. Based on preclinical results, RDEA684
demonstrates many of the same positive attributes as RDEA594,
but with more than 170-times greater potency against the URAT1
transporter. Preclinical development activities with respect to
RDEA684 are currently ongoing.
CANCER
Mitogen-activated ERK kinase (MEK) is believed to
play an important role in cancer cell proliferation, apoptosis
and metastasis. RDEA119 is a potent and selective inhibitor of
MEK in development for the treatment of cancer. In vivo
preclinical tests have shown RDEA119 to have potent
anti-tumor activity. In addition, preclinical in vitro
and in vivo studies of RDEA119 have demonstrated
synergistic activity across multiple tumor types when RDEA119 is
used in combination with other anti-cancer agents, including
sorafenib
(Nexavar®,
Bayer HealthCare AG (Bayer) and Onyx
Pharmaceuticals, Inc.).
RDEA119 is currently being evaluated in advanced cancer patients
with different tumor types as a single agent in a Phase 1 study,
as well as in combination with sorafenib in a Phase
1/2
study.
In April 2009, we entered into a global license agreement with
Bayer to develop and commercialize MEK inhibitors for the
treatment of cancer. Under the license agreement, we are
responsible for the completion of the ongoing Phase 1 and Phase
1/2
studies. Thereafter, Bayer will be responsible for the further
development and commercialization of RDEA119 and any of our
other MEK inhibitors.
HIV
RDEA806, a non-nucleoside reverse transcriptase inhibitor, or
NNRTI, for the treatment of HIV, has successfully completed
Phase 1 and Phase 2a studies and has been evaluated in over 250
subjects. Results from a Phase 2a monotherapy
proof-of-concept
study of RDEA806 demonstrated placebo-adjusted plasma viral load
reductions of up to 2.0
log10
on day 8 with once-daily dosing of RDEA806. All dosing regimens
tested were well tolerated in this study.
RDEA427, a next generation NNRTI, is from a chemical class that
is distinct from the RDEA806 chemical class. Based on
preclinical results, RDEA427 demonstrates many of the same
positive attributes as RDEA806, but is more potent, has superior
pharmacokinetic properties, and has even greater activity
against a wide range of drug-resistant viral isolates than
RDEA806. We have evaluated RDEA427 in a human micro-dose
pharmacokinetic study.
We anticipate that the timing of future studies of RDEA806 and
RDEA427 will be dependent on the results of our partnering
efforts.
Market
Opportunity
We believe that there is a significant market opportunity for
our products, should they be successfully developed, approved
and commercialized.
In 2008, there were approximately 7.5 million cases of gout
in the United States, 9.0 million cases of gout in Europe
and 3.2 million cases of gout in Japan (Decision
Resources). Yet, there has been only one new drug approved in
the United States for the treatment of gout in the last
40 years. We believe that there is a significant need for
new products for the treatment and prevention of gout, a painful
and debilitating disease caused by elevated levels of uric acid.
Many chronic gout sufferers are unable to achieve target
reductions in uric acid with current treatments. Allopurinol is
the most widely-prescribed drug for the treatment of gout;
however, in large clinical trials, approximately 60 percent
of patients did not respond adequately to treatment with
allopurinol alone (N Engl J Med 2005 353:2450-61;
Arthritis & Rheumatism Vol. 59, No. 11, pp
1540-48
2008; www.clinicaltrials.gov NCT00430248).
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We also believe that the number of gout patients treated with
uric acid lowering therapies, and the duration of such
treatment, will expand as a result of the marketing efforts of
companies developing new drugs for the treatment of gout and
increased funding of education programs for physicians and
patients.
In addition, we believe there may be opportunities to develop
uric acid-lowering agents to treat diseases other than gout.
Evidence suggests that the chronic elevation of uric acid
associated with gout, known as hyperuricemia, may also have
systemic consequences, including an increased risk for kidney
dysfunction, elevated CRP, hypertension and possibly other
cardiovascular risk factors.
Sales of products used in the treatment of cancer exceeded
$48.0 billion in 2008, according to IMS Health
Incorporated, fueled by strong acceptance of innovative and
effective targeted therapies. The failure rate of kinase
inhibitor compounds in clinical development in oncology is only
53% versus 82% in the oncology field as a whole. Given the role
that MEK appears to play in cancer indications and the
increasing preference for oral therapies, we believe that
RDEA119 and our next generation MEK inhibitors, if successfully
developed, approved and commercialized, could participate in the
growing market for targeted cancer therapies.
Bayer
Relationship
Under the terms of our license agreement with Bayer, we granted
to Bayer a worldwide, exclusive license to develop and
commercialize our MEK inhibitors for all indications. In June
2009, Bayer paid us a non-refundable, upfront cash payment of
$35 million in partial consideration for the exclusive
right to develop and commercialize our MEK inhibitors. Potential
payments under the license agreement with Bayer could total up
to $407 million, not including royalties. This amount
includes the upfront cash payment, as well as additional cash
payments upon achievement of certain development, regulatory and
sales-based milestones. We are also eligible to receive low
double-digit royalties on sales of products under the license
agreement. We are responsible for the completion of the Phase 1
and Phase 1/2 studies currently being conducted for RDEA119.
Valeant
Relationship
In December 2006, we acquired intellectual property and other
assets from Valeant Research & Development, Inc.
related to RDEA806 and our next generation NNRTI program, and
RDEA119 and our next generation MEK inhibitor program. In
consideration for the assets purchased from Valeant and subject
to the satisfaction of certain conditions, Valeant received
certain rights, including the right to receive from us
development-based milestone payments and sales-based royalty
payments. There is one set of potential milestones totaling up
to $25 million for RDEA806 and the next generation NNRTI
program, and a separate set of potential milestones totaling up
to $17 million for RDEA119 and the next generation MEK
inhibitor program. The first milestone payments of
$2 million and $1 million in the NNRTI program and the
MEK inhibitor program, respectively, would be due after the
first patient is dosed in the first Phase 2b study. The royalty
rates on all products are in the mid-single digits.
Under the asset purchase agreement, Valeant retains a one-time
option to repurchase commercialization rights in territories
outside the United States and Canada for our first NNRTI product
derived from the acquired intellectual property to advance to a
Phase 2b HIV clinical trial. If Valeant exercises this option,
which it can do following the completion of a Phase 2b clinical
trial, but prior to the initiation of a Phase 3 clinical trial,
Valeant would pay us a $10 million option fee, up to
$21 million in milestone payments based on regulatory
approvals, and a mid-single-digit royalty on product sales in
the Valeant Territories.
Research
and Development Expenses
Our research and development expenses for the three years ended
December 31, 2009, 2008 and 2007 were $42.2 million,
$44.9 million and $23.1 million, respectively.
Research and development expenses decreased in 2009 as a result
of our May 2009 restructuring, and increased substantially in
2008 as compared to 2007 primarily due to the continued
development and progression of our clinical and preclinical
programs.
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Clinical
Supplies and Manufacturing
We have no in-house manufacturing capabilities. We rely on
third-party contract manufacturers to produce our product
candidates to support our development activities. Our clinical
trial material, critical to our operations, is purchased from
various companies and suppliers.
Sales and
Marketing
We do not currently have sales or marketing capabilities. In
order to commercially market any pharmaceutical product that we
successfully advance through preclinical and clinical
development and for which we obtain regulatory approval, we must
either develop a sales and marketing infrastructure or
collaborate with third parties with sales and marketing
capabilities. Because of the early stage of our pharmaceutical
development programs, we have not yet developed a sales and
marketing strategy for any pharmaceutical products that we may
develop.
Customers
and Distribution
We do not currently sell or distribute pharmaceutical products.
Competition
The biotechnology and pharmaceutical industries are extremely
competitive. Our potential competitors in the field are many in
number and include major pharmaceutical and specialized
biotechnology companies. Many of our potential competitors have
significantly more financial, technical and other resources than
we do, which may allow them to have a competitive advantage. In
addition, they may have substantially more experience in
effecting strategic combinations, in-licensing technology,
developing drugs, obtaining regulatory approvals and
manufacturing and marketing products. We cannot give any
assurances that we can effectively compete with these other
biotechnology and pharmaceutical companies.
Any products that we may develop or discover will compete in
highly competitive markets. Our potential competitors in these
markets may succeed in developing products that could render our
products and those of our collaborators obsolete or
non-competitive. In addition, many of our competitors have
significantly greater experience than we do in the fields in
which we compete.
Intellectual
Property
Our success will depend in large part on our ability to:
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obtain and maintain international and domestic patent and other
legal protections for the proprietary technology, inventions and
improvements we consider important to our business;
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prosecute and defend our patents;
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preserve our trade secrets; and
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operate without infringing the patents and proprietary rights of
third parties.
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We intend to continue to seek appropriate patent protection for
the lead product candidates in our research and development
programs and their uses by filing patent applications in the
United States and other selected countries. We intend for these
patent applications to cover, where possible, claims for
composition of matter, medical uses, processes for preparation
and formulations.
We own a total of four issued United States patents, 20 pending
United States non-provisional applications, 13 pending United
States provisional applications, seven pending international
applications and almost 200 pending foreign patent applications.
Although we believe that our rights under patent applications we
own provide a competitive advantage, the patent positions of
pharmaceutical and biotechnology companies are highly uncertain
and involve complex legal and factual questions. We may not be
able to develop patentable products or processes, and may not be
able to obtain patents from pending applications. Even if patent
claims are allowed, the claims may not issue, or in the event of
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issuance, may not be sufficient to protect the technology owned
by or licensed to us. Any patents or patent rights that we
obtain may be circumvented, challenged or invalidated by our
competitors.
We also rely on trade secrets, proprietary know-how and
continuing innovation to develop and maintain our competitive
position, especially when we do not believe that patent
protection is appropriate or can be obtained. We seek protection
of these trade secrets, proprietary know-how and any continuing
innovation, in part, through confidentiality and proprietary
information agreements. However, these agreements may not
provide meaningful protection for, or adequate remedies to
protect, our technology in the event of unauthorized use or
disclosure of information. Furthermore, our trade secrets may
otherwise become known to, or be independently developed by, our
competitors.
Government
Regulation
Pharmaceutical
Regulation
If and when we market any pharmaceutical products, they would be
subject to extensive government regulation in the United States.
Additionally, if we seek to market and distribute any such
products abroad, they would also be subject to extensive foreign
government regulation.
In the United States, the Food and Drug Administration, or FDA,
regulates pharmaceutical products. FDA regulations govern the
testing, manufacturing, advertising, promotion, labeling, sale
and distribution of pharmaceutical products, and generally
require approval of new drugs through a rigorous process. We
also may be subject to foreign regulatory requirements governing
clinical trials and drug product sales if products are studied
or marketed abroad. The approval process outside the United
States varies from jurisdiction to jurisdiction and the time
required may be longer or shorter than that required for FDA
approval.
Regulation
in the United States
The FDA testing and approval process requires substantial time,
effort and money. We cannot assure you that any of our products
will ever obtain approval. The FDA approval process for new
drugs includes, without limitation:
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preclinical studies;
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submission of an Investigational New Drug application, or IND,
for clinical trials;
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adequate and well-controlled human clinical trials to establish
safety and efficacy of the product;
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review of a NDA; and
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inspection of the facilities used in the manufacturing of the
drug to assess compliance with the FDAs current Good
Manufacturing Practices, or cGMP, regulations.
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A NDA must include comprehensive and complete descriptions of
the preclinical testing, clinical trials and the chemical,
manufacturing and control requirements of a drug that enable the
FDA to determine the drugs safety and efficacy. A NDA must
be submitted, filed and approved by the FDA before any product
that we may successfully develop can be marketed commercially in
the United States.
Preclinical studies include laboratory evaluation of the
product, as well as animal studies to assess the potential
safety and effectiveness of the product. Most of these studies
must be performed according to good laboratory practices. The
results of the preclinical studies, together with manufacturing
information and analytical data, are submitted to the FDA as
part of an IND. Clinical trials may begin 30 days after an
IND is received, unless the FDA raises concerns or questions
about the conduct of the clinical trials. If concerns or
questions are raised, an IND sponsor and the FDA must resolve
any outstanding concerns before clinical trials can proceed. We
have filed and received approval for INDs for our lead clinical
candidates, RDEA806, RDEA119 and RDEA594, and we may file
additional INDs during 2009. We are required to file an IND
before we can commence any clinical trials for our product
candidates in the United States.
We cannot assure you that submission of an IND for any of our
preclinical product candidates will result in authorization to
commence clinical trials. Nor can we assure you that any of our
current or future clinical trials will
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result in approval to market our products. Clinical trials
involve the administration of the product candidate that is the
subject of the trial to volunteers or patients under the
supervision of a qualified principal investigator. Each clinical
trial must be reviewed and approved by an independent
institutional review board at each institution at which the
study will be conducted. The institutional review board will
consider, among other things, ethical factors, safety of human
subjects and the possible liability of the institution arising
from the conduct of the proposed clinical trial. Also, clinical
trials must be performed according to good clinical practices
which are enumerated in FDA regulations and guidance documents.
Clinical trials typically are conducted in sequential phases:
Phases 1, 2, 3 and 4. The phases may overlap. The FDA may
require that we suspend clinical trials at any time on various
grounds, including if the FDA makes a finding that the subjects
are being exposed to an unacceptable health risk.
In Phase 1 clinical trials, a drug is usually tested on a small
number of healthy volunteers to determine safety, any adverse
effects, proper dosage, absorption, metabolism, distribution,
excretion and other drug effects.
In Phase 2 clinical trials, a drug is usually tested on a
limited number of subjects (generally up to several hundred) to
preliminarily evaluate the efficacy of the drug for specific,
targeted indications, determine dosage tolerance and optimal
dosage, and identify possible adverse effects and safety risks.
In Phase 3 clinical trials, a drug is usually tested on a larger
number of subjects (up to several thousand), in an expanded
patient population and at multiple clinical sites.
In Phase 4 clinical trials or other post-approval commitments,
additional studies and patient
follow-up
are conducted to gain experience from the treatment of patients
in the intended therapeutic indication. Additional studies and
follow-up
are also conducted to document a clinical benefit where drugs
are approved under accelerated approval regulations and based on
surrogate endpoints. In clinical trials, surrogate endpoints are
alternative measurements of the symptoms of a disease or
condition that are substituted for measurements of observable
clinical symptoms. Failure to promptly conduct Phase 4 clinical
trials and
follow-up
could result in expedited withdrawal of products approved under
accelerated approval regulations.
The facilities, procedures and operations for any of our
contract manufacturers must be determined to be adequate by the
FDA before product approval. Manufacturing facilities are
subject to inspections by the FDA for compliance with cGMP,
licensing specifications and other FDA regulations before and
after a NDA has been approved. Foreign manufacturing facilities
are also subject to periodic FDA inspections or inspections by
foreign regulatory authorities. Among other things, the FDA may
withhold approval of NDAs or other product applications if
deficiencies are found at the facility. Vendors that may supply
us with finished products or components used to manufacture,
package and label products are also subject to similar
regulations and periodic inspections.
In addition, the FDA imposes a number of complex regulatory
requirements on entities that advertise and promote
pharmaceuticals, including, but not limited to, standards and
regulations for
direct-to-consumer
advertising, off-label promotion, industry-sponsored scientific
and educational activities, and promotional activities involving
the Internet.
Failure to comply with FDA and other governmental regulations
can result in fines, unanticipated compliance expenditures,
recall or seizure of products, total or partial suspension of
production
and/or
distribution, suspension of the FDAs review of NDAs,
injunctions and criminal prosecution. Any of these actions could
have a material adverse effect on us.
Regulation Outside
the United States
If we market drugs in foreign countries, we also will be subject
to foreign regulatory requirements governing human clinical
trials and marketing approval for pharmaceutical products. The
requirements governing the conduct of clinical trials, product
approval, pricing and reimbursement vary widely from country to
country. Whether or not FDA approval has been obtained, approval
of a product by the comparable regulatory authorities of foreign
countries must be obtained before manufacturing or marketing the
product in those countries. The approval process varies from
country to country and the time required for such approvals may
differ substantially from that required
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for FDA approval. There is no assurance that any future FDA
approval of any of our clinical trials or drugs will result in
similar foreign approvals or vice versa.
Additional
Regulation
Third-Party
Reimbursement
In the United States, physicians, hospitals and other healthcare
providers that purchase pharmaceutical products generally rely
on third-party payors, principally private health insurance
plans, Medicare and, to a lesser extent, Medicaid, to reimburse
all or part of the cost of the product and procedure for which
the product is being used. Even if a product is approved for
marketing by the FDA, there is no assurance that third-party
payors will cover the cost of the product and related medical
procedures. If they do not, end-users of the drug would not be
eligible for any reimbursement of the cost, and our ability to
market any such drug would be materially and adversely impacted.
Reimbursement systems in international markets vary
significantly by country and, within some countries, by region.
Reimbursement approvals must be obtained on a
country-by-country
basis. In many foreign markets, including markets in which we
hope to sell our products, the pricing of prescription
pharmaceuticals is subject to government pricing control. In
these markets, once marketing approval is received, pricing
negotiations could take significant additional time. As in the
United States, the lack of satisfactory reimbursement or
inadequate government pricing of any of our products would limit
their widespread use and lower potential product revenues.
Fraud and
Abuse Laws
Federal and state anti-kickback and anti-fraud and abuse laws,
as well as the federal Civil False Claims Act may apply to
certain drug and device research and marketing practices. The
Civil False Claims Act prohibits knowingly presenting or causing
to be presented a false, fictitious or fraudulent claim for
payment to the United States. Actions under the Civil False
Claims Act may be brought by the Attorney General or by a
private individual acting as an informer or whistleblower in the
name of the government. Violations of the Civil False Claims Act
can result in significant monetary penalties. The federal
government is using the Civil False Claims Act, and the threat
of significant liability, in its investigations of healthcare
providers, suppliers and drug and device manufacturers
throughout the country for a wide variety of drug and device
marketing and research practices, and has obtained multi-million
dollar settlements. The federal government may continue to
devote substantial resources toward investigating healthcare
providers, suppliers and drug and device
manufacturers compliance with the Civil False Claims Act
and other fraud and abuse laws. We may have to expend
significant financial resources and management attention if we
ever become the focus of such an investigation, even if we are
not guilty of any wrong doings.
HIPAA
The Health Insurance Portability and Accountability Act of 1996,
or HIPAA, requires the use of standard transactions, privacy and
security standards and other administrative simplification
provisions by covered entities, which include many healthcare
providers, health plans and healthcare clearinghouses. HIPAA
instructs the Secretary of the Department of Health and Human
Services to promulgate regulations implementing these standards
in the United States.
Other
Laws
We are also subject to other federal, state and local laws of
general applicability, such as laws regulating working
conditions, and various federal, state and local environmental
protection laws and regulations, including those governing the
discharge of material into the environment.
Employees
As of March 1, 2010, we employed 62 regular full-time
employees (including 19 people who have a Ph.D. and one
person who has a Pharm.D.), 47 of whom are involved full-time in
research and development activities. All members of our senior
management team have had prior experience with pharmaceutical or
biotechnology
7
companies. We believe that we have been successful in attracting
skilled and experienced personnel, but competition for personnel
is intense and there can be no assurance that we will be able to
attract and retain the individuals needed. None of our employees
are covered by a collective bargaining agreements and management
considers relations with our employees to be good.
Company
Information
We were incorporated in the State of Delaware in January 1994.
Our corporate offices are located at 4939 Directors Place,
San Diego, CA 92121. Our telephone number is
(858) 652-6500.
Our website address is www.ardeabio.com. We make available free
of charge through our Internet website our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, or the Exchange Act, as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC.
You should carefully consider the following information about
risks and uncertainties that may affect us or our business,
together with the other information appearing elsewhere in this
annual report on
Form 10-K.
If any of the following events, described as risks, actually
occur, our business, financial condition, results of operations
and future growth prospects would likely be materially and
adversely affected. In these circumstances, the market price of
our common stock could decline, and you may lose all or part of
your investment in our securities. An investment in our
securities is speculative and involves a high degree of risk.
You should not invest in our securities if you cannot bear the
economic risk of your investment for an indefinite period of
time and cannot afford to lose your entire investment.
Risks
Related to Our Business
Development
of our products will take years; we may never attain product
sales; and we expect to continue to incur net operating
losses.
We have incurred, and expect to continue to incur, substantial
operating losses for the foreseeable future. We expect that most
of our resources for the foreseeable future will be dedicated to
research and development and preclinical and clinical testing of
compounds. The amounts paid to advance the preclinical and
clinical development of our product candidates may continue to
increase. Any compounds we advance through preclinical and
clinical development will require extensive and costly
development, preclinical testing and clinical trials prior to
seeking regulatory approval for commercial sales. Our most
advanced product candidates may never be approved for commercial
sales. The time required to achieve product sales and
profitability is lengthy and highly uncertain and we cannot
assure you that we will be able to achieve or maintain product
sales.
We are
not currently profitable and may never become
profitable.
To date, we have generated limited revenues and we do not
anticipate generating significant revenues for at least several
years, if ever. We may increase our operating expenses over the
next several years as we plan to advance our product candidates
into further preclinical testing and clinical trials, and may
expand our research and development activities and acquire or
license new technologies and product candidates. As a result, we
expect to continue to incur significant and potentially
increasing operating losses for the foreseeable future. Because
of the numerous risks and uncertainties associated with our
research and product development efforts, we are unable to
predict the extent of any future losses or when we will become
profitable, if ever. Even if we do achieve profitability, we may
not be able to sustain or increase profitability on an ongoing
basis.
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.
Positive results from preclinical studies should not be relied
upon as evidence that clinical trials will succeed. Even if our
product candidates achieve positive results in preclinical
studies, we will be required to demonstrate
8
through clinical trials that these product candidates are safe
and effective for use in a diverse population before we can seek
regulatory approvals for their commercial sale. There is
typically an extremely high rate of attrition from the failure
of product candidates proceeding through clinical trials. If any
product candidate fails to demonstrate sufficient safety and
efficacy in any clinical trial, then we would experience
potentially significant delays in, or be required to abandon,
development of that product candidate. If we delay or abandon
our development efforts of any of our product candidates, then
we may not be able to generate sufficient revenues to become
profitable, and our reputation in the industry and in the
investment community would likely be significantly damaged, each
of which would cause our stock price to decrease significantly.
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.
Our product candidates will require preclinical testing and
extensive clinical trials prior to submission of any regulatory
application for commercial sales. Delays in the commencement of
clinical testing of our product candidates could significantly
increase our product development costs and delay product
commercialization. In addition, many of the factors that may
cause, or lead to, a delay in the commencement of clinical
trials may also ultimately lead to denial of regulatory approval
of a product candidate.
The commencement of clinical trials can be delayed for a variety
of reasons, including:
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delays in demonstrating sufficient safety and efficacy to obtain
regulatory approval to commence a clinical trial;
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delays in reaching agreement on acceptable terms with
prospective contract research organizations and clinical trial
sites;
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delays in manufacturing quantities of a product candidate
sufficient for clinical trials;
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delays in obtaining approval of an IND from the FDA or similar
foreign approval;
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delays in obtaining institutional review board approval to
conduct a clinical trial at a prospective site; and
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insufficient financial resources.
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In addition, the commencement of clinical trials may be delayed
due to insufficient patient enrollment, which is a function of
many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical
sites, the availability of effective treatments for the relevant
disease, and the eligibility criteria for the clinical trial.
Finally, we may delay the commencement of clinical trials with
respect to product candidates, as we have with RDEA806 and
RDEA427, until we enter into a collaboration or license
agreement with another party to fund the clinical trials of such
product candidates.
The
termination, or delays in the completion, of clinical testing of
our current and potential product candidates could result in
increased costs to us and delay or prevent us from generating
revenues.
Once a clinical trial for any current or potential product
candidate has begun, it may be delayed, suspended or terminated
by us or the FDA or other regulatory authorities due to a number
of factors, including:
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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;
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failure to conduct clinical trials in accordance with regulatory
requirements;
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lower than anticipated recruitment rate or retention rate of
patients in clinical trials;
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the imposition of a clinical hold;
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lack of adequate funding to continue clinical trials;
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negative results of clinical trials;
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changes to clinical trials protocols;
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insufficient supply or deficient quality of product candidates
or other materials necessary for the conduct of our clinical
trials; or
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serious adverse events or other undesirable drug-related side
effects experienced by clinical trial participants.
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Many of these factors that may lead to a delay, suspension or
termination of clinical testing of a current or potential
product candidate may also ultimately lead to denial of
regulatory approval of a current or potential product candidate.
If we experience delays in the completion, or termination of,
clinical testing, our financial results and the commercial
prospects for our product candidates will be harmed, and our
ability to generate revenues from those products will be delayed.
If our
internal research and development efforts are unsuccessful, we
may be required to obtain rights to new products or product
candidates from third parties, which we may not be able to
do.
Our long-term ability to earn product revenue depends on our
ability to successfully advance our product candidates through
clinical development and regulatory approval and to identify and
obtain new products or product candidates through internal
development or licenses from third parties. If our development
programs are not successful, we may need to obtain rights to new
products or product candidates from third parties. We may be
unable to obtain suitable product candidates or products from
third parties for a number of reasons, including:
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we may be unable to purchase or license products or product
candidates on terms that would allow us to make a sufficient
financial return from resulting products;
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competitors may be unwilling to assign or license products or
product candidate rights to us; or
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we may be unable to identify suitable products or product
candidates within, or complementary to, our areas of interest
relating to the treatment of gout, cancer and HIV.
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If we are unable to obtain rights to new products or product
candidates from third parties, our ability to generate product
revenues and achieve profitability may suffer.
If we
successfully initiate and complete clinical trials for any
product candidate, there are no assurances that we will be able
to submit, or obtain regulatory approval of, a new drug
application.
There can be no assurance that if our clinical trials of any
potential product candidate are successfully initiated and
completed, we will be able to submit a NDA to the FDA in the
United States or similar application to other regulatory
authorities elsewhere in the world, or that any applications we
submit will be approved by these regulatory authorities in a
timely manner, if at all. If we are unable to submit a NDA or
similar application with respect to any future product
candidate, or if any NDA or similar application we submit is not
approved by the FDA or other regulatory authorities elsewhere in
the world, we will be unable to commercialize that product.
These authorities can and do reject new drug applications and
require additional clinical trials, even when product candidates
have performed well or have achieved favorable results in
clinical trials. If we fail to commercialize any product
candidate, we may be unable to generate sufficient revenues to
attain profitability and our reputation in the industry and in
the investment community would likely be damaged, each of which
would cause our stock price to decrease.
If we
successfully develop products, but those products do not achieve
and maintain market acceptance, our business will not be
profitable.
Even if any of our product candidates are approved for
commercial sale by the FDA or other regulatory authorities, our
profitability and growth will depend on the degree of market
acceptance of any approved product candidate by physicians,
healthcare professionals and third-party payors, which will in
turn depend on a number of factors, including:
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our ability to provide acceptable evidence of safety and
efficacy of our products;
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relative convenience and ease of administration of products;
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the prevalence and severity of any adverse side effects from the
products;
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the availability of alternative treatments;
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pricing and cost effectiveness of products; and
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sufficient third-party insurance coverage or reimbursement.
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In addition, even if any of our potential products achieve
market acceptance, we may not be able to maintain that market
acceptance over time if:
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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
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complications arise with respect to use of our potential future
products.
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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.
We anticipate that our existing cash, cash equivalents, and
short-term investments will be sufficient to fund our operating
activities through the first quarter of 2011. This current
financial projection includes forecasted expenses associated
with completing the RDEA594 Phase 2 development program. This
projection does not include forecasted expenses for Phase 3
development of RDEA594, the receipt of milestone payments under
our license agreement with Bayer, proceeds from future
partnering activities or financings, or payments to Valeant
under the asset purchase agreement. However, our business and
operations may change in a manner that would consume available
resources at a greater rate than anticipated. In particular,
because most of our resources for the foreseeable future will be
used to advance our product candidates, we may not be able to
accurately anticipate our future research and development
funding needs. We will need to raise substantial additional
capital in the future to, among other things:
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fund our research and development programs;
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advance our product candidates into and through clinical trials
and the regulatory review and approval process;
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establish and maintain manufacturing, sales and marketing
operations;
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commercialize our product candidates, if any, that receive
regulatory approval; and
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acquire rights to products or product candidates, technologies
or businesses.
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Our future funding requirements will depend on, and could
increase significantly as a result of, many factors, including:
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the rate of progress and cost of our research and development
activities;
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the scope, prioritization and number of preclinical studies and
clinical trials we pursue;
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the costs of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights;
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the costs and timing of regulatory approval;
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the costs of establishing or contracting for manufacturing,
sales and marketing capabilities;
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the effects of competing technological and market developments;
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the terms and timing of any collaborative, licensing and other
arrangements that we may establish; and
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the extent to which we acquire or license new technologies,
products or product candidates.
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We do not anticipate that we will generate significant
continuing revenues for at least several years, if ever. Until
we can generate significant continuing revenues, we expect to
satisfy our future cash needs through public or private equity
offerings, debt financings and corporate collaboration and
licensing arrangements, as well as through interest income
earned on cash balances. We cannot be certain that additional
funding will be available to us on acceptable terms, or at all.
Our ability to obtain new financing may be constrained by the
volatile economic conditions currently affecting financial
markets. If funds are not available, we may be required to
delay, reduce the scope of, or eliminate one or more of our
research or development programs or our commercialization
efforts. If we do not generate sufficient additional funding in
2010, we will postpone the initiation of our currently planned
RDEA594 Phase 3 development program in order to meet our working
capital requirements.
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.
We have decreased the size of our organization and may need to
do so again in the future in response to internal or external
adverse financial conditions or events. If our staffing is
inadequate because of additional, unanticipated attrition or
because we fail to retain the staffing level required to
accomplish our business objectives we may be delayed or unable
to continue the development or commercialization of our product
candidates, which could impede our ability to generate revenues
and achieve profitability.
Additionally, employees whose positions are eliminated in
connection with any reduction may seek future employment with
our competitors. Although all of our employees are required to
sign a confidentiality agreement with us at the time of hire, we
cannot assure you that the confidential nature of our
proprietary information will be maintained in the course of such
future employment. Our restructuring efforts may harm our
reputation and employee morale, impair our ability to attract
and retain future employees, and actually increase our expenses
in the short term. We cannot assure you that any future
restructuring efforts will be successful, or that we will be
able to realize the cost savings and other anticipated benefits
from future restructuring activities.
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 may raise additional funds through public or private equity
offerings, debt financings or corporate collaborations and
licensing arrangements. We cannot be certain that additional
funding will be available on acceptable terms, or at all. To the
extent that we raise additional capital by issuing equity
securities, our stockholders ownership will be diluted.
Any debt financing we obtain may involve covenants that restrict
our operations. These restrictive covenants may include, among
other things, limitations on borrowing, specific restrictions on
the use of our assets, as well as prohibitions on our ability to
create liens on our assets, pay dividends on or redeem our
capital stock or make investments. In addition, if we raise
additional funds through collaboration and licensing
arrangements, it may be necessary to grant licenses on terms
that are not favorable to us or relinquish potentially valuable
rights to our potential products or proprietary technologies. We
may be required in future collaborations to relinquish all or a
portion of our sales and marketing rights with respect to other
potential products or license intellectual property that enable
licensees to develop competing products in order to complete any
such transaction.
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.
Our short-term investments consist primarily of securities of
the United States government, its federal agencies, entities
controlled by the federal government and United States corporate
debt securities. These investments are subject to general
credit, liquidity, market and interest rate risks, which may
further be exacerbated by United States
sub-prime
mortgage defaults and other factors, which have affected various
sectors of the financial markets and caused credit and liquidity
issues. During the year ended December 31, 2009, we
determined that any declines in the fair value of our
investments were temporary. There may be further declines in the
value of these investments, which we may determine to be other
than temporary. These market risks associated with our
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investment portfolio may have a material adverse effect on our
results of operations, liquidity and financial condition.
We
depend on collaborations with other parties to develop and
commercialize selected product candidates and to provide
substantially all of our revenues.
We expect that, for at least the next few years, our ability to
generate significant revenues will depend in large part upon the
success of our existing collaboration with Bayer and our ability
to enter into new collaborations. Future revenues from our
collaboration with Bayer will depend on the achievement of
development, regulatory and sales-based milestones and royalty
payments, if any. We will not receive additional revenues from
our existing collaboration if Bayers development and
commercialization efforts are unsuccessful.
Typically, collaborators, including Bayer, will control the
development and commercialization of partnered compounds after
entering into a collaboration or license agreement. In addition,
we may not have complete access to information about the results
and status of our collaborators clinical development and
regulatory programs and strategies. Our collaborators may not
devote adequate resources to the development of our compounds
and may not develop or implement a successful clinical or
regulatory strategy. We cannot guarantee that any development,
regulatory or sales-based milestones in our existing or future
collaborations will be achieved in the future, or that we will
receive any payments for the achievement of any milestones or
royalties on sales of products. In addition, collaborations,
including our existing collaboration with Bayer, may be
terminated early in certain circumstances, in which case, we may
not receive future milestone or royalty payments.
Our ability to enter into new collaborations will depend in part
on finding appropriate partners for our development programs.
There has recently been increased consolidation and strategic
realignment among pharmaceutical companies, particularly in the
HIV market. The reduced number of potential partners could make
it more difficult to identify a potential partner for our
compounds and negotiate and enter into any potential
collaboration.
Finally, our ability to enter into new collaborations also
depends on the outcome of preclinical and clinical testing, the
results of which we cannot control. Even if our testing is
successful, pharmaceutical companies may not partner with us on
terms that we believe are acceptable until we have advanced our
drug candidates into the clinic and, possibly, through
later-stage clinical trials, if at all.
Conflicts
may arise between us and any of our collaborators that could
delay or prevent the development or commercialization of our
product candidates.
Conflicts may arise between our collaborators and us, such as
conflicts concerning the interpretation of clinical data or the
achievement of milestones. If any conflicts arise with Bayer or
any future collaborators, they may act in their self-interest,
which may be adverse to our best interests. Any such
disagreement between us and a collaborator could result in one
or more of the following, each of which could delay or prevent
the development or commercialization of our product candidates,
and, in turn, prevent us from generating sufficient revenues to
achieve or maintain profitability:
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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;
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unwillingness on the part of a collaborator to keep us informed
regarding the progress of its development and commercialization
activities or to permit public disclosure of the results of
those activities; or
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slowing or cessation of a collaborators development or
commercialization efforts with respect to our product candidates.
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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.
Our ability to develop and commercialize any products we may
develop will depend in part on our ability to manufacture, or
arrange for collaborators or other parties to manufacture, our
products at a competitive cost, in accordance with regulatory
requirements, and in sufficient quantities for clinical testing
and eventual commercialization. We currently do not have any
significant manufacturing arrangements or agreements, as our
current product candidates will not require commercial-scale
manufacturing in the near term, if ever. Our inability to enter
into or maintain manufacturing agreements with collaborators or
capable contract manufacturers on acceptable terms could delay
or prevent the development and commercialization of our
products, which would adversely affect our ability to generate
revenues and would increase our expenses.
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.
We do not currently have a sales organization for the sales,
marketing and distribution of pharmaceutical products. In order
to commercialize any products, we must build our sales,
marketing, distribution, managerial and other non-technical
capabilities or make arrangements with other parties to perform
these services. We have not yet determined whether we will
attempt to establish internal sales and marketing capabilities
or enter into agreements with other parties to sell and market
any products we may develop. The establishment and development
of our own sales force to market any products we may develop
will be expensive and time consuming and could delay any product
launch, and we cannot be certain that we would be able to
successfully develop this capacity. If we are unable to
establish our sales and marketing capability or any other
non-technical capabilities necessary to commercialize any
product we may develop, we will need to contract with third
parties to market and sell any products we may develop. If we
are unable to establish adequate sales, marketing and
distribution capabilities, whether independently or with other
parties, we may not be able to generate product revenue and may
not become profitable.
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.
We are a small company, and our success depends on our continued
ability to attract, retain and motivate highly qualified
management and scientific personnel. In particular, our research
and drug discovery and development programs depend on our
ability to attract and retain highly skilled chemists,
biologists and preclinical personnel, especially in the fields
of gout, cancer and HIV. If we are unable to hire or retain
these employees, we may not be able to advance our research and
development programs at the pace we anticipate. We may not be
able to attract or retain qualified management and scientific
personnel in the future due to the intense competition for
qualified personnel among biotechnology and pharmaceutical
businesses, particularly in the San Diego, California area.
If we are not able to attract and retain the necessary personnel
to accomplish our business objectives, we may experience
constraints that will impede significantly the achievement of
our research and development objectives. In addition, all of our
employees are at will employees, which means that
any employee may quit at any time and we may terminate any
employee at any time. Currently, we do not have employment
agreements with any employees or members of senior management
that provide us any guarantee of their continued employment. If
we lose members of our senior management team, we may not be
able to find suitable replacements and our business may be
harmed as a result.
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Our
quarterly results and stock price may fluctuate
significantly.
We expect our results of operations and future stock price to
continue to be subject to significant fluctuations. The level of
our revenues, if any, our results of operations and our stock
price at any given time will be based primarily on the following
factors:
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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;
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the addition or termination of research or development programs
or funding support;
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the status of development of our product candidates, including
results of preclinical studies and any future clinical trials;
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variations in the level of expenses related to the development
and commercialization of our product candidates or potential
product candidates during any given period;
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our execution of collaborative, licensing or other arrangements,
and the timing and accounting treatment of payments we make or
receive under these arrangements;
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our selection of additional compounds for development; and
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fluctuations in the stock prices of other companies in the
biotechnology and pharmaceuticals industries and in the
financial markets generally.
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These factors, some of which are not within our control, may
cause the price of our stock to fluctuate substantially. In
particular, if our quarterly operating or financial results fail
to meet or exceed the expectations of securities analysts or
investors, our stock price could drop suddenly and
significantly. We believe that quarterly comparisons of our
financial results are not necessarily meaningful and should not
be relied upon as an indication of our future performance.
If we
engage in any acquisition, we will incur a variety of costs, and
we may never realize the anticipated benefits of the
acquisition.
In 2006, we acquired pharmaceutical research and development
programs, including our most advanced product candidates, from
Valeant, and there is no guarantee that we will be able to
successfully develop the acquired product candidates. We may
attempt to acquire businesses, technologies, services or other
products or in-license technologies that we believe are a
strategic fit with our existing development programs, at the
appropriate time and as resources permit. In any acquisition,
the process of integrating the acquired business, personnel,
technology, service or product may result in unforeseen
operating difficulties and expenditures and may divert
significant management attention away from our ongoing business
operations. Other operational and financial risks associated
with acquisitions include:
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assumption and exposure to unknown liabilities of an acquired
business;
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disruption of our business and diversion of our
managements time and attention to acquiring and developing
acquired products or technologies;
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incurrence of substantial debt or dilutive issuances of
securities to pay for acquisitions;
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higher than expected acquisition and integration costs;
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increased amortization expenses;
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negative effect on our earnings (or loss) per share;
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difficulties in combining and integrating the operations and
personnel of any acquired businesses with our operations and
personnel;
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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
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inability to retain key employees of any acquired businesses.
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15
We may fail to realize the anticipated benefits of any completed
acquisition or devote resources to potential acquisitions that
are never completed. If we fail to successfully identify
strategic opportunities, complete strategic transactions or
integrate acquired businesses, technologies, services or
products, then we may not be able to successfully expand our
product candidate portfolio to provide adequate revenue to
attain and maintain profitability.
Earthquake
damage to our facilities could delay our research and
development efforts and adversely affect our
business.
Our research and development facility in San Diego,
California, is located in a seismic zone, and there is the
possibility of an earthquake, which could be disruptive to our
operations and result in delays in our research and development
efforts. In the event of an earthquake, if our facilities or the
equipment in our facilities are significantly damaged or
destroyed, we may not be able to rebuild or relocate our
facility or replace any damaged equipment in a timely manner and
our business, financial condition and results of operations
could be materially and adversely affected.
Valeants
exercise of its option to repurchase commercialization rights in
territories outside the United States and Canada (the
Valeant Territories) could limit the market for our
first NNRTI product and adversely affect our
business.
Under the asset purchase agreement that we entered into with
Valeant on December 21, 2006, Valeant retains a one-time
option to repurchase commercialization rights in the Valeant
Territories for our first NNRTI product derived from the
acquired intellectual property to advance to a Phase 2b HIV
clinical trial. If Valeant exercises this option, which it can
do following the completion of a Phase 2b clinical trial, but
prior to the initiation of a Phase 3 clinical trial, Valeant
would pay us a $10.0 million option fee, up to
$21.0 million in milestone payments based on regulatory
approvals, and a mid-single-digit royalty on product sales in
the Valeant Territories. However, Valeant would then own all
commercialization rights in the Valeant Territories, which may
adversely impact the amount of aggregate revenue we may be able
to generate from sales of our NNRTI product and may negatively
impact our potential for long-term growth. Also, if Valeant
exercises its option to repurchase commercialization rights in
the Valeant Territories and experiences difficulties in
commercializing our NNRTI product in the Valeant Territories,
then our commercialization efforts in the United States and
Canada may be adversely impacted. Finally, Valeants option
may adversely impact our efforts to enter into a collaboration
or license agreement with a potential partner to develop and
commercialize our NNRTI product.
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.
Under the terms of the Valeant asset purchase agreement, we
agreed to use commercially reasonable efforts to develop the
product candidates in the pharmaceutical research and
development programs we acquired from Valeant, with the
objective of obtaining marketing approval for RDEA806, RDEA119
and the lead product candidates from the next generation NNRTI
and MEK inhibitor programs in the United States, the United
Kingdom, France, Spain, Italy and Germany. If we have a
disagreement with Valeant on whether we have used commercially
reasonable efforts to develop such product candidates, then we
may be subject to a potential lawsuit or lawsuits from Valeant
under the asset purchase agreement. If such a lawsuit was
successful, we may be subject to financial losses, our
reputation within the pharmaceutical research and development
community may be negatively impacted and our business may suffer.
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.
Section 404 of the Sarbanes-Oxley Act requires on-going
management assessments of the effectiveness of our internal
controls over financial reporting and a report by our
independent registered public accounting firm that provides
their assessment of the effectiveness of our internal controls.
Testing and maintaining internal controls involves significant
costs and can divert our managements attention from other
matters that are important to our business. We and our
independent registered public accounting firm may not be able to
conclude on an ongoing basis that we have effective internal
controls over financial reporting in accordance with
Section 404. Failure to
16
achieve and maintain an effective internal control environment
could harm our operating results and could cause us to fail to
meet our reporting obligations. Inferior internal controls could
also cause investors to lose confidence in our reported
financial information, which could have a negative effect on the
price of our stock.
Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our internal controls
over financial reporting will prevent all errors and all fraud.
A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the
control systems objectives will be met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations on all control systems, no evaluation of controls
can provide absolute assurance that all control issues and
instances of fraud involving a company have been, or will be,
detected. The design of any system of controls is based in part
on certain assumptions about the likelihood of future events,
and we cannot assure you that any design will succeed in
achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of
compliance with policies or procedures. Because of the inherent
limitations in cost-effective control systems, misstatements due
to error or fraud may occur and not be detected. We cannot
assure you that we or our independent registered public
accounting firm will not identify a material weakness in our
internal controls in the future. A material weakness in our
internal controls over financial reporting would require
management and our independent registered public accounting firm
to evaluate our internal controls as ineffective. If our
internal controls over financial reporting are not considered
effective, we may experience a loss of public confidence, which
could have an adverse effect on our business and on the price of
our stock.
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.
Our commercial success depends in significant part on obtaining
and maintaining patent protection and trade secret protection of
our product candidates and their uses, as well as successfully
defending these patents against challenges. We will only be able
to protect our product candidates and their uses from
unauthorized use by other parties to the extent that valid and
enforceable patents or effectively protected trade secrets cover
them.
Due to evolving legal standards relating to the patentability,
validity and enforceability of patents covering pharmaceutical
inventions and the scope of claims made under these patents, our
ability to obtain and enforce patents is uncertain and involves
complex legal and factual questions. The U.S. Patent and
Trademark Office recently issued revised regulations affecting
prosecution before that office, and various pieces of
legislation, including patent reform acts, have been introduced
or discussed in the U.S. Senate and Congress in the past few
years. If implemented, or following final resolution of pending
legislation, new regulations or legislation could, among other
things, restrict our ability to prosecute applications in the
U.S. Patent and Trademark Office, limit the number of
patent claims in applications that we have previously filed or
intend to file, and may lower the threshold required for
competitors to challenge our patents in the U.S. Patent and
Trademark Office after they have been granted. Accordingly,
rights under any issued patents may not provide us with
sufficient protection for our product candidates or provide
sufficient protection to afford us a commercial advantage
against competitive products or processes. In addition, we
cannot guarantee that any patents will issue from any pending or
future patent applications owned by or licensed to us. Even with
respect to patents that have issued or will issue, we cannot
guarantee that the claims of these patents are, or will be
valid, enforceable or will provide us with any significant
protection against competitive products or otherwise be
commercially valuable to us. For example:
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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;
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we might not have been the first to file patent applications for
these inventions;
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others may independently develop similar or alternative
technologies or duplicate any of our technologies;
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it is possible that none of our pending patent applications will
result in issued patents;
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our issued or acquired patents may not provide a basis for
commercially viable products, may not provide us with any
competitive advantages, or may be challenged by other parties;
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our issued patents may not be valid or enforceable; or
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the patents of others may have an adverse effect on our business.
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Patent applications in the United States are maintained in
confidence for at least 18 months after their filing.
Consequently, we cannot be certain that the patent applications
we are pursuing will lead to the issuance of any patent or be
free from infringement or other claims from other parties. In
the event that another party has also filed a United States
patent application relating to our product candidates or a
similar invention, we may have to participate in interference
proceedings declared by the United States Patent Office to
determine priority of invention in the United States. The costs
of these proceedings could be substantial and it is possible
that our efforts would be unsuccessful, resulting in a material
adverse effect on our United States patent position.
Furthermore, we may not have identified all United States and
foreign patents or published applications that affect our
business either by blocking our ability to commercialize our
product candidates or by covering similar technologies that
affect our market.
In addition, some countries, including many in Europe, do not
grant patent claims directed to methods of treating humans, and
in these countries patent protection may not be available at all
to protect our product candidates.
Even if patents issue, we cannot guarantee that the claims of
those patents will be valid and enforceable or provide us with
any significant protection against competitive products, or
otherwise be commercially valuable to us.
Other companies may obtain patents
and/or
regulatory approvals to use the same drugs to treat diseases,
other than gout, cancer and HIV. As a result, we may not be able
to enforce our patents effectively because we may not be able to
prevent healthcare providers from prescribing, administering or
using another companys product that contains the same
active substance as our products when treating patients with
gout, cancer or HIV.
Our
business depends upon not infringing the rights of
others.
If we are sued for infringing intellectual property rights of
others, it will be costly and time consuming, and an unfavorable
outcome in that litigation would have a material adverse effect
on our business. Our commercial success depends upon our ability
to develop, manufacture, market and sell our product candidates
without infringing the proprietary rights of other parties. We
may be exposed to future litigation by other parties based on
claims that our product candidates or activities infringe the
intellectual property rights of others. There are numerous
United States and foreign-issued patents and pending patent
applications owned by others in gout, cancer, HIV and the other
fields in which we may develop products. We cannot assure you
that parties holding any of these patents or patent applications
will not assert infringement claims against us for damages or
seek to enjoin our activities. We also cannot assure you that,
in the event of litigation, we will be able to successfully
assert any belief we may have as to non-infringement, invalidity
or immateriality, or that any infringement claims will be
resolved in our favor.
There is a substantial amount of litigation involving patent and
other intellectual property rights in the biotechnology and
biopharmaceutical industries generally. Any litigation or claims
against us, with or without merit, may cause us to incur
substantial costs, could place a significant strain on our
financial resources, divert the attention of management from our
core business and harm our reputation. In addition, intellectual
property
18
litigation or claims could result in substantial damages and
force us to do one or more of the following if a court decides
that we infringe on another partys patent or other
intellectual property rights:
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cease selling, incorporating or using any of our products that
incorporate the challenged intellectual property;
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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
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redesign our processes so that they do not infringe, which could
be costly and time-consuming and may not be possible.
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If we find during clinical evaluation that our product
candidates for the treatment of gout, cancer or HIV, should be
used in combination with a product covered by a patent held by
another company or institution, and that a labeling instruction
is required in product packaging recommending that combination,
we could be accused of, or held liable for, infringement of the
other partys patents covering the product recommended for
co-administration with our product. In that case, we may be
required to obtain a license from the other company or
institution to use the required or desired package labeling,
which may not be available on reasonable terms, or at all.
If we fail to obtain any required licenses or make any necessary
changes to our technologies, we may be unable to develop or
commercialize some or all of our product candidates.
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.
We also rely on trade secrets to protect our technology,
especially where we do not believe patent protection is
appropriate or obtainable. However, trade secrets are difficult
to protect. In order to protect our proprietary technology and
processes, we also rely in part on confidentiality and
intellectual property assignment agreements with our employees,
consultants and other advisors. These agreements may not
effectively prevent disclosure of confidential information or
result in the effective assignment to us of intellectual
property, and may not provide an adequate remedy in the event of
unauthorized disclosure of confidential information or other
breaches of the agreements. In addition, others may
independently discover our trade secrets and proprietary
information, and in such case we could not assert any trade
secret rights against such party. Enforcing a claim that a party
illegally obtained and is using our trade secrets is difficult,
expensive and time consuming, and the outcome is unpredictable.
In addition, courts outside the United States may be less
willing to protect trade secrets. Costly and time-consuming
litigation could be necessary to seek to enforce and determine
the scope of our proprietary rights, and failure to obtain or
maintain trade secret protection could adversely affect our
competitive business position.
Many
of our competitors have significantly more resources and
experience, which may harm our commercial
opportunity.
The biotechnology and pharmaceutical industries are subject to
intense competition and rapid and significant technological
change. We have many potential competitors, including major drug
and chemical companies, specialized biotechnology firms,
academic institutions, government agencies and private and
public research institutions. Many of our competitors have
significantly greater financial resources, experience and
expertise in:
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research and development;
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preclinical testing;
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clinical trials;
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regulatory approvals;
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manufacturing; and
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sales and marketing of approved products.
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Smaller or early stage companies and research institutions may
also prove to be significant competitors, particularly through
collaborative arrangements with large and established
pharmaceutical companies. We will also
19
face competition from these parties in recruiting and retaining
qualified scientific and management personnel, establishing
clinical trial sites and patient registration for clinical
trials, and acquiring and in-licensing technologies and products
complementary to our programs or potentially advantageous to our
business.
If our
competitors develop treatments for gout, cancer or HIV that are
approved faster, marketed better or demonstrated to be safer or
more effective than any products that we may develop, our
commercial opportunity will be reduced or
eliminated.
We believe that a significant number of drugs are currently
under development and may become available in the future for the
treatment of gout, cancer or HIV. Potential competitors may
develop treatments for gout, cancer, HIV or other technologies
and products that are safer, more effective or less costly than
our product candidates or that would make our technology and
product candidates obsolete or non-competitive. Some of these
products may use therapeutic approaches that compete directly
with our most advanced product candidates. If any of our
competitors succeed in obtaining approval from the FDA or other
regulatory authorities for their products sooner than we do or
for products that are more effective or less costly than ours,
our commercial opportunity could be significantly reduced.
If we
cannot establish pricing of our product candidates acceptable to
the United States or foreign governments, insurance companies,
managed care organizations and other payors, or arrange for
favorable reimbursement policies, any product sales will be
severely hindered.
The continuing efforts of the United States and foreign
governments, insurance companies, managed care organizations and
other payors of health care costs to contain or reduce costs of
health care may adversely affect our ability to generate
adequate revenues and gross margins to make the products we
develop commercially viable. Our ability to commercialize any
product candidates successfully will depend in part on the
extent to which governmental authorities, private health
insurers and other organizations establish appropriate
reimbursement levels for the cost of such products and related
treatments.
In certain foreign markets, the pricing of prescription
pharmaceuticals is subject to government control. In the United
States, recent federal and state government initiatives directed
at lowering the total cost of health care mean the United States
Congress and state legislatures will likely continue to focus on
health care reform, the cost of prescription pharmaceuticals and
the reform of the Medicare and Medicaid systems. The trend
toward managed health care in the United States, which could
significantly influence the purchase of health care services and
products, as well as legislative proposals to reform health
care, control pharmaceutical prices or reduce government
insurance programs, may result in lower prices for our product
candidates. While we cannot predict whether any legislative or
regulatory proposals affecting our business will be adopted, the
adoption of these proposals could have a material and adverse
effect on our potential revenues and gross margins.
Product
liability claims may damage our reputation and, if insurance
proves inadequate, the product liability claims may harm our
results of operations.
We face an inherent risk of product liability exposure when we
test our product candidates in human clinical trials, and we
will face an even greater risk if we sell our product candidates
commercially. If we cannot successfully defend ourselves against
product liability claims, we will incur substantial liabilities,
our reputation may be harmed and we may be unable to
commercialize our product candidates. We have product liability
insurance that covers the conduct of our clinical trials. We
intend to expand our insurance coverage to include the sale of
commercial products if marketing approval is obtained for any of
our product candidates. However, insurance coverage is
increasingly expensive. We may not be able to maintain insurance
coverage at a reasonable cost and we may not be able to obtain
insurance coverage that will be adequate to satisfy any
liability that may arise.
Any
claims relating to our improper handling, storage or disposal of
biological, hazardous and radioactive materials could be
time-consuming and costly.
Our research and development activities involve the controlled
use of hazardous materials, including chemicals that cause
cancer, volatile solvents, radioactive materials and biological
materials that have the potential
20
to transmit disease. Our operations also produce hazardous waste
products. We are subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling
and disposal of these materials and waste products. If we fail
to comply with these laws and regulations or with the conditions
attached to our operating licenses, the licenses could be
revoked, and we could be subjected to criminal sanctions and
substantial financial liability or be required to suspend or
modify our operations. Although we believe that our safety
procedures for handling and disposing of these materials comply
with legally prescribed standards, we cannot completely
eliminate the risk of accidental contamination or injury from
these materials. In the event of contamination or injury, we
could be held liable for damages or penalized with fines in an
amount exceeding our resources. In addition, we may have to
incur significant costs to comply with future environmental laws
and regulations. We do not currently have a pollution and
remediation insurance policy.
Our
business and operations would suffer in the event of system
failures.
Despite the implementation of security measures, our internal
computer systems are vulnerable to damage from computer viruses,
unauthorized access, natural disasters, terrorism, war and
telecommunication and electrical failures. Any system failure,
accident or security breach that causes interruptions in our
operations could result in a material disruption of our research
and drug discovery and development programs. To the extent that
any disruption or security breach results in a loss or damage to
our data or applications, or inappropriate disclosure of
confidential or proprietary information, we may incur liability
as a result, our research and drug discovery and development
programs may be adversely affected and the further development
of our product candidates may be delayed. In addition, we may
incur additional costs to remedy the damages caused by these
disruptions or security breaches.
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.
Our directors, executive officers, principal stockholders and
affiliated entities currently beneficially own or control a
significant majority of our outstanding securities. Two of our
directors own collectively approximately 46% of our outstanding
shares of common stock. These stockholders, if they determine to
vote in the same manner, would control the outcome of any matter
requiring approval by our stockholders, including the election
of directors and the approval of mergers or other business
combination transactions or terms of any liquidation.
Future
sales of our common stock may cause our stock price to
decline.
Our principal stockholders and affiliated entities hold a
substantial number of shares of our common stock that they are
able to sell in the public market. In addition, they currently
own outstanding warrants exercisable for additional shares of
our common stock. The exercise of these warrants or the sale by
our current stockholders of a substantial number of shares, or
the expectation that such exercises or sales may occur, could
significantly reduce the market price of our common stock.
Anti-takeover
provisions in our charter documents and under Delaware law may
make it more difficult to acquire us.
Provisions in our certificate of incorporation and bylaws could
make it more difficult for a third party to acquire us, even if
doing so would be beneficial to our stockholders. These
provisions:
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allow the authorized number of directors to be changed only by
resolution of our Board of Directors;
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require that stockholder actions must be effected at a duly
called stockholder meeting and prohibit stockholder action by
written consent;
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establish advance notice requirements for nominations to our
Board of Directors or for proposals that can be acted on at
stockholder meetings;
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authorize our Board of Directors to issue blank check preferred
stock to increase the number of outstanding shares; and
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limit who may call stockholder meetings.
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In addition, because we are incorporated in Delaware, we are
subject to the provisions of Section 203 of the Delaware
General Corporation Law, which may prohibit large stockholders
from consummating a merger with, or acquisition of us. These
provisions may prevent a merger or acquisition that would be
attractive to stockholders and could limit the price that
investors would be willing to pay in the future for our common
stock.
We
have never paid cash dividends on our common stock and we do not
anticipate paying dividends in the foreseeable
future.
We have paid no cash dividends on any of our common stock to
date, and we currently intend to retain our future earnings, if
any, to fund the development and growth of our business. In
addition, the terms of any future debt or credit facility may
preclude us from paying any dividends. As a result, capital
appreciation, if any, of our common stock will be your sole
source of potential gain for the foreseeable future.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS.
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None.
We currently
sub-lease a
facility in San Diego, California covering a total of
approximately 52,000 square feet. Our facility includes our
research and development laboratories and our corporate offices
and warehouse. The building
sub-lease
expires in February 2015. We have one option to extend the term
of the
sub-lease
agreement until March 2017. The lease is subject to an
escalation clause that provides for annual rent increases. We
believe that this facility will be adequate to meet our needs
for the near term.
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ITEM 3.
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LEGAL
PROCEEDINGS.
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We are not currently a party to any legal proceedings.
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
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Unregistered
Sales of Equity Securities and Use of Proceeds
On September 29, 2009, the Company issued 11,862
unregistered shares of common stock to an accredited investor in
reliance on Rule 144 of the Securities Exchange Act of
1933, as amended, pursuant to the net exercise provision of an
outstanding warrant. Accordingly, the Company did not receive
any proceeds from the exercise of the warrant.
22
Information
About Our Common Stock
Our common stock trades on the Nasdaq Global Stock Market under
the symbol RDEA. Set forth below are the high and
low sales prices for our common stock for each full quarterly
period within the two most recent fiscal years.
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High
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Low
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Year Ended December 31, 2009
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First Quarter
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$
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15.00
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$
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10.00
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Second Quarter
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$
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16.75
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$
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8.78
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Third Quarter
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$
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21.35
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$
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15.85
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Fourth Quarter
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$
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18.93
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$
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12.18
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High
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Low
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Year Ended December 31, 2008
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First Quarter
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$
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16.25
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$
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11.20
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Second Quarter
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$
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15.30
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$
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12.36
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Third Quarter
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$
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15.07
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$
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9.26
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Fourth Quarter
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$
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14.16
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$
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6.29
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Holders
The number of record holders of our common stock as of
March 1, 2010 was approximately 61.
Dividend
Policy
We have never paid dividends on our common stock. We currently
intend to retain all available funds and any future earnings for
use in the operation and expansion of our business and we do not
anticipate paying any cash dividends in the foreseeable future.
The holders of our Series A preferred stock were entitled
to receive cumulative dividends at the rate of 8% per annum of
the original purchase price of $10,000 per share of
Series A preferred stock, prior to and in preference to any
declaration or payment of a dividend to the holders of our
common stock. The dividends were payable quarterly in shares of
our common stock. The number of shares payable was determined
based on the average closing sale price of our common stock for
each of the five trading days immediately preceding the
applicable dividend payment date. Until accrued and unpaid
dividends on the Series A preferred stock were paid and set
apart, no dividends or other distributions in respect of any
other shares of our capital stock could be declared. There are
currently no shares of Series A Preferred Stock
outstanding. All outstanding shares of Series A Preferred
Stock were automatically converted into shares of common stock
in May 2008.
Information
About Our Equity Compensation Plans
Information regarding our equity compensation plans is
incorporated by reference in Item 12 of Part III of
this annual report on
Form 10-K.
23
Stock
Performance Graph
This information, including the graph below, is not
soliciting material or deemed to be
filed with the Securities and Exchange Commission,
and is not incorporated by reference into any prior or
subsequent filing by us under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended,
without regard to any general incorporation language contained
in such filing.
The following graph compares the cumulative total stockholder
return on our common stock for the five years ended
December 31, 2009 with the Center for Research in
Securities Prices (CRSP) Total Return Index for the
Nasdaq Global Market (U.S. Companies) and the CRSP Total
Return Index for Nasdaq Pharmaceutical Stocks (comprising all
companies listed in the Nasdaq Global Market under SIC 283). The
graph assumes that $100 was invested on December 31, 2004
in our common stock and each index and that all dividends were
reinvested. No cash dividends have been declared on our common
stock. The comparisons in the graph are required by the
Securities and Exchange Commission and are not intended to
forecast or be indicative of possible future performance of our
common stock.
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12/31/2004
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12/31/2005
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12/31/2006
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12/31/2007
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12/31/2008
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12/31/2009
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Ardea Biosciences, Inc.
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$
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100
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$
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88.48
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|
$
|
106.86
|
|
|
$
|
375.00
|
|
|
$
|
293.38
|
|
|
$
|
343.14
|
|
Nasdaq US
|
|
$
|
100
|
|
|
$
|
102.13
|
|
|
$
|
112.19
|
|
|
$
|
121.68
|
|
|
$
|
58.64
|
|
|
$
|
84.28
|
|
Nasdaq-Pharmaceuticals
|
|
$
|
100
|
|
|
$
|
110.12
|
|
|
$
|
107.79
|
|
|
$
|
113.36
|
|
|
$
|
105.48
|
|
|
$
|
118.52
|
|
24
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA.
|
The following Selected Financial Data should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations included
in Item 7 beginning on page 26 and the consolidated
financial statements and related notes thereto beginning on
page F-2
of this annual report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License fees
|
|
$
|
20,442
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Sponsored research
|
|
|
|
|
|
|
304
|
|
|
|
3,095
|
|
|
|
|
|
|
|
|
|
Reimbursable research and development costs
|
|
|
2,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
22,936
|
|
|
|
304
|
|
|
|
3,095
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
42,198
|
|
|
|
44,858
|
|
|
|
23,103
|
|
|
|
72
|
|
|
|
255
|
|
General and administrative
|
|
|
10,689
|
|
|
|
11,921
|
|
|
|
7,566
|
|
|
|
2,674
|
|
|
|
2,980
|
|
Restructuring and other charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(29,951
|
)
|
|
|
(56,475
|
)
|
|
|
(27,574
|
)
|
|
|
(2,746
|
)
|
|
|
(3,883
|
)
|
Interest income
|
|
|
386
|
|
|
|
1,524
|
|
|
|
2,128
|
|
|
|
2,377
|
|
|
|
1,502
|
|
Interest expense
|
|
|
(1,323
|
)
|
|
|
(215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
21
|
|
|
|
171
|
|
|
|
375
|
|
|
|
2
|
|
|
|
(1
|
)
|
Change in fair value on revaluation of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(30,867
|
)
|
|
|
(54,995
|
)
|
|
|
(25,071
|
)
|
|
|
(367
|
)
|
|
|
(3,171
|
)
|
Non-cash dividends on Series A preferred stock
|
|
|
|
|
|
|
(60
|
)
|
|
|
(240
|
)
|
|
|
(240
|
)
|
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(30,867
|
)
|
|
$
|
(55,055
|
)
|
|
$
|
(25,311
|
)
|
|
$
|
(607
|
)
|
|
$
|
(3,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis and diluted net loss per share applicable to common
stockholders
|
|
$
|
(1.70
|
)
|
|
$
|
(3.79
|
)
|
|
$
|
(2.55
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
applicable to common stockholders
|
|
|
18,158
|
|
|
|
14,544
|
|
|
|
9,934
|
|
|
|
9,326
|
|
|
|
9,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
50,891
|
|
|
$
|
57,743
|
|
|
$
|
66,215
|
|
|
$
|
48,669
|
|
|
$
|
48,830
|
|
Working capital
|
|
$
|
30,943
|
|
|
$
|
49,463
|
|
|
$
|
62,548
|
|
|
$
|
48,338
|
|
|
$
|
48,820
|
|
Total assets
|
|
$
|
55,065
|
|
|
$
|
61,475
|
|
|
$
|
68,840
|
|
|
$
|
50,240
|
|
|
$
|
49,171
|
|
Noncurrent portion of obligations under capital leases and notes
payable
|
|
$
|
3,315
|
|
|
$
|
6,132
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Accumulated deficit
|
|
$
|
(347,410
|
)
|
|
$
|
(316,543
|
)
|
|
$
|
(261,488
|
)
|
|
$
|
(236,177
|
)
|
|
$
|
(235,570
|
)
|
Total stockholders equity
|
|
$
|
24,741
|
|
|
$
|
45,958
|
|
|
$
|
63,739
|
|
|
$
|
49,064
|
|
|
$
|
48,820
|
|
25
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
Introduction
Managements discussion and analysis of financial condition
and results of operations is provided as a supplement to the
accompanying consolidated financial statements and notes to help
provide an understanding of our financial condition, the changes
in our financial condition and our results of operations. Our
discussion is organized as follows:
|
|
|
|
|
Overview. This section provides a general
description of our business and operating expenses.
|
|
|
|
Recent developments. This section provides a
general description of recent events and significant
transactions that we believe are important in understanding our
financial condition and results of operations.
|
|
|
|
Critical accounting policies and
estimates. This section contains a discussion of
the accounting policies that we believe are important to our
financial condition and results of operations and that require
significant judgment and estimates on the part of management in
their application. In addition, all of our significant
accounting policies, including the critical accounting policies
and estimates, are summarized in Note 2 to the accompanying
consolidated financial statements.
|
|
|
|
Results of operations. This section provides
an analysis of our results of operations presented in the
accompanying consolidated statements of operations by comparing
the results for the year ended December 31, 2009 to the
results for the year ended December 31, 2008 and comparing
the results for the year ended December 31, 2008 to the
results for the year ended December 31, 2007.
|
|
|
|
Liquidity and capital resources. This section
provides an analysis of our cash flows and a discussion of our
outstanding commitments and contingencies that existed as of
December 31, 2009. Included in this discussion is our
financial capacity to fund our future commitments and a
discussion of other financing arrangements.
|
Overview
We are a biotechnology company focused on the development of
small-molecule therapeutics for the treatment of gout, cancer
and HIV. We have five product candidates in development,
including:
|
|
|
|
|
RDEA594: An inhibitor of the URAT1 kidney
transporter for the treatment of hyperuricemia and gout;
|
|
|
|
RDEA684: A next generation URAT1 transporter
inhibitor for the treatment of hyperuricemia and gout;
|
|
|
|
RDEA119: A MEK inhibitor for the treatment of
cancer;
|
|
|
|
RDEA806: A NNRTI for the treatment of
HIV; and
|
|
|
|
RDEA427: A next generation NNRTI for the
treatment of HIV.
|
Research
and Development Expense
Research and development expenses primarily consist of costs
associated with the development and clinical trials of our
product candidates, costs associated with our ongoing research
programs, salaries and share-based compensation for research and
development personnel and facility costs.
At this time, due to the risks inherent in the clinical trial
process and given the early stage of development of our product
candidates and lead compounds from our research programs, we are
unable to estimate with any certainty the costs we will incur in
the continued development of our product candidates for
commercialization. Other than costs for outsourced services
associated with our clinical programs, we generally do not track
our research and development expenses by project; rather, we
track such expenses by the type of cost incurred. Due to these
same factors, we are unable to determine the anticipated
completion dates for our current research and development
projects.
26
General
and Administrative Expense
General and administrative expense primarily consist of
salaries, share-based compensation and other related costs for
personnel in executive, finance and accounting, business
development, investor relations, information technology, legal
and human resource functions. Other general and administrative
costs include professional fees for legal, accounting and other
general corporate purposes, and facility costs not otherwise
included in research and development expense.
Other
Income (Expense)
Other income (expense) primarily consists of the interest earned
on our cash, cash equivalents and short-term investments
available-for-sale,
net of interest expense.
Recent
Developments
In January 2010, we announced additional positive results from a
recently completed Phase 2a study of RDEA594, as well as
additional positive results from the second panel of a Phase 1
drug-drug interaction and pharmacodynamic study of RDEA594 in
combination with febuxostat. In the Phase 2a study, 100% of
patients reached target serum urate levels with the combination
of RDEA594 and allopurinol. In the Phase 1 study, the
combination of RDEA594 and febuxostat reduced serum urate levels
in healthy volunteers by approximately 70%.
Critical
Accounting Policies and Estimates
The discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance with United
States generally accepted accounting principles, or GAAP. The
preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We evaluate our
estimates on an ongoing basis, including those related to
revenues, accrued clinical liabilities and share-based
compensation. We base our estimates on historical experience and
on other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis of making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ materially from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies involve
significant judgments and estimates used in the preparation of
our consolidated financial statements.
Revenue
Recognition
Our collaboration arrangements may contain multiple elements and
we may be eligible for payments made in the form of upfront
license fees, research funding, cost reimbursement, milestone
payments and downstream royalties.
Revenue from upfront, nonrefundable license fees is recognized
over the period that any related services are provided. Amounts
received for research funding are recognized as revenues as the
research services that are the subject of such funding are
performed. Revenue derived from reimbursement of research and
development costs in transactions where we act as a principal
are recorded as revenue for the gross amount of the
reimbursement, and the costs associated with these
reimbursements are reflected as a component of research and
development expense in the consolidated statements of
operations. Revenue from milestones is recognized when earned,
as evidenced by written acknowledgement from the collaborator or
other persuasive evidence that the milestone has been achieved,
provided that the milestone event is substantive and its
achievability was not reasonably assured at the inception of the
agreement. Revenues recognized for royalty payments, if any,
will be based upon actual net sales of the licensed compounds,
as provided by the collaboration arrangement, in the period the
sales occur. Any amounts received prior to satisfying our
revenue recognition criteria are recorded as deferred revenue on
the consolidated balance sheet.
27
Accrued
Clinical Liabilities
We review and accrue clinical costs based on work performed,
which relies on estimates of the services received and related
expenses incurred. Clinical trial-related contracts vary
significantly in length, and may be for a fixed amount, based on
milestones or deliverables, a variable amount based on actual
costs incurred, capped at a certain limit, or for a combination
of these elements. Revisions are charged to expense in the
period in which the facts that give rise to the revision become
known. Historically, revisions have not resulted in material
changes to research and development costs, however, a
modification in the protocol of a clinical trial or cancellation
of a trial could result in a charge to our results of operations.
Share-Based
Compensation
We grant equity based awards under three stockholder-approved,
share-based compensation plans. We have granted, and may in the
future grant, options and restricted stock awards to employees,
directors, consultants and advisors under either our 2002
Non-Officer Equity Incentive Plan or our 2004 Stock Incentive
Plan. In addition, all of our employees are eligible to
participate in our 2000 Employee Stock Purchase Plan which
enables employees to purchase common stock at a discount through
payroll deductions.
We estimate the fair value of stock options granted using the
Black-Scholes-Merton, or Black-Scholes, option valuation model.
This fair value is then amortized over the requisite service
periods of the awards. The Black-Scholes option valuation model
requires the input of subjective assumptions, including each
options expected life and price volatility of the
underlying stock. Expected volatility is based on the
weighted-average volatility of our stock, factoring in daily
share price observations and the historical price volatility of
certain peers within our industry sector. In computing expected
volatility, the length of the historical period used is equal to
the length of the expected term of the option and the share
purchase right. The expected life of employee stock options
represents the average of the contractual term of the options
and the weighted-average vesting period, as permitted under the
simplified method.
As share-based compensation expense is based on awards
ultimately expected to vest, it has been reduced for estimated
forfeitures. Forfeitures are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Forfeitures are
estimated based on historical experience. Changes in assumptions
used under the Black-Scholes option valuation model could
materially affect our net loss and net loss per share.
New
Accounting Pronouncements
See Note 2 to the consolidated financial statements
included in Item 15 of this Annual Report on
Form 10-K.
Results
of Operations
Years
Ended December 31, 2009 and 2008
Revenues
For the year ended December 31, 2009, revenues increased to
$22.9 million from $0.3 million for the year ended
December 31, 2008. The revenue earned in 2009 primarily
resulted from the recognition of a portion of the upfront,
non-refundable license fee and reimbursement of third-party
development costs associated with our MEK inhibitor program
under the terms of the license agreement with Bayer. The
$35.0 million upfront license fee has been recognized on a
straight-line basis over a period of approximately
13 months, which was the original period in which we
expected to complete all of our obligations under the License
Agreement. In December 2009, we revised our estimate of this
period extending it to 26 months as a result of design
modifications to our ongoing RDEA119 clinical trials. The
unamortized balance of the license fee as of the date of the
change in estimate will be recognized over the revised timeline.
The revenue earned in fiscal 2008 resulted from the research
services we provided under our master services agreement with
Valeant, which has since terminated by its terms.
28
Research
and Development Expense
For the year ended December 31, 2009, research and
development expense decreased to $42.2 million from
$44.9 million for the same period in 2008. The decrease in
research and development expense was primarily due to a decrease
in spending of approximately $1.8 million mainly due to
reduced discovery research and clinical development expenditures
as we focus our resources on our gout-related programs, RDEA594
and RDEA684. Research and development expense also decreased
approximately $2.2 million as a result of savings from our
May 2009 restructuring. In addition, the decrease was a result
of approximately $0.3 million in one-time facility-related
expenses incurred in the first quarter of 2008 in connection
with our facility relocation and decreased monthly rent and
common area maintenance charges for the San Diego facility,
which we occupied beginning in March 2008. These decreases were
partially offset by severance-related charges of approximately
$0.8 million recorded in 2009 in connection with our May
2009 restructuring. In addition, research and development
expense was also partially offset by an increase in share-based
compensation expense of approximately $0.3 million in 2009
as compared to 2008.
General
and Administrative Expense
For the year ended December 31, 2009, general and
administrative expense decreased to $10.7 million from
$11.9 million for the same period in 2008. The decrease in
general and administrative expense was primarily a result of
one-time costs of approximately $0.7 million incurred in
2008 related to the facility relocation. In addition, the
decrease in general and administrative expense was the result of
a decrease in consulting and professional outside services of
approximately $0.5 million and a decrease in personnel and
related costs due to a decrease in headcount of approximately
$0.4 million for the year ended December 31, 2009 as
compared to 2008. These decreases were partially offset by an
increase in share-based compensation expense of approximately
$0.4 million in 2009 as compared to 2008.
Other
Income (expense)
For the year ended December 31, 2009, other income
(expense) decreased to ($0.9) million net other expense
from $1.5 million net other income for the same period in
2008. The decrease in other income (expense) was primarily a
result of an increase in interest expense in connection with our
growth capital loan and capital lease obligations entered into
in the second half of 2008 and a decrease in interest income due
to lower average interest rates and lower average cash balances
as compared to 2008.
Years
Ended December 31, 2008 and 2007
Revenues
For the year ended December 31, 2008, revenues decreased to
$0.3 million from $3.1 million for the year ended
December 31, 2007. Revenues earned in 2007 and 2008
resulted from the research services we provided under our master
services agreement with Valeant for its preclinical
neuropharmacology program. The decrease in revenues from 2007
levels was due to the earlier than anticipated identification of
a clinical development candidate from that program and
Valeants subsequent reduction in the utilization of our
research and development services. The master services agreement
has since terminated by its terms.
Research
and Development Expense
For the year ended December 31, 2008, research and
development expense increased to $44.9 million from
$23.1 million for the same period in 2007. The increase in
research and development expense was primarily due to continued
development and progression of our clinical and preclinical
programs, which included increased spending of approximately
$16.1 million on clinical research organizations,
professional outside services, and research and clinical trial
supplies and materials for the year ended December 31,
2008. In addition, the increase in research and development
expense was a result of additional personnel costs of
approximately $3.1 million and an increase in share-based
compensation expense of approximately $1.4 million for the
year ended December 31, 2008 resulting from increased
headcount in 2008 as compared to 2007.
29
General
and Administrative Expense
For the year ended December 31, 2008, general and
administrative expense increased to $11.9 million from
$7.6 million for the same period in 2007. The increase in
general and administrative expense was primarily the result of
higher share-based compensation expense of approximately
$2.3 million and additional personnel costs of
approximately $1.9 million due to increased headcount in
2008 as compared to 2007.
Other
Income (expense)
For the year ended December 31, 2008, other income
(expense) decreased to $1.5 million from $2.5 million
for the same period in 2007. The decrease in other income
(expense) was primarily a result of lower average interest rates
and lower average cash balances for 2008 as compared to 2007, as
well as increased interest expense in 2008 associated with our
growth capital loan, tenant improvements loan and capital lease
obligation entered into in 2008. There were no comparable
obligations in 2007.
Liquidity
and Capital Resources
From inception through December 31, 2009, we have incurred
a cumulative net loss of approximately $347.4 million, of
which $111.2 million was incurred subsequent to the closing
of the asset acquisition from Valeant and the commencement of
operating activities as Ardea Biosciences, Inc. We have financed
our operations through public and private offerings of
securities, revenues from collaborative arrangements, proceeds
from our growth capital loan and interest income from invested
cash balances.
In May 2009, we committed to a restructuring plan (the
Restructuring Plan) intended to conserve our
financial resources by focusing on our clinical-stage programs.
In combination with other employee attrition since
January 1, 2009, the Restructuring Plan resulted in a
reduction of approximately 47% of our workforce with the
majority coming from discovery research and associated
administrative personnel. Estimated cost savings from the
Restructuring Plan, net of severance and related costs, were
approximately $2.2 million in 2009 and are expected to be
approximately $6.6 million per year thereafter.
In April 2009, we entered into the license agreement with Bayer.
Under the terms of the license agreement, we have granted to
Bayer a worldwide, exclusive license to develop and
commercialize our MEK inhibitors for all indications. In partial
consideration for the license, Bayer paid us a non-refundable
upfront cash fee of $35 million. We are eligible to receive
additional cash payments totaling up to $372 million upon
achievement of certain development, regulatory and sales-based
milestones, as well as low double-digit royalties on worldwide
sales of products covered under the license agreement.
In December 2008, we raised $30.5 million by selling
2,737,336 newly issued unregistered shares of our common stock
and warrants to purchase 684,332 shares of common stock at
a total purchase price of approximately $11.17 per unit, with
each unit consisting of one share of common stock and a warrant
to purchase 0.25 shares of common stock at an exercise
price of $11.14 per share. On January 13, 2009, we filed a
registration statement with the SEC covering the resale of these
shares and the shares issuable upon exercise of the warrants.
This registration statement was declared effective by the SEC on
January 21, 2009.
In November 2008, we entered into an agreement with Oxford
Finance Corporation and Silicon Valley Bank, (collectively, the
Lenders), pursuant to which the Lenders provided us
with an approximately three-year, $8.0 million growth
capital loan. Interest accrues at a rate of 12% per annum, with
monthly interest-only payments required during a period that
began on the loan funding date and continued through
February 28, 2009, followed thereafter by equal monthly
payments of principal and interest over a period of
33 months. In addition, we are required to pay a total loan
commitment fee of approximately $0.5 million, of which
$0.1 million was paid upon entering into the loan agreement
and the remaining $0.4 million is due at the end of the
term of the loan. We have the option to prepay in full the
outstanding balance of the loan, subject to a prepayment fee.
The loan is collateralized by our general assets, excluding
intellectual property. There are no financial covenants
associated with the loan. In connection with the loan, we issued
to the Lenders warrants to purchase up to an aggregate of
56,010 shares of our common stock at an exercise price of
$8.57 per share. In September 2009, Silicon Valley Bank
exercised its warrant to purchase 21,004 shares of our
common stock using the conversion right provision in the warrant
agreement,
30
which resulted in the net issuance of 11,862 shares of
common stock and no net cash proceeds to us. The remaining
warrants are currently exercisable and expire seven years from
the date of issuance.
In July 2008, we entered into a capital lease agreement for
approximately $318,000 to finance the purchase of certain
equipment. The agreement is secured by the equipment, bears
interest at 6.05% per annum, and is payable in monthly
installments of principal and interest of approximately $10,000
for 36 months beginning in September 2008.
In March 2008, we exercised our right under our sublease
agreement to borrow from the sublessor approximately $250,000
for costs incurred and paid for certain tenant improvements. The
note evidencing the borrowings bears interest at 7.00% per annum
and is payable in monthly installments of principal and interest
of approximately $4,000 for 84 months beginning in June
2008.
As of December 31, 2009, we had $50.9 million in cash,
cash equivalents, and short-term investments, and
$1.4 million in receivables, compared to $57.7 million
in cash, cash equivalents, and short-term investments, and
$0.4 million in receivables as of December 31, 2008.
The net decrease in cash, cash equivalents and short-term
investments and receivables for 2009 was primarily due to the
use of cash to fund our clinical-stage programs, personnel costs
and for other general corporate purposes, partially offset by
the receipt of a $35.0 million non-refundable, upfront
license fee and the reimbursement of third-party development
costs associated with our MEK inhibitor program under the
license agreement with Bayer.
Under the asset purchase agreement with Valeant, we will be
required to pay Valeant $2.0 million after the first
patient is dosed in the first Phase 2b study for the NNRTI
program and $1.0 million after the first patient is dosed
in the first Phase 2b study for the MEK inhibitor program.
We also enter into agreements from time to time with clinical
sites and contract research organizations for the conduct of our
clinical trials. We make payments to these sites and
organizations based upon the number of patients enrolled and the
length of their participation in the clinical trials. Under
certain of these agreements, we may be subject to penalties in
the event that we prematurely terminate these agreements. At
this time, due to the variability associated with clinical site
and contract research organization agreements, we are unable to
estimate with certainty the future costs we will incur. We
intend to use our current financial resources to fund our
obligations under these commitments.
In addition, we entered into employment agreements with our
executive officers and certain other key employees that, under
certain cases, provide for the continuation of salary and
certain other benefits if these executives or employees are
terminated under specified circumstances. These agreements
generally expire upon termination for cause or when we have met
our obligations under these agreements. In connection with our
Restructuring Plan, one of these employees, who was terminated
during the second quarter of 2009, will receive continuation of
salary and other benefits until April 2010 as required by an
employment agreement.
The following table summarizes our contractual obligations as of
December 31, 2009. Long-term debt and capital lease
obligations include interest.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
|
(In thousands)
|
|
|
Long-term debt obligations
|
|
$
|
7,505
|
|
|
$
|
3,475
|
|
|
$
|
3,920
|
|
|
$
|
91
|
|
|
$
|
19
|
|
Operating lease obligations
|
|
|
5,722
|
|
|
|
1,076
|
|
|
|
2,223
|
|
|
|
2,233
|
|
|
|
190
|
|
Capital lease obligations
|
|
|
194
|
|
|
|
116
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
Purchase Obligations
|
|
|
1,682
|
|
|
|
1,644
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,103
|
|
|
$
|
6,311
|
|
|
$
|
6,259
|
|
|
$
|
2,324
|
|
|
$
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, purchase obligations primarily
consisted of commitments with third-party manufacturers of
materials to be used in our clinical and preclinical studies.
Approximately $0.9 million of the total purchase
obligations were not included in our consolidated financial
statements for the year ended December 31, 2009. We intend
to use our current financial resources to fund our commitments
under these purchase obligations.
31
Our future capital uses and requirements depend on numerous
forward-looking factors. These factors may include, but are not
limited to, the following: the rate of progress and cost of our
clinical trials and other research and development activities;
the scope, prioritization and number of clinical development
programs we pursue; the terms and timing of any collaborative,
licensing and other arrangements that we may establish; the cost
of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights; the costs and
timing of regulatory approvals; the cost of establishing or
contracting for manufacturing, sales and marketing capabilities;
and the effect of competing technological and market
developments.
We anticipate that our existing cash, cash equivalents, and
short-term investments will be sufficient to fund our operating
activities through the first quarter of 2011. This current
financial projection includes forecasted expenses associated
with completing the RDEA594 Phase 2 development program. This
projection does not include forecasted expenses for Phase 3
development of RDEA594, the receipt of milestone payments under
our license agreement with Bayer, proceeds from future
partnering activities or financings, or payments to Valeant
under our asset purchase agreement.
We have no current means of generating material cash flows from
operations. There can be no assurance that our product
development efforts with respect to any of our product
candidates will be successfully completed, that required
regulatory approvals will be obtained, or that any products, if
introduced, will be successfully marketed or achieve commercial
acceptance. Until we can generate significant continuing
revenues, we expect to satisfy our future cash needs through
public or private equity offerings, debt financings and
corporate collaboration and licensing arrangements, as well as
through interest income earned on cash balances. We cannot be
certain that additional funding will be available to us on
acceptable terms, or at all. Our ability to obtain new financing
may be constrained by volatile economic conditions currently
affecting financial markets. If we do not generate sufficient
additional funding in 2010, we will postpone the initiation of
the RDEA594 Phase 3 development program in order to meet our
working capital requirements through December 31, 2010 and
thereafter.
Off-Balance
Sheet Arrangements
We have no off-balance sheet arrangements that have, or are
reasonably likely to have, a current or future effect on our
consolidated financial condition, changes in our consolidated
financial condition, expenses, consolidated results of
operations, liquidity, capital expenditures or capital resources.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
The primary objective of our investment activities is to
preserve our capital to fund operations, while at the same time
maximizing the income we receive from our investments without
significantly increasing risk. As of December 31, 2009, we
owned financial instruments that are sensitive to market risk,
including interest rate risk, as part of our investment
portfolio. To minimize our exposure to market risk, we have
generally limited our investments to cash and securities of the
government of the United States of America and its federal
agencies, or high-grade corporate debt securities with maturity
dates of less than one year. Due to the short-term nature of our
investments, a 50-basis point movement in market interest rates
over the nine-month period following December 31, 2009
would not have a material impact on the fair value of our
portfolio as of December 31, 2009. We have no investments
denominated in foreign currencies and therefore our investments
are not subject to foreign currency exchange risk. We also do
not invest in any derivative financial instruments, derivative
commodity instruments, auction rate securities or other market
risk sensitive instruments, positions or transactions.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
The financial statements and supplementary data required by this
item are incorporated by reference in Item 15 of
Part III of this annual report on
Form 10-K.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
|
None.
32
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES.
|
(a) Disclosure Controls and Procedures; Changes in
Internal Control Over Financial Reporting
Our management, with the participation of our principal
executive and principal financial and accounting officers, has
evaluated the effectiveness of our disclosure controls and
procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange
Act)) as of December 31, 2009. Based on this
evaluation, our principal executive and principal financial and
accounting officers concluded that our disclosure controls and
procedures were effective as of December 31, 2009.
There was no change in our internal control over financial
reporting during the quarter ended December 31, 2009 that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
(b) Management Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is defined in
Rule 13a-15(f)
and
Rule 15d-15(f)
promulgated under the Exchange Act as a process designed by, or
under the supervision of, our principal executive and principal
financial officers and effected by our board of directors,
management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and
includes those policies and procedures that:
|
|
|
|
|
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.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2009.
In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework.
Based on our assessment, management concluded that, as of
December 31, 2009, our internal control over financial
reporting was effective based on those criteria.
The independent registered public accounting firm that audited
the consolidated financial statements that are included in this
Annual Report on
Form 10-K
has issued an audit report on our internal control over
financial reporting. The report appears below.
(c) Report of Independent Registered Public Accounting
Firm
To the Stockholders and Board of Directors of
Ardea Biosciences, Inc.
We have audited Ardea Biosciences, Inc.s internal control
over financial reporting as of December 31, 2009, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Ardea
Biosciences, Inc.s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying
Management Report on Internal Control Over
33
Financial Reporting. Our responsibility is to express an
opinion on the Companys internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk.
Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) 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 of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Ardea Biosciences, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2009, based on the criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets as of December 31, 2009 and
2008, and the related consolidated statements of operations,
stockholders equity, and cash flows for each year of the
three year period ended December 31, 2009, of Ardea
Biosciences, Inc. and our report dated March 11, 2010
expressed an unqualified opinion.
/s/ Stonefield
Josephson, Inc.
Irvine, California
March 11, 2010
|
|
ITEM 9B.
|
OTHER
INFORMATION.
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
Information required by this item will be contained in our
Definitive Proxy Statement for our 2010 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A with
the Securities and Exchange Commission within 120 days of
December 31, 2009. Such information is incorporated herein
by reference.
34
We have adopted a code of conduct that applies to our Principal
Executive Officer, Principal Financial and Accounting Officer,
and to all of our other officers, directors and employees. The
code of conduct is available at the Corporate Governance section
of the Investor Center page on our website at www.ardeabio.com.
We intend to disclose future waivers or material amendments to
certain provisions of our code of conduct on the above website
within four business days following the date of such waiver or
amendment.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION.
|
Information required by this item will be contained in our
Definitive Proxy Statement for our 2010 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A with
the Securities and Exchange Commission within 120 days of
December 31, 2009. Such information is incorporated herein
by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
|
Information required by this item will be contained in our
Definitive Proxy Statement for our 2010 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A with
the Securities and Exchange Commission within 120 days of
December 31, 2009. Such information is incorporated herein
by reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
Information required by this item will be contained in our
Definitive Proxy Statement for our 2010 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A with
the Securities and Exchange Commission within 120 days of
December 31, 2009. Such information is incorporated herein
by reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
Information required by this item will be contained in our
Definitive Proxy Statement for our 2010 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A with
the Securities and Exchange Commission within 120 days of
December 31, 2009. Such information is incorporated herein
by reference.
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.
|
(a) Documents filed as part of this report.
|
|
|
|
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:
|
|
|
|
|
2.
|
Financial Statement Schedules.
|
These schedules are omitted because they are not required, or
are not applicable, or the required information is shown in the
consolidated financial statements or notes thereto.
The exhibit index attached to this report is incorporated by
reference herein.
35
|
|
|
|
|
Exhibit
|
|
Document Description
|
|
|
2
|
.1
|
|
Asset Purchase Agreement with Valeant Research &
Development and Valeant Pharmaceuticals International dated
December 21, 2006(1)
|
|
3
|
.1
|
|
Restated Certificate of Incorporation filed with the Delaware
Secretary of State on September 10, 2008(2)
|
|
3
|
.2
|
|
Amended and Restated Bylaws(3)
|
|
4
|
.1
|
|
Registration Rights Agreement, dated December 19, 2007, by
and among Ardea Biosciences, Inc. and the Purchasers listed on
the signature pages thereto(4)
|
|
4
|
.2
|
|
Registration Rights Agreement, dated January 4, 2008, by
and among Ardea Biosciences, Inc. and the stockholders listed on
the signature pages thereto(5)
|
|
4
|
.3
|
|
Form of Warrant issued by the Company pursuant to the Loan and
Security Agreement dated November 12, 2008(12)
|
|
4
|
.4
|
|
Form of Warrant issued by the Company pursuant to the Securities
Purchase Agreement dated December 17, 2008(6)
|
|
4
|
.5
|
|
Registration Rights Agreement, dated December 17, 2008, by
and among Ardea Biosciences, Inc. and the Purchasers listed on
the signature pages thereto(7)
|
|
10
|
.1
|
|
Form of Indemnity Agreement(8)
|
|
10
|
.2*
|
|
Senior Executive Severance Benefit Plan, as amended and restated
on November 7, 2008(12)
|
|
10
|
.3*
|
|
Executive Severance Benefit Plan, as amended and restated on
November 7, 2008(12)
|
|
10
|
.4*
|
|
2002 Non-Officer Equity Incentive Plan and related documents, as
amended on February 3, 2003(9)
|
|
10
|
.5
|
|
Noncompetition Agreement with Valeant Research &
Development dated December 21, 2006(1)
|
|
10
|
.6*
|
|
Amended and Restated Executive Employment Agreement, effective
November 7, 2008, between the Company and Barry Quart(12)
|
|
10
|
.7*
|
|
Executive Employment Agreement, effective December 21,
2006, between the Company and Kimberly J. Manhard(1)
|
|
10
|
.8*
|
|
Ardea Biosciences, Inc. 2000 Employee Stock Purchase Plan(10)
|
|
10
|
.9*
|
|
Executive Employment Agreement, effective March 22, 2007,
between the Company and Christopher W. Krueger(11)
|
|
10
|
.10*
|
|
Amended and Restated 2004 Stock Incentive Plan
|
|
10
|
.11
|
|
Securities Purchase Agreement, dated December 19, 2007, by
and among Ardea Biosciences, Inc. and the Purchasers listed on
the signature pages thereto(4)
|
|
10
|
.12
|
|
Sublease by and between Verenium Corporation and the Company
dated October 2007(13)
|
|
10
|
.13*
|
|
Executive Employment Agreement, effective as of May 27,
2008, between the Company and John W. Beck(14)
|
|
10
|
.14
|
|
Loan and Security Agreement, dated November 12, 2008, by
and among Ardea Biosciences, Inc. and Oxford Finance Corporation
and Silicon Valley Bank(12)
|
|
10
|
.15
|
|
Securities Purchase Agreement, dated December 17, 2008, by
and among Ardea Biosciences, Inc. and the Purchasers listed on
the signature pages thereto(7)
|
|
10
|
.16
|
|
Development and Commercialization License Agreement, dated
April 27, 2009, by and among Ardea Biosciences, Inc. and
Bayer HealthCare AG(15)
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
31
|
.1
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
31
|
.2
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32
|
.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
* |
|
Management contract or compensatory plan, contract or
arrangement. |
|
|
|
Confidential treatment request has been granted with respect to
certain portions of this exhibit. Omitted portions have been
filed separately with the Securities and Exchange Commission. |
36
|
|
|
(1) |
|
Incorporated by reference to our
Form 8-K
(File
No. 000-29993)
filed with the Securities and Exchange Commission on
December 28, 2006. |
|
(2) |
|
Incorporated by reference to our
Form 10-Q
(File
No. 001-33734)
filed with the Securities and Exchange Commission on
November 13, 2008. |
|
(3) |
|
Incorporated by reference to our
Form 8-K
(File
No. 000-29993)
filed with the Securities and Exchange Commission on
August 2, 2007. |
|
(4) |
|
Incorporated by reference to our
Form 8-K
(File
No. 001-33734)
filed with the Securities and Exchange Commission on
December 20, 2007. |
|
(5) |
|
Incorporated by reference to our
Form 8-K
(File
No. 001-33734)
filed with the Securities and Exchange Commission on
January 10, 2008. |
|
(6) |
|
Incorporated by reference to our
Form 8-K
(File
No. 001-33734)
filed with the Securities and Exchange Commission on
December 19, 2008. |
|
(7) |
|
Incorporated by reference to our
Form 8-K
(File
No. 001-33734)
filed with the Securities and Exchange Commission on
December 22, 2008. |
|
(8) |
|
Incorporated by reference to our Registration Statement on
Form S-1
(File
No. 333-95461)
initially filed with the Securities and Exchange Commission on
January 27, 2000 as subsequently amended. |
|
(9) |
|
Incorporated by reference to our
Form 10-K
(File
No. 000-29993)
filed with the Securities and Exchange Commission on
March 31, 2003. |
|
(10) |
|
Incorporated by reference to our
Form 8-K
(File
No. 001-33734)
filed with the Securities and Exchange Commission on
October 15, 2007. |
|
(11) |
|
Incorporated by reference to our
Form 10-Q
(File
No. 000-29993)
filed with the Securities and Exchange Commission on May 8,
2007. |
|
(12) |
|
Incorporated by reference to our
Form 10-K
(File
No. 001-33734)
filed with the Securities and Exchange Commission on
March 13, 2009. |
|
(13) |
|
Incorporated by reference to our
Form 10-K
(File
No. 001-33734)
filed with the Securities and Exchange Commission on
March 24, 2008. |
|
(14) |
|
Incorporated by reference to our
Form 8-K
(File
No. 001-33734)
filed with the Securities and Exchange Commission on
May 13, 2008. |
|
(15) |
|
Incorporated by reference to our
Form 10-Q
(File
No. 001-33734)
filed with the Securities and Exchange Commission on
August 7, 2009. |
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ARDEA BIOSCIENCES, INC.
Barry D. Quart, Pharm.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ BARRY
D. QUART
Barry
D. Quart, Pharm. D.
|
|
President and Chief Executive Officer (Principal Executive
Officer)
|
|
March 12, 2010
|
|
|
|
|
|
/s/ JOHN
W. BECK
John
W. Beck, C.P.A.
|
|
Senior Vice President, Finance and Operations and Chief
Financial Officer (Principal Financial
and Accounting Officer)
|
|
March 12, 2010
|
|
|
|
|
|
/s/ FELIX
J. BAKER, Ph.D.
Felix
J. Baker, Ph.D.
|
|
Director
|
|
March 12, 2010
|
|
|
|
|
|
/s/ HENRY
J. FUCHS
Henry
J. Fuchs, M.D.
|
|
Director
|
|
March 12, 2010
|
|
|
|
|
|
/s/ CRAIG
A. JOHNSON
Craig
A. Johnson
|
|
Director
|
|
March 12, 2010
|
|
|
|
|
|
/s/ JOHN
W. POYHONEN
John
W. Poyhonen
|
|
Director
|
|
March 12, 2010
|
|
|
|
|
|
/s/ JACK
S. REMINGTON
Jack
S. Remington, M.D.
|
|
Director
|
|
March 12, 2010
|
|
|
|
|
|
/s/ KEVIN
C. TANG
Kevin
C. Tang
|
|
Director
|
|
March 12, 2010
|
38
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Stockholders and Board of Directors of
Ardea Biosciences, Inc.
We have audited the accompanying consolidated balance sheets of
Ardea Biosciences, Inc. as of December 31, 2009 and 2008,
and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the years
in the three-year period ended December 31, 2009. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Ardea Biosciences, Inc. as of December 31, 2009
and 2008, and the results of its operations and its cash flows
for each of the years in the three-year period ended
December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated March 11, 2010
expressed an unqualified opinion.
/s/ Stonefield
Josephson, Inc.
Irvine, California
March 11, 2010
F-1
ARDEA
BIOSCIENCES, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share and par value amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,562
|
|
|
$
|
41,551
|
|
Short-term investments,
available-for-sale
|
|
|
39,329
|
|
|
|
16,192
|
|
Receivables
|
|
|
1,433
|
|
|
|
384
|
|
Prepaids and other current assets
|
|
|
215
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
52,539
|
|
|
|
58,364
|
|
Property and equipment, net
|
|
|
1,961
|
|
|
|
2,310
|
|
Other assets
|
|
|
565
|
|
|
|
801
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
55,065
|
|
|
$
|
61,475
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,916
|
|
|
$
|
2,260
|
|
Accrued clinical liabilities
|
|
|
4,072
|
|
|
|
2,278
|
|
Accrued payroll and employee liabilities
|
|
|
2,138
|
|
|
|
1,758
|
|
Other accrued liabilities
|
|
|
769
|
|
|
|
545
|
|
Current portion of deferred revenue
|
|
|
9,706
|
|
|
|
|
|
Current portion of obligations under capital lease
|
|
|
108
|
|
|
|
102
|
|
Current portion of obligations under notes payable
|
|
|
2,887
|
|
|
|
1,958
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
21,596
|
|
|
|
8,901
|
|
Deferred rent
|
|
|
160
|
|
|
|
84
|
|
Non-current portion of deferred revenue
|
|
|
4,853
|
|
|
|
|
|
Non-current portion of obligations under capital lease
|
|
|
76
|
|
|
|
175
|
|
Non-current portion of obligations under notes payable
|
|
|
3,239
|
|
|
|
5,957
|
|
Other long-term liabilities
|
|
|
400
|
|
|
|
400
|
|
Commitments and contingencies (see Note 5)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.001 par value:
5,000,000 shares authorized; no shares outstanding at
December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value: 70,000,000 shares
authorized; 18,504,898 and 17,835,734 shares issued and
outstanding at December 31, 2009 and 2008, respectively
|
|
|
18
|
|
|
|
17
|
|
Additional paid-in capital
|
|
|
372,091
|
|
|
|
362,345
|
|
Accumulated other comprehensive income
|
|
|
42
|
|
|
|
139
|
|
Accumulated deficit
|
|
|
(347,410
|
)
|
|
|
(316,543
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
24,741
|
|
|
|
45,958
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
55,065
|
|
|
$
|
61,475
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-2
ARDEA
BIOSCIENCES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except
|
|
|
|
per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
License fees
|
|
$
|
20,442
|
|
|
$
|
|
|
|
$
|
|
|
Sponsored research
|
|
|
|
|
|
|
304
|
|
|
|
3,095
|
|
Reimbursable research and development costs
|
|
|
2,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
22,936
|
|
|
|
304
|
|
|
|
3,095
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
42,198
|
|
|
|
44,858
|
|
|
|
23,103
|
|
General and administrative
|
|
|
10,689
|
|
|
|
11,921
|
|
|
|
7,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
52,887
|
|
|
|
56,779
|
|
|
|
30,669
|
|
Loss from operations
|
|
|
(29,951
|
)
|
|
|
(56,475
|
)
|
|
|
(27,574
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
386
|
|
|
|
1,524
|
|
|
|
2,128
|
|
Interest expense
|
|
|
(1,323
|
)
|
|
|
(215
|
)
|
|
|
|
|
Other income, net
|
|
|
21
|
|
|
|
171
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(916
|
)
|
|
|
1,480
|
|
|
|
2,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(30,867
|
)
|
|
|
(54,995
|
)
|
|
|
(25,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash dividends on Series A preferred stock
|
|
|
|
|
|
|
(60
|
)
|
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(30,867
|
)
|
|
$
|
(55,055
|
)
|
|
$
|
(25,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share applicable to common
stockholders
|
|
$
|
(1.70
|
)
|
|
$
|
(3.79
|
)
|
|
$
|
(2.55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
applicable to common stockholders
|
|
|
18,158
|
|
|
|
14,544
|
|
|
|
9,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
ARDEA
BIOSCIENCES, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balances at December 31, 2006
|
|
$
|
1,634
|
|
|
|
9,362
|
|
|
$
|
9
|
|
|
$
|
283,594
|
|
|
$
|
4
|
|
|
$
|
(236,177
|
)
|
|
$
|
49,064
|
|
Issuance of common stock in private offering, net
|
|
|
|
|
|
|
3,019
|
|
|
|
3
|
|
|
|
37,225
|
|
|
|
|
|
|
|
|
|
|
|
37,228
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
99
|
|
|
|
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
282
|
|
Issuance of common stock upon exercise of warrants
|
|
|
|
|
|
|
789
|
|
|
|
1
|
|
|
|
815
|
|
|
|
|
|
|
|
|
|
|
|
816
|
|
Issuance of common stock as dividend on series A preferred
stock
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
240
|
|
|
|
|
|
|
|
(240
|
)
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,410
|
|
|
|
|
|
|
|
|
|
|
|
1,410
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,071
|
)
|
|
|
(25,071
|
)
|
Unrealized gain on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
$
|
1,634
|
|
|
|
13,313
|
|
|
$
|
13
|
|
|
$
|
323,566
|
|
|
$
|
14
|
|
|
$
|
(261,488
|
)
|
|
$
|
63,739
|
|
Conversion 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
|
|
|
|
|
|
|
|
|
|
|
|
30,541
|
|
Issuance of common stock under Employee Stock Purchase Plan
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
|
491
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
117
|
|
|
|
|
|
|
|
544
|
|
|
|
|
|
|
|
|
|
|
|
544
|
|
Issuance of common stock upon exercise of warrants
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock as dividend on series A preferred
stock
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
120
|
|
|
|
|
|
|
|
(60
|
)
|
|
|
60
|
|
Issuance of warrants in connection with debt financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
343
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,110
|
|
|
|
|
|
|
|
|
|
|
|
5,110
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,995
|
)
|
|
|
(54,995
|
)
|
Unrealized gain on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
$
|
|
|
|
|
17,836
|
|
|
$
|
17
|
|
|
$
|
362,345
|
|
|
$
|
139
|
|
|
$
|
(316,543
|
)
|
|
$
|
45,958
|
|
Issuance of common stock under Employee Stock Purchase Plan
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
490
|
|
|
|
|
|
|
|
|
|
|
|
490
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
595
|
|
|
|
1
|
|
|
|
3,477
|
|
|
|
|
|
|
|
|
|
|
|
3,478
|
|
Issuance of common stock upon exercise of warrants
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,779
|
|
|
|
|
|
|
|
|
|
|
|
5,779
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,867
|
)
|
|
|
(30,867
|
)
|
Unrealized gain (loss) on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
$
|
|
|
|
|
18,505
|
|
|
$
|
18
|
|
|
$
|
372,091
|
|
|
$
|
42
|
|
|
$
|
(347,410
|
)
|
|
$
|
24,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
ARDEA
BIOSCIENCES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(30,867
|
)
|
|
$
|
(54,995
|
)
|
|
$
|
(25,071
|
)
|
Adjustments to reconcile net loss to net cash used for operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
5,779
|
|
|
|
5,110
|
|
|
|
1,410
|
|
Depreciation
|
|
|
668
|
|
|
|
535
|
|
|
|
249
|
|
Amortization of debt discount and debt issuance costs
|
|
|
429
|
|
|
|
62
|
|
|
|
|
|
Loss (gain) on disposal of property and equipment
|
|
|
17
|
|
|
|
(28
|
)
|
|
|
(332
|
)
|
Deferred rent
|
|
|
76
|
|
|
|
84
|
|
|
|
|
|
Amortization of premium on short-term investments
|
|
|
356
|
|
|
|
79
|
|
|
|
215
|
|
Realized gain on short-term investments
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(1,049
|
)
|
|
|
840
|
|
|
|
(819
|
)
|
Prepaids and other current assets
|
|
|
22
|
|
|
|
(27
|
)
|
|
|
230
|
|
Other assets
|
|
|
(24
|
)
|
|
|
|
|
|
|
(312
|
)
|
Accounts payable
|
|
|
(344
|
)
|
|
|
60
|
|
|
|
1,966
|
|
Accrued clinical liabilities
|
|
|
1,794
|
|
|
|
1,822
|
|
|
|
452
|
|
Accrued payroll and employee liabilities
|
|
|
380
|
|
|
|
146
|
|
|
|
1,392
|
|
Other accrued liabilities
|
|
|
224
|
|
|
|
(228
|
)
|
|
|
115
|
|
Deferred revenue
|
|
|
14,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for operating activities
|
|
|
(8,004
|
)
|
|
|
(46,540
|
)
|
|
|
(20,505
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(56,632
|
)
|
|
|
(33,920
|
)
|
|
|
(48,579
|
)
|
Proceeds from sale or maturity of short-term investments
|
|
|
33,066
|
|
|
|
37,605
|
|
|
|
62,432
|
|
Proceeds from sale of property and equipment
|
|
|
10
|
|
|
|
80
|
|
|
|
332
|
|
Purchases of property and equipment
|
|
|
(346
|
)
|
|
|
(1,700
|
)
|
|
|
(401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by investing activities
|
|
|
(23,902
|
)
|
|
|
2,065
|
|
|
|
13,784
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of notes payable
|
|
|
|
|
|
|
8,250
|
|
|
|
|
|
Payments of debt issuance costs
|
|
|
|
|
|
|
(127
|
)
|
|
|
|
|
Payments on capital lease and note payable obligations
|
|
|
(2,051
|
)
|
|
|
(57
|
)
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
|
3,968
|
|
|
|
31,576
|
|
|
|
38,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,917
|
|
|
|
39,642
|
|
|
|
38,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(29,989
|
)
|
|
|
(4,833
|
)
|
|
|
31,605
|
|
Cash and cash equivalents at beginning of year
|
|
|
41,551
|
|
|
|
46,384
|
|
|
|
14,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
11,562
|
|
|
$
|
41,551
|
|
|
$
|
46,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
912
|
|
|
$
|
134
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations incurred for property and equipment
|
|
$
|
|
|
|
$
|
318
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (loss) gain on short-term investments
|
|
$
|
(97
|
)
|
|
$
|
125
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued debt issuance costs
|
|
$
|
|
|
|
$
|
400
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock dividend on Series A preferred
stock
|
|
$
|
|
|
|
$
|
(60
|
)
|
|
$
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants in connection with note payable obligation
|
|
$
|
|
|
|
$
|
343
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
ARDEA
BIOSCIENCES, INC.
|
|
1.
|
Organization
and Business
|
Ardea Biosciences, Inc. (the Company) is a
biotechnology company focused on the development of
small-molecule therapeutics for the treatment of gout, cancer
and human immunodeficiency virus (HIV).
|
|
2.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of Ardea Biosciences, Inc. and its wholly owned
subsidiary, Ardea Biosciences Limited, which was incorporated in
England and Wales in February 2008. Ardea Biosciences Limited
has no business and no material assets or liabilities and there
have been no significant transactions related to Ardea
Biosciences Limited since its inception.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with United States generally accepted accounting
principles (GAAP) requires management to make
estimates and assumptions that affect the amounts reported in
the consolidated financial statements and disclosures made in
the accompanying notes to the consolidated financial statements.
Actual results could differ materially from those estimates.
Reclassification
Certain amounts in the 2007 and 2008 financial statements have
been reclassified to conform to the 2009 presentation.
Cash,
Cash Equivalents and Short-Term Investments
Cash and cash equivalents consist of cash and highly liquid
investments with original maturities from purchase date of three
months or less.
Short-term investments consist of securities with maturities
from purchase date of greater than three months. The Company has
classified its short-term investments as
available-for-sale
securities in the accompanying consolidated financial
statements.
Available-for-sale
securities are stated at fair market value, with unrealized
gains and losses reported in other comprehensive income (loss)
and realized gains and losses included in interest income. The
cost of securities sold is based on the specific-identification
method. Interest and dividends on securities classified as
available-for-sale
are included in interest income.
Fair
Value of Financial Instruments
Financial instruments, including cash and cash equivalents,
receivables, accounts payable and accrued expenses, are carried
at cost, which is considered to be representative of their
respective fair values because of the short-term maturity of
these instruments. Short-term
available-for-sale
investments are carried at fair value. None of the
Companys debt or capital lease instruments that were
outstanding at December 31, 2009 have readily available
ascertainable market values, however, the carrying values are
considered to approximate their fair values. See footnote 3 for
further details regarding the fair value financial instruments.
Concentration
of Credit Risk
Cash and cash equivalents and short-term investments are
financial instruments which potentially subject the Company to
concentrations of credit risk. The Company deposits its cash in
financial institutions. At times, such deposits may be in excess
of insured limits. The Company invests its excess cash primarily
in United States government and agency obligations, United
States corporate debt and money market funds. The Company has
established guidelines relative to the diversification of its
cash investments and their maturities in an effort to
F-6
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and
interest rates.
Property
and Equipment
Property and equipment is stated at cost less accumulated
depreciation. Depreciation is calculated on a straight-line
basis over the estimated useful lives of the assets (primarily
five years). Leasehold improvements are stated at cost and
depreciated on a straight-line basis over the shorter of the
estimated useful life or the lease term.
Impairment
of Long-Lived Assets
In accordance with GAAP, if indicators of impairment exist, the
Company assesses the recoverability of the affected long-lived
assets by determining whether the carrying value of such assets
can be recovered through the undiscounted future operating cash
flows. If impairment is indicated, the Company measures the
amount of such impairment by comparing the carrying value of the
asset to the fair value of the asset and records the impairment
as a reduction in the carrying value of the related asset and a
charge to operating results. Estimating the undiscounted future
cash flows associated with long-lived assets requires judgment
and assumptions that could differ materially from the actual
results.
Revenue
Recognition
The Companys collaboration arrangements may contain
multiple elements and the Company may be eligible for payments
made in the form of upfront license fees, research funding, cost
reimbursement, milestone payments and downstream royalties.
Revenue from upfront, nonrefundable license fees is recognized
over the period that any related services are provided. Amounts
received for research funding are recognized as revenues as the
research services that are the subject of such funding are
performed. Revenue derived from reimbursement of research and
development costs in transactions where the Company acts as a
principal are recorded as revenue for the gross amount of the
reimbursement, and the costs associated with these
reimbursements are reflected as a component of research and
development expense in the consolidated statements of
operations. Revenue from milestones is recognized when earned,
as evidenced by written acknowledgement from the collaborator or
other persuasive evidence that the milestone has been achieved,
provided that the milestone event is substantive and its
achievability was not reasonably assured at the inception of the
agreement. Revenues recognized for royalty payments, if any, are
based upon actual net sales of the licensed compounds, as
provided by the collaboration arrangement, in the period the
sales occur. Any amounts received prior to satisfying the
Companys revenue recognition criteria are recorded as
deferred revenue on its consolidated balance sheet.
Research
and Development Expenses
All costs of research and development are expensed in the period
incurred. Research and development costs primarily consist of
salaries and related expenses for personnel, share-based
compensation, fees paid to outside service providers and
consultants, facilities costs, travel costs, dues and
subscriptions, depreciation and materials used in the clinical
and preclinical trials and research and development. The Company
reviews and accrues clinical costs based on work performed,
which relies on estimates of the progress of the trials and the
related expenses incurred. Clinical trial-related contracts vary
significantly in length, and may be for a fixed amount, based on
milestones or deliverables, a variable amount based on actual
costs incurred, capped at a certain limit, or for a combination
of these elements. Revisions are charged to expense in the
period in which the facts that give rise to the revision become
known. Historically, revisions have not resulted in material
changes to research and development costs, however, a
modification in the protocol of a clinical trial or cancellation
of a trial could result in a charge to our results of operations.
F-7
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Patent
Costs
The Company incurs third-party legal fees in connection with
filing and maintaining its various patent applications. All
patent costs are expensed as incurred and included in general
and administrative expense in the consolidated statement of
operations.
Share-Based
Compensation Expense
The Company estimates the fair value of share-based payment
awards using the Black-Scholes-Merton, or Black-Scholes, option
valuation model. This fair value is then amortized using the
straight-line single-option method of attributing the value of
share-based compensation to expense over the requisite service
periods of the awards. The Black-Scholes option valuation model
requires the input of highly complex and subjective assumptions,
including each options expected life and price volatility
of the underlying stock. Expected volatility is based on the
weighted-average volatility of our stock, factoring in daily
share price observations and the historical price volatility of
certain peers within our industry sector.
As share-based compensation expense is based on awards
ultimately expected to vest, it has been reduced for estimated
forfeitures. Forfeitures are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Forfeitures were
estimated based on historical experience.
Share-based compensation expense related to the Companys
equity compensation plans recognized for the years ended
December 31, 2009, 2008 and 2007 was approximately
$5,779,000, $5,110,000 and $1,410,000, respectively. As of
December 31, 2009, there was $12,362,000 of total
unrecognized compensation cost related to non-vested,
share-based payment awards granted under all of the
Companys equity compensation plans. Total unrecognized
compensation cost will be adjusted for future changes in
estimated forfeitures. The Company expects to recognize this
compensation cost over a weighted-average period of
2.3 years.
Valuation
and Expense Information
The following table summarizes share-based compensation expense
(in thousands) related to employee and director stock options
and ESPP purchases for the years ended December 31, 2009,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Research and development
|
|
$
|
2,386
|
|
|
$
|
2,098
|
|
|
$
|
665
|
|
General and administrative
|
|
|
3,393
|
|
|
|
3,012
|
|
|
|
745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense included in operating expenses
|
|
$
|
5,779
|
|
|
$
|
5,110
|
|
|
$
|
1,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2009, 2008, and 2007 the
Company estimated the fair value of each option grant and ESPP
purchase right on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions:
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Risk-free interest rate
|
|
|
2.5
|
%
|
|
|
3.1
|
%
|
|
|
4.2
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Volatility
|
|
|
77.1
|
%
|
|
|
74.0
|
%
|
|
|
71.7
|
%
|
Expected life (years)
|
|
|
5.5-6.1
|
|
|
|
5.2-6.3
|
|
|
|
6.25
|
|
F-8
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ESPP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Risk-free interest rate
|
|
|
0.6
|
%
|
|
|
2.1
|
%
|
|
|
4.20
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Volatility
|
|
|
83.0
|
%
|
|
|
90.6
|
%
|
|
|
71.0
|
%
|
Expected life (years)
|
|
|
1.24
|
|
|
|
1.22
|
|
|
|
1.25
|
|
The weighted-average fair values of options granted were $9.60,
$9.21, and $3.72 for the years ended December 31, 2009,
2008 and 2007, respectively. The weighted-average purchase price
of shares purchased through the ESPP was $7.90 and $7.87 for the
years ended December 31, 2009 and 2008, respectively. There
were no shares purchased through the ESPP for the year ended
December 31, 2007.
The risk-free interest rate assumption is based on observed
interest rates on United States Treasury debt securities with
maturities close to the expected term of the Companys
employee and director stock options and ESPP purchases.
The dividend yield assumption is based on the Companys
history and expectation of dividend payouts. The Company has
never paid dividends on its common stock and the Company does
not anticipate paying dividends in the foreseeable future.
The Company used the weighted-average volatility of the
Companys common stock and the historical stock price
volatility of certain peers within the Companys industry
sector. In computing expected volatility, the length of the
historical period used is equal to the length of the expected
term of the option or share purchase right.
The expected life of employee and non-employee director stock
options represents the average of the contractual term of the
options and the weighted-average vesting period, as permitted
under the simplified method.
Warrants
The Company issued warrants to purchase shares of its common
stock in conjunction with its Growth Capital Loan and December
2008 equity fundraising. The terms of the warrants were
evaluated to determine the appropriate classification as equity
or a liability. As of December 31, 2009, all warrants
issued are classified as equity.
Net
Loss per Share
Basic earnings per share (EPS) is calculated by
dividing the net loss by the weighted-average number of common
shares outstanding for the period, without consideration for
common share equivalents. Diluted EPS is computed by dividing
the net loss by the weighted-average number of common shares and
common share equivalents outstanding for the period determined
using the treasury stock method. For purposes of this
calculation, stock options and warrants are considered to be
common stock equivalents and are only included in the
calculation of diluted EPS when their effect is dilutive.
Because the Company has incurred a net loss for all periods
presented in the Consolidated Statements of Operations, stock
options and warrants are not included in the computation of net
loss per share because their effect is anti-dilutive. The shares
used to compute basic and diluted net loss per share represent
the weighted-average common shares outstanding.
Comprehensive
Loss
Comprehensive income (loss) is defined as the change in equity
during a period from transactions and other events and
circumstances from non-owner sources. Unrealized gains and
losses on
available-for-sale
securities are included in other comprehensive income (loss) and
represent the difference between the Companys net loss and
F-9
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
comprehensive net loss for all periods presented. The following
are the components of the Companys comprehensive net loss
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net loss
|
|
$
|
(30,867
|
)
|
|
$
|
(54,995
|
)
|
|
$
|
(25,071
|
)
|
Net unrealized gains (losses) on short-term investments
|
|
|
(97
|
)
|
|
|
125
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net loss
|
|
$
|
(30,964
|
)
|
|
$
|
(54,870
|
)
|
|
$
|
(25,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
Effective July 1, 2009, the Company adopted the Financial
Accounting Standards Board (FASB) Accounting
Standards Codification (ASC)
105-10,
Generally Accepted Accounting Principles Overall
(ASC
105-10).
ASC 105-10
establishes the FASB Accounting Standards Codification
(the Codification) as the source of authoritative
accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial
statements in conformity with GAAP. Rules and interpretive
releases of the SEC under authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. All
guidance contained in the Codification carries an equal level of
authority. The Codification superseded all existing non-SEC
accounting and reporting standards. All other non-grandfathered,
non-SEC accounting literature not included in the Codification
is non-authoritative. The FASB will not issue new standards in
the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting
Standards Updates (ASUs). The FASB will not consider
ASUs as authoritative in their own right. ASUs will serve only
to update the Codification, provide background information about
the guidance and provide the basis for conclusions on the
change(s) in the Codification. References made to FASB guidance
throughout this document have been updated for the Codification.
Effective January 1, 2008, the Company adopted FASB ASC
820-10,
Fair Value Measurements and Disclosures Overall
(ASC
820-10)
with respect to its financial assets and liabilities. In
February 2008, the FASB issued updated guidance related to fair
value measurements, which is included in the Codification in ASC
820-10-55,
Fair Value Measurements and Disclosures Overall
Implementation Guidance and Illustrations. The
updated guidance provided a one year deferral of the effective
date of ASC
820-10 for
non-financial assets and non-financial liabilities, except those
that are recognized or disclosed in the financial statements at
fair value at least annually. Therefore, the Company adopted the
provisions of ASC
820-10 for
non-financial assets and non-financial liabilities effective
January 1, 2009, and such adoption did not have a material
impact on the Companys consolidated results of operations
or financial condition for the year ended December 31, 2009.
Effective April 1, 2009, the Company adopted FASB ASC
320-10-65,
Investments Debt and Equity
Securities Overall Transition and Open
Effective Date Information (ASC
320-10-65).
ASC
320-10-65
amends the
other-than-temporary
impairment (OTTI) guidance in GAAP to make the
guidance more operational and to improve the presentation of
other-than-temporary
impairments in the financial statements. Prior to ASC
320-10-65,
if OTTI was determined to exist, the Company recognized an OTTI
charge into earnings in an amount equal to the difference
between the investments amortized cost basis and its fair
value as of the balance sheet date of the reporting period.
Under ASC
320-10-65,
if OTTI has been incurred, and it is more-likely-than-not that
the Company will not sell the investment security before the
recovery of its amortized cost basis, then the OTTI is separated
into (a) the amount representing the credit loss and
(b) the amount related to all other factors. The amount of
the total OTTI related to the credit loss is recognized in
earnings. The amount of the total OTTI related to other factors
is recognized in accumulated other comprehensive income
(AOCI). The total OTTI, which includes both credit
and non-credit losses, is presented gross in the Companys
statements of operations and is reduced by the non-credit loss
amount of the total OTTI that is recognized in AOCI. The Company
adopted the provisions of ASC
F-10
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
320-10-65
which did not have a material impact on the Companys
consolidated results of operations or financial condition for
the year ended December 31, 2009.
Effective April 1, 2009, the Company adopted FASB ASC
820-10-65,
Fair Value Measurements and Disclosures
Overall Transition and Open Effective Date
Information (ASC
820-10-65).
ASC
820-10-65
provides additional guidance for estimating fair value in
accordance with ASC
820-10 when
the volume and level of activity for an asset or liability have
significantly decreased. ASC
820-10-65
also includes guidance on identifying circumstances that
indicate a transaction is not orderly. The adoption of ASC
820-10-65
did not have an impact on the Companys consolidated
results of operations or financial condition for the year ended
December 31, 2009.
Effective April 1, 2009, the Company adopted FASB ASC
825-10-65,
Financial Instruments Overall
Transition and Open Effective Date Information (ASC
825-10-65).
ASC
825-10-65
amends ASC
825-10 to
require disclosures about fair value of financial instruments in
interim financial statements as well as in annual financial
statements and also amends ASC
270-10 to
require those disclosures in all interim financial statements.
The adoption of ASC
825-10-65
did not have a material impact on the Companys
consolidated results of operations or financial condition for
the year ended December 31, 2009.
Effective April 1, 2009, the Company adopted FASB ASC
855-10,
Subsequent Events Overall (ASC
855-10).
ASC 855-10
establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
Adoption of ASC
855-10 did
not have a material impact on the Companys consolidated
results of operations or financial condition for the year ended
December 31, 2009.
Effective July 1, 2009, the Company adopted FASB ASU
No. 2009-05,
Fair Value Measurements and Disclosures (Topic 820)
(ASU
2009-05).
ASU 2009-05
provided amendments to ASC
820-10,
Fair Value Measurements and Disclosures Overall,
for the fair value measurement of liabilities. ASU
2009-05
provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value
using certain techniques. ASU
2009-05 also
clarifies that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of a liability. ASU
2009-05 also
clarifies that both a quoted price in an active market for the
identical liability at the measurement date and the quoted price
for the identical liability when traded as an asset in an active
market when no adjustments to the quoted price of the asset are
required are Level 1 fair value measurements. Adoption of
ASU 2009-05
did not have a material impact on the Companys
consolidated results of operations or financial condition for
the year ended December 31, 2009.
In January 2010, the FASB issued ASU
No. 2010-06,
Fair Value Measurements and Disclosures (Topic
820) Improving Disclosures about Fair Value
Measurements. ASU
No. 2010-06
requires an entity to disclose separately the amounts of
significant transfers in and out of Level 1 and 2 fair
value measurements, and describe the reasons for the transfers.
Also, it requires additional disclosure regarding purchases,
sales, issuances and settlements of Level 3 measurements.
ASU 2010-06
is effective for interim and annual periods beginning after
December 15, 2009, except for the additional disclosure of
Level 3 measurements, which is effective for fiscal years
beginning after December 15, 2010. The Company does not
expect the adoption of this statement to have a material impact
on its consolidated results of operations or financial condition.
|
|
3.
|
Fair
Value Measurements
|
Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between
F-11
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
market participants on the measurement date. Valuation
techniques used to measure fair value must maximize the use of
observable inputs and minimize the use of unobservable inputs.
The fair value hierarchy based on three levels of inputs, of
which the first two are considered observable and the last
unobservable, that may be used to measure fair value, is as
follows:
|
|
|
|
|
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.
|
The Company measures the following financial assets at fair
value on a recurring basis. The fair values of these financial
assets at December 31, 2009 (in thousands) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
Balance at
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
2009
|
|
|
(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
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A company may elect to use fair value to measure accounts and
loans receivable,
available-for-sale
and
held-to-maturity
securities, equity method investments, accounts payable,
guarantees and issued debt. Other eligible items include firm
commitments for financial instruments that otherwise would not
be recognized at inception and non-cash warranty obligations
where a warrantor is permitted to pay a third party to provide
the warranty goods or services. If the use of fair value is
elected, any upfront costs and fees related to the item such as
debt issuance costs must be recognized in earnings and cannot be
deferred. The fair value election is irrevocable and generally
made on an
instrument-by-instrument
basis, even if a company has similar instruments that it elects
not to measure based on fair value. Unrealized gains and losses
on existing items for which fair value has been elected are
reported as a cumulative adjustment to beginning retained
earnings and any changes in fair value are recognized in
earnings. The Company has elected not to apply the fair value
option to its financial assets and liabilities.
The Company considers the carrying amount of cash and cash
equivalents, prepaid expenses and other current assets,
receivables, accounts payable and accrued liabilities to be
representative of their respective fair values because of the
short-term nature of those instruments. Based on the borrowing
rates currently available to the Company for loans with similar
terms, management believes the fair value of these long-term
obligations approximate their carrying value. The Company does
apply fair value accounting to its securities
available-for-sale.
Unrealized gains and losses associated with the Companys
investments, if any, are reported in stockholders equity.
For the years ended December 31, 2009 and 2008, the Company
recognized approximately $97,000 in net unrealized losses and
$125,000 in net unrealized gains, respectively, associated with
its short-term investments.
F-12
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Short-Term
Investments
The following is a summary of the Companys short-term,
available-for-sale
securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
United Stated Government agency obligations
|
|
$
|
24,077
|
|
|
$
|
20
|
|
|
$
|
|
|
|
$
|
24,097
|
|
United States corporate debt
|
|
|
11,611
|
|
|
|
23
|
|
|
|
|
|
|
|
11,634
|
|
Foreign commercial paper
|
|
|
3,598
|
|
|
|
|
|
|
|
|
|
|
|
3,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
39,286
|
|
|
$
|
43
|
|
|
$
|
|
|
|
$
|
39,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
United States Government agency securities
|
|
$
|
14,552
|
|
|
$
|
140
|
|
|
$
|
|
|
|
$
|
14,692
|
|
Municipal bonds
|
|
|
1,501
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,053
|
|
|
$
|
140
|
|
|
$
|
(1
|
)
|
|
$
|
16,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity.
As of December 31, 2009, all
available-for-sale
securities mature in one year or less. The Company regularly
monitors and evaluates the realizable value of its marketable
securities. The Company did not recongize any impairment losses
for the years ended December 31, 2009 and 2008.
Receivables
Receivables consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Amounts due under collaboration arrangements
|
|
$
|
1,189
|
|
|
$
|
44
|
|
Interest on short-term investments
|
|
|
195
|
|
|
|
173
|
|
Vendor refunds
|
|
|
|
|
|
|
149
|
|
Other
|
|
|
49
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
Total Receivables
|
|
$
|
1,433
|
|
|
$
|
384
|
|
|
|
|
|
|
|
|
|
|
F-13
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property
and Equipment
Property and equipment is comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Laboratory equipment
|
|
$
|
1,437
|
|
|
$
|
1,331
|
|
Computer equipment and software
|
|
|
734
|
|
|
|
577
|
|
Furniture and fixtures
|
|
|
183
|
|
|
|
183
|
|
Leasehold improvements
|
|
|
969
|
|
|
|
952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,323
|
|
|
|
3,043
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,362
|
)
|
|
|
(733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,961
|
|
|
$
|
2,310
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense, which includes equipment
under a capital lease, for the years ended December 31,
2009, 2008 and 2007 was approximately $668,000, $535,000 and
$249,000, respectively. Equipment acquired under capital leases
included in property and equipment totaled approximately
$252,000 (net of accumulated amortization of $100,000) and
$323,000 (net of accumulated amortization of $29,000) at
December 31, 2009 and 2008, respectively. Amortization
expense associated with this equipment is included in
depreciation expense for the period ended December 31, 2009
and 2008.
Accrued
Payroll and Employee Liabilities and Other Accrued
Liabilities
Accrued payroll and employee liabilities and other accrued
liabilities and consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Accrued employee salaries and benefits
|
|
$
|
634
|
|
|
$
|
786
|
|
Accrued bonuses
|
|
|
1,462
|
|
|
|
972
|
|
Accrued restructuring
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accrued Payroll and Employee Liabilities
|
|
$
|
2,138
|
|
|
$
|
1,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Accrued professional fees
|
|
$
|
173
|
|
|
$
|
86
|
|
Accrued legal fees
|
|
|
362
|
|
|
|
232
|
|
Accrued accounts payable
|
|
|
130
|
|
|
|
101
|
|
Accrued interest
|
|
|
62
|
|
|
|
81
|
|
Other accrued liabilities
|
|
|
42
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
Total Other Accrued Liabilities
|
|
$
|
769
|
|
|
$
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Commitments
and Contingencies
|
Leases
In October 2007, the Company entered into a non-cancelable
operating lease for the
sub-lease of
a facility in San Diego, California covering a total of
approximately 52,000 square feet. The facility includes the
Companys
F-14
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
research and development laboratories and its corporate offices
and warehouse. The building
sub-lease
commenced on March 1, 2008 and expires in February 2015.
The Company has one option to extend the term of the
sub-lease
agreement until March 2017. The lease is subject to an
escalation clause that provides for annual rent increases. The
difference between the straight-line expense over the term of
the lease and actual amounts paid are recorded as deferred rent.
Prior to March 2008, the Company leased its office and research
facilities under a different operating lease.
In July 2008, the Company entered into a capital lease agreement
for approximately $318,000 to finance the purchase of certain
equipment. The agreement is secured by the equipment, bears
interest at 6.05% per annum, and is payable in monthly
installments of principal and interest of approximately $10,000
for 36 months beginning in August 2008.
In September 2009, we entered into a non-cancellable operating
lease for lab equipment. Under the terms of the lease agreement,
we will make 36 monthly payments of approximately $5,000
beginning in the fourth quarter of 2009.
Annual future minimum lease payments as of December 31,
2009 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
Capital Lease
|
|
|
Years ended December 31,
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
1,076
|
|
|
$
|
116
|
|
2011
|
|
|
1,101
|
|
|
|
78
|
|
2012
|
|
|
1,122
|
|
|
|
|
|
2013
|
|
|
1,099
|
|
|
|
|
|
2014
|
|
|
1,134
|
|
|
|
|
|
Thereafter
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,722
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
|
|
|
|
184
|
|
Less current portion
|
|
|
|
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
Noncurrent portion of capital lease obligation
|
|
|
|
|
|
$
|
76
|
|
|
|
|
|
|
|
|
|
|
Rent expense under all operating leases totaled approximately
$989,000, $1,333,000 and $1,152,000 for the years ended
December 31, 2009, 2008 and 2007, respectively.
Notes
Payable
In March 2008, the Company exercised its right under its
sub-lease
agreement with its landlord to borrow $250,000 for costs
incurred and paid for tenant improvements. The note bears
interest at 7.00% per annum and is payable in monthly
installments of principal and interest of approximately $4,000
for 84 months beginning in June 2008.
In November 2008, the Company entered into an agreement with two
lenders, pursuant to which the lenders provided the Company with
an approximately three-year, $8,000,000 loan. Interest accrues
at a rate of 12% per annum, with monthly interest only payments
required during a period beginning on the loan funding date and
continuing through February 28, 2009, followed thereafter
by equal monthly payments of principal and interest over a
period of 33 months. The Company has the option to prepay
the outstanding balance of the loan in full, subject to a
prepayment fee. The loan is collateralized by the Companys
general assets, excluding intellectual property. There are no
financial covenants associated with the loan. The Company
calculated an effective interest rate for this loan at
F-15
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
approximately 18.57% per annum, which takes into account the
debt issuance costs of approximately $527,000 and the debt
discount of approximately $343,000 (see below for further
details).
In connection with this loan, the Company incurred debt issuance
costs of approximately $527,000, which consists of commitment
fees of $480,000 and legal fees of approximately $47,000. Of the
total commitment fees incurred, $80,000 was paid upon entering
into the agreement and the remaining $400,000 will be due at the
end of the term of the loan. The debt issuance costs were
recorded as a deferred charge and classified as other assets on
the Consolidated Balance Sheet and the loan was recorded and
classified as current and non-current note payable obligations.
The debt issuance costs are being amortized as a component of
interest expense over the term of the loan using the effective
interest rate method. The aggregate unamortized debt issuance
costs as of December 31, 2009 and 2008 were approximately
$229,000 and $489,000, respectively.
Furthermore, in conjunction with this loan, the Company issued
to the lenders warrants to purchase an aggregate of up to
56,010 shares of the Companys common stock at an
exercise price of $8.57 per share. The warrants are currently
exercisable and expire seven years from the date of issuance.
The warrants met all of the criteria for classification as
equity. The warrants were valued using the Black-Scholes model
assuming a risk-free interest rate of 3.00%, a dividend yield of
0%, expected volatility of 77.04% and a contractual life of the
warrants of seven years. The estimated fair value of the
warrants was $343,000 and was recorded as a debt discount. The
debt discount is being amortized as additional interest expense
over the term of the loan using the effective interest rate
method. The aggregate unamortized debt discount as of
December 31, 2009 and 2008 was approximately $150,000 and
$319,000, respectively.
The following is a summary of the notes payable obligations as
of December 31, 2009 (in thousands):
|
|
|
|
|
|
|
Notes Payable
|
|
|
Years ended December 31,
|
|
|
|
|
2010
|
|
$
|
3,475
|
|
2011
|
|
|
3,875
|
|
2012
|
|
|
45
|
|
2013
|
|
|
45
|
|
2014
|
|
|
46
|
|
Thereafter
|
|
|
19
|
|
|
|
|
|
|
Total
|
|
|
7,505
|
|
Less unamortized discount
|
|
|
(150
|
)
|
Less amount representing interest
|
|
|
(1,229
|
)
|
|
|
|
|
|
Present value of net minimum notes payable payments
|
|
|
6,126
|
|
Less current portion
|
|
|
(2,887
|
)
|
|
|
|
|
|
Noncurrent portion of notes payable
|
|
$
|
3,239
|
|
|
|
|
|
|
Executive
Severance Agreements
The Company has entered into employment agreements with its
executive officers and certain other key employees that, under
certain circumstances, provide for the continuation of salary
and certain other benefits if terminated under specified
circumstances.
These agreements generally expire upon termination for cause or
when the Company has met its obligations under these agreements.
In connection with the Companys May 2009 restructuring,
one of these employees, who was terminated during the second
quarter of 2009 will receive continuation of salary and other
benefits until April 2010 as required by her employment
agreement.
F-16
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Clinical
Development Agreements
The Company has entered into agreements with various vendors for
the research and development of its product candidates, which
are generally cancellable at the option of the Company at any
time. Under the terms of these agreements, the vendors provide a
variety of services including conducting preclinical
development, research, manufacturing clinical compounds,
enrolling and recruiting patients, monitoring studies, data
analysis and regulatory filing assistance. Payments under these
agreements typically include fees for services and reimbursement
of expenses. In addition, under certain agreements, we are
subject to penalties in the event we permanently discontinue
performance under these agreements.
Purchase
Obligations
At December 31, 2009, purchase obligations of approximately
$1,682,000 primarily consisted of commitments with third-party
manufacturers of materials to be used in our clinical and
pre-clinical studies. Approximately $879,000 of the total
purchase obligations were not included in the Companys
consolidated financial statements for the year ended
December 31, 2009. The Company intends to use its current
financial resources to fund its commitments under these purchase
obligations.
In May 2009, the Company committed to a restructuring plan (the
Restructuring Plan) intended to conserve the
financial resources of the Company by focusing on its
clinical-stage programs. Employees directly affected by the
Restructuring Plan received notification and were provided with
severance payments upon termination, continued benefits for a
specified period of time and outplacement assistance.
The Company expects to incur total restructuring charges of
approximately $818,000, primarily for severance-related costs in
connection with the Restructuring Plan. The Company did not
incur any expense related to contractual or lease obligations or
other exit costs. For the year ended December 31, 2009,
approximately $791,000 of the total restructuring charge was
included in research and development expense and approximately
$27,000 was included in general and administrative expense. The
Company expects to make the final payment under the
Restructuring Plan in April 2010.
As of December 31, 2009, the Company has paid $625,000 of
the total $667,000 cash restructuring charges. The total
non-cash charges of approximately $151,000 are primarily for
share-based compensation expense resulting from stock option
modifications which were included in research and development
expense in the second quarter of 2009.
On December 21, 2006, the Company entered into an asset
purchase agreement with Valeant Research and Development, Inc.
(Valeant), pursuant to which the Company acquired
intellectual property and other assets related to the
non-nucleoside reverse transcriptase inhibitor HIV program
(RDEA806 program), the next generation
non-nucleoside reverse transcriptase inhibitor HIV program
(next generation NNRTI program), the
mitogen-activated ERK kinase program (RDEA119
program) and the next generation mitogen-activated ERK
kinase program (next generation MEK inhibitor
program).
Concurrent with the asset purchase agreement, the Company
entered into a Master Services Agreement with Valeant under
which the Company agreed to advance a preclinical program in the
field of neuropharmacology on behalf of Valeant. Under the
two-year agreement term, Valeant agreed to pay the Company
quarterly payments totaling up to $3.5 million per year,
and up to $1 million in milestone payments. The first
milestone totaling $500,000 was paid in August 2007. Due to the
early achievement of this milestone, the Companys efforts
under the agreement were reduced throughout 2008 and the
agreement expired by its terms on December 21, 2008. Total
F-17
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
revenues, including the milestone payment, amounted to
$3,095,000 for 2007, while revenues for the year ended
December 31, 2008 totaled $304,000.
Under the asset purchase agreement with Valeant, the Company
will be obligated to make development-based milestone payments
and sales-based royalty payments to Valeant upon subsequent
development of products. There is one set of potential
milestones totaling up to $25 million for the RDEA806
program and the next generation NNRTI program and a separate set
totaling up to $17 million for the RDEA119 program and the
next generation MEK inhibitor program. Accordingly, the Company
has identified a total contingent liability of $42 million
related to these milestone payments. Each milestone payment will
be recorded when the related contingency is resolved and
consideration is issued or becomes assumable, none of which have
occurred as of December 31, 2009. The royalty rates on all
products are in the mid-single digits.
In April 2009, the Company entered into a Development and
Commercialization License Agreement (the License
Agreement) with Bayer HealthCare AG (Bayer).
Under the terms of the License Agreement, the Company granted to
Bayer a worldwide, exclusive license to develop and
commercialize the Companys mitogen-activated ERK kinase
(MEK) inhibitors for all indications. In partial
consideration for the license, Bayer paid the Company an upfront
cash fee of $35 million. The Company is eligible to receive
additional cash payments totaling up to $372 million upon
achievement of certain development-, regulatory- and sales-based
milestones, as well as low double-digit royalties on worldwide
sales of products covered under the License Agreement. The
Company is responsible for the completion of the Phase 1 and
Phase 1/2 studies currently being conducted for RDEA119. The
upfront fee, reimbursement of third-party development costs,
payments associated with the achieving specific milestones and
royalties based on product sales, if any, will be accounted for
as separate units of accounting. In addition, the
$35 million upfront payment has been recognized on a
straight-line basis over a period of approximately
13 months, which was the original period that the Company
expected to complete all of its obligations under the License
Agreement. In December 2009, the Company revised its estimate of
this period extending it to 26 months. The unamortized
balance of the license fee as of the date of the change in
estimate of approximately $14,558,000 will be recognized over
the revised timeline. For the year ended December 31, 2009,
the Company recognized revenue of approximately $20,442,000 as
licenses fees in the consolidated statement of operations.
Participants in a collaborative arrangement shall report costs
incurred and revenues generated from transactions with third
parties in each entitys respective income statement based
on whether the participant is considered a principal or an
agent. Under the terms of the License Agreement with Bayer, the
Company would be considered the principal as the Company is the
primary obligor with respect to the third parties, has latitude
in establishing price, has discretion in supplier selection and
is involved in the determination of product or service
specifications. As such, the Company records the gross amount of
the reimbursement of third-party development costs for the
ongoing clinical trials as revenue and the costs associated with
these reimbursements are reflected as a component of research
and development expense in the Companys consolidated
statement of operations. For the year ended December 31,
2009, the Company recognized revenue of approximately $2,494,000
as reimbursable research and development costs in the
consolidated statement of operations.
Revenue from milestone payments, if any, will be recognized upon
achievement of the milestone only if (1) the milestone
payment is non-refundable, (2) substantive effort is
involved in achieving the milestone, (3) the amount of the
milestone is reasonable in relation to the effort expended or
the risk associated with achievement of the milestone, and
(4) the milestone is at risk for both parties. If any of
these conditions are not met, the Company will defer recognition
of the milestone payment and recognize it as revenue over the
estimated period of performance under the License Agreement as
the performance obligations are completed.
The License Agreement provides that revenues recognized for
royalty payments, if any, will be based upon actual net sales of
licensed products in the period the sales occur.
F-18
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Any amounts received by the Company pursuant to the License
Agreement prior to satisfying the Companys revenue
recognition criteria are recorded as deferred revenue on the
consolidated balance sheet.
Preferred
Stock
As of December 31, 2009, the Companys Board of
Directors is authorized to issue 5,000,000 shares of
preferred stock with a par value of $0.001 per share, in one or
more series.
On May 7, 2008, the automatic conversion provisions of the
then outstanding shares of the Companys Series A
preferred stock, as described in the Companys Certificate
of Designation of Series A Preferred Stock in effect at
that time, were met. As such, all 300 shares of
Series A preferred stock outstanding automatically
converted into an aggregate of 1,578,346 shares of the
Companys common stock.
Prior to the Series A preferred stock conversion, the
holders of Series A preferred stock were also entitled to
receive quarterly dividends at the annual rate of $800 per share
of Series A preferred stock. The dividends were paid in
shares of common stock based on the average of the closing sales
price of the common stock for the five trading days immediately
preceding and ending on the last trading day prior to the date
the dividends are payable. The final non-cash dividend payment
was earned with respect to the first quarter of 2008 and was
paid in common stock in the second quarter of 2008.
Common
Stock
In December 2007, the Company entered into a Securities Purchase
Agreement for the private placement of 3,018,868 unregistered,
newly issued shares of the Companys common stock at a
price of $13.25 per share. The net proceeds from the private
placement were approximately $37,228,000. On January 18,
2008, the Company filed a registration statement with the SEC
covering the resale of 1,924,528 of these shares. This
registration statement was declared effective by the SEC on
February 1, 2008. On August 27, 2008, the Company
filed another registration statement with the SEC covering the
resale of the remaining 1,094,340 shares. This registration
statement was declared effective by the SEC on September 8,
2008.
In December 2008, the Company entered into a Securities Purchase
Agreement for the private placement of 2,737,336 unregistered,
newly issued shares of the Companys common stock and
warrants to purchase 684,332 shares of common stock at a
total purchase price of approximately $11.17 per unit, with each
unit consisting of one share of common stock and a warrant to
purchase 0.25 shares of common stock at an exercise price
of $11.14 per share. The net proceeds from the private placement
were approximately $30,541,000. On January 13, 2009, the
Company filed a registration statement with the SEC covering the
resale of these shares and the shares issuable upon exercise of
the warrants. This registration statement was declared effective
by the SEC on January 21, 2009.
Common
Stock Reserved for Future Issuance
Shares of common stock reserved for future issuance at
December 31, 2009 were as follows:
|
|
|
|
|
Warrants
|
|
|
719,338
|
|
Stock option plans
|
|
|
4,453,288
|
|
Employee stock purchase plan
|
|
|
224,963
|
|
|
|
|
|
|
Total shares reserved for future issuance
|
|
|
5,397,589
|
|
|
|
|
|
|
F-19
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Warrants
On December 31, 2007, warrants to purchase
4,167 shares of the Companys common stock at an
exercise price of $3.48 per share expired without exercise.
These warrants were issued in December 2002 in connection with
the termination of the lease agreement with the landlord of
certain office facilities.
On October 10, 2008, warrants to purchase
275,600 shares of common stock at an exercise price of
$10.85 per share expired without exercise. These warrants were
issued in October 2003 in conjunction with a private placement
transaction.
On November 12, 2008, in conjunction with the $8,000,000
loan, the Company issued warrants to purchase an aggregate of
56,010 shares of its common stock at an exercise price of
$8.57 per share. The warrants are immediately exercisable and
expire seven years from the date of issuance. In September 2009,
an accredited investor exercised its warrant to purchase
21,004 shares of the Companys common stock using the
conversion right provision in the warrant agreement, which
resulted in the net issuance of 11,862 shares of common
stock and no net cash proceeds to the Company. As of
December 31, 2009, 35,006 shares of common stock have
been reserved for issuance upon exercise of an outstanding
warrant.
In conjunction with the December 2008 private placement, the
Company issued warrants to purchase an aggregate of
684,332 shares of its common stock at an exercise price of
$11.14 per share. The warrants are first exercisable on
June 17, 2009 and expire on December 19, 2013. As of
December 31, 2009, all of the warrants were outstanding and
684,332 shares of common stock have been reserved for
issuance upon exercise of the warrants. The warrants met all of
the criteria for classification as equity. The warrants were
valued using the Black-Scholes model assuming a risk-free
interest rate of 1.35%, a dividend yield of 0%, expected
volatility of 77.66% and a contractual life of the warrants of
five years. The estimated fair value of the warrants was
$4,528,000. The net effect of recording the fair value of the
warrants to equity was zero.
Stock
Option Plans
In 2002, the Company adopted its 2002 Non-Officer Equity
Incentive Plan (the 2002 Plan), which provides for
the grant of stock awards, stock bonuses and rights to acquire
restricted common stock to employees who are not officers, to
executive officers not previously employed by the Company as an
inducement to entering into an employment relationship with the
Company, and to consultants of the Company. These awards have up
to a 10-year
contractual life and are subject to various vesting periods, as
determined by the Companys Compensation Committee or the
Board of Directors.
In 2004, the Company adopted its 2004 Stock Incentive Plan (the
2004 Plan), which provides for the grant of
incentive and non-qualified stock options, as well as other
share-based payment awards, to employees, directors, consultants
and advisors of the Company. These awards have up to a
10-year
contractual life and are subject to various vesting periods, as
determined by the Companys Compensation Committee or the
Board of Directors. The 2004 Plan also provides for automatic
fixed grants to non-employee directors of the Company.
The number of shares of the Companys common stock
available for issuance under the 2004 Plan automatically
increases on the first trading day of January of each calendar
year during the term of the 2004 Plan, beginning with calendar
year 2005, by an amount equal to five percent of the sum of the
following share numbers: (i) the total number of shares of
the Companys common stock outstanding on the date and
(ii) the number of shares of the Companys common
stock into which the outstanding shares of Series A
preferred stock are convertible on that date. In accordance with
the preceding formula, the shares available for issuance under
the 2004 Plan were increased by 891,787 on January 2, 2009,
by 744,552 on January 2, 2008 and by 547,027 on
January 2, 2007. In addition, the shares available for
issuance under the 2004 Plan will increase by
925,245 shares on January 4, 2010.
F-20
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the Companys stock option activity and
related data follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Options
|
|
|
|
|
|
Average
|
|
|
|
Available for
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Grant
|
|
|
Shares
|
|
|
Price
|
|
|
Balance at December 31, 2006
|
|
|
1,734,850
|
|
|
|
1,345,834
|
|
|
$
|
5.45
|
|
Additional shares authorized
|
|
|
547,027
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(1,479,500
|
)
|
|
|
1,479,500
|
|
|
$
|
5.52
|
|
Exercised
|
|
|
|
|
|
|
(98,941
|
)
|
|
$
|
2.85
|
|
Cancelled
|
|
|
545,500
|
|
|
|
(545,500
|
)
|
|
$
|
4.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
1,347,877
|
|
|
|
2,180,893
|
|
|
$
|
5.79
|
|
Additional shares authorized
|
|
|
744,552
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(1,793,875
|
)
|
|
|
1,793,875
|
|
|
$
|
13.62
|
|
Exercised
|
|
|
|
|
|
|
(116,653
|
)
|
|
$
|
4.66
|
|
Cancelled
|
|
|
182,026
|
|
|
|
(182,026
|
)
|
|
$
|
7.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
480,580
|
|
|
|
3,676,089
|
|
|
$
|
9.54
|
|
Additional shares authorized
|
|
|
891,787
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(557,350
|
)
|
|
|
557,350
|
|
|
$
|
14.19
|
|
Exercised
|
|
|
|
|
|
|
(595,168
|
)
|
|
$
|
5.89
|
|
Cancelled
|
|
|
246,476
|
|
|
|
(246,476
|
)
|
|
$
|
10.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
1,061,493
|
|
|
|
3,391,795
|
|
|
$
|
10.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009, options cancelled
(included in the above table) consisted of 243,186 options
forfeited with a weighted-average exercise price of
approximately $10.88 and 3,290 options expired with a
weighted-average exercise price of approximately $16.20.
As of December 31, 2009, options exercisable have a
weighted-average remaining contractual term of 6.9 years.
The total intrinsic value of stock option exercises, which is
the difference between the exercise price and closing price of
the Companys common stock on the date of exercise, during
the years ended December 31, 2009, 2008, and 2007 was
approximately $6,218,000, $1,001,000 and $810,000, respectively.
As of December 31, 2009 the total intrinsic value, which is
the difference between the exercise price and closing price of
the Companys common stock of options outstanding and
exercisable was approximately $12,437,000 and $7,277,000,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
Weighted-
|
|
|
|
Weighted-
|
|
|
|
Weighted-
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
Exercisable at end of year
|
|
|
1,559,117
|
|
|
$
|
9.85
|
|
|
|
1,092,025
|
|
|
$
|
6.54
|
|
|
|
541,058
|
|
|
$
|
7.76
|
|
Weighted-average fair value of options granted during the year
|
|
$
|
9.60
|
|
|
|
|
|
|
$
|
9.21
|
|
|
|
|
|
|
$
|
3.72
|
|
|
|
|
|
F-21
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Exercise prices and weighted-average remaining contractual lives
for the options outstanding as of December 31, 2009 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Price of
|
|
Options
|
|
|
Range of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Options
|
|
|
Options
|
|
Outstanding
|
|
|
Exercise Prices
|
|
|
Life (in years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Exercisable
|
|
|
|
491,032
|
|
|
$
|
2.76 - $3.90
|
|
|
|
6.52
|
|
|
$
|
3.76
|
|
|
|
347,282
|
|
|
$
|
3.70
|
|
|
426,100
|
|
|
$
|
4.08 - $5.25
|
|
|
|
6.99
|
|
|
$
|
5.00
|
|
|
|
258,822
|
|
|
$
|
4.99
|
|
|
211,792
|
|
|
$
|
5.85 - $9.46
|
|
|
|
7.69
|
|
|
$
|
6.85
|
|
|
|
109,103
|
|
|
$
|
6.29
|
|
|
497,390
|
|
|
$
|
10.68 - $10.68
|
|
|
|
8.95
|
|
|
$
|
10.68
|
|
|
|
116,642
|
|
|
$
|
10.68
|
|
|
463,721
|
|
|
$
|
12.16 - $14.25
|
|
|
|
7.16
|
|
|
$
|
13.17
|
|
|
|
220,644
|
|
|
$
|
13.39
|
|
|
633,558
|
|
|
$
|
14.26 - $14.95
|
|
|
|
9.33
|
|
|
$
|
14.68
|
|
|
|
100,874
|
|
|
$
|
14.29
|
|
|
504,500
|
|
|
$
|
15.69 - $15.69
|
|
|
|
8.00
|
|
|
$
|
15.69
|
|
|
|
295,122
|
|
|
$
|
15.69
|
|
|
163,702
|
|
|
$
|
16.20 - $20.37
|
|
|
|
5.87
|
|
|
$
|
16.59
|
|
|
|
110,628
|
|
|
$
|
16.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,391,795
|
|
|
$
|
2.76 - $20.37
|
|
|
|
7.81
|
|
|
$
|
10.84
|
|
|
|
1,559,117
|
|
|
$
|
9.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the Company has reserved
4,453,288 shares of common stock for future issuance upon
exercise of options granted or to be granted under the 2002 Plan
and the 2004 Plan.
Employee
Stock Purchase Plan
In 2000, the Company adopted the ESPP, under which shares of
common stock are reserved for sale to eligible employees, as
defined in the ESPP.
Employees may purchase common stock under the ESPP every six
months (up to but not exceeding 15% of each employees base
salary or hourly compensation, subject to certain limitations)
over the offering period at 85% of the fair market value of the
common stock at specified dates. The offering period may not
exceed 24 months. During the years ended December 31,
2009 and 2008, 62,134 and 62,449 shares of common stock
were issued under the ESPP, respectively. There were no shares
purchased under the ESPP during the year ended December 31,
2007. As of December 31, 2009, 132,294 shares of
common stock have been issued under the ESPP and
224,963 shares of common stock are available for future
issuance.
The ESPP included an annual evergreen provision which provided
that on December 31st of each year, the number of
reserved shares were increased automatically by the lesser of
(i) one percent of the total amount of shares of common
stock outstanding on such anniversary date, or (ii) such
lesser amount as approved by the Board of Directors. The
evergreen provision expired and the final increase under the
provision occurred on December 31, 2008. On
December 31, 2008 and 2007, shares available for issuance
under the ESPP were increased by 178,357 and 133,127 shares
pursuant to the evergreen provision.
F-22
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Taxes on income vary from the statutory federal income tax rate
applied to earnings before tax on income as follows (in
thousands):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
Statutory federal income tax rate of 34% applies to earnings
before income taxes and extraordinary items
|
|
$
|
(10,494
|
)
|
States taxes net of federal benefit
|
|
|
(2,224
|
)
|
Meals and entertainment
|
|
|
9
|
|
Share-based compensation
|
|
|
238
|
|
Federal R&D credit
|
|
|
(872
|
)
|
162(m) Executive compensation limitation
|
|
|
160
|
|
NOL adjustment due to 382 study
|
|
|
(9,437
|
)
|
R&D credit adjustment
|
|
|
334
|
|
APIC valuation allowance
|
|
|
(39
|
)
|
Change in valuation allowance
|
|
|
22,204
|
|
Other
|
|
|
121
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities arising from
differences between accounting for financial statement purposes
and tax purposes, less valuation reserves at year-end are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
51,821
|
|
|
$
|
29,570
|
|
Research and development credits
|
|
|
4,459
|
|
|
|
2,770
|
|
Capitalized research and development costs
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
1,452
|
|
|
|
870
|
|
Share-based compensation
|
|
|
3,052
|
|
|
|
1,720
|
|
Other, net
|
|
|
961
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
61,745
|
|
|
|
35,280
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred state taxes
|
|
|
(4,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
57,484
|
|
|
|
35,280
|
|
Valuation allowance for net deferred tax assets
|
|
|
(57,484
|
)
|
|
|
(35,280
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities are recorded for
differences between the financial statement and tax basis of the
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted laws and rates applicable
to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected
to be realized.
The Company has evaluated the available evidence supporting the
realization of its gross deferred tax assets, including the
amount and timing of future taxable income, and has determined
it is more likely than not that the
F-23
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets will not be realized. Due to uncertainties surrounding
the realizability of the deferred tax assets, the Company
continually maintains a full valuation allowance against its
deferred tax assets at fiscal year ended December 31, 2009.
At December 31, 2009, the Company had federal and
California income tax net operating loss carryforwards of
approximately $124,623,000 and $106,890,000, respectively. The
difference between the federal and California tax loss
carryforwards is primarily attributable to the capitalization of
research and development expenses and expiring carryforwards for
California income tax purposes. In addition, the Company had
federal and California research and development tax credit
carryforwards of $2,457,000 and $2,001,000, respectively. The
federal and California net operating loss carryforwards will
expire through 2029 and 2019, respectively, unless previously
utilized. The federal research tax credit carryforwards will
expire through 2029 unless previously utilized and the
California research and development credit carry forwards will
carry forward indefinitely until utilized.
The utilization of net operating loss carryforwards may be
subject to limitations under provisions of the Internal Revenue
Code Section 382 and similar state provisions.
As a result of ASC 715, Compensation, our deferred tax
assets as of December 31, 2009 do not include $1,307,000 of
excess tax benefits from employee stock option exercises that
are a component of our net operating loss carryovers.
Stockholders equity will be increased by $1,307,000 if and
when such excess tax benefits are ultimately realized.
On January 1, 2007, the Company adopted the provisions of
FIN 48, which clarifies the accounting for uncertain tax
positions, ASC 740, Income Taxes, requires that the
Company recognize the impact of a tax position in its financial
statements if the position is more likely than not to be
sustained upon examination and on the technical merits of the
position. The impact of the adoption of FIN 48 was
immaterial to the Companys consolidated financial
statements. The total amount of unrecognized tax benefits as of
December 31, 2009 was $334,000 which, if recognized, would
affect other tax accounts, primarily deferred taxes in future
periods, and would not affect the Companys effective tax
rate since the Company maintains a full valuation allowance
against its deferred tax assets.
A reconciliation of the beginning and ending balance of
unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
Balance at December 31, 2007
|
|
$
|
|
|
Gross increase (decrease)
|
|
|
|
|
Balance at December 31, 2008
|
|
|
|
|
Gross increase (decrease)
|
|
|
334
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
334
|
|
|
|
|
|
|
The Company had a $334,000 increase in unrecognized tax benefits
related to a reduction of the federal and California research
and development credits. The Company does not anticipate any
material change in the total amount of unrecognized tax benefits
will occur within the next twelve months.
The Companys practice is to recognize interest
and/or
penalties related to income tax matters in income tax expense.
The Company had no accrual for interest or penalties on the
Companys consolidated balance sheets at December 31,
2009, and has not recognized interest
and/or
penalties in the consolidated statement of operations for the
period ended December 31, 2009, since the unrecognized tax
benefits do not result in FIN 48 liabilities.
The Company is subject to taxation in the United States and
state jurisdictions. The Companys tax years for 2003 and
forward are subject to examination by the United States and
California tax authorities due to the carryforward of utilized
net operating losses and research and development credits.
F-24
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
Employee
Benefit Plan
|
The Company has established a 401(k) defined contribution
retirement plan (the 401(k) Plan), conforming to
Section 401(k) of the Internal Revenue Code (the
IRC). All full-time employees may elect to have a
portion of their salary deducted and contributed to the 401(k)
Plan up to the maximum allowable limitations of the IRC. The
Company does not match employee contributions or otherwise
contribute to the 401(k) Plan.
There were no subsequent events that were required to be
recognized or disclosed in the consolidated financial statements.
|
|
13.
|
Summary
of Quarterly Financial Data (unaudited)
|
The following is a summary of the unaudited quarterly results of
operations for the years ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License fees
|
|
$
|
|
|
|
$
|
5,013
|
|
|
$
|
8,178
|
|
|
$
|
7,251
|
|
Reimbursable research and development costs
|
|
|
|
|
|
|
499
|
|
|
|
991
|
|
|
|
1,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
|
|
|
5,512
|
|
|
|
9,169
|
|
|
|
8,255
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
10,996
|
|
|
|
10,725
|
|
|
|
8,999
|
|
|
|
11,478
|
|
General and administrative
|
|
|
2,877
|
|
|
|
2,526
|
|
|
|
2,404
|
|
|
|
2,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(13,873
|
)
|
|
|
(7,739
|
)
|
|
|
(2,234
|
)
|
|
|
(6,105
|
)
|
Interest income
|
|
|
136
|
|
|
|
119
|
|
|
|
65
|
|
|
|
66
|
|
Interest expense
|
|
|
(364
|
)
|
|
|
(348
|
)
|
|
|
(320
|
)
|
|
|
(291
|
)
|
Other income, net
|
|
|
(2
|
)
|
|
|
5
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(14,103
|
)
|
|
|
(7,963
|
)
|
|
|
(2,471
|
)
|
|
|
(6,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis and diluted net loss per share applicable to common
stockholders
|
|
$
|
(0.79
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
ARDEA
BIOSCIENCES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Collaboration revenues
|
|
$
|
260
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
44
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
9,969
|
|
|
|
12,923
|
|
|
|
11,459
|
|
|
|
10,507
|
|
General and administrative
|
|
|
3,408
|
|
|
|
3,272
|
|
|
|
3,043
|
|
|
|
2,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(13,117
|
)
|
|
|
(16,195
|
)
|
|
|
(14,502
|
)
|
|
|
(12,661
|
)
|
Interest income
|
|
|
607
|
|
|
|
414
|
|
|
|
293
|
|
|
|
210
|
|
Interest expense
|
|
|
|
|
|
|
(1
|
)
|
|
|
(10
|
)
|
|
|
(204
|
)
|
Other income, net
|
|
|
135
|
|
|
|
51
|
|
|
|
(4
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(12,375
|
)
|
|
|
(15,731
|
)
|
|
|
(14,223
|
)
|
|
|
(12,666
|
)
|
Non-cash dividends on Series A preferred stock
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(12,435
|
)
|
|
$
|
(15,731
|
)
|
|
$
|
(14,223
|
)
|
|
$
|
(12,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis and diluted net loss per share applicable to common
stockholders
|
|
$
|
(0.93
|
)
|
|
$
|
(1.10
|
)
|
|
$
|
(0.95
|
)
|
|
$
|
(0.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26