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Costs Push Up Loss at Ardea

BAYRY

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Ardea Biosciences Inc.’s second quarter 2011 net loss of $0.68 per share exceeded the year-ago loss by $0.11 and the Zacks Consensus loss Estimate by $0.16. The wider loss was attributable to lower revenues and higher operating costs recorded in the quarter.

Quarterly Results

Revenues in the reported quarter slipped 38.2% to $2.2 million. The decline was attributable to an extension of the amortization period of the upfront license fee received under the licensing agreement with Bayer (BAYRY - Analyst Report). The extension was due to an expected delay in fulfilling Ardea’s obligations under the deal. The Zacks Consensus Estimate was $3 million.

Ardea, which does not have any marketed product, earned its entire revenue from license fees, reimbursable research and development (R&D) costs apart from sponsored research. License fees in the reported quarter declined 55.6% to approximately $1.1 million.

Both R&D expenses (up 20.5% to $15.5 million) and general and administrative expenses (G&A) (up 43.7% to $4.8 million) were on the upswing during the second quarter of 2011. The rise in R&D expenses was primarily attributable to Ardea’s efforts to develop its pipeline especially its gout candidate, lesinurad and the next-generation gout candidate RDEA3170. The rise in G&A expenses was attributable to the increase in non-cash stock-based expenses apart from the rise in other related expenditures.

Our Recommendation

We have an Outperform recommendation on the stock in the long-run. We are encouraged by the development of Ardea’s lead candidate lesinurad. The current therapies for gout have limited efficacy with many gout patients failing to respond favorably to these therapies. This should provide lesinurad, which has performed well in clinical studies, with the opportunity to take market share away from currently approved therapies.

Moreover, Ardea’s efforts to develop the other candidates in its pipeline are also encouraging. The stock carries a Zacks #3 Rank (Hold rating) in the short-run.

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