Ardea Slips to Neutral

Recently, we downgraded Ardea Biosciences Inc. (RDEA - Analyst Report) to Neutral from Outperform following its disappointing results in the second quarter of 2011. Our target price for the stock is $16.00.

In August 2011, Ardea came out with gloomy results in the second quarter 2011. The company suffered a loss of $0.68 per share in the quarter, which 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. (For a detailed coverage of the earnings report please read: Costs Push Up Loss at Ardea).

We believe that the trend of losses will continue in the absence of any marketed product at Ardea. Consequently, we have increased our loss estimates for 2011 and 2012 by $0.33 and $0.15 per share, respectively. The pipeline candidates at Ardea are in early/mid-stage of development. Given the current scenario, an Ardea product hitting the market  is not be foreseen in the near future.

The most advanced pipeline candidate at Ardea is lesinurad (formerly RDEA594). The candidate is being developed for the treatment of hyperuricemia (elevated uric acid levels) and gout. Ardea intends to initiate phase III studies to evaluate lesinurad in gout patients.

An end-of-phase II meeting with the US Food and drug Administration (FDA) is expected in the third quarter of 2011. However, any hiccups in the development of the lead pipeline candidate will push Ardea further back.

Apart from lesinurad, two other promising pipeline candidates at Ardea are RDEA806 (targeting HIV) and BAY86-9766 (targeting cancer). BAY86-9766 is being developed under Ardea’s agreement with Bayer (BAYRY - Analyst Report). Even if the candidates mange to wriggle out of the clinical and regulatory hurdles and eventually reach the market, they will face substantial competition from big pharmaceutical and biotech companies in the HIV and cancer markets.

We see limited upside from current levels in the absence of any late-stage catalyst and hence revert to a Neutral stand on the stock.

Read the full analyst report on RDEA

Read the full analyst report on BAYRY