Higher Costs Push Up Loss at Ardea

Ardea Biosciences Inc.’s (RDEA - Analyst Report) third quarter 2011 net loss of 84 cents per share exceeded the year-ago loss by 5 cents and the Zacks Consensus loss Estimate by 17 cents. The wider loss was attributable to lower revenues and higher operating costs recorded in the quarter.

Quarterly Results

Revenues in the reported quarter slipped 48.5% to $1.7 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 $2 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 50.4% to approximately $1.1 million.

Operating costs at Ardea climbed 13.3% to $24.2 million driven by a 31.4% increase in research and development (R&D) expenses. The rise in R&D expenses to $19.3 million was primarily attributable to Ardea’s efforts to develop its pipeline especially gout candidate, lesinurad and the next-generation gout candidate RDEA3170. The rise in R&D expenses more than mitigated the 26.4% reduction in general & administrative (G&A) costs. The reduction in G&A expenses to $4.9 million was primarily due to the decrease in non-cash stock-based expenses.

Our Take & Recommendation

We are encouraged by the development of Ardea’s lead candidate lesinurad. However, we are concerned about the company’s pipeline candidates being in early/mid-stage of development. Furthermore, the competition awaiting Ardea’s products on approval is also a concern. In the absence of any late-stage catalyst we see limited upside potential for the stock from current levels and hence have a Neutral stance on the stock.

The stock carries a Zacks #3 Rank (Hold rating) in the short-run.

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