Ardea Bio Kept at Neutral

We are maintaining our Neutral recommendation on Ardea Biosciences Inc. (RDEA - Analyst Report) with a target price of $20.00.

Ardea Biosciences, headquartered in San Diego, California, primarily develops small-molecule therapeutics for treating serious diseases such as gout and cancer.

Ardea recently reported third quarter 2011 results. The development stage biopharmaceutical company’s net loss of $0.84 per share exceeded the year-ago loss by $0.05 and the Zacks Consensus loss Estimate by $0.17. The wider loss was attributable to lower revenues and higher operating costs recorded in the quarter. (Read our full coverage on this earnings report: Higher Costs Push Up Loss at Ardea).

We are pleased with Ardea’s efforts to develop its lead candidate lesinurad (formerly RDEA594), for the treatment of hyperuricemia (elevated uric acid levels) and gout. The candidate has performed well so far in clinical trials. Ardea intends to initiate phase III studies to evaluate lesinurad in gout patients by year end. We note that the incidence and severity of gout is increasing in the US.

Lesinurad will target a market with a huge unmet need on approval. This should boost the company’s top line significantly. Furthermore, the lucrative agreement with Bayer (BAYRY - Analyst Report), signed in 2009, focusing on the development of MEK (methyl ethyl ketone) inhibitors for the treatment of cancer is another positive for Ardea.

However, we remain concerned about the early stage development status of the pipeline. Furthermore, any pipeline development has its own risks. Moreover, the competition awaiting Ardea’s candidates on approval is another concern. We see limited upside from current levels and maintain our long-term Neutral stance on Ardea.

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