Ardea Remains Neutral

We are maintaining our Neutral recommendation on Ardea Biosciences Inc. (RDEA) with a target price of $20.

Ardea Biosciences, headquartered in San Diego, CA, focuses on the discovery and development of small-molecule therapeutics for the treatment of gout, human immunodeficiency virus (HIV) and cancer.

Ardea recently reported disappointing second quarter 2010 results. The development stage biopharmaceutical company’s second-quarter 2010 net loss of $12.8 million, or $0.57 per share was higher than the year-ago loss of $8 million, or $0.44 per share and the Zacks Consensus Estimate of a $0.46 per share loss.

The wider loss at Ardea in the reported quarter was attributable to the increased amount spent on developing its pipeline coupled with lower revenues in the quarter. Revenue in the reported quarter slipped 36 % to $3.5 million.

(Read our full coverage on this earnings report: Q2 Loss Widens at Ardea)

We are pleased with Ardea’s efforts to develop its lead candidate RDEA594. RDEA594 is being developed for the treatment of hyperuricemia (elevated uric acid levels) and gout. The market has a huge unmet need with Uloric (febuxostat) of Takeda, approved in February 2009, being the only new drug to be approved in the United States for the treatment of gout in the last 40 years.

We believe RDEA594 can serve the market effectively on approval. The lucrative agreement with Bayer, signed in 2009, focused 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 pipeline’s early stage development status. Furthermore, any pipeline development has attendant risks. For example, in 2004, Ardea suffered a major setback when the development of its lead pipeline candidate, Iseganan, had to be discontinued on the recommendation of an independent data monitoring committee.

Any similar pipeline failure would weigh heavily on the stock. The competition awaiting Ardea’s products on approval is another concern. We note that apart from Ardea, companies like Savient Pharmaceuticals Inc.(SVNT), Regeneron Pharmaceuticals Inc. (REGN) and Novartis (NVS) are also developing treatments for gout.

Currently, the stock has a Zacks #4 Rank (short-term sell recommendation). This highlights the short-term pressure on the stock attributable to the headwinds mentioned above. However, we have a Neutral stance on Ardea in the long-run primarily because of the bright prospects of its gout candidate, which aims at a lucrative market with a huge unmet need. Successful development and commercialization of the drug will boost Ardea’s top line significantly.

ARDEA BIOSCIENC (RDEA): Free Stock Analysis Report

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