Table ofContents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

** **

----

 

**(MarkOne)**
| **x**                                                       | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                        |       |                                                                                                    |
| **For the  quarterly period ended September 30, 2008** |
| ** **                                                  | ** ** | ** **                                                                                              |
| **OR**                                                      |
|                                                        |       |                                                                                                    |
| **o**                                                       | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File Number: 0-19700**

 

**AMYLINPHARMACEUTICALS, INC.**(Exactname of registrant as specified in its charter)

 
| **Delaware**                                                     | ** ** | **33-0266089**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **9360  Towne Centre Drive  San Diego, California**              | ** ** | **92121**                             |
| (Address of principal  executive offices)                        |       | (Zip code)                            |

 

**(858) 552-2200**(Registrant’s telephone number, including area code)

 

**Not Applicable**(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

Yes x     No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 
| Large  accelerated filer x                                              |   | Accelerated  filer o         |
|-------------------------------------------------------------------------|--------|------------------------------|
| Non-accelerated  filer o (Do not check if a smaller reporting  company) |   | Smaller  reporting company o |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

Yes o     No x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

| **Class**                      | ** ** | **Outstanding on October 28, 2008** |
|--------------------------------|------------|---------------------------------------------------------|
| Common Stock, $.001 par  value |       | 137,617,353                                             |

** **

** **

** **

----

**Tableof Contents**

** **

**AMYLIN PHARMACEUTICALS, INC.**

** **

**TABLE OF CONTENTS**

 
| COVER PAGE                             |
|----------------------------------------|
| ** **                             | ** ** | ** ** |
| TABLE OF CONTENTS                      | 2 |
|                                   |   |   |
| **PART I. FINANCIAL INFORMATION** |
|                                   |   |   |
| ITEM 1.                                | Financial Statements | 3 |
|                                   |   |   |
|                                   | Consolidated  Balance Sheets as of September 30, 2008 (unaudited) and  December 31, 2007 | 3 |
|                                   |   |   |
|                                   | Consolidated  Statements of Operations for the three and nine months ended  September 30, 2008 and 2007 (unaudited) | 4 |
|                                   |   |   |
|                                   | Consolidated  Statements of Cash Flows for the nine months ended September 30, 2008  and 2007 (unaudited) | 5 |
|                                   |   |   |
|                                   | Notes to Consolidated Financial Statements (unaudited) | 6 |
|                                   |   |   |
| ITEM 2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 14 |
|                                   |   |   |
| ITEM 3.                                | Quantitative  and Qualitative Disclosures about Market Risk | 22 |
|                                   |   |   |
| ITEM 4.                                | Controls and Procedures | 22 |
|                                   |   |   |
| **PART II.  OTHER INFORMATION**   |
|                                   |   |   |
| ITEM 1.                                | Legal Proceedings | 23 |
|                                   |   |   |
| ITEM 1A.                               | Risk Factors | 23 |
|                                   |   |   |
| ITEM 6.                                | Exhibits | 35 |
|                                   |   |   |
| SIGNATURE                              |   | 36 |

** **

**2**

----

**Table of Contents**

** **

**PART I. FINANCIAL INFORMATION**

** **

**ITEM 1. Financial Statements**

** **

**AMYLINPHARMACEUTICALS, INC.**

** **

**Consolidated BalanceSheets**

**(in thousands, except pershare data)**

 
| ** **                                                                                                                                                                 | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **(unaudited)**              | ** ** | **(Note 1)**           | ** ** |
| Assets                                                                                                                                                                     | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                            |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                  |       | $                            | 196,605    |                        | $          | 422,232 |   |
| Short-term investments                                                                                                                                                     |       | 608,846                      |       | 708,183                     |       |
| Accounts receivable, net                                                                                                                                                   |       | 64,130                       |       | 73,579                      |       |
| Inventories, net                                                                                                                                                           |       | 98,508                       |       | 100,214                     |       |
| Other current assets                                                                                                                                                       |       | 28,422                       |       | 32,100                      |       |
| Total current assets                                                                                                                                                       |       | 996,511                      |       | 1,336,308                   |       |
|                                                                                                                                                                       |       |                         |       |                        |       |
| Property, plant and equipment, net                                                                                                                                         |       | 600,204                      |       | 390,301                     |       |
| Other long-term assets, net                                                                                                                                                |       | 19,051                       |       | 28,082                      |       |
| Debt issuance costs, net                                                                                                                                                   |       | 16,832                       |       | 19,520                      |       |
|                                                                                                                                                                       |       | $                            | 1,632,598  |                        | $          | 1,774,211 |   |
|                                                                                                                                                                       |       |                         |       |                        |       |
| Liabilities and  Stockholders’ Equity                                                                                                                                 |       |                         |       |                        |       |
|                                                                                                                                                                       |       |                         |       |                        |       |
| Current liabilities:                                                                                                                                                       |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                           |       | $                            | 39,829     |                        | $          | 37,530 |   |
| Accrued compensation                                                                                                                                                       |       | 64,068                       |       | 56,428                      |       |
| Payable to collaborative partner                                                                                                                                           |       | 60,767                       |       | 66,116                      |       |
| Other current liabilities                                                                                                                                                  |       | 86,650                       |       | 122,924                     |       |
| Current portion of deferred revenue                                                                                                                                        |       | 4,158                        |       | 4,286                       |       |
| Current portion of long-term note payable                                                                                                                                  |       | 23,437                       |       | —                      |       |
| Total current liabilities                                                                                                                                                  |       | 278,909                      |       | 287,284                     |       |
|                                                                                                                                                                       |       |                         |       |                        |       |
| Other long-term obligations, net of current portion                                                                                                                        |       | 32,661                       |       | 31,023                      |       |
|                                                                                                                                                                       |       |                         |       |                        |       |
| Deferred revenue, net of current portion                                                                                                                                   |       | —                       |       | 3,086                       |       |
|                                                                                                                                                                       |       |                         |       |                        |       |
| Long-term note payable, net of current portion                                                                                                                             |       | 101,563                      |       | 125,000                     |       |
|                                                                                                                                                                       |       |                         |       |                        |       |
| Convertible senior notes                                                                                                                                                   |       | 775,000                      |       | 775,000                     |       |
|                                                                                                                                                                       |       |                         |       |                        |       |
| Commitments and contingencies (Note 10)                                                                                                                                    |       |                         |       |                        |       |
|                                                                                                                                                                       |       |                         |       |                        |       |
| Stockholders’ equity:                                                                                                                                                 |       |                         |       |                        |       |
| Common stock, $.001 par value, 450,000 shares authorized, 137,617 and  135,044 issued and outstanding at September 30, 2008 and  December 31, 2007, respectively |       | 138                          |       | 135                         |       |
| Additional paid-in capital                                                                                                                                                 |       | 2,098,503                    |       | 1,987,453                   |       |
| Accumulated deficit                                                                                                                                                        |       | (1,645,654                   | )          | (1,434,320                  | )          |
| Accumulated other comprehensive loss                                                                                                                                       |       | (8,522                       | )          | (450                        | )          |
| Total stockholders’ equity                                                                                                                                            |       | 444,465                      |       | 552,818                     |       |
|                                                                                                                                                                       |       | $                            | 1,632,598  |                        | $          | 1,774,211 |   |

 

See accompanyingnotes to consolidated financial statements.

** **

**3**

----

**Table of Contents**

** **

**AMYLINPHARMACEUTICALS, INC.**

** **

**Consolidated Statements of Operations**

**(in thousands, except per share data)**

**(unaudited)**

 
| ** **                                                          | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Net product sales                                                   |       | $                                                    | 201,364    |                                                | $          | 177,391 |   | $ | 580,420 |   | $ | 506,731 |   |
| Revenues under collaborative agreements                             |       | 16,998                                               |       | 12,637                                              |       | 57,198 |   | 52,228 |   |
| Total revenues                                                      |       | 218,362                                              |       | 190,028                                             |       | 637,618 |   | 558,959 |   |
|                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Costs and expenses:                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of goods sold                                                  |       | 23,395                                               |       | 13,750                                              |       | 70,101 |   | 43,322 |   |
| Selling, general and administrative                                 |       | 99,676                                               |       | 87,718                                              |       | 309,007 |   | 268,626 |   |
| Research and development                                            |       | 73,466                                               |       | 61,457                                              |       | 226,073 |   | 192,712 |   |
| Collaborative profit sharing                                        |       | 80,567                                               |       | 75,026                                              |       | 229,418 |   | 212,328 |   |
| Total costs and expenses                                            |       | 277,104                                              |       | 237,951                                             |       | 834,599 |   | 716,988 |   |
|                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Operating loss                                                      |       | (58,742                                              | )          | (47,923                                             | )          | (196,981 | ) | (158,029 | ) |
|                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Interest and other income                                           |       | 3,307                                                |       | 14,239                                              |       | 21,311 |   | 33,561 |   |
| Interest and other expense                                          |       | (7,343                                               | )          | (6,074                                              | )          | (20,721 | ) | (9,727 | ) |
| Loss on impairment of investments                                   |       | (14,943                                              | )          | —                                              |       | (14,943 | ) | — |   |
| Net loss                                                            |       | $                                                    | (77,721    | )                                                   | $          | (39,758 | ) | $ | (211,334 | ) | $ | (134,195 | ) |
|                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss per share, basic and diluted                               |       | $                                                    | (0.57      | )                                                   | $          | (0.30 | ) | $ | (1.54 | ) | $ | (1.02 | ) |
|                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Shares used in computing net loss per share, basic and diluted |       | 137,389                                              |       | 132,805                                             |       | 136,799 |   | 131,884 |   |

 

See accompanying notes to condensedconsolidated financial statements.

** **

**4**

----

**Table of Contents**

** **

**AMYLINPHARMACEUTICALS, INC.**

** **

**Consolidated Statements of Cash Flows**

**(in thousands)**

**(unaudited)**

 
| ** **                                                                    | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Operating activities:                                                         |       |                                                |       |   |   |
| Net loss                                                                      |       | $                                                   | (211,334   | ) | $ | (134,195 | ) |
| Adjustments to reconcile net loss to net cash used for operating  activities: |       |                                                |       |   |   |
| Depreciation and amortization                                                 |       | 24,169                                              |       | 14,743 |   |
| Stock-based compensation                                                      |       | 43,011                                              |       | 44,297 |   |
| Loss on impairment of investments                                             |       | 14,941                                              |       | — |   |
| Other non-cash expenses, net                                                  |       | 3,003                                               |       | 2,161 |   |
| Changes in operating assets and liabilities:                                  |       |                                                |       |   |   |
| Accounts receivable, net                                                      |       | 9,449                                               |       | (5,066 | ) |
| Inventories, net                                                              |       | 1,706                                               |       | (44,181 | ) |
| Other current assets                                                          |       | 1,406                                               |       | (8,990 | ) |
| Accounts payable and accrued liabilities                                      |       | 2,882                                               |       | 16,593 |   |
| Accrued compensation                                                          |       | 28,919                                              |       | 2,354 |   |
| Payable to collaborative partner                                              |       | (5,349                                              | )          | 13,093 |   |
| Deferred revenue                                                              |       | (3,214                                              | )          | (3,214 | ) |
| Other assets and liabilities, net                                             |       | 1,482                                               |       | 14,708 |   |
| Net cash flows used for operating activities                                  |       | (88,929                                             | )          | (87,697 | ) |
|                                                                          |       |                                                |       |   |   |
| Investing activities:                                                         |       |                                                |       |   |   |
| Purchases of short-term investments                                           |       | (712,287                                            | )          | (328,847 | ) |
| Sales and maturities of short-term investments                                |       | 799,917                                             |       | 282,867 |   |
| Purchases of property, plant and equipment, net                               |       | (237,806                                            | )          | (202,733 | ) |
| Increase in other long-term assets                                            |       | (3,144                                              | )          | (12,639 | ) |
| Net cash flows used for investing activities                                  |       | (153,320                                            | )          | (261,352 | ) |
|                                                                          |       |                                                |       |   |   |
| Financing activities:                                                         |       |                                                |       |   |   |
| Issuance of common stock, net                                                 |       | 16,622                                              |       | 61,034 |   |
| Issuance of convertible senior notes, net                                     |       | —                                              |       | 558,705 |   |
| Net cash flows provided by financing activities                               |       | 16,622                                              |       | 619,739 |   |
|                                                                          |       |                                                |       |   |   |
| Change in cash and cash equivalents                                           |       | (225,627                                            | )          | 270,690 |   |
|                                                                          |       |                                                |       |   |   |
| Cash and cash equivalents at beginning of period                              |       | 422,232                                             |       | 66,640 |   |
| Cash and cash equivalents at end of period                                    |       | $                                                   | 196,605    |   | $ | 337,330 |   |
|                                                                          |       |                                                |       |   |   |
| **Supplemental disclosure of cash flow  information:**                        | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Property, plant and equipment additions in other current liabilities          |       | $                                                   | 8,703      |   | $ | 21,110 |   |
|                                                                          |       |                                                |       |   |   |
| **Non-cash financing activities:**                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Issuance of common stock for contingent share settled obligation              |       | $                                                   | 30,000     |   | $ | — |   |
| Shares contributed as employer 401(k) match                              |       | $                                                   | 4,284      |   | $ | 5,819 |   |
| Shares contributed to employee stock ownership plan                           |       | $                                                   | 16,996     |   | $ | — |   |

 

See accompanying notes to consolidatedfinancial statements.

 

5

----

**Table of Contents**

** **

**AMYLINPHARMACEUTICALS, INC.**

** **

**Notes to Consolidated Financial Statements**

**September 30, 2008**

**(unaudited)**

** **

**1.****    ****Summaryof Significant Accounting Policies**

 

**Basis of Presentation**

** **

The informationcontained herein has been prepared in accordance with instructions for Form 10-Qand Article 10 of Regulation S-X. The information as of September 30,2008, and for the three month and nine month periods ended September 30,2008 and 2007, are unaudited. In the opinion of management, the informationreflects all adjustments necessary to make the results of operations for theinterim periods a fair statement of such operations. All such adjustments areof a normal recurring nature. Interim results are not necessarily indicative ofresults for a full year. The balance sheet at December 31, 2007, has beenderived from the audited consolidated financial statements at that date butdoes not include all information and footnotes required by U.S. generallyaccepted accounting principles for complete financial statements. For morecomplete financial information, these financial statements should be read inconjunction with the audited consolidated financial statements included inAmylin Pharmaceuticals, Inc.’s (referred to as the Company or Amylin)Annual Report on Form 10-K for the year ended December 31, 2007.

 

**RevenueRecognition**

** **

***NetProduct Sales***

*** ***

TheCompany sells BYETTA®(exenatide) injection for the treatment of type 2 diabetes and SYMLIN®(pramlintide acetate) injection for the treatment of type 1 and type 2 diabetesprimarily to wholesale distributors, who, in turn, sell to retail pharmaciesand government entities. Product sales are recognized when delivery ofthe products has occurred, title has passed to the customer, the selling priceis fixed or determinable, collectability is reasonably assured and the Companyhas no further obligations. The Company records allowances for product returns,rebates, wholesaler chargebacks, wholesaler discounts, and prescriptionvouchers at the time of sale and reports product sales net of such allowances.The Company must make significant judgments in determining these allowances. Ifactual results differ from the Company’s estimates, the Company will berequired to make adjustments to these allowances in the future.

 

TheCompany reports all United States BYETTA and SYMLIN product sales. With respectto BYETTA, the Company has determined that it is qualified as a principal underthe criteria set forth in Emerging Issues Task Force (EITF), Issue 99-19, *“Reporting Gross Revenue as a Principal vs. Net as anAgent,”* based on the Company’s responsibilities under its contractswith Eli Lilly and Company, or Lilly, which include manufacture of product forsale in the United States, responsibility for establishing pricing in theUnited States, distribution, ownership of product inventory and credit riskfrom customers.  Accordingly the Companyrecords all United States products sales of BYETTA.

 

***Revenues UnderCollaborative Agreements***

*** ***

Amountsreceived for upfront product and technology license fees under multiple-elementarrangements are deferred and recognized over the period of such services orperformance if such arrangements require on-going services or performance.Non-refundable amounts received for substantive milestones are recognized uponachievement of the milestone. Amounts received for sharing of developmentexpenses are recognized in the period in which the related expenses areincurred. Any amounts received prior to satisfying these revenue recognitioncriteria will be recorded as deferred revenue.

 

***CollaborativeProfit-Sharing***

*** ***

Collaborativeprofit-sharing represents Lilly’s 50% share of the gross margin for BYETTAsales in the United States.

 

***Accounts***Receivable

*** ***

Tradeaccounts receivable are recorded net of allowances for cash discounts forprompt payment, doubtful accounts, product returns and chargebacks. Allowancesfor rebate discounts and distribution fees are included in other current liabilitiesin the accompanying consolidated balance sheets. Estimates for allowances fordoubtful accounts are determined based on existing contractual obligations,historical payment patterns and individual customer circumstances.  Theallowance for doubtful accounts was $0.6 million and $0.2 million at September 30,2008 and December 31, 2007, respectively.

 

6

----

Table ofContents

 

**Investments in UnconsolidatedEntities**

 

The Company uses the equitymethod of accounting for investments in other companies that are not controlledby the Company and in which the Company’s interest is generally between 20% and50% of the voting shares or the Company has significant influence over theentity, or both.  The Company’s share ofthe income or losses of these entities are included in interest and otherincome or interest and other expense, and the investments, which have a netbook value of $6.4 million and $15.7 million at September 30, 2008 and December 31,2007, respectively, are included in other long-term assets.  The Company recorded $0.8 million and $0.6 million for its share of equity method investee losses during the three months ended September 30,2008 and 2007, respectively, and $2.8 million and $1.1 million of equity method investee losses during the nine months ended September 30, 2008and 2007, respectively. The Company recognized animpairment loss of $9.0 million on an equity method investment after assessingthe financial and technical performance of the entity in which the investmentwas made as well as the entity’s ability to raise additional capital insignificantly deteriorated financial markets to fund ongoing operations.

 

**Fair Value Measurements**

 

SFAS No. 157, “*Fair ValueMeasurements*,” provides a framework for measuring fair value and requires expandeddisclosures regarding fair value measurements. SFAS No. 157 defines fairvalue as the exchange price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date. Market participants are buyers andsellers in the principal market that are (i) independent, (ii) knowledgeable,(iii) able to transact, and (iv) willing to transact.  SFAS No. 157 prioritizes the inputs usedin measuring fair value into the following hierarchy:

 
| Level 1 |   | Quoted prices (unadjusted)  in active markets for identical assets or liabilities;                                                                                                                    |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                  |
| Level 2 |   | Inputs other than quoted  prices included within Level 1 that are either directly or indirectly  observable; and                                                                                      |
|    |   |                                                                                                                                                                                                  |
| Level 3 |   | Unobservable inputs in which little or no market activity exists, therefore  requiring an entity to develop its own assumptions about the assumptions that  market participants would use in pricing. |

 

# **Researchand Development Expenses**

#  

# Research and developmentcosts are expensed as incurred and include salaries and bonuses,benefits, non-cash stock-based compensation, license fees, milestones underlicense agreements, costs paid to third-party contractors to perform research,conduct clinical trials, and develop drug materials and delivery devices; andassociated overhead expenses and facilities costs. Clinical trial costs, including costs associated with third-partycontractors, are a significant component of research and development expenses.Invoicing from third-party contractors for services performed can lag severalmonths. The Company accrues the costs of services rendered in connection withsuch activities based on its estimate of management fees, site management andmonitoring costs, and data management costs. Actual clinical trial costs maydiffer from estimates and are adjusted in the period in which they becomeknown.

#  

**Per Share Data**

** **

Basic and diluted netloss applicable to common stock per share is computed using the weightedaverage number of common shares outstanding during the period. Common stockequivalents from stock options and warrants of 2.4 million and 2.9 million forthe three and nine months ended September 30, 2008, respectively andcommon stock equivalents of 7.6 million and 7.0 million from stock options andwarrants for the three and nine months ended September 30, 2007,respectively, are excluded from the calculation of diluted loss per share forall periods presented because the effect is antidilutive. Common stockequivalents from shares underlying our convertible senior notes of 15.2 millionfor the three and nine months ended September 30, 2008, respectively and15.2 million and 9.8 million for the three and nine months ended September 30,2007, respectively, are also excluded from the calculation of diluted loss pershare because the effect is antidilutive. Infuture periods, if the Company reports net income and the common shareequivalents for our convertible senior notes are dilutive, the common stockequivalents will be included in the weighted average shares computation andinterest expense related to the notes will be added back to net income tocalculate diluted earnings per share.

 

# **Accounting for Stock-Based Compensation**

#  

EffectiveJanuary 1, 2006, the Company adopted the fair value method of accountingfor stock-based compensation arrangements in accordance with Financial AccountingStandards Board (FASB) revised Statement of Financial Accounting Standards(SFAS) No. 123 (SFAS 123R), “*Share-BasedPayment,”*which establishes accounting for non-cash stock-basedawards exchanged for 

 

7

----

Table ofContents

 

employee services andrequires companies to expense the estimated fair value of these awards over therequisite employee service period, which for the Company is generally thevesting period. The Company adopted SFAS 123R using the modified prospectivemethod. Under the modified prospective method, prior periods are not revisedfor comparative purposes. The valuation provisions of SFAS 123R apply to newawards and to awards that are outstanding on the effective date andsubsequently modified or cancelled. Estimated non-cash stock-based compensationexpense for awards outstanding at the effective date will be recognized over theremaining service period using the compensation cost calculated for pro-formadisclosure purposes under SFAS 123, *“Accountingfor Stock-Based Compensation.”*

 

Totalestimated stock-based compensation was as follows (in thousands, except pershare data):

 
| ** **                                              | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Selling, general and administrative expenses            |       | $                                                    | 8,590      |                                                | $          | 9,122 |   | $ | 25,976 |   | $ | 26,642 |   |
| Research and development expenses                       |       | 5,419                                                |       | 6,119                                               |       | 17,035 |   | 17,655 |   |
|                                                    |       | $                                                    | 14,009     |                                                | $          | 15,241 |   | $ | 43,011 |   | $ | 44,297 |   |
|                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Net stock-based compensation expense, per common share: |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                   |       | $                                                    | 0.10       |                                                | $          | 0.11 |   | $ | 0.31 |   | $ | 0.34 |   |
| Diluted                                                 |       | $                                                    | 0.10       |                                                | $          | 0.11 |   | $ | 0.31 |   | $ | 0.34 |   |

 

TheCompany recorded $14.0 million and $15.2 million of total non-cash stock-basedcompensation expense during the three months ended September 30, 2008 and2007, respectively, and $43.0 million and $44.3 million of total non-cashstock-based compensation expense during the nine months ended September 30,2008 and 2007, respectively, in all cases related to stock-based awardsconsisting of stock options and employee stock purchase rights.  At September 30, 2008, totalunrecognized estimated compensation cost related to non-vested stock-basedawards granted prior to that date was $100.4 million, which is expected to berecognized over a weighted-average period of 2.4 years.  The Company issued 0.1 million and 0.5million shares upon the exercise of stock options in the three and nine monthsended September 30, 2008, respectively.

 

In addition to the stock-based compensationdiscussed above, the Company also recorded $4.4 million of expense associatedwith its Employee Stock Ownership Plan, or ESOP, of which $2.6 million isincluded in selling general and administrative expenses, and $1.8 million isincluded in research and development expenses, and $15.1 million of expenseassociated with its ESOP, of which $8.5 million is included in selling generaland administrative expenses, and $6.6 million is included in research anddevelopment expenses during the three and nine months ended September 30,2008, respectively.  There was no expensefor the ESOP during the three and nine months ended September 30, 2007 asthe ESOP was not adopted until December 2007.

 

**Consolidation**

 

Theconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries, Amylin Europe Limited, Amylin Ohio LLC and AmylinInvestments LLC. All significant intercompany transactions and balances havebeen eliminated in consolidation.

 

**Recently IssuedAccounting Pronouncements**

** **

In May 2008, the FASB issued FASB StaffPosition (FSP) No. APB 14-1 (FSP No. APB 14-1), “*Accountingfor Convertible Debt Instruments that may be Settled in Cash Upon Conversion(Including Partial Cash Settlement).*”  FSP No. APB 14-1 establishes that theliability and equity components of convertible debt instruments within thescope of FSP APB No. 14-1 shall be separately accounted for in a mannerthat will reflect the entity’s nonconvertible debt borrowing rate when interestcost is recognized in subsequent periods. The carrying amount of the liability component of the convertible debtinstrument will be determined by measuring the fair value of a similarliability that does not have an associated equity component.  The carrying value of the equity componentwill be determined by deducting the fair value of the liability component fromthe initial proceeds ascribed to the convertible debt instrument as awhole.  Related transaction costs shallbe allocated to the liability and equity components in proportion to theallocation of proceeds and accounted for as debt issuance costs and equityissuance costs, respectively.  The excessof the principal amount of the liability component over its carrying amountshall be amortized to interest cost using the interest method.  FSP No. APB 14-1 is effective for theCompany on January 1, 2009 and shall be applied retrospectively to allperiods presented with the cumulative effect of the change in accountingprinciple on periods prior to those presented recognized as of the beginning ofthe first period presented.  Earlyadoption is not permitted.  The Company expectsthat the adoption of FSP No. APB 14-1 will have a material impact on itsconsolidated financial statements.

 

8

----

Table ofContents

 

In December 2007, the FASB issued SFAS No. 141(revised 2007) (SFAS No. 141R), “*Business Combinations*”and SFAS No. 160, “*Noncontrolling Interestsin Consolidated Financial Statements, an amendment of Accounting ResearchBulletin No. 51.*” SFAS No. 141R will change how business acquisitions areaccounted for and will impact financial statements both on the acquisition dateand in subsequent periods.  SFAS No. 160will change the accounting and reporting for minority interests, which will berecharacterized as noncontrolling interests and classified as a component ofequity.  SFAS No. 141R andSFAS No. 160 are effective for the Company on January 1,2009.  Early adoption is notpermitted.  The Company is currentlyevaluating the impact that adoption of SFAS No. 141R and SFAS No. 160will have on its consolidated financial statements.

 

In June 2007, the FASB ratified the EITFconsensus on EITF Issue No. 07-3, *“Accounting forNonrefundable Advance Payments for Goods or Services Received for Use in FutureResearch and Development Activities.”*  EITF Issue No. 07-3 requires thatnonrefundable advance payments for goods or services that will be used orrendered for future research and development activities should be deferred andcapitalized.  Such amounts should berecognized as an expense as the related goods are delivered or the relatedservices are performed.  Entities shouldcontinue to evaluate whether they expect the goods to be delivered or servicesto be rendered.  If an entity does notexpect the goods to be delivered or services to be rendered, the capitalizedadvance payment should be charged to expense. The Company adopted EITF Issue No. 07-3 on January 1,2008.  The adoption of EITF Issue No. 07-3did not have a material impact on the Company’s consolidated financialstatements.

 

In February 2007, the FASB issued SFAS No. 159,*“The Fair Value Option for Financial Assets andFinancial Liabilities.”* SFAS No. 159 gives the Company theirrevocable option to carry many financial assets and liabilities at fairvalues, with changes in fair value recognized in earnings.  The Company adopted SFAS No. 159 on January 1,2008.  The adoption of SFAS No. 159did not have a material impact on the Company’s consolidated financialstatements.

 

**2.****    ****Short-term Investment**s

 

The Company’s short-term investments, consistingprincipally of debt securities, are classified as available-for-sale and arestated at fair value based upon observed market prices (Level 1 in the fairvalue hierarchy). Unrealized holding gains or losses on these securities areincluded in other comprehensive income (loss). The amortized cost of debtsecurities in this category is adjusted for amortization of premiums andaccretion of discounts to maturity. ****For investments in mortgage-backed securities,amortization of premiums and accretion of discounts are recognized in interestincome using the interest method, adjusted for anticipated prepayments asapplicable.  Estimates of expected cashflows are updated periodically and changes are recognized in the calculatedeffective yield prospectively****** ******as appropriate. ****Such amortization is included in interest income.Realized gains and losses and declines in value judged to beother-than-temporary on available-for-sale securities are included inimpairment loss on investments. In assessing potential impairment of itsshort-term investments, the Company evaluates the impact of interest rates,potential prepayments on mortgage-backed securities, changes in credit quality,the length of time and extent to which the market value has been less thancost, and the Company’s intent and ability to retain the security in order toallow for an anticipated recovery in fair value. The cost of securities sold is based on the specific-identificationmethod.

 

The following is a summary ofshort-term investments as of September 30, 2008 and December 31, 2007(in thousands):

 
| ** **                                                            | ** ** | **Available-for-Sale Securities** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                            | ** ** | **Amortized  Cost**                    | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses(1)** | ** ** | **Estimated  Fair Value** | ** ** |
| **September 30, 2008**                                           |       |                                   |       |   |   |   |   |   |   |
| U.S. Treasury securities and obligations of  U.S. Government agencies |       | $                                      | 281,824    |   | $ | 63 |   | $ | (343 | ) | $ | 281,544 |   |
| Corporate debt securities                                             |       | 255,623                                |       | 12 |   | (4,250 | ) | 251,385 |   |
| Asset backed securities                                               |       | 42,487                                 |       | — |   | (2,123 | ) | 40,364 |   |
| Mortgage-backed securities                                            |       | 35,917                                 |       | 137 |   | (501 | ) | 35,553 |   |
| Total                                                                 |       | $                                      | 615,851    |   | $ | 212 |   | $ | (7,217 | ) | $ | 608,846 |   |
|                                                                  |       |                                   |       |   |   |   |   |   |   |
| **December 31, 2007**                                            |       |                                   |       |   |   |   |   |   |   |
| U.S. Treasury securities and obligations of  U.S. Government agencies |       | $                                      | 96,246     |   | $ | 385 |   | $ | (36 | ) | $ | 96,595 |   |
| Corporate debt securities                                             |       | 408,020                                |       | 101 |   | (1,576 | ) | 406,545 |   |
| Asset backed securities                                               |       | 138,447                                |       | 258 |   | (655 | ) | 138,050 |   |
| Mortgage-backed securities                                            |       | 66,676                                 |       | 441 |   | (124 | ) | 66,993 |   |
| Total                                                                 |       | $                                      | 709,389    |   | $ | 1,185 |   | $ | (2,391 | ) | $ | 708,183 |   |

 

----

(1) Othercomprehensive loss included an unrealized loss of $1.5 million and anunrealized gain of $0.8 million on investments underlying the Company’s 2001Non-Qualified Deferred Compensation Plan at September 30, 2008 andDecember 31, 2007, respectively. 

 

9

----

Table ofContents

 

The Company’s investmentshad gross unrealized losses of $7.2 million and $2.4 million at September 30,2008 and December 31, 2007, respectively. The unrealized losses on the Company’s investments in marketable securitiesgenerally relate to liquidity, credit and economic concerns that have depressedsecurity values over the past several months. The Company has the ability andintent to hold these securities to a recovery in fair value, which may bematurity, and considers these unrealized losses to be temporary.  The Company recognized a $5.9 millionother-than-temporary impairment loss on an investment in a corporate debtsecurity in the quarter ended September 30, 2008 based upon an assessmentof the impact of bankruptcy proceedings of the debt issuer on therecoverability of the Company’s investment. The Company determined the fair value of this investment using thequoted market price of the security at September 30, 2008.

 

**3.****     ****Inventories**

 

Inventories are stated at the lower of cost (FIFO)or market and net of a valuation allowance for potential excess and/or obsoletematerial of $9.3 million and $5.3 million at September 30, 2008 and December 31,2007, respectively. Raw materials consists of bulk drug material for BYETTA andSYMLIN, work-in-process consists of in-process BYETTA cartridges, in-processSYMLIN cartridges and in-process SYMLIN vials, and finished goods consists ofBYETTA drug product in a disposable pen/cartridge delivery system,  finished SYMLIN drug product in vials forsyringe administration and finished SYMLIN drug product in a disposablepen/cartridge delivery system.

 

Inventoriesconsist of the following (in thousands):

 
| ** **      | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                            | 59,599     |                        | $          | 55,706 |   |
| Work-in-process |       | 24,005                       |       | 24,463                      |       |
| Finished goods  |       | 14,904                       |       | 20,045                      |       |
|            |       | $                            | 98,508     |                        | $          | 100,214 |   |

 

**4.****    ****Debt Issuance Costs**

 

Debtissuance costs relate to the $200 million principalamount of 2.5% convertible senior notes, due April 15, 2011, issued in April 2004,referred to as the 2004 Notes, the $575 million principal amount of 3.0%convertible senior notes, due June 15, 2014, issued in June 2007,referred to as the 2007 Notes, and a $125 million term loan entered into in December 2007,referred to as the Term Loan. Amortization of debt issuance costs are recorded as interest expense inthe consolidated statement of operations on a straight-line basis, whichapproximates the interest method over the contractual term of the related debt.The Company incurred total debt issuance costs of $24.4 million in connectionwith the 2004 Notes, the 2007 Notes and the Term Loan. Amortization expense of$0.9 million and $0.8 million was recorded in each of the three months ended September 30,2008 and 2007, respectively. Amortization expense of $2.8 and $1.4 million wasrecorded in each of the nine months ended September 30, 2008 and 2007,respectively.

 

**5.****    ****Other Current Liabilities**

 

Other current liabilities consist of thefollowing (in thousands):

 
| ** **                                         | ** ** | **September 30,****2008** | ** ** | **December 31,****2007** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| Contingent share-settled obligation (1)            |       | $                              | —     |                          | $          | 30,000 |   |
| Accrued contract research and development expenses |       | 9,161                          |       | 20,107                        |       |
| Accrued rebate discounts                           |       | 29,307                         |       | 19,673                        |       |
| Accrued property, plant and equipment additions    |       | 8,703                          |       | 15,559                        |       |
| Other accrued sales allowances                     |       | 11,389                         |       | 13,989                        |       |
| Other current liabilities                          |       | 28,090                         |       | 23,596                        |       |
|                                               |       | $                              | 86,650     |                          | $          | 122,924 |   |

 

----

(1)  Represents aliability for $30 million in convertible milestone payments received from Lillythat converted into approximately 0.8 million shares of the Company’s commonstock during the three months ended March 31, 2008.

 

10

----

Table ofContents

 

**6.****    ****Comprehensive Loss**

 

SFAS No. 130, “*Reporting Comprehensive Income,”* requires reporting anddisplaying comprehensive income (loss) and its components, which, for theCompany, includes net loss and unrealized gains and losses on investments. Inaccordance with SFAS No. 130, the accumulated balance of othercomprehensive income (loss) is disclosed as a separate component ofstockholders’ equity. For the three and nine months ended September 30,2008 and 2007,  comprehensive lossconsisted of (in thousands):

 
| ** **                            | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net loss                              |       | $                                                        | (77,721    | )                                                       | $          | (39,758 | ) | $ | (211,334 | ) | $ | (134,195 | ) |
| Other comprehensive loss:             |       |                                                     |       |                                                    |       |   |   |   |   |
| Unrealized (loss) gain on investments |       | (4,434                                                   | )          | (1,016                                                  | )          | (8,072 | ) | (388 | ) |
| Comprehensive loss                    |       | $                                                        | (82,155    | )                                                       | $          | (40,774 | ) | $ | (219,406 | ) | $ | (134,583 | ) |

 

**7.****    ****Convertible Senior Notes**

 

In June 2007, in a private placement, the Companyissued the 2007 Notes, which have an aggregate principal amount of $575million, and are due June 15, 2014. The 2007 Notes are senior unsecuredobligations and rank equally with all other existing and future seniorunsecured debt. The 2007 Notes bear interest at 3.0% per year, payable in cashsemi-annually, and are initially convertible into a total of up to 9.4 millionshares of common stock at a conversion price of $61.07 per share, subject tothe customary adjustment for stock dividends and other dilutive transactions.In addition, if a “fundamental change” (as defined in the associated indentureagreement) occurs prior to the maturity date, the Company will in some casesincrease the conversion rate for a holder of the 2007 Notes that elects to convertits 2007 Notes in connection with such fundamental change. The maximumconversion rate is 22.9252, which would result in a maximum issuance of 13.2million shares of common stock if all holders converted at the maximumconversion rate.

 

The 2007 Notes will be convertible into shares ofthe Company’s common stock unless the Company elects net-share settlement. Ifnet-share settlement is elected by the Company, the Company will satisfy theaccreted value of the obligation in cash and will satisfy the excess ofconversion value over the accreted value in shares of the Company’s commonstock based on a daily conversion value, determined in accordance with theassociated indenture agreement, calculated on a proportionate basis for eachday of the relevant 20-day observation period. Holders may convert the 2007Notes only in the following circumstances and to the following extent: (1) duringthe five business-day period after any five consecutive trading day period (themeasurement period) in which the trading price per note for each day of suchmeasurement period was less than 97% of the product of the last reported saleprice of the Company’s common stock and the conversion rate on each such day; (2) duringany calendar quarter after the calendar quarter ending March 31, 2007, ifthe last reported sale price of the Company’s common stock for 20 or moretrading days in a period of 30 consecutive trading days ending on the lasttrading day of the immediately preceding calendar quarter exceeds 130% of theapplicable conversion price in effect on the last trading day of theimmediately preceding calendar quarter; (3) upon the occurrence ofspecified events; and (4) the 2007 Notes will be convertible at any timeon or after April 15, 2014 through the scheduled trading day immediatelypreceding the maturity date.

 

Subject to certainexceptions, if the Company undergoes a “designated event” (as defined in theassociated indenture agreement) including a “fundamental change,” holders ofthe 2007 Notes will, for the duration of the 2007 Notes, have the option torequire the Company to repurchase all or any portion of their 2007 Notes. Thedesignated event repurchase price will be 100% of the principal amount of the2007 Notes to be purchased plus any accrued interest up to but excluding therelevant repurchase date. The Company will pay cash for all 2007 Notes sorepurchased. The Company may not redeem the 2007 Notes prior to maturity.

 

The 2007 Notes have been registered under theSecurities Act of 1933, as amended, to permit registered resale of the 2007Notes and of the common stock issuable upon conversion of the 2007 Notes.  Subject to certain limitations, the Companywill be required to pay the holders of the 2007 Notes special interest on the2007 Notes if the Company fails to keep such registration statement effectiveduring specified time periods.

 

In April 2004, the Company issued the 2004Notes, which have an aggregate principal amount of $200 million, and are due April 15,2011, in a private placement. The 2004 Notes are senior unsecured obligationsand rank equally with all other existing and future senior unsecured debt. The2004 Notes bear interest at 2.5% per year, payable in cash semi-annually andare convertible into a total of up to 5.8 million shares of common stock at aconversion price of $34.35 per share, subject to customary adjustments forstock dividends and other dilutive transactions. The Company may not redeem the2004 Notes prior to maturity.

 

11

----

Table ofContents

 

Upon a change in control, the holders of the 2004Notes may elect to require the Company to repurchase the 2004 Notes. TheCompany may elect to pay the purchase price in common stock instead of cash, ora combination thereof. If paid with common stock, the number of shares ofcommon stock a holder will receive will be valued at 95% of the closing pricesof the Company’s common stock for the five trading day period ending on thethird day before the purchase date.

 

The 2004 Notes have been registered under theSecurities Act of 1933, as amended, to permit registered resale of the 2004Notes and of the common stock issuable upon conversion of the 2004 Notes.

 

**8.****     Long-Term****Note Payable**

 

In December 2007, the Company****entered into a$140 million credit agreement with Bank of America, N.A., as administrativeagent, collateral agent and letter of credit issuer, Silicon Valley Bank andRBS Asset Finance, Inc., as syndication agents, and Comerica Bank and BMOCapital Markets Financing, Inc., as documentation agents.  The creditagreement provides for a $125 million Term Loan and a $15 million revolvingcredit facility.  The proceeds of both loans will be used for general corporatepurposes.  The revolving credit facilityalso provides for the issuance of letters of credit and foreign exchangehedging up to the $15 million borrowing limit. The Company had an outstanding balance of $125.0 million under the TermLoan and had issued $5.6 million and $5.2 million of stand-by letters of creditunder the revolving credit facility primarily in connection with office leases,at September 30, 2008 and December 31, 2007, respectively.

 

The Company’sdomestic subsidiaries, Amylin Ohio LLC and Amylin Investments LLC, areco-borrowers under the credit agreement.  The loans under the revolvingcredit facility are secured by substantially all of the Company’s and the twodomestic subsidiaries’ assets (other than intellectual property and certainother excluded collateral).  The Term Loan is repayable on aquarterly basis, with no principal payments due quarters one through four,6.25% of the outstanding principal due quarters five through eleven, and 56.25%of the outstanding principal due in quarter twelve.  Interest on the Term Loan will be paidquarterly on the unpaid principal balance at 1.75% above the London InterbankOffered Rate, or LIBOR, based on the Company’s election of either one, two,three or six months LIBOR term, and payable at the end of the selected interestperiod but no less frequently than quarterly as of the first business day ofthe quarter prior to the period in which the quarterly installment is due.  The Company has elected to use the threemonth LIBOR rate, which was 4.05% and 4.85% at September 30, 2008 and December 31,2007, respectively.  Interest periods onthe revolving credit facility may be either one, two, three or six months, andpayable at the end of the selected interest period but no less frequently thanquarterly, and the interest rate will be either LIBOR plus 1.0% or the Bank ofAmerica prime rate, as selected by the Company. Both loans have a final maturity date of December 21, 2010.

 

The creditagreement contains certain covenants, including a requirement to maintainminimum unrestricted cash and cash equivalents balances, as defined in theagreement, in excess of $400 million, below which certain limitations providedfor in the agreement become effective. The credit agreement also contains certain events of default includingunrestricted cash and cash equivalents balances, as defined in the agreement,falling below $280 million, nonpayment of principal, interest, fees or otheramounts, violation of covenants, inaccuracy of representations and warrantiesand default under other indebtedness that would permit the administrative agentto accelerate the Company’s outstanding obligations if not cured withinapplicable grace periods.  In addition, the credit agreement provides forautomatic acceleration upon the occurrence of bankruptcy and other insolvencyevents.  There is an annual commitmentfee associated with the revolving credit facility of 0.25%.

 

Maturitiesof long-term notes payable for fiscal years ending after September 30,2008 are as follows (in thousands):

 
| 2008                                  |   | $      | —  |   |
|---------------------------------------|--------|--------|---------|--------|
| 2009                                  |   | 31,250 |    |
| 2010                                  |   | 93,750 |    |
| Thereafter                            |   | — |    |
| Total minimum long-term debt payments |   | $      | 125,000 |   |

 

In connection with theexecution of the Term Loan, the Company entered into an interest rate swap withan initial notional amount of $125 million on December 21, 2007.  The Company will make payments to acounter-party at 3.967% and receive payments at LIBOR which is reset everythree months following the first reset date of March 21, 2008.  Payments will be made each March, June, September andDecember, commencing in March 2008 through the maturity of the swap, whichmaturity is coincident with the Term Loan maturity.  The Company determined that the interest rateswap agreement is defined as Level 2 in the fair value hierarchy. As of September 30,2008, the fair value of the interest rate swap agreement was a liability of$1.4 million and the recognized loss on the interest rate swap, which isincluded in interest and other expense, was $0.4 million and $1.0 million forthe three and nine months ended September 30, 2008, respectively.  The interest rate swap has resulted in afixed rate of 5.717% for net interest receipts and payments for the term loanand interest rate swap transactions.

 

12

----

Tableof Contents

 

**9.****      Stockholders’ Equity**

 

InMarch 2008, the Company contributed approximately 0.7 million newly issuedshares of its common stock, valued at $24.87 per share, to the Company’s ESOPfor amounts earned by participants during the year ended December 31,2007.

 

InFebruary 2008, the Company contributed approximately 0.1 million newlyissued shares of its common stock, valued at $37.00 per share, to the Company’s401(k) plan for amounts earned by participants during the year ended December 31,2007.

 

InFebruary 2008, the Company issued approximately 0.8 million shares of itscommon stock to Lilly, upon Lilly’s election to convert $30 million ofdevelopment milestone payments related to exenatide once weekly received in2007, at aconversion price of $37.95, which represents the averageclosing market price of the Company’s common stock for the 20 trading dayperiod immediately preceding December 31, 2007, in accordance with theCompany’s exenatide collaboration agreement with Lilly.

 

**10.****  ****Commitments and Contingencies**

 

# **Other Commitments**

#  

TheCompany has committed to make potential future milestone payments to thirdparties as part of in-licensing and development programs primarily related toresearch and development agreements. Potential future payments generally becomedue and payable only upon the achievement of certain developmental, regulatoryand/or commercial milestones, such as achievement of regulatory approval,successful development and commercialization of products, and subsequentproduct sales. Because the achievement of these milestones is neither probablenor reasonably estimable, the Company has not recorded a liability on thebalance sheet for any such contingencies.

 

As of September 30,2008, if all such milestones are successfully achieved, the potential futuremilestone and other contingency payments due under certain contractualagreements are approximately $312.4 million in aggregate, of which $1.8 millionwould be due within the next twelve months.

 

TheCompany has committed to make future minimum payments to third parties forcertain inventories in the normal course of business. The minimum purchasecommitments total approximately $35.4 million as of September 30, 2008.

 

**11.****  ****Litigation**

 

Fromtime-to-time the Company becomes involved in various lawsuits, claims andproceedings relating to the conduct of our business, including, for example,those pertaining to product liability, patent infringement and employmentclaims.  While the Company cannot predictthe outcome of any lawsuit, claim or proceeding, the Company believes that thedisposition of any pending matters is not likely to have a material affect onour financial condition or liquidity.

 

**12.**** ****Subsequent Events**

 

On October 20,2008, the Company and Lilly entered into an Exenatide Once Weekly SupplyAgreement pursuant to which the Company will supply commercial quantities ofexenatide once weekly for sale in the United States, if approved by the UnitedStates Food and Drug Administration, or FDA. In addition, if Lilly receives approval to market the product injurisdictions outside the United States, the Company will be required tomanufacture the product intended for commercial sale by Lilly in thosejurisdictions

 

Underthe terms of the supply agreement, Lilly made a cash payment of $125 million tothe Company, which represents an amount to compensate the Company for the costof carrying Lilly’s share of the capital investment made in the Company’smanufacturing facility in Ohio.  Inaddition to the $125 million cash payment, the Company will recover Lilly’sshare of the over $500 million capital investment in the facility through anallocation of depreciation to cost of goods sold in accordance with thecollaboration agreement.  The totalamount that will ultimately be recovered from Lilly will be dependent upon theproportion of product supplied for sale in the United States, the cost of whichis shared equally by the parties, and the proportion of product supplied forsale outside of the United States, the cost of which is paid for 100% by Lilly.

 

On October 20,2008, the Company and Lilly entered into a loan agreement pursuant to whichLilly will make available to Amylin a $165 million unsecured line of creditthat Amylin can draw upon from time to time beginning on December 1, 2009and ending on June 30, 2011.  Anyinterest due under the credit facility will bear interest at the five-dayaverage three-month LIBOR rate immediately prior to the date of the advance plus 5.25% and shall be due and payablequarterly in arrears on the first business day of each quarter.  All outstanding principal, together with allaccrued and unpaid interest shall be due and payable the earlier of 36 monthsfollowing the date on which the loan commitment is fully advanced or June 30,2014.

 

13

----

Table of Contents

 

**ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

Exceptfor the historical information herein, the discussion in this quarterly reporton Form 10-Q contains forward-looking statements that involve risks anduncertainties. These statements include projections about our accounting andfinances, plans and objectives for the future, future operating and economicperformance and other statements regarding future performance. These statementsare not guarantees of future performance or events. Our actual results maydiffer materially from those discussed here. Factors that could cause orcontribute to differences in our actual results include those discussed underthe caption “Cautionary Factors That May Affect Future Results,” as wellas those discussed elsewhere in this quarterly report on Form 10-Q or inour other public disclosures. You should consider carefully those cautionaryfactors, together with all of the other information included in this quarterlyreport on Form 10-Q. Each of the cautionary factors, either alone or takentogether, could adversely affect our business, operating results and financialcondition, as well as adversely affect the value of an investment in our commonstock. There may be additional risks that we are not presently aware of or thatwe currently believe are immaterial which could also impair our business andfinancial position. We disclaim any obligation to update these forward-lookingstatements.

 

**Overview**

 

AmylinPharmaceuticals, Inc. is a biopharmaceutical company committed toimproving the lives of people with diabetes, obesity and other diseases throughthe discovery, development and commercialization of innovative medicines. Wehave developed and gained approval for two first-in-class medicines to treatdiabetes, BYETTA® (exenatide) injection and SYMLIN®(pramlintide acetate) injection, both of which were commercially launched inthe United States during the second quarter of 2005.  BYETTA has also been approved in the EuropeanUnion, or EU, and our collaboration partner Lilly, has commercially launchedBYETTA in more than 30 countries as of September 30, 2008.  Lilly continues to launch BYETTA inadditional EU member states and other countries during 2008.

 

BYETTAis the first and only approved medicine in a new class of compounds calledincretin mimetics. We began selling BYETTA in the United States in June 2005.  BYETTA is approved in the United States forthe treatment of patients with type 2 diabetes who have not achieved adequateglycemic control and are using metformin, sulfonylurea and/or athiazolidinedone, or TZD, three common oral therapies for type 2 diabetes.  In October 2008, BYETTA was added to theAmerican Diabetes Association’s treatment guidelines for type 2 diabetes as atreatment option for physicians to consider following first-line treatmentoptions of lifestyle change and metformin. Net product sales of BYETTA were $179.9 million and $161.1 million forthe three months ended September 30, 2008 and 2007, respectively, and$515.9 million and $459.7 million for the nine months ended September 30,2008 and 2007, respectively.

 

Wehave an agreement with Lilly for the global development and commercializationof exenatide. This agreement includes BYETTA and any sustained-releaseformulations of exenatide such as exenatide once weekly, our once weeklyformulation of exenatide for the treatment of type 2 diabetes. Under the termsof the agreement, operating profits from products sold in the United States areshared equally between Lilly and us.  Theagreement provides for tiered royalties payable to us by Lilly based upon theannual gross margin for all exenatide product sales, including any long-actingrelease formulations, outside of the United States.  Royalty payments for exenatide product salesoutside of the United States will commence after a one-time cumulative grossmargin threshold amount has been met.  Weexpect royalty payments to commence in 2009. Lilly is responsible for 100% of the costs related to development oftwice-daily BYETTA for sale outside of the United States.  Development costs related to all otherexenatide products for sale outside of the United States will continue to beallocated 80% to Lilly and 20% to us. Lilly will continue to be responsible for commercialization and all of thecosts related to commercialization of all exenatide products for sale outsideof the United States.

 

On October 20,2008 we entered into a commercial supply agreement with Lilly, pursuant towhich we will supply exenatide once weekly for sale in the United States, ifapproved.  In addition we will supplyLilly with commercial quantities of exenatide once weekly for sale by Lillyoutside of the United States, if approved. Under the terms of this agreement, Lilly made a $125 million cashpayment to us in October 2008 representing an amount to compensate us forour cost of carrying Lilly’s share of the capital investment in our exenatideonce weekly manufacturing facility in Ohio. We also entered into a loan agreement with Lilly under which we mayborrow up to $165 million beginning on December 1, 2009 and ending on June 30,2011, with maturity no later than June 30, 2014.

 

SYMLIN is the first and only approved medicine in anew class of compounds called amylinomimetics. We began selling SYMLIN in the United States in April 2005.  SYMLIN is approved in the United States forthe treatment of patients with either type 1 or type 2 diabetes who are treatedwith mealtime insulin but who have not achieved adequate glycemic control.  In January 2008, we commerciallylaunched the SymlinPenTM 120 and SymlinPenTM 60 peninjector devices in the United States. These new pre-filled pen-injector devices feature simple, fixed dosingto improve mealtime glucose control.  Net product sales of SYMLIN were $21.5million and $16.3 million for the three months ended September 30, 2008and 2007, respectively, and $64.5 million and $47.0 million for the nine monthsended September 30, 2008 and 2007, respectively.

 

14

----

Table of Contents

 

We have a field force ofapproximately 650 people, after our recent expansion discussed below, dedicatedto marketing BYETTA and SYMLIN in the United States.  Our field force includes our specialty andprimary care sales forces, a managed care and government affairs organization,a medical science organization and diabetes care specialists.  In addition, Lillyco-promotes BYETTA in the United States.  In May 2008,we amended our United States co-promotion agreement with Lilly, resulting in a40% increase in the total number of sales representatives promoting BYETTAbeginning July 1, 2008.  To achievethis increase, Lilly’s existing third party sales force for Cialis® (tidalafil)will co-promote BYETTA in the United States and Amylin increased the number ofsales representatives in its existing primary care sales force by approximately15%.   In exchange for Lilly sharing in50% of the costs related to the additional Amylin sales representatives andpaying 100% of the costs of the third party sales force discussed above, ourprimary care sales force will co-promote Cialis in the United States.

 

In addition to our marketed products, we are workingwith Lilly and Alkermes, Inc., or Alkermes, to develop exenatide onceweekly.  We are also working withAlkermes and Parsons, Inc., or Parsons, on the construction of amanufacturing facility for exenatide once weekly in Ohio.  We are now manufacturing exenatide onceweekly at commercial scale in our facility in Ohio and we began supplyingongoing and planned clinical trials with this material in the third quarter of2008.  During the second quarter of 2008,we held our pre-New Drug Application, or NDA, meeting with the FDA to discussopen items for our exenatide once weekly regulatory submission.  Based on the pre-NDA meeting and our ongoingdialog with the FDA, we continue to believe that the pacing item for an NDAsubmission is to provide sufficient data to the FDA to demonstrate the comparabilitybetween material manufactured by Alkermes in its facility and used in previousclinical studies and the commercial scale material produced in our Ohiofacility.  We submitted data from our invitro in vivo correlation, or IVIVC, studies to the FDA to support thiscomparability requirement.  We haverecently received feedback from the FDA that these data have not met theirrequirements to demonstrate comparability. We are continuing discussions with the FDA regarding these data andvarious alternatives to enable an NDA submission by the end of the first halfof 2009.  If we are required to initiatea new clinical study to demonstrate comparability, the timing of the NDAsubmission would depend on the parameters of the new study, and our submissioncould be delayed beyond the end of the first half of 2009.

 

We also have other early stage programs fordiabetes, obesity, and other therapeutic areas. We have a number of compounds in development for the potential treatmentof obesity, which are part of a broader clinical strategy which we refer to asINTO: Integrated Neurohormonal Therapies for Obesity.  In March 2008, we licensed rights tosustained release technology from Pacira Pharmaceuticals, Inc. for thepotential development of sustained release formulations of our early stageobesity and other potential product candidates.

 

Our efforts will remain primarily focused on ournear-term opportunities including BYETTA, SYMLIN and exenatide once weekly aswell as select investments in our obesity programs. We also maintain an activediscovery research program focused on novel peptide therapeutics and we havemade a number of strategic investments and collaborations for the potentialdevelopment of additional drug candidates.

 

Since our inception in September 1987, we havedevoted substantially all of our resources to our research and developmentprograms and, more recently, to the commercialization of our products. All ofour revenues prior to May 2005 were derived from fees and expensereimbursements under our BYETTA collaboration agreement with Lilly, previousSYMLIN collaborative agreements and previous co-promotion agreements. Duringthe second quarter of 2005, we began to derive revenues from product sales ofBYETTA and SYMLIN.  At September 30, 2008, our accumulateddeficit was approximately $1.6 billion.

 

At September 30,2008, we had approximately $805 million in cash, cash equivalents andshort-term investments.  Additionally wereceived a $125 million cash payment from Lilly in October 2008 in connectionwith the exenatide once weekly supply agreement and have future availability of$165 million pursuant to the loan agreement with Lilly.   Although we may not generate positiveoperating cash flows for the next few years, we intend to improve our operating results and reduce ouruse of cash for operating activities from current levels.  Additionally, we expect that our use of cashfor capital expenditures will decrease significantly from current levelsfollowing the expected completion of our manufacturing facility in Ohio inearly 2009.  Therefore, ourcurrent business plan does not contemplate the need to raise additional fundsfrom outside sources.  While we believewe have sufficient resources to fund our on-going operations, we will continueto evaluate the performance of our business and strategic opportunities, whichmay require us to raise additional funds from outside sources in thefuture.  Refer to the discussions underthe headings “Liquidity and Capital Resources” below and “Cautionary FactorsThat May Affect Future Results” in Part II, Item 1A for furtherdiscussion regarding our anticipated future capital requirements.

 

**Applicationof Critical Accounting Policies**

 

Ourdiscussion and analysis of financial condition and results of operations arebased upon our consolidated financial statements, which have been prepared inaccordance with U.S. generally accepted accounting principles. The preparationof these financial statements requires us to make significant estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosures. On an on-going basis, our actual results maydiffer significantly from our estimates.

 

Therewere no significant changes in critical accounting policies from those at December 31,2007.  The financial information as of September 30,2008, should be read in conjunction with the financial statements for the yearended December 31, 2007, contained in our annual report on Form 10-Kfiled on February 27, 2008.

 

15

----

Table ofContents

 

For adiscussion of our critical accounting policies, see “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inour annual report on Form 10-K filed on February 27, 2008.

 

**Resultsof Operations**

 

**Comparisonof Three Months Ended September 30, 2008 to Three Months Ended September 30,2007**

 

***Net Product Sales***

 

Netproduct sales for the three months ended September 30, 2008 and 2007 were$201.4 million and $177.4 million, respectively, and consisted of shipmentsof BYETTA and SYMLIN, less allowances for product returns, rebates, wholesalerchargebacks, wholesaler discounts and prescription vouchers.

 

Thefollowing table provides information regarding net product sales (in millions):

 
| ** ** | ** ** | **Three months ended  September 30,** | ** ** |
|------------|------------|------------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| BYETTA     |       | $                                                    | 179.9      |   | $ | 161.1 |   |
| SYMLIN     |       | 21.5                                                 |       | 16.3 |   |
|       |       | $                                                    | 201.4      |   | $ | 177.4 |   |

 

The increases in netproduct sales for BYETTA and SYMLIN in the current period primarily reflectcontinued growth in patient demand. Sales of our products in future periods may be impacted by numerousfactors, including potential competition, the potential approval of additionalproducts including exenatide once weekly, regulatory matters, includingexpected label changes for BYETTA, economic factors and other environmentalfactors.

 

***Revenues Under Collaborative Agreements***

 

Revenues undercollaborative agreements for the three months ended September 30, 2008were $17.0****million, compared to $12.6 million forthe same period in 2007. Substantially all of the revenue recorded in theseperiods consists of amounts earned pursuant to our BYETTA collaborationagreement with Lilly. The $4.4 million increase in revenues under collaborativeagreements in the current quarter compared to the same period in 2007 reflectshigher cost-sharing payments from Lilly due primarily to increased developmentexpenses for exenatide once weekly and a higher proportion of total shareddevelopment expenses incurred by us.

 

The following table summarizes the components ofrevenues under collaborative agreements for the three months ended September 30,2008 and 2007 (in millions):

 
| ** **                             | ** ** | **Three months ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Amortization of up-front payments      |       | $                                                    | 1.1        |   | $ | 1.1 |   |
| Cost-sharing and co-promotion payments |       | 15.9                                                 |       | 11.5 |   |
|                                   |       | $                                                    | 17.0       |   | $ | 12.6 |   |

 

In future periods, revenuesunder collaborative agreements will consist of ongoing cost-sharing paymentsfrom Lilly for sharing of development costs, possible future milestone paymentsand the continued amortization of the $30 million portion of the up-frontpayment received from Lilly upon signing of our collaboration agreement in2002. The amount of cost-sharing revenue recorded will be dependent on thetiming, extent and relative proportion of total development costs for theexenatide once weekly and BYETTA development programs incurred by us and byLilly. The receipt and recognition as revenue of future milestone payments issubject to the achievement of performance requirements underlying suchmilestone payments.

 

***Cost of Goods Sold***

 

Costof goods sold for the three months ended September 30, 2008 and 2007 was$23.4 million, representing a gross margin of 88%, and $13.8 million,representing a gross margin of 92%, respectively, and is comprised primarily ofmanufacturing costs associated with BYETTA and SYMLIN sales during theperiod.  The decrease in gross marginfor the three months ended September 30, 2008, compared to the same periodin 2007, primarily reflects increased production costs for BYETTA due tolower production volumes, increases in inventory reserves and product mix,including the introduction of the SYMLIN Pen, partially offset by higher net salesprices per unit for BYETTA and SYMLIN. Quarterly fluctuations in gross margins may beinfluenced by product mix, pricing and the level of sales allowances.

 

16

----

Tableof Contents

 

***Selling, General and Administrative Expenses***

 

Selling,general and administrative expenses increased to $99.7 million for the threemonths ended September 30, 2008 from $87.7 million for the same period in2007. The increase primarily reflects expenses associated with the recentexpansion of our sales force, continued investment in promotional expenses forBYETTA and SYMLIN and expenses associated with pre-launch education activitiesfor exenatide once weekly.

 

***Research and Development Expenses***

 

Ourresearch and development costs are comprised of salaries and bonuses,benefits, non-cash stock-based compensation, license fees, milestones underlicense agreements, costs paid to third-party contractors to perform research,conduct clinical trials, and develop drug materials and delivery devices; andassociated overhead expenses and facilities costs. We charge direct internal and external program costs to the respectivedevelopment programs. We also incur indirect costs that are not allocated tospecific programs because such costs benefit multiple development programs andallow us to increase our pharmaceutical development capabilities. These consistprimarily of facilities costs and other internal shared resources related tothe development and maintenance of systems and processes applicable to all ofour programs.

 

Ourresearch and development efforts are focused on diabetes, obesity and otherdiseases.  We also maintain an activediscovery research program.  In diabetes,we have two approved products, BYETTA and SYMLIN, and we are developingexenatide once weekly, a long-acting release formulation of exenatide, theactive pharmaceutical ingredient in BYETTA. In obesity, we have a number of compounds in development for thepotential treatment of obesity, which are part of a broader program, which werefer to as INTO: Integrated Neurohormonal Therapies for Obesity.  As part of this program, we are currentlyconducting clinical trials of our drug candidates, or combinations of our drugcandidates.

 

Thefollowing table provides information regarding our research and developmentexpenses for our major projects (in millions):

 
| ** **                         | ** ** | **Three months ended September 30,** | ** ** |
|------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                         | ** ** | **2008**                                                 | ** ** | **2007** | ** ** | **Increase/(Decrease)** | ** ** |
| Diabetes (1)                       |       | $                                                        | 37.8       |   | $ | 34.6 |   | $ | 3.2 |   |
| Obesity                            |       | 14.1                                                     |       | 10.2 |   | 3.9 |   |
| Research and early-stage  programs |       | 8.1                                                      |       | 7.2 |   | 0.9 |   |
| Indirect costs                     |       | 13.5                                                     |       | 9.5 |   | 4.0 |   |
|                               |       | $                                                        | 73.5       |   | $ | 61.5 |   | $ | 12.0 |   |

 

----

(1)  Researchand development expenses consist primarily of costs associated with BYETTA andexenatide once weekly which are shared by Lilly pursuant to our collaborationagreement.  Cost-sharing paymentsreceived by Lilly are included in revenues under collaborative agreements.  Increased expenditures for our diabetesdevelopment programs are generally partially offset by an increase incost-sharing payments from Lilly. Cost-sharing payments were $15.9 million and $11.6 million for the threemonths ended September 30, 2008 and 2007, respectively.

 

The$12.0 million increase in research and development expenses for the threemonths ended September 30, 2008 as compared to the same period in 2007primarily reflects increased expenses of $3.2 million for our diabetesprograms, increased expenses of $3.9 million for our obesity programs and anincrease in indirect costs of $4.0 million. The increase in expenses for ourdiabetes programs primarily reflects increased expenses for exenatide onceweekly associated with manufacturing scale-up and on-going clinicaltrials.  The increase in expenses in ourobesity programs reflects costs associated with an ongoing clinical trial forour pramlintide/metreleptin combination therapy development program. Theincrease in indirect costs primarily reflects increased facilities costs, aportion of which are allocated to research and development expenses.

 

***Collaborative Profit Sharing***

 

Collaborativeprofit sharing was $80.6 million and $75.0 million for the three months ended September 30,2008 and 2007, respectively, and consists of Lilly’s 50% share of the grossmargin for BYETTA in the United States.

 

***Interestand Other Income and Expense***

 

Interestand other income consist primarily of interest income from investment of cashand other investments. Interest and other income decreased to $3.3 million forthe three months ended September 30, 2008 from $14.2 million for the sameperiod in 2007.  The decrease primarilyreflects lower balances, lower interest rates earned on our short-terminvestments and an increase in realized losses during the three months ended September 30,2008 as compared to the same period in 2007.

 

17

----

Tableof Contents

 

Interest and other expenseconsist primarily of interest expense resulting from our long-term debtobligations. Interest expense in the three months ended September 30, 2008consists of interest on our $775 million of outstanding convertible seniornotes and our $125 million of outstanding long-term note payable, theamortization of associated debt issuance costs and recognized gains and lossesassociated with recording economic hedge transactions at fair value. Interestand other expense was $7.3 million and $6.1 million for the three months ended September 30,2008 and 2007, respectively.  Theincrease in interest and other expense for the three months ended September 30,2008 primarily reflects additional interest expense for our long-term notepayable entered into in December 2007.

 

***Loss on Impairment of Investments***

 

Werecognized a loss on impairment of investments of $14.9 million for the threemonths ended September 30, 2008. This primarily represents a recognized $9.0 million other-than-temporaryimpairment loss on an equity investment in a privately held entity based uponour assessment of the entity’s financial and technical performance and theentity’s ability to raise additional capital in significantly deterioratedfinancial markets to fund ongoing operations. We also recognized a $5.9 million other-than-temporary impairment losson a corporate debt security in our investment portfolio based upon anassessment of the impact of bankruptcy proceedings of the debt issuer on therecoverability of our investment.  Therewas no comparable expense for the quarter ended September 30, 2007.  At September 30, 2008, gross unrealizedlosses on our short-term investmentswere $7.2 million, all of which we determined to be temporary.

 

***Net Loss***

 

Ournet loss for the three months ended September 30, 2008 was $77.7 millioncompared to a net loss of $39.8 million for the same period in 2007. Theincrease in net loss primarily reflects the increased selling, general andadministrative expenses, increased collaborative profit-sharing, increasedresearch and development expenses and the loss on impairment of investments,partially offset by increased net product sales and increased revenues undercollaborative arrangements discussed above. We may incur operating losses for the next few years.  Our ability to reach profitability in thefuture will be heavily dependent upon the amount of product sales that weachieve for BYETTA and SYMLIN. In addition, ongoing and potential increased expensesassociated with the continued commercialization of BYETTA and SYMLIN, costsassociated with the development and commercialization of exenatide once weekly,if approved, and expenses associated with potential expansion of our researchand development programs, including our obesity and our early-stage developmentprograms and related support infrastructure, may impact our ability to reachprofitability in the future. Our operating results may fluctuate from quarterto quarter as a result of differences in the timing of expenses incurred andrevenues recognized.

 

**Comparisonof Nine Months Ended September 30, 2008 to Nine Months Ended September 30,2007**

 

***Net Product Sales***

 

Netproduct sales for the nine months ended September 30, 2008 and 2007 were$580.4 million and $506.7 million, respectively, and consisted of shipmentsof BYETTA and SYMLIN, less allowances for product returns, rebates, wholesalerchargebacks, wholesaler discounts and prescription vouchers. Sales of our products in future periods may be impacted by numerousfactors, including potential competition, the potential approval of additionalproducts including exenatide once weekly, regulatory matters, includingexpected label changes for BYETTA, economic factors and other environmentalfactors.

 

Thefollowing table provides information regarding net product sales (in millions):

 
| ** ** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------|------------|-----------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| BYETTA     |       | $                                                   | 515.9      |   | $ | 459.7 |   |
| SYMLIN     |       | 64.5                                                |       | 47.0 |   |
|       |       | $                                                   | 580.4      |   | $ | 506.7 |   |

 

The increases in net product sales for BYETTA andSYMLIN in the current period primarily reflect continued growth in patientdemand.

 

***Revenues Under Collaborative Agreements***

 

Revenuesunder collaborative agreements for the nine months ended September 30,2008 were $57.2 million compared to $52.2 million for the same period in 2007.Substantially all of the revenue recorded in these periods consists of amountsearned pursuant to our BYETTA collaboration agreement with Lilly. The $5.0million increase in revenues under collaborative agreements in the nine 

 

18

----

Table of Contents

 

months ended September 30,2008 compared to the same period in 2007 reflects higher cost-sharingpayments from Lilly due primarily to increased development expenses forexenatide once weekly and a higher proportion of total shared developmentexpenses incurred by us, partially off-set by a reduction in milestone revenues.  Milestone revenues for the nine monthsended September 30, 2007 consisted of $15.0 million in milestones associatedprimarily with Lilly’s launch of BYETTA in the EU.  There were no milestones earned in the ninemonths ended September 30, 2008.

 

Thefollowing table summarizes the components of revenues under collaborative agreementsfor the nine months ended September 30, 2008 and 2007 (in millions):

 
| ** **                             | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Amortization of up-front payments      |       | $                                                   | 3.2        |   | $ | 3.2 |   |
| Milestones                             |       | —                                              |       | 15.0 |   |
| Cost-sharing and co-promotion payments |       | 54.0                                                |       | 34.0 |   |
|                                   |       | $                                                   | 57.2       |   | $ | 52.2 |   |

 

***Cost of Goods Sold***

 

Costof goods sold for the nine months ended September 30, 2008 and 2007 was$70.1 million, representing a gross margin of 88%, and $43.3 million,representing a gross margin of 91%, respectively, and is comprised primarily ofmanufacturing costs associated with BYETTA and SYMLIN sales during theperiod.  The decrease in gross margin forthe nine months ended September 30, 2008 compared to the same period in2007 reflects thesame factors that influenced similar fluctuations in the three months ended September 30,2008 discussed above.

 

***Selling, General and Administrative Expenses***

 

Selling,general and administrative expenses increased to $309.0 million for the ninemonths ended September 30, 2008 from $268.6 million for the same period in2007. The increase primarily reflects costs associated with the recentexpansion of our sales force, increased promotional activities for BYETTA andSYMLIN and increases in business infrastructure to support our growth.

 

***Research and Development Expenses***

 

The following table provides information regarding ourresearch and development expenses for our major projects (in millions):

 
| ** **                         | ** ** | **Nine months ended September 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                         | ** ** | **2008**                                                | ** ** | **2007** | ** ** | **Increase/(Decrease)** | ** ** |
| Diabetes (1)                       |       | $                                                       | 119.5      |   | $ | 98.3 |   | $ | 21.2 |   |
| Obesity                            |       | 43.4                                                    |       | 45.1 |   | (1.7 | ) |
| Research and early-stage  programs |       | 24.6                                                    |       | 21.0 |   | 3.6 |   |
| Indirect costs                     |       | 38.6                                                    |       | 28.3 |   | 10.3 |   |
|                               |       | $                                                       | 226.1      |   | $ | 192.8 |   | $ | 33.4 |   |

 

----

(1)          Researchand development expenses consist primarily of costs associated with BYETTA andexenatide once weekly which are shared by Lilly pursuant to our collaborationagreement.  Cost-sharing paymentsreceived by Lilly are included in revenues under collaborative agreements.  Increased expenditures for our diabetesdevelopment programs are generally partially offset by an increase incost-sharing payments from Lilly. Cost-sharing payments were $54.0 million and $34.0 million for the ninemonths ended September 30, 2008 and 2007, respectively.

 

The $33.3 million increase in research and developmentexpenses for the nine months ended September 30, 2008 as compared to thesame period in 2007 primarily reflects increased expenses of $21.2 million forour diabetes programs and increased expenses of $10.3 million for indirectcosts. The increase in expenses for our diabetes programs primarily reflectsincreased expenses for exenatide once weekly associated with manufacturingscale-up and on-going clinical trials. The increase in indirect costs primarilyreflects increased facilities costs, a portion of which are allocated toresearch and development expenses.

 

***Collaborative Profit Sharing***

 

Collaborativeprofit sharing was $229.4 million and $212.3 million for the nine months ended September 30,2008 and 2007, respectively, and consists of Lilly’s 50% share of the grossmargin for BYETTA in the United States.

 

19

----

Table ofContents

 

***Interest and Other Income and Expense***

 

Interestand other income consist primarily of interest income from investment of cashand other investments. Interest and other income decreased to $21.3 million forthe nine months ended September 30, 2008, from $33.6 million for the sameperiod in 2007.  The decrease of $12.3million primarily reflects lower interest rates, along with lower averageinvestment balances during the nine months ended September 30, 2008 ascompared to the same period in 2007.

 

Interest and other expenseconsist primarily of interest expense resulting from our long-term debtobligations. Interest expense in the nine months ended September 30, 2008consists of interest on our $775 million of outstanding convertible seniornotes and our $125 million of outstanding long-term note payable, or our termloan, and the amortization of associated debt issuance costs. Interestand other expense was $20.7 million and $9.7 million for the nine months ended September 30,2008 and 2007, respectively.  Theincrease primarily reflects additional interest expense for our convertiblesenior notes issued in June 2007 and long-term note payable entered intoin December 2007.

 

***Loss on Impairment of Investments***

 

Werecognized a loss on impairment of investments of $14.9 million for the ninemonths ended September 30, 2008. This primarily represents a recognized $9.0 million other-than-temporaryimpairment loss on an equity investment in a privately held entity based uponour assessment of the entity’s financial and technical performance and theentity’s ability to raise additional capital in significantly deterioratedfinancial markets to fund ongoing operations. We also recognized a $5.9 million other-than-temporary impairment losson a corporate debt security in our investment portfolio based upon our assessmentof the impact of bankruptcy proceedings of the issuer on the recoverability ofour investment.  There was no comparableexpense for the quarter ended September 30, 2007.  At September 30, 2008, gross unrealizedlosses on our short-term investmentswere $7.2 million, all of which we determined to be temporary.

 

***Net Loss***

 

Ournet loss for the nine months ended September 30, 2008 was $211.3 millioncompared to a net loss of $134.2 million for the same period in 2007. Theincrease in net loss primarily reflects the increased selling, general andadministrative expenses, increased research and development expenses, increasedcollaborative profit-sharing, increased interest and other expense and the losson impairment of investments, partially offset by increased net product salesand revenues under collaborative agreements discussed above.

 

# **Liquidity and Capital Resources**

#  

Sinceour inception, we have financed our operations primarily through public salesand private placements of our common and preferred stock, debt financings,payments received pursuant to our BYETTA collaboration with Lilly,reimbursement of SYMLIN development expenses through earlier collaborationagreements and, since the second quarter of 2005, through product sales ofBYETTA and SYMLIN.

 

At September 30,2008, we had approximately $805 million in cash, cash equivalents andshort-term investments, compared to $1.1 billion at December 31,2007.  Additionally we received a $125million cash payment from Lilly in October 2008 in connection with theexenatide once-weekly supply agreement and have future availability of $165million pursuant to the loan agreement with Lilly.  Although we may not generate positiveoperating cash flows for the next few years we intend to improve our operatingresults and reduce our use of cash for operating activities from currentlevels. Additionally, we expect that our use of cash for capital expenditureswill decrease significantly following the completion of our manufacturingfacility in Ohio in early 2009. Therefore our current business plan does not contemplate a need to raiseadditional funds from outside sources however we will continue to evaluate theperformance of our business and strategic opportunities which may require us toraise additional funds from outside sources in the future.  We used cash of $88.9 million and $87.7million for our operating activities in the nine months ended September 30,2008 and 2007, respectively.   Our cashused for operating activities in the nine months ended September 30, 2008included a net source of cash of $37.3 million from changes in working capital,due primarily to sources of cash from a decrease in accounts receivable and anincrease in accrued compensation of $9.4 million and $28.9 million,respectively, offset by uses of cash from a decrease in payable tocollaborative partner and a decrease in deferred revenue of $5.3 million and$3.2 million, respectively.

 

Ourinvesting activities used cash of $153.3 million and $261.4 million for thenine months ended September 30, 2008 and 2007, respectively. Investingactivities in both quarters consisted primarily of purchases and sales ofshort-term investments and purchases of property, plant and equipment andincreases in other long-term assets.  Purchases of property, plant and equipment increased to $237.8 millionfor the nine months ended September 30, 2008 from $202.7 million for thenine months ended September 30, 2007. The increase during the nine months ended September 30, 2008primarily reflects costs associated with our manufacturing facility forexenatide once weekly and, to a lesser extent, purchases of tenantimprovements, office equipment and scientific equipment to support 

 

20

----

Table ofContents

 

our efforts.  We are now manufacturingexenatide once weekly at commercial scale in our facility in Ohio and begansupplying ongoing and planned clinical trials with this material during thethird quarter of 2008.  Through September 30,2008, we had expended in excess of $473 million associated with theconstruction of this facility and we expect the total investment to be inexcess of $500 million by the end of 2008, which includes costs associated withthe construction of the facility, purchase and installation of equipment andcapitalized labor and materials required to validate the facility.   We will continue to evaluate potentialadditional investments in our Ohio manufacturing facility during the productlifecycle for exenatide once weekly.

 

Financingactivities provided cash of $16.6 million and $619.7 million for the ninemonths ended September 30, 2008 and 2007, respectively.  Financing activities in thenine months ended September 30, 2008 include proceeds from the exercise ofstock options and proceeds from our employee stock purchase plan. Financingactivities for the nine months ended September 30, 2007 included proceedsfrom the exercise of stock options, proceeds from our employee stock purchaseplan and $559 million in net proceeds from the issuance of the 2007 Notes.

 

At September 30, 2008, we had $200 million inaggregate principal amount of our 2.5% convertible senior notes due in 2011, orthe 2004 Notes, and $575 million in aggregate principal amount of our 3.0%convertible senior notes due in 2014, or the 2007 Notes, outstanding. The 2004Notes are currently convertible into a total of up to 5.8 million shares of ourcommon stock at approximately $34.35 per share and are not redeemable at ouroption. The 2007 Notes are currently convertible into a total of up to 9.4million shares of our common stock at approximately $61.07 per share and arenot redeemable at our option.

 

In December 2007, we****enteredinto a $140 million credit agreement. The credit agreement provides for a $125 million term loan and a $15million revolving credit facility.  The revolving credit facility alsoprovides for the issuance of letters of credit and foreign exchange hedging upto the $15 million borrowing limit.  Theterm loan is repayable on a quarterly basis, with no principal payments duequarters one through four, 6.25% of the outstanding principal due quarters fivethrough eleven, and 56.25% of the outstanding principal due in quartertwelve.  At September 30, 2008 wehad an outstanding balance of $125 million under the term loan and had issued$5.6 million of stand-by letters of credit under the revolving creditfacility.  Both loans have a finalmaturity date of December 21, 2010. Interest on the term loan is payable quarterly in arrears at a rateequal to 1.75% above the London Interbank Offered Rate, or LIBOR, of eitherone, two, three or six months LIBOR term at our election.  We have entered into an interest rate swapagreement which resulted in a net fixed interest rate of 5.717% under the termloan.  The interest rate on the creditfacility is either LIBOR plus 1.0% or the Bank of America prime rate, at ourelection.

 

On October 20,2008, we entered into a loan agreement with Lilly pursuant to which Lilly willmake available to us a $165 million unsecured line of credit that we can drawupon from time to time beginning on December 1, 2009 and ending on June 30,2011.  Any interest due under this creditfacility will bear interest at the five-day average three-month LIBOR rateimmediately prior to the date of the advance plus 5.25% and shall be due andpayable quarterly in arrears on the first business day of each quarter.  All outstanding principal, together with allaccrued and unpaid interest, shall be due and payable the earlier of 36 monthsfollowing the date on which the loan commitment is fully advanced or June 30,2014.

 

Thefollowing table summarizes our contractual obligations and maturity dates as ofSeptember 30, 2008 (in thousands):

 
| ** **                                                             | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**                                       | ** ** | **Total**                                 | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
| Long-term convertible debt                                             |       | $                                         | 775,000    |   | $ | — |   | $ | 200,000 |   | $ | — |   | $ | 575,000 |   |
| Interest payments on long-term convertible debt                        |       | 118,500                                   |       | 22,250 |   | 44,500 |   | 34,500 |   | 17,250 |   |
| Long-term note payable                                                 |       | 125,000                                   |       | 23,437 |   | 101,563 |   | — |   | — |   |
| Interest on long-term note payable, net of  swap transactions (1) |       | 12,952                                    |       | 6,811 |   | 6,141 |   | — |   | — |   |
| Inventory purchase obligations(2)                                      |       | 120,020                                   |       | 85,676 |   | 30,714 |   | 3,630 |   | — |   |
| Operating lease obligations                                            |       | 213,884                                   |       | 22,908 |   | 46,014 |   | 48,713 |   | 96,249 |   |
| Total(3)                                                               |       | $                                         | 1,365,356  |   | $ | 161,082 |   | $ | 428,932 |   | $ | 86,843 |   | $ | 688,499 |   |

 

----

(1)  The interest payments shownwere calculated using a rate of 5.717%, the combined net rate of the term loanand interest rate swap, on the outstanding principal balance of the term loan

 

(2)   Includes$84.6 million of outstanding purchase orders, cancelable by us upon 30 days’written notice, subject to reimbursement of costs incurred through the date ofcancellation.

 

(3)   Excludeslong-term obligation of $7.7 million related to deferred compensation, thepayment of which is subject to elections made by participants that are subjectto change.

 

21

----

Table ofContents

 

In addition, under certain license and collaborationagreements we are required to pay royalties and/or milestone payments upon thesuccessful development and commercialization of related products.  We expect to make development milestonepayments up to $1.8 million associated with licensing agreements in the next 12months.  Additional milestones of up toapproximately $310.6 million could be paid over the next 10 to 15 years ifdevelopment and commercialization of all our early stage programs continue andare successful.  The significant majorityof these milestones relate to potential future regulatory approvals and subsequentsales thresholds.  Given the inherentrisk in pharmaceutical development, it is highly unlikely that we willultimately make all of these milestone payments; however, we would considerthese payments as positive because they would signify that the related productsare moving successfully through development and commercialization.

 

Our future capitalrequirements will depend on many factors, including: the amount of productsales we and Lilly achieve for BYETTA and we achieve for SYMLIN; costsassociated with the continued commercialization of BYETTA and SYMLIN; costsassociated with the establishment of our exenatide once weekly manufacturingfacility; costs of potential licenses or acquisitions; the potential need torepay existing indebtedness; costs associated with an increase in our infrastructure;our ability to receive or need to make milestone payments; our ability, and theextent, to which we establish collaborative arrangements for SYMLIN or any ofour product candidates; progress in our research and development programs andthe magnitude of these programs; costs involved in preparing, filing,prosecuting, maintaining, enforcing or defending our patents; competingtechnological and market developments; and costs of manufacturing, includingcosts associated with establishing our own manufacturing capabilities orobtaining and validating additional manufacturers of our products; and scale-upcosts for our drug candidates.

 

**ITEM 3.****                                                    ****Quantitative andQualitative Disclosures about Market Risk**

 

We invest our excess cash primarily in United StatesGovernment securities, asset-backed securities and debt instruments offinancial institutions and corporations with strong credit ratings. Theseinstruments have various short-term maturities. We do not utilize derivativefinancial instruments, derivative commodity instruments or other market risksensitive instruments, positions or transactions in any material fashion.Accordingly, we believe that, while the instruments held are subject to changesin the financial standing of the issuer of such securities, we are not subjectto any material risks arising from changes in interest rates, foreign currencyexchange rates, commodity prices, equity prices or other market changes thataffect market risk sensitive investments. Our debt is not subject to significantswings in valuation as interest rates on our debt are fixed. The fair value ofour 2004 Notes and 2007 Notes at September 30, 2008 was approximately $184million and $344 million, respectively. A hypothetical 1% adverse move ininterest rates along the entire interest rate yield curve would not materiallyaffect the fair value of our financial instruments that are exposed to changesin interest rates.

 

**ITEM 4.****                                                    ****Controls and Procedures**

 

As of September 30,2008, an evaluation was performed under the supervision and with theparticipation of our management, including our President and Chief ExecutiveOfficer (referred to as our CEO) and our Senior Vice President, Finance andChief Financial Officer (referred to as our CFO), of the effectiveness of thedesign and operation of our disclosure controls and procedures. In designingand evaluating the disclosure controls and procedures, management recognizesthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management necessarily is required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures. Based on thatevaluation, our management, including our CEO and CFO, concluded that ourdisclosure controls and procedures were effective at a reasonable level ofassurance as of September 30, 2008.

 

Ourmanagement does not expect that our disclosure control and procedures or ourinternal control over financial reporting will prevent all error and all fraud.A control system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, or misstatements due to error, if any, withinthe company have been detected. While we believe that our disclosure controls andprocedures and internal control over financial reporting are and have beeneffective, in light of the foregoing we intend to continue to examine andrefine our disclosure controls and procedures and internal control overfinancial reporting.

 

An evaluation was also performed under the supervision and with theparticipation of our management, including our CEO and CFO, of any change inour internal control over financial reporting that occurred during our lastfiscal quarter and that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting. Thatevaluation did not identify any change in our internal control over financialreporting that occurred during our latest fiscal quarter and that has materiallyaffected, or is reasonably likely to affect, our internal control overfinancial reporting.

 

22

----

Table of Contents

 

**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

From time-to-time we become involved in various lawsuits, claims andproceedings relating to the conduct of our business, including, for example,those pertaining to product liability, patent infringement and employmentclaims.  While we cannot predict theoutcome of any lawsuit, claim or proceeding, we believe that the disposition ofany pending matters is not likely to have a material affect on our financialcondition or liquidity.

 

**Item 1A. Risk Factors**

 

**CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS**

** **

The following sets forth cautionary factors that may affect our futureresults, including clarifications to the cautionary factors included in ourAnnual Report on Form 10-K for the fiscal year ended December 31,2007.

 

***We have a history ofoperating losses, anticipate future losses and may never become profitable.***

 

We have experienced significant operating losses since our inception in1987, including losses of $211.3 million for the nine months ended September 30,2008, $211.1 million in 2007, $218.9 million in 2006 and $206.8 million in2005.  As of September 30, 2008, wehad an accumulated deficit of approximately $1.6 billion.  The extent of our future losses and thetiming of potential profitability are uncertain, and we may never achieveprofitable operations.  We have been engagedin discovering and developing drugs since inception, which has required, andwill continue to require, significant research and developmentexpenditures.  We derived substantiallyall of our revenues prior to 2005 from development funding, fees and milestonepayments under collaborative agreements and from interest income.  BYETTA and SYMLIN may not be as commerciallysuccessful as we expect and we may not succeed in commercializing any of ourother drug candidates.  We may incursubstantial operating losses for at least the next few years.  These losses, among other things, have hadand will have an adverse effect on our stockholders’ equity and workingcapital.  Even if we become profitable,we may not remain profitable.

 

***We began selling,marketing and distributing our first products, BYETTA and SYMLIN, in 2005 andwe will depend heavily on the success of those products in the marketplace.***

 

Prior to the launch of BYETTA and SYMLIN in 2005, we had never sold ormarketed our own products.  Our abilityto generate product revenue for the next few years will depend solely on the successof these products.  The ability of BYETTAand SYMLIN to generate revenue at the levels we expect will depend on manyfactors, including the following:

 

·                                          acceptance ofand ongoing satisfaction with these first-in-class medicines in the UnitedStates and foreign markets by the medical community, patients receiving therapyand third party payers;

 

·                                          asatisfactory efficacy and safety profile as demonstrated in a broad patientpopulation;

 

·                                          successfullyexpanding and sustaining manufacturing capacity to meet demand;

 

·                                          safetyconcerns in the marketplace for diabetes therapies;

 

·                                          thecompetitive landscape for approved and developing therapies that will competewith the products; and

 

·                                          ourability to expand the indications for which we can market the products.

 

***If we encountersafety issues with BYETTA or SYMLIN or any other drugs we market or fail tocomply with extensive continuing regulations enforced by domestic and foreignregulatory authorities, it could cause us to discontinue marketing those drugs,reduce our revenues and harm our ability to generate future revenues, whichwould negatively impact our financial position.***

 

BYETTA and SYMLIN, in addition to any other of our drug candidates thatmay be approved by the FDA, will be subject to continual review by the FDA, andwe cannot assure you that newly discovered or developed safety issues will notarise.  With the use of any of ourmarketed drugs by a wide patient population, serious adverse events may occur fromtime to time that initially do not appear to relate to the drug itself, andonly if the specific event occurs with some regularity over a period of timedoes the drug become suspect as having a causal relationship to the adverseevent.  Any safety issues could cause usto suspend or cease marketing of our approved products, subject us tosubstantial liabilities, and adversely affect our revenues and financialcondition.

 

23

----

Tableof Contents

 

Moreover, the marketing of our approved products will be subject toextensive regulatory requirements administered by the FDA and other regulatorybodies, including adverse event reporting requirements and the FDA’s generalprohibition against promoting products for unapproved uses.  The manufacturing facilities for our approvedproducts are also subject to continual review and periodic inspection andapproval of manufacturing modifications. Manufacturing facilities that manufacture drug products for the UnitedStates market, whether they are located inside or outside the United States,are subject to biennial inspections by the FDA and must comply with the FDA’scurrent good manufacturing practice, or cGMP, regulations.  The FDA stringently applies regulatorystandards for manufacturing.  Failure tocomply with any of these post-approval requirements can, among other things,result in warning letters, product seizures, recalls, fines, injunctions,suspensions or revocations of marketing licenses, operating restrictions andcriminal prosecutions.  Any of theseenforcement actions, any unanticipated changes in existing regulatoryrequirements or the adoption of new requirements, or any safety issues thatarise with any approved products, could adversely affect our ability to marketproducts and generate revenues and thus adversely affect our ability tocontinue our business.

 

The manufacturers of our products and drug candidates also are subjectto numerous federal, state, local and foreign laws relating to such matters assafe working conditions, manufacturing practices, environmental protection,fire hazard control and hazardous substance disposal.  In the future, our manufacturers may incur significantcosts to comply with those laws and regulations, which could increase ourmanufacturing costs and reduce our ability to operate profitably.

 

***We currently do notmanufacture our own drug products or drug candidates and may not be able toobtain adequate supplies, which could cause delays, subject us to productshortages, or reduce product sales.***

 

The manufacturing of sufficient quantities of newly-approved drugproducts and drug candidates is a time-consuming and complex process.  We currently have no manufacturingcapabilities.  In order to successfullycommercialize our products, including BYETTA and SYMLIN, and continue todevelop our drug candidates, including exenatide once weekly, we rely onvarious third parties to provide the necessary manufacturing.

 

There are a limited number of manufacturers that operate under the FDA’scGMP regulations capable of manufacturing for us.  In addition, there are a limited number ofbulk drug substance suppliers, cartridge manufacturers and disposable penmanufacturers.  If we are not able toarrange for and maintain third-party manufacturing on commercially reasonableterms, or we lose one of our sole source suppliers used for our existingproducts or for some components of our manufacturing processes for our productsor drug candidates, we may not be able to market our products or completedevelopment of our drug candidates on a timely basis, if at all.

 

Reliance on third-party suppliers limits our ability to control certainaspects of the manufacturing process and therefore exposes us to a variety ofsignificant risks, including, but not limited to, risks to our ability tocommercialize our products or conduct clinical trials, risks of reliance on thethird-party for regulatory compliance and quality assurance, third-partyrefusal to supply on a long-term basis, or at all, the possibility of breach ofthe manufacturing agreement by the third-party and the possibility oftermination or non-renewal of the agreement by the third-party, based on itsbusiness priorities, at a time that is costly or inconvenient for us.  If any of these risks occur, our productsupply will be interrupted resulting in lost or delayed revenues and delayedclinical trials.  Our reliance onthird-party manufacturers for the production of our two commercial products isdescribed in more detail below.

 

We rely on Bachem California, or Bachem, and Mallinckrodt, Inc.,or Mallinckrodt, to manufacture our long-term commercial supply of bulkexenatide, the active ingredient in BYETTA. In addition, we rely on single-source manufacturers for some of our rawmaterials used by Bachem and Mallinckrodt to produce bulk exenatide.  We also rely on Wockhardt UK (Holdings) Ltd.,or Wockhardt, and Baxter Pharmaceutical Solutions LLC, a subsidiary of Baxter, Inc.,or Baxter, to manufacture the dosage form of BYETTA in cartridges.  We are further dependent upon Lilly to supplypens for delivery of BYETTA in cartridges.

 

We rely on Bachem and Lonza Ltd. to manufacture our commercial supplyof bulk pramlintide acetate, the active ingredient contained in SYMLIN.  In addition, we rely on Baxter to manufacturethe dosage form of SYMLIN in vials.  Werecently received FDA approval of a disposable pen for the delivery of SYMLINin cartridges.  We rely on Wockhardt forthe dosage form of SYMLIN in cartridges and Ypsomed AG to manufacture thecomponents for the SYMLIN disposable pen. We also rely on Hollister-StierLaboratories LLC for the assembly of the SYMLIN pen.

 

If any of our existing or future manufacturers cease to manufacture orare otherwise unable to timely deliver sufficient quantities of BYETTA orSYMLIN, in either bulk or dosage form, or other product components, includingpens for the delivery of these products, it could disrupt our ability to marketour products, subject us to product shortages, reduce product sales and/orreduce our profit margins.  Any delay ordisruption in the manufacturing of bulk product, the dosage form of ourproducts or other product components, including pens for delivery of our products,could also harm our reputation in the medical and patient communities.  In addition, we may need to engage additionalmanufacturers so that we will be able to continue our commercialization anddevelopment efforts for these products or drug candidates.  The cost and time to establish these newmanufacturing facilities would be substantial.

 

24

----

Tableof Contents

 

Our manufacturers have not produced BYETTA or SYMLIN for commercial usefor a sustained period of time.  As such,additional unforeseeable risks may be encountered as we, together with ourmanufacturers, continue to develop familiarity and experience with regard tomanufacturing our products.  Furthermore,we and the other manufacturers used for our drug candidates may not be able toproduce supplies in commercial quantities if our drug candidates areapproved.  While we believe that businessrelations between us and our manufacturers are generally good, we cannotpredict whether any of the manufacturers that we may use will meet ourrequirements for quality, quantity or timeliness for the manufacture of bulkexenatide or pramlintide acetate, dosage form of BYETTA or SYMLIN, or pens.  Therefore, we may not be able to obtainnecessary supplies of products with acceptable quality, on acceptable terms orin sufficient quantities, if at all.  Ourdependence on third parties for the manufacture of products may also reduce ourgross profit margins and our ability to develop and deliver products in atimely manner.

 

In order to manufacture exenatide once weeklyon a commercial scale, if it is approved by the FDA, we must design, construct,and commission a new facility and validate the manufacturing process.  We are dependent on Alkermes and Parsons toassist us in the design, construction and commissioning of the manufacturingfacility.  We have never established,validated, and operated a manufacturing facility and cannot assure you that wewill be able to successfully establish or operate such a facility in a timelyor economical manner, or at all.  Inaddition, we are dependent on Alkermes to successfully develop and transfer tous its technology for manufacturing exenatide once weekly and to supply us withcommercial quantities of the polymer required to manufacture exenatide onceweekly.  We also will need to obtainsufficient supplies of diluents, solvents, devices, packaging and othercomponents necessary for commercial manufacture of exenatide once weekly.  Although we are working diligently to qualifythe commercial-scale manufacturing process at this facility, we cannot beassured that we will be able to demonstrate comparability of productmanufactured at development scale and product manufactured at commercial scale.  If we are unable to demonstrate comparabilityof product, we may not be able to commercially launch exenatide once weekly ina timely manner or at all.

 

***Our ability togenerate revenues will be diminished if we fail to obtain acceptable prices oran adequate level of reimbursement for our products from third-party payers.***

 

The continuing efforts of government, private health insurers and otherthird-party payers to contain or reduce the costs of health care throughvarious means, including efforts to increase the amount of patient co-payobligations, may limit our commercial opportunity.  In the United States, we expect that therewill continue to be a number of federal and state proposals to implementgovernment control over the pricing of prescription pharmaceuticals.  In addition, increasing emphasis on managedcare in the United States will continue to put pressure on the rate of adoptionand pricing of pharmaceutical products.

 

Significant uncertainty exists as to the reimbursement status of healthcare products.  Third-party payers,including Medicare, are challenging the prices charged for medical products andservices.  Government and otherthird-party payers increasingly are attempting to contain health care costs bylimiting both coverage and the level of reimbursement for new drugs and byrefusing to provide coverage for uses of approved products for diseaseindications for which the FDA has not granted labeling approval.  Third-party insurance coverage may not beavailable to patients for BYETTA and/or SYMLIN or any other products wediscover and develop.  If government andother third-party payers do not provide adequate coverage and reimbursementlevels for our products, the market acceptance of these products may bereduced.

 

***Competition in thebiotechnology and pharmaceutical industries may result in competing products,superior marketing of other products and lower revenues or profits for us.***

 

There are many companies that are seeking to develop products andtherapies for the treatment of diabetes and other metabolic disorders.  Our competitors include multinationalpharmaceutical and chemical companies, specialized biotechnology firms anduniversities and other research institutions. A number of our largest competitors, including AstraZeneca,Bristol-Myers Squibb, GlaxoSmithKline, Lilly, Merck & Co., Novartis,Novo Nordisk, Pfizer, Sanofi-Aventis and Takeda Pharmaceuticals, are pursuingthe development or marketing of pharmaceuticals that target the same diseasesthat we are targeting, and it is possible that the number of companies seekingto develop products and therapies for the treatment of diabetes, obesity andother metabolic disorders will increase. Many of our competitors have substantially greater financial, technical,human and other resources than we do and may be better equipped to develop,manufacture and market technologically superior products.  In addition, many of these competitors havesignificantly greater experience than we do in undertaking preclinical testingand human clinical studies of new pharmaceutical products and in obtainingregulatory approvals of human therapeutic products.  Accordingly, our competitors may succeed inobtaining FDA approval for superior products. Furthermore, now that we have received FDA approval for BYETTA andSYMLIN, we may also be competing against other companies with respect to ourmanufacturing and product distribution efficiency and sales and marketingcapabilities, areas in which we have limited or no experience as anorganization.

 

25

----

Table of Contents

 

Our target patient population for BYETTA includes people with diabeteswho have not achieved adequate glycemic control using metformin, sulfonylureaand/or a TZD, three common oral therapies for type 2 diabetes.  Our target population for SYMLIN is peoplewith either type 2 or type 1 diabetes whose therapy includes multiple mealtimeinsulin injections daily.  Other productsare currently in development or exist in the market that may compete directlywith the products that we are developing or marketing.  Various other products are available or indevelopment to treat type 2 diabetes, including:

 

·              sulfonylureas;

 

·              metformin;

 

·              insulins, including injectable and inhaled versions;

 

·              TZDs;

 

·              glinides;

 

·              DPP-IVinhibitors;

 

·              incretin/GLP-1agonists;

 

·              CB-1 antagonists;

 

·              PPARs; and

 

·              alpha-glucosidaseinhibitors.

 

In addition, several companies are developing various approaches,including alternative delivery methods, to improve treatments for type 1 andtype 2 diabetes. We cannot predict whether our products will have sufficientadvantages to cause health care professionals to adopt them over other productsor that our products will offer an economically feasible alternative to otherproducts.  Our products could becomeobsolete before we recover expenses incurred in developing these products.

 

***Delays in theconduct or completion of our clinical trials, the analysis of the data from ourclinical trials or our manufacturing scale-up activities may result in delaysin our planned filings for regulatory approvals, and may adversely affect ourability to enter into new collaborative arrangements.***

 

We cannot predict whether we will encounter problems with any of ourcompleted, ongoing or planned clinical studies that will cause us to delay orsuspend our ongoing and planned clinical studies, delay the analysis of datafrom our completed or ongoing clinical studies or perform additional clinicalstudies prior to receiving necessary regulatory approvals.  We also cannot predict whether we willencounter delays or an inability to create manufacturing processes for drugcandidates that allow us to produce drug product in sufficient quantities to beeconomical, otherwise known as manufacturing scale-up.

 

If the results of our ongoing or planned clinical studies for our drugcandidates are not available when we expect or if we encounter any delay in theanalysis of data from our clinical studies or if we encounter delays in ourability to scale-up our manufacturing processes:

 

·              wemay be unable to complete our development programs for exenatide once weekly orour obesity clinical trials;

 

·              we may have to delayor terminate our planned filings for regulatory approval;

 

·              wemay not have the financial resources to continue research and development ofany of our drug candidates; and

 

·              wemay not be able to enter into, if we chose to do so, any additional collaborativearrangements.

 

In addition, Lilly can terminate our collaboration for the developmentand commercialization of BYETTA and sustained-release formulations of exenatideat any time on six months’ notice.

 

26

----

Table of Contents

 

Any of the following could delay the completion of our ongoing andplanned clinical studies:

 

·                                         ongoingdiscussions with the FDA or comparable foreign authorities regarding the scopeor design of our clinical trials;

 

·                                         delaysin enrolling volunteers;

 

·                                         lowerthan anticipated retention rate of volunteers in a clinical trial;

 

·                                         negativeresults of clinical studies;

 

·                                         insufficientsupply or deficient quality of drug candidate materials or other materialsnecessary for the performance of clinical trials;

 

·                                         ourinability to reach agreement with Lilly regarding the scope, design, conduct orcosts of clinical trials with respect to BYETTA, exenatide once weekly or nasalexenatide; or

 

·                                         seriousside effects experienced by study participants relating to a drug candidate.

 

***We are substantiallydependent on our collaboration with Lilly for the development andcommercialization of BYETTA and dependent on Lilly and Alkermes for thedevelopment of exenatide once weekly.***

 

We have entered into a collaborative arrangement with Lilly, whocurrently markets diabetes therapies and is developing additional diabetes drugcandidates, to commercialize BYETTA and further develop sustained-releaseformulations of BYETTA, including exenatide once weekly.  We entered into this collaboration in orderto:

 

·                                         fundsome of our research and development activities;

 

·                                         assistus in seeking and obtaining regulatory approvals; and

 

·                                         assistus in the successful commercialization of BYETTA and exenatide once weekly.

 

In general, we cannot control the amount and timing of resources thatLilly may devote to our collaboration. If Lilly fails to assist in the further development of exenatide onceweekly or the commercialization of BYETTA, or if Lilly’s efforts are noteffective, our business may be negatively affected.  We are relying on Lilly to obtain regulatoryapprovals for and successfully commercialize BYETTA and exenatide once weeklyoutside the United States.  Ourcollaboration with Lilly may not continue or result in additional successfullycommercialized drugs.  Lilly canterminate our collaboration at any time upon six months’ notice.  If Lilly ceased funding and/or developing andcommercializing BYETTA or exenatide once weekly, we would have to seekadditional sources for funding and may have to delay, reduce or eliminate oneor more of our commercialization and development programs for thesecompounds.  If Lilly does notsuccessfully commercialize BYETTA outside the United States we may receivelimited or no revenues from them.  Inaddition, we are dependent on Alkermes to successfully develop and transfer tous its technology for manufacturing exenatide once weekly.  If Alkermes’ technology is not successfullydeveloped to effectively deliver exenatide in a sustained release formulation,or Alkermes does not devote sufficient resources to the collaboration, ourefforts to develop sustained release formulations of exenatide could be delayedor curtailed.

 

***Ifour patents are determined to be unenforceable or if we are unable to obtainnew patents based on current patent applications or for future inventions, wemay not be able to prevent others from using our intellectual property.  If we are unable to obtain licenses to thirdparty patent rights for required technologies, we could be adversely affected.***

 

We own or hold exclusive rights to manyissued United States patents and pending United States patent applicationsrelated to the development and commercialization of exenatide, including BYETTAand exenatide once weekly, SYMLIN and our other drug candidates.  These patents and applications covercomposition-of-matter, medical indications, methods of use, formulations andother inventive results.  We have issuedand pending applications for formulations of BYETTA and exenatide once weekly,but we do not have a composition-of-matter patent covering exenatide.  We also own or hold exclusive rights tovarious foreign patent applications that correspond to issued United Statespatents or pending United States patent applications.

 

Our success will depend in part on our abilityto obtain patent protection for our products and drug candidates andtechnologies both in the United States and other countries.  We cannot guarantee that any patents willissue from any pending or future patent applications owned by or licensed tous.  Alternatively, a third party maysuccessfully challenge or circumvent our patents.  Our rights under any issued patents may notprovide us with sufficient protection against competitive products or otherwisecover commercially valuable products or processes.  For example, our SYMLIN and BYETTA productsare subject to the provisions of the Drug Price Competition and Patent TermRestoration Act of 1984, also known as the “Hatch-Waxman Act,” which providesdata exclusivity for a 

 

27

----

Tableof Contents

 

certain period of time.  Oncethis exclusivity period expires, the Hatch-Waxman Act allows genericmanufacturers to file Abbreviated New Drug Applications, or ANDAs, with the FDArequesting approval of generic versions of previously-approved products.  For example, a generic pharmaceuticalmanufacturer could file an ANDA for SYMLIN as early as March 2009 and forBYETTA as early as April 2009.  Ifan ANDA is filed for one of our approved products prior to expiration of thepatents covering those products, it could result in our initiating patentinfringement litigation to enforce our rights. We can provide no assurances that we would prevail in such an action orin any challenge related to our patent rights.

 

In addition, because patent applications inthe United States are maintained, in general, in secrecy for 18 months afterthe filing of the applications, and publication of discoveries in thescientific or patent literature often lag behind actual discoveries, we cannotbe sure that the inventors of subject matter covered by our patents and patentapplications were the first to invent or the first to file patent applicationsfor these inventions.  Third parties havefiled, and in the future are likely to file, patent applications on inventionssimilar to ours.  From time-to-time wehave participated in, and in the future are likely to participate in,interference proceedings declared by the United States Patent and TrademarkOffice to determine priority of invention, which could result in a loss of ourpatent position.  We have alsoparticipated in, and in the future are likely to participate in, oppositionproceedings against our patents in other jurisdictions, such as Europe andAustralia.  Furthermore, we may not haveidentified all United States and foreign patents that pose a risk ofinfringement.

 

We also rely upon licensing opportunities forsome of our technologies.  We cannot be certainthat we will not lose our rights to certain patented technologies underexisting licenses or that we will be able to obtain a license to any requiredthird-party technology.  If we lose ourlicensed technology rights or if we are not able to obtain a required license,we could be adversely affected.

 

***Wemay be unable to obtain regulatory clearance to market our drug candidates inthe United States or foreign countries on a timely basis, or at all.***

 

Our drug candidates are subject to extensivegovernment regulations related to development, clinical trials, manufacturingand commercialization.  The process ofobtaining FDA and other regulatory approvals is costly, time-consuming,uncertain and subject to unanticipated delays. Regulatory authorities may refuse to approve an application for approvalof a drug candidate if they believe that applicable regulatory criteria are notsatisfied.  Regulatory authorities mayalso require additional testing for safety and efficacy.  Moreover, if the FDA grants regulatoryapproval of a product, the approval may be limited to specific indications orlimited with respect to its distribution, and expanded or additionalindications for approved drugs may not be approved, which could limit ourrevenues.  Foreign regulatory authoritiesmay apply similar limitations or may refuse to grant any approval.  Unexpected changes to the FDA or foreignregulatory approval process could also delay or prevent the approval of ourdrug candidates.

 

The data collected from our clinical trials may not be sufficient tosupport approval of our drug candidates or additional or expanded indicationsby the FDA or any foreign regulatory authorities.  Biotechnology stock prices have declinedsignificantly in certain instances where companies have failed to meetexpectations with respect to FDA approval or the timing for FDA approval.  If the FDA’s or any foreign regulatoryauthority’s response is delayed or not favorable for any of our drugcandidates, our stock price could decline significantly.

 

Moreover, manufacturing facilities operated by us or by the third-partymanufacturers with whom we may contract to manufacture our unapproved drugcandidates may not pass an FDA or other regulatory authority preapprovalinspection.  Any failure or delay inobtaining these approvals could prohibit or delay us or any of our businesspartners from marketing these drug candidates.

 

Consequently, even if we believe that preclinical and clinical data aresufficient to support regulatory approval for our drug candidates, the FDA andforeign regulatory authorities may not ultimately approve our drug candidatesfor commercial sale in any jurisdiction. If our drug candidates are not approved, our ability to generaterevenues may be limited and our business will be adversely affected.

 

***Litigation regardingpatents and other proprietary rights may be expensive, cause delays in bringingproducts to market and harm our ability to operate.***

 

Our successwill depend in part on our ability to operate without infringing the proprietaryrights of third parties and preventing others from infringing our patents.  Challenges by pharmaceutical companiesagainst the patents of competitors are common. Legal standards relating to the validity of patents coveringpharmaceutical and biotechnological inventions and the scope of claims madeunder these patents are still developing. As a result, our ability to obtain and enforce patents is uncertain andinvolves complex legal and factual questions. Third parties may challenge, in courts or through patent officeproceedings, or infringe upon, existing or future patents.  In the event that a third party challenges apatent, a court or patent office may invalidate the patent or determine thatthe patent is not enforceable. Proceedings involving our patents or patent applications or those ofothers could result in adverse decisions about:

 

28

----

Tableof Contents

 

·                                         thepatentability of our inventions, products and drug candidates; and/or

 

·                                         theenforceability, validity or scope of protection offered by our patents.

 

Themanufacture, use or sale of any of our products or drug candidates may infringeon the patent rights of others.  If weare unable to avoid infringement of the patent rights of others, we may berequired to seek a license, defend an infringement action or challenge thevalidity of the patents in court. Patent litigation is costly and timeconsuming.  We may not have sufficientresources to bring these actions to a successful conclusion.  In addition, if we do not obtain a license,develop or obtain non-infringing technology, fail to successfully defend aninfringement action or have infringing patents declared invalid, we may:

 

·                                         incursubstantial monetary damages;

 

·                                         encountersignificant delays in bringing our drug candidates to market; and/or

 

·                                         beprecluded from participating in the manufacture, use or sale of our products ordrug candidates or methods of treatment requiring licenses.

 

***Weare subject to “fraud and abuse” and similar laws and regulations, and afailure to comply with such regulations or prevail in any litigation related tononcompliance could harm our business.***

 

Upon approval of BYETTA and SYMLIN by the FDA, we became subject tovarious health care “fraud and abuse” laws, such as the Federal False ClaimsAct, the federal anti-kickback statute and other state and federal laws andregulations.  Pharmaceutical companieshave faced lawsuits and investigations pertaining to violations of these lawsand regulations.  We cannot guaranteethat measures that we have taken to prevent such violations, including ourcorporate compliance program, will protect us from future violations, lawsuitsor investigations.  If any such actionsare instituted against us, and we are not successful in defending ourselves orasserting our rights, those actions could have a significant impact on ourbusiness, including the imposition of significant fines or other sanctions.

 

***Our financialresults will fluctuate, and these fluctuations may cause our stock price tofall.***

 

Forecasting future revenues is difficult, especially since we launchedour first products in 2005 and the level of market acceptance of these productsmay change rapidly.  In addition, ourcustomer base is highly concentrated with four customers accounting for most ofour net product sales.  Fluctuations inthe buying patterns of these customers, which may result from seasonality,wholesaler buying decisions or other factors outside of our control, couldsignificantly affect the level of our net sales on a period to periodbasis.  As a result, it is reasonablylikely that our financial results will fluctuate to an extent that may not meetwith market expectations and that also may adversely affect our stockprice.  There are a number of otherfactors that could cause our financial results to fluctuate unexpectedly,including:

 

·                                         productsales;

 

·                                         costof product sales;

 

·                                         achievementand timing of research and development milestones;

 

·                                         collaborationrevenues;

 

·                                         costand timing of clinical trials, regulatory approvals and product launches;

 

·                                         marketingand other expenses;

 

·                                         manufacturingor supply issues; and

 

·                                         potentialacquisitions of businesses and technologies and our ability to successfullyintegrate any such acquisitions into our existing business.

 

***We may requireadditional financing in the future, which may not be available to us onfavorable terms, or at all.***

 

We intend to use our available cash for:

 

·                                         Commercializationof BYETTA and SYMLIN;

 

29

----

Tableof Contents

 

·                                         Establishmentof additional manufacturing sources, including our Ohio manufacturing facility;

 

·                                         Developmentof exenatide once weekly and other pipeline candidates;

 

·                                         Executingour INTO strategy;

 

·                                         Ourother research and development activities;

 

·                                         Otheroperating expenses;

 

·                                         Potentialacquisitions or investments in complementary technologies or businesses; and

 

·                                         Othergeneral corporate purposes.

 

We may also be required to use our cash to pay principal and intereston outstanding debt, including a $125 million term loan due in 2010 and $775million in outstanding principal amount of convertible senior notes, of which$200 million is due in 2011under our 2004 Notes and $575 million is due in 2014under our 2007 Notes.

 

If we require additional financing in the future, we cannot assure youthat it will be available to us on favorable terms, or at all.  Although we have previously been successfulin obtaining financing through our debt and equity securities offerings, therecan be no assurance that we will be able to so in the future, especially giventhe recent adverse economic and credit conditions.

 

***Our investments in marketable debt securitiesare subject to credit and market risks that may adversely affect their fairvalue.***

 

We maintain a portfolio of investments in marketable debt securitieswhich are recorded at fair value. Although we have established investment guidelines relative todiversification and maturity with the objective of maintaining safety ofprincipal and liquidity, credit rating agencies may reduce the credit qualityof our individual holdings which could adversely affect their value.  Lower credit quality and other market events,such as increases in interest rates, and further deterioration in the creditmarkets may have an adverse effect on the fair value of our investment holdingsand cash position.

 

***Our business has asubstantial risk of product liability claims, and insurance may not be adequateto cover these claims.***

 

Our business exposes us to potential product liability risks that areinherent in the testing, manufacturing and marketing of human therapeuticproducts.  Product liability claims couldresult in the imposition of substantial defense costs and liability on us, arecall of products, or a change in the indications for which they may beused.  We currently have limited productliability insurance coverage.  We cannotassure you that our insurance will provide adequate coverage against potentialliabilities.

 

***Our ability to enterinto and maintain third-party relationships is important to our successfuldevelopment and commercialization of BYETTA, SYMLIN and our other drugcandidates and to our potential profitability.***

 

With respect to sales, marketing and distribution outside the UnitedStates, we will be substantially dependent on Lilly for activities relating toBYETTA and sustained-release formulations of BYETTA, including exenatide onceweekly.  We believe that we will likelyneed to enter into marketing and distribution arrangements with third partiesfor, or find a corporate partner who can provide support for, the developmentand commercialization of SYMLIN or our other drug candidates outside the UnitedStates.  We may also enter intoarrangements with third parties for the commercialization of SYMLIN or any ofour other drug candidates within the United States.

 

With respect to BYETTA and, if approved, exenatide once weekly, Lillyis co-promoting within the United States. If Lilly ceased commercializing BYETTA or, if approved, exenatide onceweekly, for any reason, we would likely need to either enter into a marketingand distribution arrangement with a third party for those products orsignificantly increase our internal sales and commercialization infrastructure.

 

We may not be able to enter into marketing and distributionarrangements or find a corporate partner for SYMLIN or our other drugcandidates as we deem necessary.  If weare not able to enter into a marketing or distribution arrangement or find a corporatepartner who can provide support for commercialization of our drug candidates aswe deem necessary, we may not be able to successfully perform these marketingor distribution activities.  Moreover,any new marketer or distributor or corporate partner for our drug candidates,including Lilly, with whom we choose to contract may not establish adequatesales and distribution capabilities or gain market acceptance for our products,if any.

 

30

----

Tableof Contents

 

***We have asignificant amount of indebtedness.  Wemay not be able to make payments on our indebtedness, and we may incuradditional indebtedness in the future, which could adversely affect ouroperations.***

 

In April 2004, we issued $200 million of the 2004 Notes and in June 2007,we issued $575 million of the 2007 Notes. In December 2007, we entered into a $125 million term loan due in December 2010,or the Term Loan.  Our ability to makepayments on our debt, including the 2004 and 2007 Notes and the Term Loan, willdepend on our future operating performance and ability to generate cash and mayalso depend on our ability to obtain additional debt or equity financing.During each of the last five years, our operating cash flows were negative andinsufficient to cover our fixed charges. We may need to use our cash to pay principal and interest on our debt,thereby reducing the funds available to fund our research and developmentprograms, strategic initiatives and working capital requirements.  Our ability to generate sufficient operatingcash flow to service our indebtedness, including the 2004 and 2007 Notes andthe Term Loan, and fund our operating requirements will depend on our ability,alone or with others, to successfully develop, manufacture, obtain requiredregulatory approvals for and market our drug candidates, as well as otherfactors, including general economic, financial, competitive, legislative and regulatoryconditions, some of which are beyond our control.  Our debt service obligations increase ourvulnerabilities to competitive pressures, because many of our competitors areless leveraged than we are.  If we areunable to generate sufficient operating cash flow to service our indebtednessand fund our operating requirements, we may be forced to reduce or defer ourdevelopment programs, sell assets or seek additional debt or equity financing,which may not be available to us on satisfactory terms or at all.  Our level of indebtedness may make us morevulnerable to economic or industry downturns. If we incur new indebtedness, the risks relating to our business and ourability to service our indebtedness will intensify.

 

***We may be requiredto redeem our convertible senior notes upon a designated event or repay theTerm Loan upon an event of default.***

 

Holders of the 2004 and 2007 Notes may require us to redeem all or anyportion of their notes upon the occurrence of certain designated events whichgenerally involve a change in control of our company.  The lenders under the Term Loan may requireus to repay outstanding principal and accrued interest due under the Term Loanupon the occurrence of an event of default, which could include, among otherthings, nonpayment of principle and interest, violation of covenants and achange in control.  We may not havesufficient cash funds to redeem the notes upon a designated event or repay theTerm Loan upon an event of default.  Wemay elect, subject to certain conditions, to pay the redemption price for the2004 Notes in our common stock or a combination of cash and our commonstock.  We may be unable to satisfy therequisite conditions to enable us to pay some or all of the redemption pricefor the 2004 Notes in our common stock. In addition, although there are currently no restrictions on our abilityto pay the redemption price under our existing debt agreements, future debtagreements may prohibit us from repaying the redemption price of either of the2004 or 2007 Notes in either cash or common stock.  If we are prohibited from redeeming the 2004or 2007 Notes, we could seek consent from our lenders to redeem the 2004 or2007 notes.  If we are unable to obtaintheir consent, we could attempt to refinance the 2004 or 2007 Notes.  If we were unable to obtain a consent orrefinance, we would be prohibited from redeeming the 2004 or 2007 Notes.  If we were unable to redeem the 2004 or 2007Notes upon a designated event, it would result in an event of default under theindentures governing the 2004 or 2007 Notes. An event of default under the indentures could result in a further eventof default under our other then-existing debt, including the Term Loan.  In addition, the occurrence of a designatedevent may be an event of default under our other debt.  Further, an event of default under the TermLoan could result in an event of default under the indentures governing the2004 or 2007 Notes.

 

***If our research anddevelopment programs fail to result in additional drug candidates, the growthof our business could be impaired.***

 

Certain of our research and development programs for drug candidatesare at an early stage and will require significant research, development,preclinical and clinical testing, manufacturing scale-up activities, regulatoryapproval and/or commitments of resources before commercialization.  We cannot predict whether our research willlead to the discovery of any additional drug candidates that could generateadditional revenues for us.

 

***Our future success dependson our chief executive officer, and other key executives and our ability toattract, retain and motivate qualified personnel.***

 

We are highly dependent on our chief executive officer, and the otherprincipal members of our executive and scientific teams.  The unexpected loss of the services of any ofthese persons might impede the achievement of our research, development andcommercialization objectives.  Recruitingand retaining qualified sales, marketing, regulatory, scientific and otherpersonnel and consultants will also be critical to our success.  We may not be able to attract and retainthese personnel and consultants on acceptable terms given the competitionbetween numerous pharmaceutical and biotechnology companies.  We do not maintain “key person” insurance onany of our employees.

 

31

----

Tableof Contents

 

***We may be unable toadequately prevent disclosure of trade secrets and other proprietaryinformation.***

 

In order to protect our proprietary technology and processes, we relyin part on confidentiality agreements with our corporate partners, employees,consultants, manufacturers, outside scientific collaborators and sponsoredresearchers and other advisors.  Theseagreements may not effectively prevent disclosure of confidential informationand may not provide an adequate remedy in the event of unauthorized disclosureof confidential information.  Inaddition, others may independently discover our trade secrets and proprietaryinformation.

 

Costly and time-consuming litigation could be necessary to enforce anddetermine the scope of our proprietary rights, and failure to obtain ormaintain trade secret protection could adversely affect our competitivebusiness position.

 

***Our research anddevelopment activities and planned manufacturing activities involve the use ofhazardous materials, which subject us to regulation, related costs and delaysand potential liabilities.***

 

Our research and development and our planned manufacturing activitiesinvolve the controlled use of hazardous materials, chemicals and variousradioactive compounds.  Although webelieve that our research and development safety procedures for handling anddisposing of these materials comply with the standards prescribed by state andfederal regulations, the risk of accidental contamination or injury from thesematerials cannot be eliminated.  Inaddition, as part of the development of our planned manufacturing activities,we will need to develop additional safety procedures for the handling anddisposing of hazardous materials.  If anaccident occurs, we could be held liable for resulting damages, which could besubstantial.  We are also subject tonumerous environmental, health and workplace safety laws and regulations,including those governing laboratory procedures, exposure to blood-bornepathogens and the handling of biohazardous materials.  Additional federal, state and local laws andregulations affecting our operations may be adopted in the future.  We may incur substantial costs to complywith, and substantial fines or penalties if we violate, any of these laws orregulations.

 

***We are exposed topotential risks from legislation requiring companies to evaluate internalcontrol over financial reporting.***

 

The Sarbanes-Oxley Act requires that we report annually on theeffectiveness of our internal control over financial reporting.  Among other things, we must perform systemsand processes evaluation and testing.  Wemust also conduct an assessment of our internal control to allow management toreport on, and our independent registered public accounting firm to attest to,our internal control over financial reporting, as required by Section 404of the Sarbanes-Oxley Act.  In connectionwith our Section 404 compliance efforts, we have incurred or expended, andexpect to continue to incur or expend, substantial accounting and otherexpenses and significant management time and resources.  We have implemented certain remediationactivities resulting from our ongoing assessment of internal control overfinancial reporting.  Our futureassessment, or the future assessments by our independent registered publicaccounting firm, may reveal material weaknesses in our internal control.  If material weaknesses are identified in thefuture we would be required to conclude that our internal control overfinancial reporting are ineffective and we could be subject to sanctions orinvestigations by the SEC, the NASDAQ Stock Market or other regulatoryauthorities, which would require additional financial and management resourcesand could adversely affect the market price of our common stock.

 

***We have implementedanti-takeover provisions that could discourage or prevent an acquisition of ourcompany, even if the acquisition would be beneficial to our stockholders, andas a result our management may become entrenched and hard to replace.***

 

Provisions in our certificate of incorporation and bylaws could make itmore difficult for a third party to acquire us, even if doing so would benefitour stockholders.  These provisionsinclude:

 

·                                          allowingour board of directors to elect a director to fill a vacancy created by theexpansion of the board of directors;

 

·                                          allowing ourboard of directors to issue, without stockholder approval, up to 5.5 millionshares of preferred stock with terms set by the board of directors;

 

·                                          limitingthe ability of holders of our outstanding common stock to call a specialmeeting of our stockholders; and

 

·                                          preventingstockholders from taking actions by written consent and requiring allstockholder actions to be taken at a meeting of our stockholders.

 

Each of these provisions, as well as selected provisions of Delawarelaw, could discourage potential takeover attempts, could adversely affect thetrading price of our securities and could cause our management to becomeentrenched and hard to replace.  Inaddition to provisions in our charter documents and under Delaware law, anacquisition of our company could be made more difficult by our employeebenefits plans and our employee change in control severance plan, under which,in connection with a change in control and termination of employment, stockoptions held by our employees may become vested and our officers may receiveseverance benefits.  We also haveimplemented a stockholder rights plan, also called a poison pill, which couldmake it uneconomical for a third party to acquire us on a hostile basis.

 

32

----

Tableof Contents

 

***Our executiveofficers, directors and major stockholders control approximately 62% of ourcommon stock.***

 

As of September 30, 2008, executive officers, directors andholders of 5% or more of our outstanding common stock, in the aggregate, ownedor controlled approximately 62% of our outstanding common stock.  As a result, these stockholders are able toinfluence all matters requiring approval by our stockholders, including theelection of directors and the approval of corporate transactions.  This concentration of ownership may alsodelay, deter or prevent a change in control of our company and may make sometransactions more difficult or impossible to complete without the support ofthese stockholders.

 

***Substantial futuresales of our common stock by us or our existing stockholders or the conversionof our convertible senior notes to common stock could cause the trading priceof our common stock to fall.***

 

Sales by existing stockholders of a large number of shares of ourcommon stock in the public market or the perception that additional sales couldoccur could cause the trading price of our common stock to drop.  Likewise, the issuance of shares of commonstock upon conversion of our convertible notes or redemption of our convertiblenotes upon a designated event, or upon additional convertible debt or equityfinancings or other share issuances by us, including shares issued inconnection with potential future strategic alliances, could adversely affectthe trading price of our common stock. Our convertible notes are currently convertible into a total of up to15.2 million shares. In addition, the existence of these notes may encourageshort selling of our common stock by market participants.

 

***Significantvolatility in the market price for our common stock could expose us tolitigation risk.***

 

The market prices for securities of biopharmaceutical and biotechnologycompanies, including our common stock, have historically been highly volatile,and the market from time to time has experienced significant price and volumefluctuations that are unrelated to the quarterly operating performance of thesebiopharmaceutical and biotechnology companies. Since January 1, 2006, the high and low sales price of our commonstock varied significantly, as shown in the following table:

 
| ** **                                      | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------------------------------------|------------|----------|------------|---------|------------|
| **Year ending December 31, 2008**          |       |     |       |    |       |
| Fourth Quarter (through October 28,  2008) |       | $        | 20.47      |    | $          | 7.17 |   |
| Third Quarter                                   |       | $        | 35.00      |    | $          | 18.55 |   |
| Second Quarter                                  |       | $        | 33.22      |    | $          | 25.30 |   |
| First Quarter                                   |       | $        | 37.38      |    | $          | 23.75 |   |
| **Year ended December 31, 2007**           |       |     |       |    |       |
| Fourth Quarter                                  |       | $        | 51.10      |    | $          | 35.83 |   |
| Third Quarter                                   |       | $        | 53.25      |    | $          | 40.86 |   |
| Second Quarter                                  |       | $        | 46.93      |    | $          | 36.91 |   |
| First Quarter                                   |       | $        | 42.45      |    | $          | 35.55 |   |
| **Year ended December 31, 2006**           |       |     |       |    |       |
| Fourth Quarter                                  |       | $        | 48.48      |    | $          | 35.74 |   |
| Third Quarter                                   |       | $        | 51.54      |    | $          | 40.76 |   |
| Second Quarter                                  |       | $        | 49.37      |    | $          | 38.16 |   |
| First Quarter                                   |       | $        | 49.08      |    | $          | 35.58 |   |

 

Given the uncertainty of our future funding, whether BYETTA and SYMLINwill meet our expectations, and the regulatory approval of our other drugcandidates, we may continue to experience volatility in our stock price for theforeseeable future.  In addition, thefollowing factors may significantly affect the market price of our commonstock:

 

·                                         ourfinancial results and/or fluctuations in our financial results;

 

·                                         safetyissues with BYETTA, SYMLIN or our product candidates;

 

·                                         clinicalstudy results;

 

·                                         determinationsby regulatory authorities with respect to our drug candidates;

 

·                                         ourability to complete our Ohio manufacturing facility and the commercialmanufacturing process for exenatide once weekly;

 

33

----

Tableof Contents

 

·                                         developmentsin our relationships with current or future collaborative partners;

 

·                                         ourability to successfully execute our commercialization strategies;

 

·                                         developmentsin our relationships with third-party manufacturers of our products and otherparties who provide services to us;

 

·                                         technologicalinnovations or new commercial therapeutic products by us or our competitors;

 

·                                         developmentsin patent or other proprietary rights; and

 

·                                         governmentalpolicy or regulation, including with respect to pricing and reimbursement.

 

Broad market and industry factors also may materially adversely affectthe market price of our common stock, regardless of our actual operatingperformance.  Periods of volatility inthe market price of our common stock expose us to securities class-actionlitigation, and we may be the target of such litigation as a result of marketprice volatility in the future.

 

34

----

Table of Contents

 

**ITEM 6.  Exhibits**

 

The following exhibits areincluded as part of this report:

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                    |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                               |
| 3.1                 |       | Amended and Restated Certificate of Incorporation (filed as an  exhibit to Registrant’s registration statement on Form S-1 (File  No. 333-44195) or amendments thereto and incorporated herein by  reference)                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 3.2                 |       | Third Amended and Restated Bylaws (filed as an exhibit to  Registrant’s Current Report on Form 8-K filed on October 31, 2007  and incorporated herein by reference)                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 3.3                 |       | Certificate of Amendment of Amended and Restated Certificate of  Incorporation (filed as an exhibit to Registrant’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2001 and incorporated  herein by reference)                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 3.4                 |       | Certificate of Amended and Restated Certificate of Incorporation  (filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q for  the quarter ended September 30, 2007 and incorporated herein by  reference)                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.1                 |       | Specimen Common Stock Certificate (filed as an exhibit to  Registrant’s registration statement on Form S-1 (File  No. 333-44195) or amendments thereto and incorporated herein by  reference)                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.2                 |       | Rights Agreement, dated as of June 17, 2002, between the  Registrant and American Stock Transfer & Trust Company (filed as an  exhibit to Registrant’s Current Report on Form 8-K filed on  June 18, 2002 and incorporated herein by reference)                                       |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.3                 |       | First Amendment to Rights Agreement dated December 13, 2002,  between the Registrant and American Stock Transfer & Trust Company  (filed as an exhibit to Registrant’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2002 and incorporated herein by  reference) |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.4                 |       | Form of Rights Certificate (filed as an exhibit to Registrant’s  Current Report on Form 8-K filed on June 18, 2002 and incorporated  herein by reference)                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.5                 |       | Certificate of Designation of Series A Junior Participating  Preferred Stock (filed as an exhibit to Registrant’s Current Report on  Form 8-K filed on June 18, 2002 and incorporated herein by  reference)                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.6                 |       | Certificate of Designation of Series A Junior Participating  Preferred Stock (filed as an exhibit to Registrant’s Current Report on  Form 8-K filed on June 18, 2002 and incorporated herein by  reference)                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 31.1                |       | Certification of Principal Financial Officer pursuant to  Rule 13a-14(a) and Rule 15d-14(a) of the Securities  Exchange Act of 1934, as amended                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 31.2                |       | Certification of Principal Executive Officer pursuant to  Rule 13a-14(a) and Rule 15d-14(a) of the Securities  Exchange Act of 1934, as amended                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 32.1                |       | Certifications Pursuant to U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                    |

 

35

----

Table of Contents

 

**SIGNATURE**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                             | Amylin Pharmaceuticals, Inc.                                                                                                                                                      |
|-----------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                        |                                                                                                                                                                                   |
| Date: November 4, 2008 | By:                                                                                                                                                                                    | /S/ MARK G. FOLETTA |
|                        | Mark G. Foletta,*Senior Vice President, Finance and  Chief Financial Officer  (on behalf of the registrant and as the  registrant’s principal financial and accounting  officer)* |

 

36

----