**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington,D.C. 20549

** **

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**FORM 10-Q**

** **

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**(MarkOne)**

 

| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                              |
| ** ** | ** ** | **For the  quarterly period ended March 31, 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 definition of “acceleratedfiler” “large 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 April 21, 2008** |
|--------------------------------|------------|-------------------------------------------------------|
| Common Stock,  $.001 par value |       | 137,073,350                                           |

 

 

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** **

**AMYLIN PHARMACEUTICALS, INC.**

** **

**TABLE OF CONTENTS**

 

COVER PAGE

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

 

2

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. Financial Statements**

 

**AMYLIN PHARMACEUTICALS, INC.**

 

**Consolidated Balance Sheets(in thousands, except per share data)**

 
| ** **                                                                                                                                                             | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                             | ** ** | **(unaudited)**          | ** ** | **(Note 1)**           | ** ** |
| Assets                                                                                                                                                                 |       |                     |       |                        |       |
| Current assets:                                                                                                                                                        |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                             |       | $                        | 321,743    |                        | $          | 422,232 |   |
| Short-term  investments                                                                                                                                                |       | 712,200                  |       | 708,183                     |       |
| Accounts  receivable, net                                                                                                                                              |       | 65,512                   |       | 73,579                      |       |
| Inventories, net                                                                                                                                                       |       | 98,066                   |       | 100,214                     |       |
| Other current  assets                                                                                                                                                  |       | 28,768                   |       | 32,100                      |       |
| Total current  assets                                                                                                                                                  |       | 1,226,289                |       | 1,336,308                   |       |
|                                                                                                                                                                   |       |                     |       |                        |       |
| Property, plant  and equipment, net                                                                                                                                    |       | 476,990                  |       | 390,301                     |       |
| Other long-term  assets, net                                                                                                                                           |       | 27,800                   |       | 28,082                      |       |
| Debt issuance  costs, net                                                                                                                                              |       | 18,730                   |       | 19,520                      |       |
|                                                                                                                                                                   |       | $                        | 1,749,809  |                        | $          | 1,774,211 |   |
|                                                                                                                                                                   |       |                     |       |                        |       |
| Liabilities and Stockholders’ Equity                                                                                                                              |       |                     |       |                        |       |
|                                                                                                                                                                   |       |                     |       |                        |       |
| Current  liabilities:                                                                                                                                                  |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                       |       | $                        | 48,412     |                        | $          | 37,530 |   |
| Accrued  compensation                                                                                                                                                  |       | 35,050                   |       | 56,428                      |       |
| Payable to  collaborative partner                                                                                                                                      |       | 66,637                   |       | 66,116                      |       |
| Other current  liabilities                                                                                                                                             |       | 105,751                  |       | 122,924                     |       |
| Current portion  of deferred revenue                                                                                                                                   |       | 4,286                    |       | 4,286                       |       |
| Total current  liabilities                                                                                                                                             |       | 260,136                  |       | 287,284                     |       |
|                                                                                                                                                                   |       |                     |       |                        |       |
| Deferred  revenue, net of current portion                                                                                                                              |       | 2,015                    |       | 3,086                       |       |
|                                                                                                                                                                   |       |                     |       |                        |       |
| Other long-term  obligations, net of current portion                                                                                                                   |       | 34,760                   |       | 31,023                      |       |
|                                                                                                                                                                   |       |                     |       |                        |       |
| Long-term note  payable                                                                                                                                                |       | 125,000                  |       | 125,000                     |       |
|                                                                                                                                                                   |       |                     |       |                        |       |
| Convertible  senior notes                                                                                                                                              |       | 775,000                  |       | 775,000                     |       |
|                                                                                                                                                                   |       |                     |       |                        |       |
| Commitments and  contingencies (Note 8)                                                                                                                                |       |                     |       |                        |       |
|                                                                                                                                                                   |       |                     |       |                        |       |
| Stockholders’  equity:                                                                                                                                            |       |                     |       |                        |       |
| Common stock,  $.001 par value, 200,000 shares authorized, 137,037 and 135,044 issued and  outstanding at March 31, 2008 and December 31, 2007, respectively |       | 137                      |       | 135                         |       |
| Additional  paid-in capital                                                                                                                                            |       | 2,059,473                |       | 1,987,453                   |       |
| Accumulated  deficit                                                                                                                                                   |       | (1,503,117               | )          | (1,434,320                  | )          |
| Accumulated  other comprehensive loss                                                                                                                                  |       | (3,595                   | )          | (450                        | )          |
| Total  stockholders’ equity                                                                                                                                       |       | 552,898                  |       | 552,818                     |       |
|                                                                                                                                                                   |       | $                        | 1,749,809  |                        | $          | 1,774,211 |   |

 

See accompanying notes to consolidated financial statements.

 

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**AMYLIN PHARMACEUTICALS, INC.**

 

**Consolidated Statements ofOperations(in thousands, except per share data)**

**(unaudited)**

 
| ** **                                                      | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                      | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Revenues:                                                       |       |                                             |       |   |   |
| Net product sales                                               |       | $                                                | 178,721    |   | $ | 162,003 |   |
| Revenues under collaborative agreements                         |       | 18,516                                           |       | 9,975 |   |
| Total revenues                                                  |       | 197,237                                          |       | 171,978 |   |
|                                                            |       |                                             |       |   |   |
| Costs and expenses:                                             |       |                                             |       |   |   |
| Cost of goods sold                                              |       | 22,024                                           |       | 15,210 |   |
| Selling, general and administrative                             |       | 98,243                                           |       | 87,787 |   |
| Research and development                                        |       | 77,206                                           |       | 59,564 |   |
| Collaborative profit sharing                                    |       | 69,901                                           |       | 66,947 |   |
| Total costs and expenses                                        |       | 267,374                                          |       | 229,508 |   |
|                                                            |       |                                             |       |   |   |
| Operating loss                                                  |       | (70,137                                          | )          | (57,530 | ) |
|                                                            |       |                                             |       |   |   |
| Interest and other income                                       |       | 11,030                                           |       | 9,404 |   |
| Interest and other expense                                      |       | (9,690                                           | )          | (1,288 | ) |
| Net loss                                                        |       | $                                                | (68,797    | ) | $ | (49,414 | ) |
|                                                            |       |                                             |       |   |   |
| Net loss per share, basic and diluted                           |       | $                                                | (0.51      | ) | $ | (0.38 | ) |
|                                                            |       |                                             |       |   |   |
| Shares used in  computing net loss per share, basic and diluted |       | 135,859                                          |       | 131,054 |   |

 

See accompanying notes to consolidated financialstatements.

 

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**AMYLIN PHARMACEUTICALS, INC.**

 

**Consolidated Statements of Cash Flows(in thousands)**

**(unaudited)**

 
| ** **                                                                    | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Operating  activities:                                                        |       |                                             |       |   |   |
| Net loss                                                                      |       | $                                                | (68,797    | ) | $ | (49,414 | ) |
| Adjustments to  reconcile net loss to net cash used for operating activities: |       |                                             |       |   |   |
| Depreciation and  amortization                                                |       | 7,434                                            |       | 4,177 |   |
| Stock-based compensation                                                      |       | 14,062                                           |       | 13,317 |   |
| Other non-cash  expenses, net                                                 |       | 967                                              |       | 378 |   |
| Changes in  operating assets and liabilities:                                 |       |                                             |       |   |   |
| Accounts  receivable, net                                                     |       | 8,067                                            |       | (25,583 | ) |
| Inventories, net                                                              |       | 2,148                                            |       | (6,544 | ) |
| Other current  assets                                                         |       | 2,479                                            |       | (4,579 | ) |
| Accounts payable  and other current liabilities                               |       | 17,073                                           |       | 9,623 |   |
| Accrued  compensation                                                         |       | (99                                              | )          | (6,930 | ) |
| Payable to  collaborative partner                                             |       | 521                                              |       | 2,994 |   |
| Deferred revenue                                                              |       | (1,071                                           | )          | (1,072 | ) |
| Other operating  assets and liabilities, net                                  |       | 3,217                                            |       | 1,635 |   |
| Net cash flows  used for operating activities                                 |       | (13,999                                          | )          | (61,998 | ) |
|                                                                          |       |                                             |       |   |   |
| Investing  activities:                                                        |       |                                             |       |   |   |
| Purchases of  short-term investments                                          |       | (368,471                                         | )          | (24,694 | ) |
| Sales and  maturities of short-term investments                               |       | 362,162                                          |       | 157,012 |   |
| Purchase of  property, plant, and equipment, net                              |       | (86,448                                          | )          | (81,168 | ) |
| Increase in  patents and other long-term assets                               |       | (339                                             | )          | (2,536 | ) |
| Net cash flows  (used for) provided by investing activities                   |       | (93,096                                          | )          | 48,614 |   |
|                                                                          |       |                                             |       |   |   |
| Financing  activities:                                                        |       |                                             |       |   |   |
| Issuance of  common stock, net                                                |       | 6,606                                            |       | 12,806 |   |
| Net cash flows  provided by financing activities                              |       | 6,606                                            |       | 12,806 |   |
|                                                                          |       |                                             |       |   |   |
| Decrease in cash  and cash equivalents                                        |       | (100,489                                         | )          | (578 | ) |
|                                                                          |       |                                             |       |   |   |
| Cash and cash  equivalents at beginning of period                             |       | 422,232                                          |       | 66,640 |   |
| Cash and cash  equivalents at end of period                                   |       | $                                                | 321,743    |   | $ | 66,062 |   |
|                                                                          |       |                                             |       |   |   |
| **Supplemental  disclosure of cash flow information:**                        |       |                                             |       |   |   |
| Property, plant,  and equipment additions in other current liabilities        |       | $                                                | 22,196     |   | $ | 12,575 |   |
|                                                                          |       |                                             |       |   |   |
| **Non-cash  financing activities:**                                           |       |                                             |       |   |   |
| Issuance of  common stock for contingent share settled obligation             |       | $                                                | 30,000     |   | $ | — |   |
| Shares  contributed as employer 401(k) match                             |       | $                                                | 4,283      |   | $ | 5,819 |   |
| Shares  contributed to employee stock ownership plan                          |       | $                                                | 16,996     |   | $ | — |   |

 

See accompanying notes to consolidated financial statements.

 

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** **

**AMYLINPHARMACEUTICALS, INC.**

 

**Notes to Consolidated Financial Statements**

**March 31, 2008(unaudited)**

 

**1.****             ****Summary of Significant AccountingPolicies**

 

# **Basis of Presentation**

#  

Theinformation contained herein has been prepared in accordance with instructionsfor Form 10-Q and Article 10 of Regulation S-X. The information as ofMarch 31, 2008, and for the three months ended March 31, 2008, and2007, are unaudited. In the opinion of management, the information reflects alladjustments necessary to make the results of operations for the interim periodsa fair statement of such operations. All such adjustments are of a normalrecurring nature. Interim results are not necessarily indicative of results fora full year. The balance sheet at December 31, 2007, has been derived fromthe audited consolidated financial statements at that date but does not includeall information and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements. For more complete financialinformation, these financial statements should be read in conjunction with theaudited consolidated financial statements included in Amylin Pharmaceuticals, Inc.’s(referred to as the Company or Amylin) Annual Report on Form 10-K for theyear ended December 31, 2007.

 

# **Revenue Recognition**

#  

# ***Net******Product Sales***

#  

The Company sells BYETTA® (exenatide)injection and SYMLIN® (pramlintide acetate) injection primarily towholesale distributors, who, in turn, sell to retail pharmacies and governmententities. Product sales are recognized when delivery of the products has occurred, title haspassed to the customer, the selling price is fixed or determinable,collectability is reasonably assured and the Company has no furtherobligations. The Company records allowances for product returns, rebates andwholesaler chargebacks, wholesaler discounts, and prescription vouchers at thetime of sale and reports product sales net of such allowances. The Company mustmake significant judgments in determining these allowances. If actual results differfrom the Company’s estimates, the Company will be required to make adjustmentsto 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, and accordingly the Company records all United States productssales of BYETTA.

 

# ***Revenues Under CollaborativeAgreements***

#  

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.  Amountsreceived for sharing of development expenses are recognized in the period inwhich the related expenses are incurred. Any amounts received prior tosatisfying these revenue recognition criteria will be recorded as deferredrevenue.

 

# **Collaborative****Profit-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 currentliabilities 

 

6

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in the accompanyingconsolidated balance sheets. Estimates for allowances for doubtful accounts aredetermined based on existing contractual obligations, historical paymentpatterns and individual customer circumstances.  The allowance fordoubtful accounts was $0.3 million and $0.2 million at March 31, 2008 and December 31,2007, respectively.

 

# **Researchand Development Expenses**

#  

# Research anddevelopment costs are expensed as incurred and include salaries, benefits, bonus, stock-basedcompensation, license fees, milestones under license agreements, costs paid tothird-party contractors to perform research, conduct clinical trials, anddevelop drug materials and delivery devices; and associated overhead expensesand facilities costs. Clinical trial costs,including costs associated with third-party contractors, are a significantcomponent of research and development expenses. Invoicing from third-partycontractors for services performed can lag several months. The Company accruesthe costs of services rendered in connection with such activities based on itsestimate of management fees, site management and monitoring costs, and datamanagement costs. Actual clinical trial costs may differ from estimates and areadjusted in the period in which they become known.

#  

# **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 3.3 million and 6.7 million forthe three months ended March 31, 2008 and 2007, respectively, are excludedfrom the calculation of diluted loss per share for all periods presentedbecause the effect is antidilutive. Common stock equivalents from sharesunderlying our convertible senior notes of 15.2 million and 5.8 million for thethree months ended March 31, 2008 and 2007, respectively, are alsoexcluded from the calculation of diluted loss per share because the effect isantidilutive. In future periods, if theCompany reports net income and the common share equivalents for our convertiblesenior notes are dilutive, the common stock equivalents will be included in theweighted average shares computation and interest expense related to the noteswill be added back to net income to calculate diluted earnings per share.

 

# **Accounting for Stock-BasedCompensation**

#  

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 employee services and requires companies to expense theestimated fair value of these awards over the requisite employee serviceperiod, which for the Company is generally the vesting period. The Companyadopted SFAS 123R using the modified prospective method. Under the modifiedprospective method, prior periods are not revised for comparative purposes. Thevaluation provisions of SFAS 123R apply to new awards and to awards that areoutstanding on the effective date and subsequently modified or cancelled.Estimated non-cash, compensation expense for awards outstanding at theeffective date will be recognized over the remaining service period using thecompensation cost calculated for pro-forma disclosure purposes under Statementof Financial Accounting Standards No. 123 (SFAS 123), *“Accounting for Stock-Based Compensation.”*

 

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

 
| ** **                                               | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **March 31,**               | ** ** |
| ** **                                               | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Selling, general  and administrative expenses            |       | $                                | 8,332      |   | $ | 7,981 |   |
| Research and  development expenses                       |       | 5,730                            |       | 5,336 |   |
|                                                     |       | $                                | 14,062     |   | $ | 13,317 |   |
|                                                     |       |                             |       |   |   |
| Net stock-based  compensation expense, per common share: |       |                             |       |   |   |
| Basic                                                    |       | $                                | 0.10       |   | $ | 0.10 |   |
| Diluted                                                  |       | $                                | 0.10       |   | $ | 0.10 |   |

 

TheCompany recorded $14.1 million and $13.3 million of total non-cash, stock-basedcompensation expense during the three months ended March 31, 2008 and March 31,2007, respectively, related to stock-based awards, consisting of stock 

 

7

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options and employeestock purchase rights, during those periods. At March 31, 2008, total unrecognized estimated compensation costrelated to non-vested share based awards granted prior to that date was $125.1million which is expected to be recognized over a weighted-average period of2.7 years.

 

Inaddition to the stock-based compensation discussed above, the Company alsorecorded $5.4 million of expense associated with its Employee Stock OwnershipPlan, or ESOP, during the three months ended March 31, 2008.  There was no expense for the ESOP during thethree months ended March 31, 2007 as the 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 Puerto Rico LLC,Amylin Ohio LLC and Amylin Investments LLC. All significant intercompanytransactions and balances have been eliminated in consolidation.

 

# **Recently Issued Accounting Pronouncements**

#  

In December 2007,FASB issued SFAS No. 141 (revised 2007), “*BusinessCombinations*” and SFAS No. 160, “*NoncontrollingInterests in Consolidated Financial Statements, an amendment of AccountingResearch Bulletin 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 us beginning in the first quarter offiscal 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 EITF consensus on EITF Issue No. 07-3, *“Accounting for Nonrefundable Advance Payments for Goods or ServicesReceived for Use in Future Research 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 forFinancial Assets and Financial Liabilities.”* SFAS No. 159 givesthe Company the irrevocable option to carry many financial assets andliabilities at fair values, with changes in fair value recognized inearnings.  The Company adopted SFAS No. 159on January 1, 2008.  The adoption ofSFAS No. 159 did not have a material impact on the Company’s consolidatedfinancial statements.

 

In September 2006,the FASB issued SFAS No. 157, “*Fair Value Measurements*,”which defines fair value, establishes guidelines for measuring fair value andexpands disclosures regarding fair value measurements.  SFAS No. 157 does not require anynew fair value measurements but rather eliminates inconsistencies in guidancefound in various prior accounting pronouncements.  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. |

 

TheCompany adopted SFAS No. 157 on January 1, 2008.  The adoption of SFAS No. 157 didnot have a material impact on the Company’s consolidated financial statements.

 

8

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

 

The Company’s short-term investments, consistingprincipally of debt securities are classified as available-for-sale and are statedat fair value based upon observed market prices (level 1 in the fair valuehierarchy). Unrealized holding gains or losses on these securities areincluded in other comprehensive income. The amortized cost of debt securitiesin this category is adjusted for amortization of premiums and accretion ofdiscounts to maturity. ****For investments in mortgage-backed securities, amortization of premiumsand accretion of discounts are recognized in interest income using the interestmethod, adjusted for anticipated prepayments as applicable. Estimates ofexpected cash flows are updated periodically and changes are recognized in thecalculated effective yield prospectively****** ******as appropriate.****Such amortization is included in interest income. Realized gains andlosses and declines in value judged to be other-than-temporary (of which therehave been none to date) on available-for-sale securities are included ininterest income. In assessing potential impairment of its short-terminvestments, the Company evaluates the impact of interest rates, potentialprepayments on mortgage-backed securities, changes in credit quality, thelength of time and extent to which the market value has been less than cost,and the Company’s intent and ability to retain the security in order to allowfor an anticipated recovery in fair value. Thecost of securities sold is based on the specific-identification method.

 

**3.****             ****Inventories, net**

 

Inventories are stated at the lower of cost (FIFO)or market and net of a valuation allowance for potential excess and/or obsoletematerial of $7.8 million and $5.3 million at March 31, 2008 and December 31,2007, respectively. Rawmaterials consists of bulk drug material, work-in-process primarily consists ofin-process SymlinPenTM pen injector devices, in-process SYMLINvials, in-process BYETTA cartridges, and finished goods consists of finishedSymlinPenTM pen injector devices, finished SYMLIN drug product invials and BYETTA drug product in a disposable pen/cartridge delivery system.

 

Inventories consist of the following(in thousands):

 
| ** **         | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials |       | $                        | 60,468     |                        | $          | 55,706 |   |
| Work-in-process    |       | 23,211                   |       | 24,463                      |       |
| Finished goods     |       | 14,387                   |       | 20,045                      |       |
|               |       | $                        | 98,066     |                        | $          | 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 the $125 million term loan entered into in December 2007.  Amortization of debt issuance costs arerecorded as interest expense in the consolidated statement of operations on astraight-line basis, which approximates the interest method, over thecontractual term of the notes. The Company incurred total debt issuance costsof $24.3 million in connection with the 2004 Notes, the 2007 Notes and the termloan. Amortization expense of $1.0 million and $0.2 million was recorded ineach of the three months ended March 31, 2008 and 2007, respectively.

 

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

 

Other current liabilities consist of the following (inthousands):

 
| ** **                                         | ** ** | **March 31,****2008** | ** ** | **December 31,****2007** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| Contingent share-settled obligation (1)            |       | $                          | —     |                          | $          | 30,000 |   |
| Accrued contract research and development expenses |       | 21,151                     |       | 20,107                        |       |
| Accrued rebate discounts                           |       | 24,780                     |       | 19,673                        |       |
| Accrued  property, plant and equipment additions   |       | 22,196                     |       | 15,559                        |       |
| Other accrued  sales allowances                    |       | 13,003                     |       | 13,989                        |       |
| Other current liabilities                          |       | 24,621                     |       | 23,596                        |       |
|                                               |       | $                          | 105,751    |                          | $          | 122,924 |   |

 

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(1)  Represents a liability for $30 million in convertiblemilestone payments received from Lilly that converted into approximately 0.8million shares the Company’s common stock during the quarter ended March 31,2008.

 

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

 

Statementof Financial Accounting Standards No. 130 (SFAS 130), “*Reporting Comprehensive Income,”* requires reporting and displaying comprehensive income (loss) andits components, which, for the Company, includes net loss and unrealized gainsand losses on investments. In accordance with SFAS 130, the accumulated balanceof other comprehensive income (loss) is disclosed as a separate component ofstockholders’ equity. For the three months ended March 31, 2008, and March 31,2007, the comprehensive loss consisted of (in thousands):

 
| ** **                             | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Net loss                               |       | $                                                    | (68,797    | ) | $ | (49,414 | ) |
| Other  comprehensive (loss) gain:      |       |                                                 |       |   |   |
| Unrealized (loss)  gain on investments |       | (3,145                                               | )          | 238 |   |
| Comprehensive  loss                    |       | $                                                    | (71,942    | ) | $ | (49,176 | ) |

 

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

 

In June 2007,the Company issued the 2007 Notes, which have an aggregate principal amount of$575 million, and are due June 15, 2014, in a private placement. The 2007Notes are senior unsecured obligations and rank equally with all other existingand future senior unsecured debt. The 2007 Notes bear interest at 3.0% peryear, payable in cash semi-annually, and are initially convertible into a totalof up to 9.4 million shares of common stock at a conversion price of $61.07 pershare, subject to the customary adjustment for stock dividends and otherdilutive transactions. In addition, if a “fundamental change” (as defined inthe associated indenture agreement) occurs prior to the maturity date, theCompany will in some cases increase the conversion rate for a holder of notesthat elects to convert its notes in connection with such fundamental change.The maximum conversion rate is 22.9252, which would result in a maximumissuance of 13.2 million shares of common stock if all holders converted at themaximum conversion rate.

 

The2007 Notes will be convertible into shares of the Company’s common stock unlessthe Company elects net-share settlement. If net-share settlement is elected bythe Company, the Company will satisfy the accreted value of the obligation incash and will satisfy the excess of conversion value over the accreted value inshares of the Company’s common stock based on a daily conversion value,determined in accordance with the associated indenture agreement, calculated ona proportionate basis for each day of the relevant 20-day observation period.Holders may convert the 2007 Notes only in the following circumstances and tothe following extent: (1) during the five business-day period after anyfive consecutive trading period (the measurement period) in which the tradingprice per note for each day of such measurement period was less than 97% of theproduct of the last reported sale price of the Company’s common stock and theconversion rate on each such day; (2) during any calendar quarter afterthe calendar quarter ending March 31, 2007, if the last reported saleprice of the Company’s common stock for 20 or more trading days in a period of30 consecutive trading days ending on the last trading day of the immediatelypreceding calendar quarter exceeds 130% of the applicable conversion price ineffect on the last trading day of the immediately preceding calendar quarter; (3) uponthe occurrence of specified events; and (4) the 2007 Notes will beconvertible at any time on or after April 15, 2014 through the scheduledtrading day immediately preceding the maturity date.

 

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Subjectto certain exceptions, if the Company undergoes a “designated event” (asdefined in the associated indenture agreement) including a “fundamental change,”holders of the 2007 Notes will, for the duration of the notes, have the optionto require the Company to repurchase all or any portion of their 2007 Notes.The designated event repurchase price will be 100% of the principal amount ofthe 2007 Notes to be purchased plus any accrued interest up to but excludingthe relevant repurchase date. The Company will pay cash for all notes sorepurchased. The Company may not redeem the Notes prior to maturity.

 

The2007 Notes have been registered under the Securities Act of 1933, as amended,to permit registered resale of the 2007 Notes and of the common stock issuableupon conversion of the 2007 Notes. Subject to certain limitations, the Company will be required to pay theholders of the 2007 Notes special interest on the 2007 Notes if the Companyfails to keep such registration statement effective during specified time periods.

 

In April 2004,the Company issued the 2004 Notes, which have an aggregate principal amount of$200 million, and are due April 15, 2011, in a private placement. The 2004Notes are senior unsecured obligations and rank equally with all other existingand future senior unsecured debt. The 2004 Notes bear interest at 2.5% peryear, payable in cash semi-annually and are convertible into a total of up to5.8 million shares of common stock at a conversion price of $34.35 per share,subject to customary adjustments for stock dividends and other dilutivetransactions. The Company may not redeem the 2004 Notes prior to maturity.

 

Upon achange in control, the holders of the 2004 Notes may elect to require theCompany to re-purchase the 2004 Notes. The Company may elect to pay thepurchase price in common stock instead of cash, or a combination thereof. Ifpaid with common stock the number of shares of common stock a holder willreceive will be valued at 95% of the closing prices of the Company’s commonstock for the five-day trading period ending on the third day before thepurchase date.

 

The2004 Notes have been registered under the Securities Act of 1933, as amended,to permit registered resale of the 2004 Notes and of the common stock issuableupon conversion of the 2004 Notes.

 

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

 

In December 2007,the Company****entered into a $140 million credit agreement with Bankof America, N.A., as administrative agent, collateral agent and letter ofcredit issuer, Silicon Valley Bank and RBS Asset Finance, Inc., assyndication agents, and Comerica Bank and BMO Capital Markets Financing, Inc.,as documentation agents.  The credit agreement provides for a $125 millionterm loan and a $15 million revolving credit facility.  The proceeds ofboth loans will be used for general corporate purposes.  The revolving credit facility also providesfor the issuance of letters of credit and foreign exchange hedging up to the$15 million borrowing limit.  The Companyhad an outstanding balance of $125.0 million under the term loan and had issued$5.9 million of stand-by letters of credit under the revolving credit facility,respectively, primarily in connection with office leases, at both March 31,2008 and December 31, 2007.

 

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 12. Interest on the term loan will be paid quarterly on the unpaid principalbalance at 1.75% above the London Interbank Offered Rate, or LIBOR, based onthe Company’s election of either one, two, three, or six months LIBOR term, andpayable at the end of the selected interest period but no less frequently thanquarterly as of the first business day of the quarter prior to the period inwhich the quarterly installment is due. The Company has elected to use the three month LIBOR, which was 2.73%and 4.85% at March 31, 2008 and December 31, 2007, respectively.  Interest periods on the revolving creditfacility may be either one, two, three, or six months, and payable at the endof the selected interest period but no less frequently than quarterly, and theinterest rate will be either LIBOR plus 1.0% or the Bank of America prime rate,as selected by the Company.  Both loanshave a final maturity date of December 21, 2010.

 

The creditagreement contains certain covenants, including a requirement to maintainminimum unrestricted cash and cash equivalents, as defined in the agreement, inexcess of $400 million, and events of default that permit the administrativeagent to accelerate the Company’s outstanding obligations if not cured withinapplicable grace periods, including nonpayment of principal, interest, fees orother amounts, violation of covenants, inaccuracy of representations andwarranties, and default under other indebtedness.  In addition, the creditagreement provides for automatic acceleration upon the occurrence of bankruptcyand other insolvency events.  There is anannual commitment fee associated with the revolving 

 

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credit facility of 0.25%.

 

Maturities of long-term note payable for years endingafter March 31, 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, the first reset date being March 21, 2008.  Payments will be made on the 21stof each March, June, September, and December, commencing on March 21, 2008for the period December 21, 2007 through March 21, 2008.  The Company determined that the interest rateswap agreement is defined as Level 2 in the fair value hierarchy. As of March 31,2008, the fair value of the interest rate swap agreement was a liability of$4.1 million and the recognized loss on the interest rate swap for the threemonths ended March 31, 2008 was $3.7 million.  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.

 

**9.     Stockholders’ Equity**

 

In March 2008, theCompany contributed approximately 0.7 million newly issued shares of its commonstock, valued at $24.87 per share, to the Company’s ESOP for amounts earned byparticipants during the year ended December 31, 2007.

 

In February 2008,the Company contributed approximately 0.1 million newly issued shares of its commonstock, at $37.00 per share, to the Company’s 401(k) plan for amountsearned by participants during the year ended December 31, 2007.

 

In February 2008,the Company issued approximately 0.8 million shares of its common stock toLilly, upon Lilly’s election to convert $30 million of development milestonepayments related to exenatide once weekly, received in 2007 at a conversion priceof $37.95, which represents the immediately preceding twenty dayaverage closing market price of the Company’s common stock on December 31,2007 in accordance with the Company and Lilly’s collaboration agreement forexenatide.

 

**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 March 31,2008, if all such milestones are successfully achieved, the potential futuremilestone and other contingency payments due under certain contractualagreements are approximately $312.9 million in aggregate, of which $4.0 millionare expected to be paid over 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 $57.2 million as of March 31, 2008, the majority ofwhich relate to BYETTA.

 

**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

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 and 

 

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finances, plans andobjectives for the future, future operating and economic performance and otherstatements regarding future performance. These statements are not guarantees offuture performance or events. Our actual results may differ materially fromthose discussed here. Factors that could cause or contribute to differences inour actual results include those discussed under the caption “CautionaryFactors That May Affect Future Results,” as well as those discussedelsewhere in this quarterly report on Form 10-Q or in our other publicdisclosures. You should consider carefully those cautionary factors, togetherwith all of the other information included in this quarterly report on Form 10-Q.Each of the cautionary factors, either alone or taken together, could adverselyaffect our business, operating results and financial condition, as well asadversely affect the value of an investment in our common stock. There may beadditional risks that we are not presently aware of or that we currentlybelieve are immaterial which could also impair our business and financialposition. 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.  We have developed and gained approval for twofirst-in-class medicines to treat diabetes, BYETTA® (exenatide)injection and SYMLIN® (pramlintide acetate) injection, both of whichwere commercially launched in the United States during the second quarter of2005.  BYETTA has also been approved inthe European Union, or EU, and our collaboration partner, Eli Lilly andCompany, or Lilly, launched BYETTA in 22 countries outside of the United Statesduring 2007.  We expect Lilly to continueto launch BYETTA in additional EU member states and other countries in 2008.

 

BYETTAis the first and only approved medicine in a new class of compounds calledincretin mimetics.  We began sellingBYETTA in the United States in June 2005. BYETTA is approved in the United States for the treatment of patientswith type 2 diabetes who have not achieved adequate glycemic control and areusing metformin, a sulfonylurea and/or a thiazolidinedone, or TZD, three commonoral therapies for type 2 diabetes.  Netproduct sales of BYETTA were $158.5 million and $146.5 million for the threemonths ended March 31, 2008 and 2007, respectively.

 

Wehave an agreement with Lilly for the global development and commercializationof exenatide.  This agreement includesBYETTA and any sustained-release formulations of exenatide such as exenatideonce weekly, our once weekly formulation of exenatide for the treatment of type2 diabetes.  Under the terms of theagreement, operating profits from products sold in the United States are sharedequally 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 100% of the costs related tocommercialization of all exenatide products for sale outside of the UnitedStates.

 

SYMLIN is the first and only approved medicine in a new class of compounds called amylinomimetics.  We began selling SYMLIN in the United States in April 2005.  SYMLIN is approved in the United States for the treatment of patients with either type 1 or type 2 diabetes who are treated with mealtime insulin but who have not achieved adequate glycemic control.  In January 2008, we commercially launched the SymlinPenTM 120 and SymlinPenTM 60 pen injector devices in the United States.  These new pre-filled pen-injector devices feature simple, fixed dosing to improve mealtime glucose control.  Net product sales of SYMLIN were $20.2 million and $15.5 million for the three months ended March 31, 2008 and 2007, respectively.

 

Wehave a field force of approximately 600 people dedicated to marketing BYETTAand SYMLIN in the United States.   Ourfield force includes our specialty and primary care sales forces, a managedcare and government affairs organization, a medical science organization anddiabetes care specialists.  In addition,Lilly co-promotes BYETTA in the United States and has primary responsibilityfor developing and commercializing BYETTA outside of the United States, and anysustained-release formulations of exenatide such as exenatide once weekly.

 

Inaddition to our marketed products, we are working with Lilly and Alkermes, Inc.,or Alkermes, to develop exenatide once weekly. We are also working with Alkermes and Parsons, Inc., or Parsons, onthe construction of a manufacturing facility for exenatide once weekly inOhio.  We are now manufacturing exenatideonce weekly at commercial scale in our facility in Ohio and we plan to beginsupplying ongoing and planned clinical trials with this material by the thirdquarter of 2008.  We are also workingaggressively to provide sufficient data to the United States Food and DrugAdministration, or FDA, to demonstrate comparability between exenatide onceweekly clinical trial material manufactured by our partner, 

 

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Alkermes, in its facilityand exenatide once weekly produced in our Ohio facility.

 

Wealso have other early stage programs for diabetes, obesity, and othertherapeutic areas.  We have a number ofcompounds in development for the potential treatment of obesity which are partof a broader clinical strategy which we refer to as INTO: IntegratedNeurohormonal Therapies for Obesity.  In March 2008,we licensed rights to sustained release technology from Pacira Pharmaceuticals, Inc.for the potential development of sustained release formulations of our earlystage obesity and other potential product candidates.

 

Wealso maintain an active discovery research program focused on novel peptidetherapeutics.  We are actively seeking toin-license additional drug candidates and we have made a number of strategicinvestments and collaborations for the potential development of additional drugcandidates.

 

Sinceour inception in September 1987, we have devoted substantially all of ourresources to our research and development programs and, more recently, to thecommercialization of our products. All of our revenues prior to May 2005were derived from fees and expense reimbursements under our BYETTAcollaboration agreement with Lilly, previous SYMLIN collaborative agreementsand previous co-promotion agreements. During the second quarter of 2005, webegan to derive revenues from product sales of BYETTA and SYMLIN. We have beenunprofitable since inception and may incur additional operating losses for atleast the next few years. At March 31, 2008, our accumulated deficit wasapproximately $1.5 billion.

 

At March 31,2008, we had $1.0 billion in cash, cash equivalents and short-terminvestments.  We may not generatepositive operating cash flows for at least the next few years and accordingly, we may need to raiseadditional funds from outside sources. 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.

 

**Application of Critical AccountingPolicies**

 

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, we evaluate ourestimates, and actual results, however, they may differ significantly from ourestimates.

 

Thefinancial information as of March 31, 2008, should be read in conjunctionwith the financial statements for the year ended December 31, 2007contained in our Form 10-K filed on February 27, 2008.

 

Therewere no significant changes in critical accounting policies from those at December 31,2007.  For a discussion of the Company’scritical accounting policies, see “Item 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations” in our Form 10-K filedon February 27, 2008.

 

**Resultsof Operations**

 

**ThreeMonths Ended March 31, 2008**

 

***Net Product Sales***

 

Netproduct sales for the three months ended March 31, 2008 and 2007 were$178.7 million and $162.0 million, respectively, and consisted of shipments ofBYETTA and SYMLIN, less allowances for product returns, rebates and wholesalerchargebacks, wholesaler discounts, and prescription vouchers.

 

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

 
| ** ** | ** ** | **Three months ended March 31,** | ** ** |
|------------|------------|------------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| BYETTA     |       | $                                                    | 158.5      |   | $ | 146.5 |   |
| SYMLIN     |       | 20.2                                                 |       | 15.5 |   |
|       |       | $                                                    | 178.7      |   | $ | 162.0 |   |

 

Theincreases in net product sales for BYETTA and SYMLIN in the current period,both of which were launched in the 

 

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United States during thesecond quarter of 2005, reflect continued growth in patient demand.

 

***Revenues Under Collaborative Agreements***

 

Revenues under collaborative agreements for the threemonths ended March 31, 2008 were $18.5****millioncompared to $10.0 million for the same period in 2007. Substantially all of therevenue recorded in these periods consists of amounts earned pursuant to ourBYETTA collaboration agreement with Lilly. The $8.5 million increase inrevenues under collaborative agreements in the current quarter compared to thesame period in 2007 reflects higher cost-sharing payments from Lilly dueprimarily to increased development expenses for exenatide once weekly. The followingtable summarizes the components of revenues under collaborative agreements forthe three months ended March 31, 2008 and 2007 (in millions):

 
| ** **                         | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Amortization of  up-front payments |       | $                                                | 1.1        |   | $ | 1.1 |   |
| Cost-sharing  payments             |       | 17.4                                             |       | 8.9 |   |
|                               |       | $                                                | 18.5       |   | $ | 10.0 |   |

 

In future periods, revenues under collaborativeagreements will consist of ongoing cost-sharing payments from Lilly for sharingof development costs, possible future milestone payments and the continued amortizationof the $30 million portion of the up-front payment received from Lilly uponsigning of our collaboration agreement in 2002. The amount of cost-sharingrevenue recorded will be dependent on the timing, extent and relativeproportion of total development costs for the exenatide once weekly and BYETTAdevelopment programs incurred by us and by Lilly. The receipt and recognitionas revenue of future milestone payments is subject to the achievement ofperformance requirements underlying such milestone payments.

 

***Cost of Goods Sold***

 

Costof goods sold for the three months ended March 31, 2008 and 2007 was $22.0million, representing a gross margin of 88%, and $15.2 million, representing agross margin of 91%, respectively, and is comprised primarily of manufacturingcosts associated with BYETTA and SYMLIN sales during the period. The decreasein gross margin for the three months ended March 31, 2008, compared to thesame period in 2007 primarily reflects increased product costs for BYETTA dueto lower production volumes, and product mix, including the introduction of theSymlinPen during the three months ended March 31, 2008, partially offsetby a higher net sales price per unit for BYETTA. Quarterly fluctuations ingross margins may be influenced by product mix, pricing, and the level of salesallowances.

 

***Selling, Generaland Administrative Expenses***

 

Selling,general and administrative expenses increased to $98.2 million for the threemonths ended March 31, 2008, from $87.8 million for the same period in 2007.The increase primarily reflects higher promotional expenses for BYETTA and  SYMLIN, increased expenses associated withour sales force, prelaunch education activities for exenatide once weekly, andincreased business infrastructure to support our growth.

 

***Research andDevelopment Expenses***

 

Ourresearch and development expenses are comprised of salaries, benefits andstock-based compensation, license fees, milestones under license agreements,costs paid to third-party contractors to perform research, conduct clinicaltrials, and develop drug materials and delivery devices, and a portion of ourfacilities costs. We charge direct internal and external program costs to therespective development programs. We also incur indirect costs that are notallocated to specific programs because such costs benefit multiple developmentprograms and allow us to increase our pharmaceutical development capabilities.These consist primarily of facilities costs and other internal shared resourcesrelated to the development and maintenance of systems and processes applicableto all of our programs.

 

Ourresearch and development efforts are focused on diabetes, obesity, and otherdiseases. We also maintain an active discovery 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 ofcompounds in development for the potential treatment of obesity which are partof a broader program which we refer to as INTO: Integrated NeurohormonalTherapies for Obesity. As part of this program, we are 

 

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currently conductingseveral 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 March 31,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                             | ** ** | **2007** | ** ** | **Increase  (Decrease)** | ** ** |
| Diabetes (1)                      |       | $                                                    | 37.7       |   | $ | 28.0 |   | $ | 9.7 |   |
| Obesity                           |       | 14.8                                                 |       | 13.9 |   | 0.9 |   |
| Research and early-stage programs |       | 13.4                                                 |       | 9.1 |   | 4.3 |   |
| Indirect costs                    |       | 11.3                                                 |       | 8.6 |   | 2.7 |   |
|                              |       | $                                                    | 77.2       |   | $ | 59.6 |   | $ | 17.6 |   |

 

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(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 $17.4 million and $8.9 million for the threemonths ended March 31, 2008 and 2007, respectively.

 

The $17.6 million increase in research and development expenses for thethree months ended March 31, 2008 as compared to the same period in 2007primarily reflects increased expenses of $9.7 million and $4.3 million for ourdiabetes programs and our research and early-stage programs, respectively. Theincrease in expenses for our diabetes programs primarily reflects increasedexpenses for exenatide once weekly including costs associated withmanufacturing scale up at third party manufacturers and at our manufacturingfacility in Ohio.  The increase inexpenses for our research and early-stage programs primarily reflects continuedinvestment in our early stage discovery and preclinical research programs.

 

***Collaborative Profit Sharing***

 

Collaborativeprofit sharing was $69.9 million and $66.9 million for the three months ended March 31,2008 and 2007, respectively, and consists of Lilly’s 50% share of the grossmargin for BYETTA in the United States. The $3.0 million increase in collaborative profit sharing for the threemonths ended March 31, 2008 as compared to the same period in 2007primarily reflects increased net product sales for BYETTA, partially offset byreduced gross margin for BYETTA.

 

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

 

Interestand other income consist primarily of interest income from investment of cashand other investments. Interest and other income increased to $11.0 million forthe three months ended March 31, 2008, from $9.4 million for the sameperiod in 2007. The increase primarily reflects higher average investmentbalances due to net proceeds of $559 million from our 2007 Notes issued in June 2007.

 

Interest and other expense consist primarily ofinterest expense resulting from our long-term debt obligations. Interestexpense in the three months ended March 31, 2008 consists of interest onour $775 million of outstanding convertible senior notes and our $125 millionof outstanding long-term note payable, and the amortization of associated debtissuance costs. Interestand other expense was $9.7 million and $1.3 million for the three months ended March 31,2008 and 2007, respectively. The increase reflects additional interest expensefor our 2007 Notes issued in June 2007 and long-term note payable enteredinto in December 2007 and recognized losses on an interest rate swapassociated with the long-term note payable.

 

***Net Loss***

 

Ournet loss for the three months ended March 31, 2008 was $68.8 millioncompared to a net loss of $49.4 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 and increased interest and other expense,partially offset by the increased net product sales and the increased revenuesunder collaborative agreements discussed above.

 

We mayincur operating losses for the next few years. Our ability to reachprofitability in the future will be heavily 

 

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dependent upon the amountof product sales that we achieve for BYETTA and SYMLIN. In addition, ongoingand potential increased expenses associated with the continuedcommercialization of BYETTA and SYMLIN, costs associated the development andcommercialization of exenatide once weekly, if approved, and expensesassociated with the potential expansion of our research and developmentprograms, including our obesity and early-stage development programs, andrelated support infrastructure, may impact our ability to reach profitability inthe future. Our operating results may fluctuate from quarter to quarter as aresult of differences in the timing of expenses incurred and revenuesrecognized.

 

# ***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 March 31,2008, we had $1.0 billion in cash, cash equivalents and short-term investments,compared to $1.1 billion at December 31, 2007.  We used cash of $14.0 million and $62.0million for our operating activities in the three months ended March 31,2008 and March 31, 2007, respectively.  Our cash used for operating activities in the three months ended March 31,2008 included sources of cash due to increases in current assets, includingdecreases in accounts receivable and inventories of $8.1 million and $2.1million, respectively and an increase in accounts payable of $17.1million.  The decrease in accountsreceivable reflects lower net product sales in the quarter ended March 31,2008 as compared to the quarter ended December 31, 2007. The increase inaccounts payable primarily reflects timing of cash disbursements.

 

Ourinvesting activities used cash of $93.1 million and provided cash of  $48.6 million in the three months ended March 31,2008 and March 31, 2007, respectively. Investing activities in both quarters consisted primarily of purchasesand sales of short-term investments and purchases of property, plant, andequipment.   Purchases of property,plant, and equipment increased to $86.4 million in the three months ended March 31,2008 from $81.2 million for the three months ended March 31, 2007.  Purchases of property plant and equipment inthe three months ended March 31, 2008 and 2007 consists primarily of costs associated with our Ohiomanufacturing facility for exenatide once weekly.   We are now manufacturing exenatideonce weekly at commercial scale in our facility in Ohio and we plan to beginsupplying ongoing and planned clinical trials with this material by the thirdquarter of 2008.  Through March 31,2008, we had expended approximately $347.1 million associated with theconstruction of this facility and we expect the total investment to beapproximately $500 million by the end of 2008, which includes costs associatedwith the construction of the facility, purchase and installation of equipmentand capitalized labor and materials required to validate the facility.  The full expansion of this project isdependent upon on the continued progress of exenatide once weekly through thedevelopment process.

 

Financingactivities provided cash of $6.6 million and $12.8 million in the three monthsended March 31, 2008 and March 31, 2007, respectively.  Financing activities in the first quarter2008 represent proceeds from the exercise of stock options and proceeds fromour employee stock purchase plan.

 

At March 31,2008, we had $200 million in aggregate principal amount of our 2.5% convertiblesenior notes due in 2011, or the 2004 Notes, and $575 million in aggregate principalamount of our 3.0% convertible senior notes due in 2014, or the 2007 Notes,outstanding. The 2004 Notes are currently convertible into a total of up to 5.8million shares of our common stock at approximately $34.35 per share and arenot redeemable at our option. The 2007 Notes are currently convertible into atotal of up to 9.4 million shares of our common stock at approximately $61.07per share and are not redeemable at our option.

 

In December 2007, we****enteredinto a $140 million credit agreement.  Thecredit agreement provides for a $125 million term loan and a $15 millionrevolving credit facility.  The revolving credit facility also providesfor the issuance of letters of credit and foreign exchange hedging up to the$15 million borrowing limit.  The termloan is repayable on a quarterly basis, with no principal payments due quartersone through four, 6.25% of the outstanding principal due quarters five througheleven, and 56.25% of the outstanding principal due in quarter twelve.  At March 31, 2008 we had an outstandingbalance of $125.0 million under the term loan and had issued $5.9 million ofstand-by letters of credit under the revolving credit facility.  Both loans have a final maturity date of December 21,2010.  Interest on the term loan is payablequarterly in arrears at a rate equal to 1.75% above the London InterbankOffered Rate, or LIBOR, of either one, two, three, or six months LIBOR term atour election.  We have entered into aninterest rate swap agreement which resulted in a net fixed interest rate of5.717% under the term loan.  The interestrate on the credit facility is either LIBOR plus 1.0% or the Bank of Americaprime rate, at our election.

 

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Thefollowing table summarizes our contractual obligations and maturity dates as ofMarch 31, 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                  |       | 129,625                                   |       | 22,250 |   | 44,500 |   | 37,000 |   | 25,875 |   |
| Long-term note payable                                           |       | 125,000                                   |       | 7,812 |   | 117,188 |   | — |   | — |   |
| Interest on long-term note payable, net of swap transactions (1) |       | 16,526                                    |       | 7,147 |   | 9,379 |   | — |   | — |   |
| Inventory purchase obligations(2)                                |       | 136,399                                   |       | 83,196 |   | 49,573 |   | 3,630 |   | — |   |
| Operating lease obligations                                      |       | 130,647                                   |       | 18,592 |   | 30,039 |   | 30,651 |   | 51,365 |   |
| Total(3)                                                         |       | $                                         | 1,313,197  |   | $ | 138,997 |   | $ | 250,679 |   | $ | 271,281 |   | $ | 652,240 |   |

 

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(1) The interest paymentsshown were calculated using a rate of 5.717%, the net rate from the term loanand interest rate swap, on the outstanding principal balance of the term loan

 

(2)   Includes $86.8 million of outstandingpurchase orders, cancelable by us upon 30 days’ written notice, subject toreimbursement of costs incurred through the date of cancellation.

 

(3)   Excludes long-term obligation of $8.4 millionrelated to deferred compensation, the payment of which is subject to electionsmade by participants that are subject to change.

 

Inaddition, under certain license and collaboration agreements we are required topay royalties and/or milestone payments upon the successful development andcommercialization of related products. We expect to make development milestone payments up to $4.0 millionassociated with licensing agreements in the next 12 months.  Additional milestones of up to approximately$312.9 million could be paid over the next ten to fifteen years if developmentand commercialization of all our early stage programs continue and aresuccessful.  The significant majority ofthese 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 capital requirements will depend on manyfactors, including: the amount of product sales we achieve for BYETTA andSYMLIN; costs associated with the continued commercialization of BYETTA andSYMLIN; costs associated 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 ourinfrastructure; our ability to receive or need to make milestone payments; ourability, and the extent, to which we establish collaborative arrangements forSYMLIN or any of our product candidates; progress in our research anddevelopment programs and the magnitude of these programs; costs involved inpreparing, filing, prosecuting, maintaining, enforcing or defending ourpatents; competing technological and market developments; and costs ofmanufacturing, including costs associated with establishing our ownmanufacturing capabilities or obtaining and validating additional manufacturersof our products; and scale-up costs for our drug candidates.

 

**ITEM 3.**** ****Quantitative and Qualitative Disclosures about Market Risk**

 

Weinvest our excess cash primarily in United States Government securities,securities of agencies sponsored by the United States Government, asset-backedsecurities, mortgage-backed securities and debt instruments of financialinstitutions and corporations with strong credit ratings.  Theseinstruments have various short-term maturities, and therefore the risk of lossdue to interest rate risk is considered to be low.  We do not invest inauction rate securities.  We mitigate certain financial exposures,including currency risk and interest rate risk, through a controlled program ofrisk management that includes the use of derivative financial instruments,however we do not utilize such instruments 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 tosignificant swings in valuation as interest rates on a majority of our debt arefixed.  The fair value of our 2004 Notes and 2007 Notes at March 31,2008 was approximately $219 million and $485 million, respectively.  Ahypothetical 1% adverse move in interest

 

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rates along the entireinterest rate yield curve would not materially affect the fair value of ourfinancial instruments that are exposed to changes in interest rates.

 

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

 

As of March 31,2008, 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 March 31, 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 controlsand procedures 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 alsoperformed under the supervision and with the participation of our management,including our CEO and CFO, of any change in our internal control over financialreporting that occurred during our last fiscal quarter and that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting. That evaluation did not identify any change in ourinternal control over financial reporting that occurred during our latestfiscal quarter and that has materially affected, or is reasonably likely toaffect, our internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**Item1A.  Risk Factors**

 

**CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS**

** **

The following sets forthcautionary factors that may affect our future results, including clarificationsto the cautionary factors included in our Annual Report on Form 10-K forthe fiscal year ended December 31, 2007.

 

***We have a history of operating losses, anticipate futurelosses and may never become profitable.***

 

We have experiencedsignificant operating losses since our inception in 1987, including losses of$68.8 million for the three months ended March 31, 2008, $211.1 million in2007, $218.9 million in 2006 and $206.8 million in 2005.  As of March 31, 2008, we had anaccumulated deficit of approximately $1.5 billion.  The extent of our future losses and thetiming of potential profitability are uncertain, and we may never achieveprofitable operations.  We have beenengaged in discovering and developing drugs since inception, which hasrequired, and will 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 as we continue toexpand our commercial function for BYETTA and SYMLIN and our research anddevelopment activities for the other drug candidates in our developmentpipeline.  These losses, among otherthings, have had and will have an adverse effect on our stockholders’ equityand working capital.  Even if we becomeprofitable, we may not remain profitable.

 

***We began selling, marketing and distributing our firstproducts, BYETTA and SYMLIN, in 2005 and we will depend heavily on the successof those products in the marketplace.***

 

Prior to the launch ofBYETTA and SYMLIN in 2005, we had never sold or marketed our own products.  Our ability to generate product revenue forthe next few years will depend solely on the success of these products.  The ability of BYETTA and SYMLIN to generaterevenue at the levels we expect will depend on many factors, including thefollowing:

 

·              acceptance of and ongoing satisfactionwith these first-in-class medicines in the United States and foreign markets bythe medical community, patients receiving therapy and third party payors;

 

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·              a satisfactory efficacy and safety profile asdemonstrated in a broad patient population;

 

·              successfully expanding and sustaining manufacturingcapacity to meet demand;

 

·              safety concerns in the marketplace for diabetestherapies;

 

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

 

·              our ability to expand the indications for which we canmarket the products.

 

***If we encounter safety issues with BYETTA or SYMLIN or anyother drugs we market or fail to comply with extensive continuing regulationsenforced by domestic and foreign regulatory authorities, it could cause us todiscontinue marketing those drugs, reduce our revenues and harm our ability togenerate future revenues, which would negatively impact our financial position.***

 

BYETTA and SYMLIN, inaddition to any other of our drug candidates that may be approved by the FDA,will be subject to continual review by the FDA, and we cannot assure you thatnewly discovered or developed safety issues will not arise.  With the use of any of our marketed drugs bya wide patient population, serious adverse events may occur from time to timethat initially do not appear to relate to the drug itself, and only if thespecific event occurs with some regularity over a period of time does the drugbecome suspect as having a causal relationship to the adverse event.  Any safety issues could cause us to suspendor cease marketing of our approved products, subject us to substantial liabilities,and adversely affect our revenues and financial condition.

 

Moreover, the marketingof our approved products will be subject to extensive regulatory requirementsadministered by the FDA and other regulatory bodies, including adverse eventreporting requirements and the FDA’s general prohibition against promotingproducts for unapproved uses.  Themanufacturing facilities for our approved products are also subject tocontinual review and periodic inspection and approval of manufacturingmodifications.  Manufacturing facilitiesthat manufacture drug products for the United States market, whether they arelocated inside or outside the United States, are subject to biennialinspections by the FDA and must comply with the FDA’s current goodmanufacturing practice, or cGMP, regulations. The FDA stringently applies regulatory standards for manufacturing.  Failure to comply with any of thesepost-approval requirements can, among other things, result in warning letters,product seizures, recalls, fines, injunctions, suspensions or revocations ofmarketing licenses, operating restrictions and criminal prosecutions.  Any of these enforcement actions, anyunanticipated changes in existing regulatory requirements or the adoption ofnew requirements, or any safety issues that arise with any approved products,could adversely affect our ability to market products and generate revenues andthus adversely affect our ability to continue our business.

 

The manufacturers of ourproducts and drug candidates also are subject to numerous federal, state, localand foreign laws relating to such matters as safe working conditions,manufacturing practices, environmental protection, fire hazard control andhazardous substance disposal.  In thefuture, our manufacturers may incur significant costs to comply with those lawsand regulations, which could increase our manufacturing costs and reduce ourability to operate profitably.

 

***We currently do not manufacture our own drug products ordrug candidates and may not be able to obtain adequate supplies, which couldcause delays, subject us to product shortages, or reduce product sales.***

 

The manufacturing ofsufficient quantities of newly-approved drug products and drug candidates is atime-consuming and complex process.  Wecurrently have no manufacturing capabilities. In order to successfully commercialize our products, including BYETTAand SYMLIN, and continue to develop our drug candidates, including exenatideonce weekly, we rely on various third parties to provide the necessarymanufacturing.

 

There are a limited numberof manufacturers that operate under the FDA’s cGMP regulations capable ofmanufacturing for us.  In addition, thereare a limited number of bulk drug substance suppliers, cartridge manufacturersand disposable pen manufacturers.  If weare not able to arrange for and maintain third-party manufacturing oncommercially reasonable terms, or we lose one of our sole source suppliers usedfor our existing products or for some components of our manufacturing processesfor our products or drug candidates, we may not be able to market our productsor complete development of our drug candidates on a timely basis, if at all.

 

Reliance on third-partysuppliers limits our ability to control certain aspects of the manufacturingprocess and therefore exposes us to a variety of significant risks, including,but not limited to, risks to our ability to commercialize our products orconduct clinical trials, risks of reliance on the third-party for regulatorycompliance and quality assurance, third-party refusal to supply on a long-termbasis, or at all, the possibility of breach of the manufacturing agreement bythe third-party and the 

 

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possibility of termination or non-renewal of theagreement by the third-party, based on its business priorities, at a time thatis costly or inconvenient for us.  If anyof these risks occur, our product supply will be interrupted resulting in lostor delayed revenues and delayed clinical trials.  Our reliance on third-party manufacturers forthe production of our two commercial products is described in more detailbelow.

 

We rely on BachemCalifornia, or Bachem, and Mallinckrodt, Inc., or Mallinckrodt, tomanufacture our long-term commercial supply of bulk exenatide, the activeingredient in BYETTA.  In addition, werely on single-source manufacturers for some of our raw materials used byBachem 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 andLonza Ltd. to manufacture our commercial supply of bulk pramlintide acetate,the active ingredient contained in SYMLIN. In addition, we rely on Baxter to manufacture the dosage form of SYMLINin vials.  We recently received FDA approvalof a disposable pen for the delivery of SYMLIN in cartridges.  We rely on Wockhardt for the dosage form ofSYMLIN in cartridges and Ypsomed AG to manufacture the components for theSYMLIN disposable pen. We also rely on Hollister-Stier Laboratories LLC for theassembly of the SYMLIN pen.

 

If any of our existing orfuture manufacturers cease to manufacture or are otherwise unable to timelydeliver sufficient quantities of BYETTA or SYMLIN, in either bulk or dosageform, or other product components, including pens for the delivery of theseproducts, it could disrupt our ability to market our products, subject us toproduct shortages, reduce product sales and/or reduce our profit margins.  Any delay or disruption in the manufacturingof bulk product, the dosage form of our products or other product components,including pens for delivery of our products, could also harm our reputation inthe medical and patient communities.  Inaddition, we may need to engage additional manufacturers so that we will beable to continue our commercialization and development efforts for these productsor drug candidates.  The cost and time toestablish these new manufacturing facilities would be substantial.

 

Our manufacturers havenot produced BYETTA or SYMLIN for commercial use for a sustained period oftime.  As such, additional unforeseeablerisks may be encountered as we, together with our manufacturers, continue todevelop familiarity and experience with regard to manufacturing ourproducts.  Furthermore, we and the othermanufacturers used for our drug candidates may not be able to produce suppliesin commercial quantities if our drug candidates are approved.  While we believe that business relationsbetween us and our manufacturers are generally good, we cannot predict whetherany of the manufacturers that we may use will meet our requirements forquality, quantity or timeliness for the manufacture of bulk exenatide orpramlintide 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.

 

Inorder to manufacture exenatide once weekly on a commercial scale, if it isapproved by the FDA, we must design, construct, and commission a new facilityand validate the manufacturing process. We are dependent on Alkermes and Parsons to assist us in the design,construction and commissioning of the manufacturing facility.  We have never established, validated, andoperated a manufacturing facility and cannot assure you that we will be able tosuccessfully establish or operate such a facility in a timely or economicalmanner, or at all.  In addition, we aredependent on Alkermes to successfully develop and transfer to us its technologyfor manufacturing exenatide once weekly and to supply us with commercialquantities of the polymer required to manufacture exenatide once weekly.  We also will need to obtain sufficientsupplies of diluents, solvents, devices, packaging and other componentsnecessary 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 commercialscale.  If we are unable to demonstratecomparability of product, we may not be able to commercially launch exenatideonce weekly in a timely manner or at all.

 

***Our ability to generate revenues will be diminished if wefail to obtain acceptable prices or an adequate level of reimbursement for ourproducts from third-party payors.***

 

The continuing efforts ofgovernment, private health insurers and other third-party payors to contain orreduce the costs of health care through various means, including efforts toincrease the amount of patient co-pay obligations, may limit our commercialopportunity.  In the United States, weexpect that there will continue to be a number of federal and state proposalsto implement government control over the pricing of prescriptionpharmaceuticals.  In addition, increasingemphasis on managed care in the United States will continue to put pressure onthe rate of adoption and pricing of pharmaceutical products.

 

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Significant uncertaintyexists as to the reimbursement status of health care products.  Third-party payors, including Medicare, arechallenging the prices charged for medical products and services.  Government and other third-party payorsincreasingly are attempting to contain health care costs by limiting bothcoverage and the level of reimbursement for new drugs and by refusing toprovide coverage for uses of approved products for disease indications forwhich 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 payors do not provide adequate coverage and reimbursementlevels for our products, the market acceptance of these products may bereduced.

 

***Competition in the biotechnology and pharmaceuticalindustries may result in competing products, superior marketing of otherproducts and lower revenues or profits for us.***

 

There are many companiesthat are seeking to develop products and therapies for the treatment ofdiabetes and other metabolic disorders. Our competitors include multinational pharmaceutical and chemicalcompanies, specialized biotechnology firms and universities and other researchinstitutions.  A number of our largestcompetitors, including AstraZeneca, Bristol-Myers Squibb, GlaxoSmithKline,Lilly, Merck & Co., Novartis, Novo Nordisk, Pfizer, Sanofi-Aventis andTakeda Pharmaceuticals, are pursuing the development or marketing ofpharmaceuticals that target the same diseases that we are targeting, and it ispossible that the number of companies seeking to develop products and therapiesfor the treatment of diabetes, obesity and other metabolic disorders willincrease.  Many of our competitors havesubstantially greater financial, technical, human and other resources than wedo and may be better equipped to develop, manufacture and markettechnologically superior products.  Inaddition, many of these competitors have significantly greater experience thanwe do in undertaking preclinical testing and human clinical studies of newpharmaceutical products and in obtaining regulatory approvals of humantherapeutic products.  Accordingly, ourcompetitors may succeed in obtaining FDA approval for superior products.  Furthermore, now that we have received FDAapproval for BYETTA and SYMLIN, we may also be competing against othercompanies with respect to our manufacturing and product distribution efficiencyand sales and marketing capabilities, areas in which we have limited or noexperience as an organization.

 

Our target patientpopulation for BYETTA includes people with diabetes who have not achievedadequate glycemic control using metformin, sulfonylurea and/or a TZD, threecommon oral therapies for type 2 diabetes. Our target population for SYMLIN is people with either type 2 or type 1diabetes whose therapy includes multiple mealtime insulin injectionsdaily.  Other products are currently indevelopment or exist in the market that may compete directly with the productsthat we are developing or marketing. Various other products are available or in development to treat type 2diabetes, 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, severalcompanies are developing various approaches to improve treatments for type 1and type 2 diabetes. We cannot predict whether our products will havesufficient advantages to cause health care professionals to adopt them overother products or that our products will offer an economically feasiblealternative to other products.  Ourproducts could become obsolete before we recover expenses incurred indeveloping these products.

 

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***Delays in the conduct or completion of our clinical trials,the analysis of the data from our clinical trials or our manufacturing scale-upactivities may result in delays in our planned filings for regulatoryapprovals, and may adversely affect our ability to enter into new collaborativearrangements.***

 

We cannot predict whetherwe will encounter problems with any of our completed, ongoing or plannedclinical studies that will cause us to delay or suspend our ongoing and plannedclinical studies, delay the analysis of data from our completed or ongoingclinical studies or perform additional clinical studies prior to receivingnecessary regulatory approvals.  We alsocannot predict whether we will encounter delays or an inability to create manufacturingprocesses for drug candidates that allow us to produce drug product insufficient quantities to be economical, otherwise known as manufacturingscale-up.

 

If the results of ourongoing or planned clinical studies for our drug candidates are not availablewhen we expect or if we encounter any delay in the analysis of data from ourclinical studies or if we encounter delays in our ability to scale-up ourmanufacturing processes:

 

·              we may be unable to complete ourdevelopment programs for exenatide once weekly or our obesity clinical trials;

 

·              wemay have to delay or terminate our planned filings for regulatory approval;

 

·              we may not have the financial resourcesto continue research and development of any of our drug candidates; and

 

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

 

In addition, Lilly canterminate our collaboration for the development and commercialization of BYETTAand sustained-release formulations of exenatide at any time on 60 days’ notice.

 

Any of the followingcould delay the completion of our ongoing and planned clinical studies:

 

·              ongoing discussions with the FDA orcomparable foreign authorities regarding the scope or design of our clinicaltrials;

 

·              delaysin enrolling volunteers;

 

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

 

·              negativeresults of clinical studies;

 

·              insufficient supply or deficient qualityof drug candidate materials or other materials necessary for the performance ofclinical trials;

 

·              our inability to reach agreement withLilly regarding the scope, design, conduct or costs of clinical trials withrespect to BYETTA, exenatide once weekly or nasal exenatide; or

 

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

 

***We are substantially dependent on our collaboration withLilly for the development and commercialization of BYETTA and dependent onLilly and Alkermes for the development of exenatide once weekly.***

 

We have entered into acollaborative arrangement with Lilly, who currently markets diabetes therapiesand is developing additional diabetes drug candidates, to commercialize BYETTAand further develop sustained-release formulations of BYETTA, includingexenatide once weekly.  We entered intothis collaboration in order to:

 

·              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 cannotcontrol the amount and timing of resources that Lilly may devote to ourcollaboration.  If Lilly fails to assistin the further development of exenatide once weekly or the commercialization ofBYETTA, or if Lilly’s efforts are not effective, our business may be negativelyaffected.  We are relying on Lilly toobtain regulatory approvals for and successfully commercialize BYETTA andexenatide once weekly outside the United States.  Our collaboration with Lilly 

 

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may not continue or result in additional successfullycommercialized drugs.  Lilly canterminate our collaboration at any time upon 60 days’ 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.

 

***If our patents are determined to beunenforceable or if we are unable to obtain new patents based on current patentapplications or for future inventions, we may not be able to prevent othersfrom using our intellectual property.  Ifwe are unable to obtain licenses to third party patent rights for required technologies,we could be adversely affected.***

 

We ownor hold exclusive rights to many issued United States patents and pendingUnited States patent applications related to the development andcommercialization of exenatide, including BYETTA and exenatide once weekly,SYMLIN and our other drug candidates. These patents and applications cover composition-of-matter, medicalindications, methods of use, formulations and other inventive results.  We have issued and pending applications forformulations of BYETTA and exenatide once weekly, but we do not have acomposition-of-matter patent covering exenatide.  We also own or hold exclusive rights tovarious foreign patent applications that correspond to issued United States patentsor pending United States patent applications.

 

Oursuccess will depend in part on our ability to obtain patent protection for ourproducts and drug candidates and technologies both in the United States andother countries.  We cannot guaranteethat any patents will issue from any pending or future patent applicationsowned by or licensed to us. Alternatively, a third party may successfully challenge or circumventour patents.  Our rights under any issuedpatents may not provide us with sufficient protection against competitiveproducts or otherwise cover commercially valuable products or processes.  In addition, because patent applications inthe United States are maintained, in general, in secrecy for eighteen monthsafter the 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.

 

Wealso rely upon licensing opportunities for some of our technologies.  We cannot be certain that we will not loseour rights to certain patented technologies under existing licenses or that wewill be able to obtain a license to any required third-party technology.  If we lose our licensed technology rights orif we are not able to obtain a required license, we could be adverselyaffected.

 

***We may be unable to obtain regulatoryclearance to market our drug candidates in the United States or foreigncountries on a timely basis, or at all.***

 

Ourdrug candidates are subject to extensive government regulations related todevelopment, clinical trials, manufacturing and commercialization.  The process of obtaining FDA and otherregulatory approvals is costly, time-consuming, uncertain and subject tounanticipated delays.  Regulatoryauthorities may refuse to approve an application for approval of a drugcandidate 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 fromour clinical trials may not be sufficient to support approval of our drugcandidates or additional or expanded indications by the FDA or any foreignregulatory authorities.  Biotechnologystock prices have declined significantly in certain instances where companieshave failed to meet expectations with respect to FDA approval or the timing forFDA approval.  If the FDA’s or anyforeign regulatory authority’s response is delayed or not favorable for any ofour drug candidates, our stock price could decline significantly.

 

24

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Moreover, manufacturingfacilities operated by the third-party manufacturers with whom we may contractto manufacture our unapproved drug candidates may not pass an FDA or otherregulatory authority preapproval inspection. Any failure or delay in obtaining these approvals could prohibit ordelay us or any of our business partners from marketing these drug candidates.

 

Consequently, even if webelieve that preclinical and clinical data are sufficient to support regulatoryapproval for our drug candidates, the FDA and foreign regulatory authoritiesmay not ultimately approve our drug candidates for commercial sale in anyjurisdiction.  If our drug candidates arenot approved, our ability to generate revenues may be limited and our businesswill be adversely affected.

 

***Litigation regarding patents and other proprietary rightsmay be expensive, cause delays in bringing products to market and harm ourability to operate.***

 

Our success will depend in part on our ability tooperate without infringing the proprietary rights of third parties andpreventing others from infringing our patents. Challenges by pharmaceutical companies against the patents ofcompetitors are common.  Legal standardsrelating to the validity of patents covering pharmaceutical andbiotechnological inventions and the scope of claims made under these patentsare still developing.  As a result, ourability to obtain and enforce patents is uncertain and involves complex legaland factual questions.  Third parties maychallenge, in courts or through patent office proceedings, or infringe upon,existing or future patents.  In the eventthat a third party challenges a patent, a court or patent office may invalidatethe patent or determine that the patent is not enforceable.  Proceedings involving our patents or patentapplications or those of others could result in adverse decisions about:

 

·              the patentability of our inventions, products and drugcandidates; and/or

 

·              the enforceability, validity or scope of protectionoffered by our patents.

 

The manufacture, use or sale of any of our productsor drug candidates may infringe on the patent rights of others.  If we are unable to avoid infringement of thepatent rights of others, we may be required to seek a license, defend aninfringement action or challenge the validity of the patents in court. Patentlitigation is costly and time consuming. We may not have sufficient resources to bring these actions to asuccessful conclusion.  In addition, ifwe do not obtain a license, develop or obtain non-infringing technology, failto successfully defend an infringement action or have infringing patentsdeclared invalid, we may:

 

·              incur substantial monetary damages;

 

·              encounter significant delays in bringing our drug candidatesto market; and/or

 

·              be precluded from participating in the manufacture,use or sale of our products or drug candidates or methods of treatmentrequiring licenses.

 

***We are subject to “fraud and abuse” andsimilar laws and regulations, and a failure to comply with such regulations orprevail in any litigation related to noncompliance could harm our business.***

 

Upon approval of BYETTAand SYMLIN by the FDA, we became subject to various health care “fraud andabuse” laws, such as the Federal False Claims Act, the federal anti-kickbackstatute and other state and federal laws and regulations.  Pharmaceutical companies have faced lawsuitsand investigations pertaining to violations of these laws and regulations.  We cannot guarantee that measures that wehave taken to prevent such violations, including our corporate complianceprogram, will protect us from future violations, lawsuits orinvestigations.  If any such actions areinstituted against us, and we are not successful in defending ourselves or assertingour rights, those actions could have a significant impact on our business,including the imposition of significant fines or other sanctions.

 

***Our financial results will fluctuate, and these fluctuationsmay cause our stock price to fall.***

 

Forecasting futurerevenues is difficult, especially since we launched our first products in 2005and when the level of market acceptance of these products may changerapidly.  In addition, our customer baseis highly concentrated with four customers accounting for most of our netproduct sales.  Fluctuations in thebuying 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 notmeet with market expectations and that also may adversely affect our stockprice.  There are a number of 

 

25

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other factors that could cause our financial resultsto fluctuate unexpectedly, including:

 

·              product sales;

 

·              cost of product sales;

 

·              achievement and timing of research and developmentmilestones;

 

·              collaboration revenues;

 

·              cost and timing of clinical trials, regulatoryapprovals and product launches;

 

·              marketing and other expenses;

 

·              manufacturing or supply issues; and

 

·              potential acquisitions of businesses and technologiesand our ability to successfully integrate any such acquisitions into ourexisting business.

 

***We may require additional financing in the future, which maynot be available to us on favorable terms, or at all.***

 

We intend to use ouravailable cash for:

 

·              Commercialization of BYETTA and SYMLIN;

 

·              Establishment of additional manufacturing sources,including our Ohio manufacturing facility;

 

·              Development of exenatide once weekly and otherpipeline candidates;

 

·              Executing our INTO strategy;

 

·              Our other research and development activities;

 

·              Other operating expenses;

 

·              Potential acquisitions or investments in complementarytechnologies or businesses; and

 

·              Other general corporate purposes.

 

We may also be requiredto use our cash to pay principal and interest on outstanding debt, including a$125 million term loan due in 2010 and $775 million in outstanding principalamount of convertible senior notes, of which $200 million is due in 2011,referred to as the 2004 Notes, and $575 million is due in 2014, referred to asthe 2007 Notes.

 

***Our business has a substantial risk of product liabilityclaims, and insurance may not be adequate to cover these claims.***

 

Our business exposes usto potential product liability risks that are inherent in the testing,manufacturing and marketing of human therapeutic products.  Product liability claims could result in theimposition of substantial liability on us, a recall of products, or a change inthe indications for which they may be used. We currently have limited product liability insurance coverage.  We cannot assure you that our insurance willprovide adequate coverage against potential liabilities.

 

***Our ability to enter into and maintain third-partyrelationships is important to our successful development and commercializationof BYETTA, SYMLIN and our other drug candidates and to our potentialprofitability.***

 

With respect to sales,marketing and distribution outside the United States, we will be substantiallydependent on Lilly for activities relating to BYETTA and sustained-releaseformulations of BYETTA, including exenatide once weekly.  We believe that we will likely need to enterinto marketing and distribution arrangements with third parties for, or find acorporate partner who can provide support for, the development and commercializationof SYMLIN or our other drug candidates outside the United States.  We may also enter into arrangements withthird parties for the commercialization of 

 

26

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SYMLIN or any of our other drug candidates within theUnited States.

 

With respect to BYETTAand, if approved, exenatide once weekly, Lilly is co-promoting within theUnited States.  If Lilly ceasedcommercializing BYETTA or, if approved, exenatide once weekly, for any reason,we would likely need to either enter into a marketing and distributionarrangement with a third party for those products or significantly increase ourinternal sales and commercialization infrastructure.

 

We may not be able toenter into marketing and distribution arrangements or find a corporate partnerfor SYMLIN or our other drug candidates as we deem necessary.  If we are not able to enter into a marketingor distribution arrangement or find a corporate partner who can provide supportfor commercialization of our drug candidates as we deem necessary, we may notbe able to successfully perform these marketing or distributionactivities.  Moreover, any new marketeror distributor or corporate partner for our drug candidates, including Lilly,with whom we choose to contract may not establish adequate sales anddistribution capabilities or gain market acceptance for our products, if any.

 

***We have a significant amount of indebtedness.  We may not be able to make payments on ourindebtedness, and we may incur additional indebtedness in the future, whichcould adversely affect our operations.***

 

In April 2004, weissued $200 million of the 2004 Notes and in June 2007, we issued $575million of the 2007 Notes.  In December 2007,we entered into a $125 million term loan due in December 2010, or the TermLoan.  Our ability to make payments onour debt, including the 2004 and 2007 Notes and the Term Loan, will depend onour future operating performance and ability to generate cash and may alsodepend on our ability to obtain additional debt or equity financing. During eachof the last five years, our operating cash flows were negative and insufficientto cover our fixed charges.  We may needto use our cash to pay principal and interest on our debt, thereby reducing thefunds available to fund our research and development programs, strategicinitiatives and working capital requirements. Our ability to generate sufficient operating cash flow to service ourindebtedness, including the 2004 and 2007 Notes and the Term Loan, and fund ouroperating requirements will depend on our ability, alone or with others, tosuccessfully develop, manufacture, obtain required regulatory approvals for andmarket our drug candidates, as well as other factors, including generaleconomic, financial, competitive, legislative and regulatory conditions, someof which are beyond our control.  Ourdebt service obligations increase our vulnerabilities to competitive pressures,because many of our competitors are less leveraged than we are.  If we are unable to generate sufficientoperating cash flow to service our indebtedness and fund our operatingrequirements, we may be forced to reduce or defer our development programs,sell assets or seek additional debt or equity financing, which may not beavailable 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 required to redeem our convertible senior notesupon a designated event or repay the Term Loan upon an event of default.***

 

Holders of the 2004 and2007 Notes may require us to redeem all or any portion of their notes upon theoccurrence of certain designated events which generally involve a change incontrol of our company.  The lendersunder the Term Loan may require us to repay outstanding principal and accruedinterest due under the Term Loan upon the occurrence of an event of default,which could include, among other things, nonpayment of principle and interest,violation of covenants and a change in control. We may not have sufficient cash funds to redeem the notes upon adesignated event or repay the Term Loan upon an event of default.  We may elect, subject to certain conditions,to pay the redemption price for the 2004 Notes in our common stock or acombination of cash and our common stock. We may be unable to satisfy the requisite conditions to enable us to paysome or all of the redemption price for the 2004 Notes in our common stock.  In addition, although there are currently norestrictions on our ability to pay the redemption price under our existing debtagreements, future debt agreements may prohibit us from repaying the redemptionprice of either of the notes in either cash or common stock.  If we are prohibited from redeeming the 2004Notes or 2007 Notes, we could seek consent from our lenders to redeem thenotes.  If we are unable to obtain theirconsent, we could attempt to refinance the notes.  If we were unable to obtain a consent orrefinance, we would be prohibited from redeeming the notes.  If we were unable to redeem the notes upon adesignated event, it would result in an event of default under the indenturesgoverning the notes.  An event of defaultunder the indentures could result in a further event of default under our otherthen-existing debt including the Term Loan. In addition, the occurrence of a designated event may be an event ofdefault under our other debt.  Further,an event of default under the Term Loan could result in an event of defaultunder the indentures governing the notes.

 

***If our research and development programs fail to result inadditional drug candidates, the growth of our business could be impaired.***

 

Certain of our researchand development programs for drug candidates are at an early stage and willrequire significant 

 

27

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research, development, preclinical and clinicaltesting, manufacturing scale-up activities, regulatory approval and/orcommitments 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 depends on our chief executive officer,and other key executives and our ability to attract, retain and motivatequalified personnel.***

 

We are highly dependenton our chief executive officer, and the other principal members of ourexecutive and scientific teams.  Theunexpected loss of the services of any of these persons might impede theachievement of our research, development and commercialization objectives.  Recruiting and retaining qualified sales,marketing, regulatory, scientific and other personnel and consultants will alsobe critical to our success.  We may notbe able to attract and retain these personnel and consultants on acceptableterms given the competition between numerous pharmaceutical and biotechnologycompanies.  We do not maintain “keyperson” insurance on any of our employees.

 

***We may be unable to adequately prevent disclosure of tradesecrets and other proprietary information.***

 

In order to protect ourproprietary technology and processes, we rely in part on confidentialityagreements with our corporate partners, employees, consultants, manufacturers,outside scientific collaborators and sponsored researchers and otheradvisors.  These agreements may noteffectively prevent disclosure of confidential information and may not providean adequate remedy in the event of unauthorized disclosure of confidentialinformation.  In addition, others mayindependently discover our trade secrets and proprietary information.

 

Costly and time-consuminglitigation could be necessary to enforce and determine the scope of ourproprietary rights, and failure to obtain or maintain trade secret protectioncould adversely affect our competitive business position.

 

***Our research and development activities and plannedmanufacturing activities involve the use of hazardous materials, which subjectus to regulation, related costs and delays and potential liabilities.***

 

Our research anddevelopment and our planned manufacturing activities involve the controlled useof hazardous materials, chemicals and various radioactive compounds.  Although we believe that our research anddevelopment safety procedures for handling and disposing of these materialscomply with the standards prescribed by state and federal regulations, the riskof accidental contamination or injury from these materials cannot beeliminated.  In addition, as part of thedevelopment of our planned manufacturing activities, we will need to developadditional safety procedures for the handling and disposing of hazardousmaterials.  If an accident occurs, wecould be held liable for resulting damages, which could be substantial.  We are also subject to numerousenvironmental, health and workplace safety laws and regulations, includingthose governing laboratory procedures, exposure to blood-borne pathogens andthe handling of biohazardous materials. Additional federal, state and local laws and regulations affecting ouroperations may be adopted in the future. We may incur substantial costs to comply with, and substantial fines orpenalties if we violate, any of these laws or regulations.

 

***We are exposed to potential risks from recent legislationrequiring companies to evaluate internal control over financial reporting.***

 

The Sarbanes-Oxley Actrequires that we report annually on the effectiveness of our internal controlover financial reporting.  Among otherthings, we must perform systems and processes evaluation and testing.  We must also conduct an assessment of ourinternal control to allow management to report on, and our independentregistered public accounting firm to attest to, our internal control overfinancial reporting, as required by Section 404 of the Sarbanes-OxleyAct.  In connection with our Section 404compliance efforts, we have incurred or expended, and expect to continue toincur or expend, substantial accounting and other expenses and significantmanagement time and resources.  We haveimplemented certain remediation activities resulting from our ongoingassessment of internal control over financial reporting.  Our future assessment, or the futureassessments by our independent registered public accounting firm, may revealmaterial weaknesses in our internal control. If material weaknesses are identified in the future we would be requiredto conclude that our internal control over financial reporting are ineffectiveand we could be subject to sanctions or investigations by the SEC, the NASDAQStock Market or other regulatory authorities, which would require additionalfinancial and management resources and could adversely affect the market priceof our common stock.

 

***We have implemented anti-takeover provisions that coulddiscourage or prevent an acquisition of our company, even if the acquisitionwould be beneficial to our stockholders, and as a result our management maybecome entrenched and hard to replace.***

 

Provisions in ourcertificate of incorporation and bylaws could make it more difficult for athird party to acquire us, even if doing so would benefit ourstockholders.  These provisions include:

 

28

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| · |   | allowing our board of  directors to elect a director to fill a vacancy created by the expansion of  the board of directors;                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                            |
| · |   | allowing our board of directors to issue, without  stockholder approval, up to 5.5 million shares of preferred stock with terms  set by the board of directors; |
|   |   |                                                                                                                                                            |
| · |   | limiting the ability of holders of our outstanding  common stock to call a special meeting of our stockholders; and                                             |
|   |   |                                                                                                                                                            |
| · |   | preventing stockholders from taking actions by  written consent and requiring all stockholder actions to be taken at a  meeting of our stockholders.            |

 

Each of these provisions,as well as selected provisions of Delaware law, could discourage potentialtakeover attempts, could adversely affect the trading price of our securitiesand could cause our management to become entrenched and hard to replace.  In addition to provisions in our charterdocuments and under Delaware law, an acquisition of our company could be mademore difficult by our employee benefits plans and our employee change incontrol plan, under which, in connection with a change in control, 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 could makeit uneconomical for a third party to acquire us on a hostile basis.

 

***Our executive officers, directors and major stockholderscontrol approximately 66% of our common stock.***

 

As of March 31,2008, executive officers, directors and holders of 5% or more of ouroutstanding common stock, in the aggregate, owned or controlled approximately66% of our outstanding common stock.  Asa result, these stockholders are able to influence all matters requiringapproval by our stockholders, including the election of directors and theapproval of corporate transactions.  Thisconcentration of ownership may also delay, deter or prevent a change in controlof our company and may make some transactions more difficult or impossible tocomplete without the support of these stockholders.

 

***Substantial future sales of our common stock by us or ourexisting stockholders or the conversion of our convertible senior notes tocommon stock could cause the trading price of our common stock to fall.***

 

Sales by existingstockholders of a large number of shares of our common stock in the publicmarket or the perception that additional sales could occur could cause thetrading price of our common stock to drop. Likewise, the issuance of shares of common stock upon conversion of ourconvertible notes or redemption of our convertible notes upon a designatedevent, or upon additional convertible debt or equity financings or other shareissuances by us, including shares issued in connection with potential futurestrategic alliances, could adversely affect the trading price of our commonstock.  Our convertible notes arecurrently convertible into a total of up to 15.2 million shares. In addition,the existence of these notes may encourage short selling of our common stock bymarket participants.

 

***Significant volatility in the market price for our commonstock could expose us to litigation risk.***

 

The market prices forsecurities of biopharmaceutical and biotechnology companies, including ourcommon stock, have historically been highly volatile, and the market from timeto time has experienced significant price and volume fluctuations that areunrelated to the quarterly operating performance of these biopharmaceutical andbiotechnology companies.  Since January 1,2006, the high and low sales price of our common stock varied significantly, asshown in the following table:

 
| ** **                                    | ** ** | **High**   | ** ** | **Low**    | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|
| **Year  ending December 31, 2008**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Second Quarter  (through April 18, 2008) |       | $          | 33.17      |       | $          | 29.00 |   |
| 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 |   |

 

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Given the uncertainty ofour future funding, whether BYETTA and SYMLIN will meet our expectations, andthe regulatory approval of our other drug candidates, we may continue toexperience volatility in our stock price for the foreseeable future.  In addition, the following factors maysignificantly affect the market price of our common stock:

 
| · |   | our financial results and/or fluctuations in our  financial results;                                                            |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                            |   |
| · |   | safety issues with BYETTA, SYMLIN or our product  candidates;                                                                   |   |
|   |   |                                                                                                                            |   |
| · |   | clinical study results;                                                                                                         |   |
|   |   |                                                                                                                            |   |
| · |   | determinations by regulatory authorities with  respect to our drug candidates;                                                  |   |
|   |   |                                                                                                                            |   |
| · |   | our ability to complete our Ohio manufacturing  facility and the commercial manufacturing process for exenatide once weekly;    |   |
|   |   |                                                                                                                            |   |
| · |   | developments in our relationships with current or  future collaborative partners;                                               |   |
|   |   |                                                                                                                            |   |
| · |   | our ability to successfully execute our  commercialization strategies;                                                          |   |
|   |   |                                                                                                                            |   |
| · |   | developments in our relationships with third-party  manufacturers of our products and other parties who provide services to us; |   |
|   |   |                                                                                                                            |   |
| · |   | technological innovations or new commercial  therapeutic products by us or our competitors;                                     |   |
|   |   |                                                                                                                            |   |
| · |   | developments in patent or other proprietary rights;  and                                                                        |
|   |   |                                                                                                                            |
| · |   | governmental policy or regulation, including with  respect to pricing and reimbursement.                                        |
|        |        |                                                                                                                                 |        |  |

 

Broad market and industryfactors also may materially adversely affect the market price of our commonstock, regardless of our actual operating performance.  Periods of volatility in the market price ofour common stock expose us to securities class-action litigation, and we may bethe target of such litigation as a result of market price volatility in thefuture.

 

**ITEM6.  Exhibits**

 

The following exhibits are included as part of thisreport:

 
| **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 June 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)                                      |

 

30

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| 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    |   | Second Amendment to Rights Agreement, dated  March 31, 2008, between the Registrant and American Stock Transfer and  Trust Company (filed as an exhibit to Registrant’s Current Report on  Form 8-K filed on March 13, 2008 and incorporated herein by  reference)                             |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 4.5    |   | 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)                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 4.6    |   | 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)                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.1   |   | Registrant’s Amended and Restated 2001 Equity  Incentive Plan                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 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                                                                                                                                                                                    |

 

31

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                   | Amylin Pharmaceuticals, Inc. |
|------------------------|-----------------------------------|
|                   |                              |   |
| Date: May 2, 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)* |

 

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