**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

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**FORM 10-Q**

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**(Mark One)**

| **x**                                                  | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                             | ** **                                                                                              |
| **For the quarterly period ended September 30,  2007** |
| ** **                                             | ** **                                                                                              |
| **OR**                                                 |
|                                                   |                                                                                                    |
| **o**                                                  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File Number: 0-19700**

** **

**AMYLIN PHARMACEUTICALS, INC.**

(Exact name ofregistrant 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’stelephone number, including area code)

 

**Not Applicable**

(Former name,former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(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 mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act (check one):

 
| Large accelerated filer x |   | Accelerated filer o |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o     No x

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

 
| Class                          | ** ** | **Outstanding on October  29, 2007** |
|--------------------------------|------------|-----------------------------------------------------|
| Common  Stock, $.001 par value |       | 134,804,609                                         |

 

 

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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 September 30, 2007 (unaudited) and December 31, 2006                        |   |   |
|                                    |       |                                                                                                                |   |   |
|                                    |       | Consolidated  Statements of Operations for the three and nine months ended September 30,  2007 and 2006 (unaudited) |   |   |
|                                    |       |                                                                                                                |   |   |
|                                    |       | Consolidated  Statements of Cash Flows for the nine months ended September 30, 2007 and  2006 (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.**

 

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

 
| ** **                                                                                                                                                                        | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **(unaudited)**              | ** ** | **(Note 1)**           | ** ** |
| Assets                                                                                                                                                                            |       |                         |       |                        |       |
| Current assets:                                                                                                                                                                   |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                         |       | $                            | 337,330    |                        | $          | 66,640 |   |
| Short-term investments                                                                                                                                                            |       | 745,148                      |       | 700,691                     |       |
| Accounts receivable, net                                                                                                                                                          |       | 63,155                       |       | 58,089                      |       |
| Inventories, net                                                                                                                                                                  |       | 103,480                      |       | 59,299                      |       |
| Other current assets                                                                                                                                                              |       | 32,223                       |       | 22,098                      |       |
| Total current assets                                                                                                                                                              |       | 1,281,336                    |       | 906,817                     |       |
|                                                                                                                                                                              |       |                         |       |                        |       |
| Property, plant and equipment, net                                                                                                                                                |       | 335,563                      |       | 146,779                     |       |
| Other long-term assets, net                                                                                                                                                       |       | 15,009                       |       | 2,870                       |       |
| Debt issuance costs, net                                                                                                                                                          |       | 18,807                       |       | 3,920                       |       |
|                                                                                                                                                                              |       | $                            | 1,650,715  |                        | $          | 1,060,386 |   |
|                                                                                                                                                                              |       |                         |       |                        |       |
| Liabilities  and Stockholders’ Equity                                                                                                                                        |       |                         |       |                        |       |
|                                                                                                                                                                              |       |                         |       |                        |       |
| Current liabilities:                                                                                                                                                              |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                  |       | $                            | 34,555     |                        | $          | 36,834 |   |
| Accrued compensation                                                                                                                                                              |       | 35,786                       |       | 39,251                      |       |
| Payable to collaborative partner                                                                                                                                                  |       | 65,431                       |       | 52,338                      |       |
| Other current liabilities                                                                                                                                                         |       | 89,941                       |       | 71,178                      |       |
| Current portion of deferred revenue                                                                                                                                               |       | 4,286                        |       | 4,286                       |       |
| Total current liabilities                                                                                                                                                         |       | 229,999                      |       | 203,887                     |       |
|                                                                                                                                                                              |       |                         |       |                        |       |
| Other long-term obligations, net of current  portion                                                                                                                              |       | 29,135                       |       | 13,836                      |       |
|                                                                                                                                                                              |       |                         |       |                        |       |
| Deferred revenue, net of current portion                                                                                                                                          |       | 4,158                        |       | 7,372                       |       |
|                                                                                                                                                                              |       |                         |       |                        |       |
| Convertible senior notes                                                                                                                                                          |       | 775,000                      |       | 200,000                     |       |
|                                                                                                                                                                              |       |                         |       |                        |       |
| Commitments and contingencies (Note 8)                                                                                                                                            |       |                         |       |                        |       |
|                                                                                                                                                                              |       |                         |       |                        |       |
| Stockholders’ equity:                                                                                                                                                        |       |                         |       |                        |       |
| Common stock, $.001 par value, 450,000 and  200,000 shares authorized, 134,740 and 130,458 issued and outstanding at  September 30, 2007 and December 31, 2006, respectively |       | 135                          |       | 130                         |       |
| Additional paid-in capital                                                                                                                                                        |       | 1,968,904                    |       | 1,857,194                   |       |
| Accumulated deficit                                                                                                                                                               |       | (1,357,379                   | )          | (1,223,184                  | )          |
| Accumulated other comprehensive income                                                                                                                                            |       | 763                          |       | 1,151                       |       |
| Total stockholders’ equity                                                                                                                                                   |       | 612,423                      |       | 635,291                     |       |
|                                                                                                                                                                              |       | $                            | 1,650,715  |                        | $          | 1,060,386 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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**AMYLIN PHARMACEUTICALS, INC.**

 

**Consolidated Statements of Operations(in thousands, except per share data)(unaudited)**

 
| ** **                                                      | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                      | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Net product sales                                               |       | $                                                    | 177,391    |                                                | $          | 138,798 |   | $ | 506,731 |   | $ | 323,457 |   |
| Revenues under collaborative agreements                         |       | 12,637                                               |       | 8,219                                               |       | 52,228 |   | 24,055 |   |
| Total revenues                                                  |       | 190,028                                              |       | 147,017                                             |       | 558,959 |   | 347,512 |   |
|                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Costs and expenses:                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of goods sold                                              |       | 13,750                                               |       | 14,508                                              |       | 43,322 |   | 38,937 |   |
| Selling, general and administrative                             |       | 87,718                                               |       | 69,037                                              |       | 268,626 |   | 192,388 |   |
| Research and development                                        |       | 61,457                                               |       | 53,703                                              |       | 192,712 |   | 155,886 |   |
| Collaborative profit sharing                                    |       | 75,026                                               |       | 57,026                                              |       | 212,328 |   | 130,382 |   |
| Total costs and expenses                                        |       | 237,951                                              |       | 194,274                                             |       | 716,988 |   | 517,593 |   |
|                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Operating loss                                                  |       | (47,923                                              | )          | (47,257                                             | )          | (158,029 | ) | (170,081 | ) |
|                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Make-whole payment on debt redemption                           |       | —                                               |       | (7,875                                              | )          | — |   | (7,875 | ) |
| Interest and other income                                       |       | 14,239                                               |       | 10,692                                              |       | 33,561 |   | 24,549 |   |
| Interest and other expense                                      |       | (6,074                                               | )          | (1,700                                              | )          | (9,727 | ) | (7,028 | ) |
| Net loss                                                        |       | $                                                    | (39,758    | )                                                   | $          | (46,140 | ) | $ | (134,195 | ) | $ | (160,435 | ) |
|                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss per share, basic and diluted                           |       | $                                                    | (0.30      | )                                                   | $          | (0.36 | ) | $ | (1.02 | ) | $ | (1.33 | ) |
|                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Shares used in computing net loss per  share, basic and diluted |       | 132,805                                              |       | 126,582                                             |       | 131,884 |   | 120,423 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

4

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**AMYLIN PHARMACEUTICALS, INC.**

 

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

 
| ** **                                                                                     | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Operating activities:                                                                          |       |                                                |       |   |   |
| Net loss                                                                                       |       | $                                                   | (134,195   | ) | $ | (160,435 | ) |
| Adjustments to reconcile net loss to net  cash used for operating activities:                  |       |                                                |       |   |   |
| Depreciation and amortization                                                                  |       | 14,743                                              |       | 11,090 |   |
| Stock-based compensation                                                                       |       | 44,297                                              |       | 37,923 |   |
| Make-whole payment on debt redemption                                                          |       | —                                              |       | 7,875 |   |
| Shares contributed as employer 401(k) match                                                    |       | 5,819                                               |       | 2,811 |   |
| Other non-cash expenses                                                                        |       | 2,161                                               |       | 1,164 |   |
| Changes in operating assets and  liabilities:                                                  |       |                                                |       |   |   |
| Accounts receivable, net                                                                       |       | (5,066                                              | )          | (38,549 | ) |
| Inventories, net                                                                               |       | (44,181                                             | )          | (21,865 | ) |
| Other current assets                                                                           |       | (8,990                                              | )          | (1,429 | ) |
| Accounts payable and accrued liabilities                                                       |       | 16,593                                              |       | 27,046 |   |
| Accrued compensation                                                                           |       | (3,465                                              | )          | (764 | ) |
| Payable to collaborative partner                                                               |       | 13,093                                              |       | 34,398 |   |
| Deferred revenue                                                                               |       | (3,214                                              | )          | (3,215 | ) |
| Other assets and liabilities, net                                                              |       | 14,708                                              |       | 2,033 |   |
| Net cash flows used for operating  activities                                                  |       | (87,697                                             | )          | (101,917 | ) |
|                                                                                           |       |                                                |       |   |   |
| Investing activities:                                                                          |       |                                                |       |   |   |
| Purchases of short-term investments                                                            |       | (328,847                                            | )          | (824,598 | ) |
| Sales and maturities of short-term  investments                                                |       | 282,867                                             |       | 518,239 |   |
| Purchase of property, plant and equipment,  net                                                |       | (202,733                                            | )          | (51,502 | ) |
| Increase in other long-term assets                                                             |       | (12,639                                             | )          | (54 | ) |
| Net cash flows used for investing  activities                                                  |       | (261,352                                            | )          | (357,915 | ) |
|                                                                                           |       |                                                |       |   |   |
| Financing activities:                                                                          |       |                                                |       |   |   |
| Issuance of common stock, net                                                                  |       | 61,034                                              |       | 541,308 |   |
| Issuance of convertible senior notes, net                                                      |       | 558,705                                             |       | — |   |
| Net cash flows provided by financing  activities                                               |       | 619,739                                             |       | 541,308 |   |
|                                                                                           |       |                                                |       |   |   |
| Increase in cash and cash equivalents                                                          |       | 270,690                                             |       | 81,476 |   |
|                                                                                           |       |                                                |       |   |   |
| Cash and cash equivalents at beginning of  period                                              |       | 66,640                                              |       | 72,026 |   |
| Cash and cash equivalents at end of period                                                     |       | $                                                   | 337,330    |   | $ | 153,502 |   |
|                                                                                           |       |                                                |       |   |   |
| Supplemental disclosure on cash flow  information:                                             |       |                                                |       |   |   |
| Property, plant and equipment additions in  other current liabilities                          |       | $                                                   | 21,110     |   | $ | 8,525 |   |
| Common stock issued upon conversion of debt                                                    |       | $                                                   | —     |   | $ | 175,000 |   |
| Reclassification of debt issuance costs to  additional paid-in capital upon conversion of debt |       | $                                                   | —     |   | $ | 1,980 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

5

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**AMYLIN PHARMACEUTICALS, INC.**

** **

**Notes to Consolidated Financial Statements**

**September 30, 2007(unaudited)**

 

**1.****                 Summary ofSignificant Accounting Policies**

 

**Basis of Presentation**

** **

The information contained herein has been prepared inaccordance with instructions for Form 10-Q and Article 10 ofRegulation S-X. The information as of September 30, 2007, and for the threemonth and nine month periods ended September 30, 2007 and 2006, are unaudited.In the opinion of management, the information reflects all adjustmentsnecessary to make the results of operations for the interim periods a fairstatement of such operations. All such adjustments are of a normal recurringnature. Interim results are not necessarily indicative of results for a fullyear. The balance sheet at December 31, 2006, has been derived from theaudited consolidated financial statements at that date but does not include allinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements. For more completefinancial information, these financial statements should be read in conjunctionwith the audited consolidated financial statements included in our AnnualReport on Form 10-K for the year ended December 31, 2006.

 

**Revenue Recognition**

** **

***Net Product Sales***

*** ***

AmylinPharmaceuticals, Inc. (referred to as the Company or Amylin) sells BYETTA® (exenatide) injectionand SYMLIN® (pramlintide acetate) injection primarily to wholesaledistributors, who, in turn, sell to retail pharmacies and government entities.Product sales are recognized when delivery of the products has occurred,title has passed to the customer, the selling price is fixed or determinable,collectibility 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 resultsdiffer from the Company’s estimates, the Company will be required to makeadjustments to these allowances in the future.

 

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

 

***Revenues UnderCollaborative Agreements***

*** ***

Amountsreceived for upfront product and technology license fees under multiple-elementarrangements are deferred and recognized over the period of such services orperformance if such arrangements require on-going services or performance.Amounts received for milestones are recognized upon achievement of themilestone, and the expiration of stock conversion rights, if any, associated withsuch payments. Amounts received for equalization of development expenses arerecognized in the period in which the related expenses are incurred. Anyamounts received prior to satisfying these revenue recognition criteria will berecorded as deferred revenue.

 

***Collaborative Profit-Sharing***

*** ***

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

 

6

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# **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 in the accompanying consolidated balance sheets. Estimates forallowances for doubtful accounts are determined based on existing contractualobligations, historical payment patterns and individual customercircumstances.  The allowance for doubtful accounts was $0.2 million atSeptember 30, 2007 and December 31, 2006, respectively.

 

# **Research and Development Expenses**

#  

Research and developmentcosts are expensed as incurred and include salaries, benefits and 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 a portion of our facilitiescosts.Clinical trial costs, including costs associated with third-party contractors,are a significant component of research and development expenses. Invoicingfrom third-party contractors for services performed can lag several months. TheCompany accrues the costs of services rendered in connection with suchactivities based on its estimate of management fees, site management andmonitoring costs, and data management costs. Actual clinical trial costs maydiffer from estimates and are adjusted in the period in which they becomeknown. Payments made under certain license and collaboration agreements for milestonesachieved are recorded as a liability when the obligation is incurred.

 

**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 of 7.6 million and 7.0 million for the three andnine months ended September 30, 2007, respectively, and common stockequivalents of 8.2 million and 8.1 million from stock options and warrants forthe three and nine months ended September 30, 2006, 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 9.8 million for thethree and nine months ended September 30, 2007, respectively, and 5.8 millionfor each of the three and nine months ended September 30, 2006, respectively,are also excluded from the calculation of diluted loss per share because theeffect is antidilutive. In future periods,if the Company reports net income and the common share equivalents for itsconvertible senior notes are dilutive, the common stock equivalents will beincluded in the weighted average shares computation and interest expenserelated to the notes will be added back to net income to calculate dilutedearnings per share.

 

# **Accountingfor Stock-Based Compensation**

#  

EffectiveJanuary 1, 2006, the Company adopted the fair value method of accounting forstock-based compensation arrangements in accordance with Financial AccountingStandards Board (FASB) revised Statement of Financial Accounting Standards(SFAS) No. 123R, “*Share-Based Payment,”*whichestablishes accounting for non-cash, stock-based awards exchanged for employeeservices and requires companies to expense the estimated fair value of theseawards over the requisite employee service period, which for the Company isgenerally the vesting period. The Company adopted SFAS 123R using the modifiedprospective method. Under the modified prospective method, prior periods arenot revised for comparative purposes. The valuation provisions of SFAS No. 123Rapply to new awards and to awards that are outstanding on the effective dateand subsequently modified or cancelled. Estimated non-cash, compensationexpense for awards outstanding at the effective date will be recognized overthe remaining service period using the compensation cost calculated forpro-forma disclosure purposes under SFAS No. 123, *“Accounting for Stock-Based Compensation.”*

 

7

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

 
| ** **                                               | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                               | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Selling, general and administrative  expenses            |       | $                                                    | 9,122      |                                                | $          | 8,302 |   | $ | 26,642 |   | $ | 20,966 |   |
| Research and development expenses                        |       | 6,119                                                |       | 6,328                                               |       | 17,655 |   | 16,957 |   |
|                                                     |       | $                                                    | 15,241     |                                                | $          | 14,630 |   | $ | 44,297 |   | $ | 37,923 |   |
|                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Net stock-based compensation expense, per  common share: |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                    |       | $                                                    | 0.11       |                                                | $          | 0.12 |   | $ | 0.34 |   | $ | 0.31 |   |
| Diluted                                                  |       | $                                                    | 0.11       |                                                | $          | 0.12 |   | $ | 0.34 |   | $ | 0.31 |   |

 

TheCompany recorded $15.2 million and $14.6 million of total non-cash, stock basedcompensation expense during the three months ended September 30, 2007 and 2006,respectively, and $44.3 million and $37.9 million of total non-cash,stock-based compensation expense during the nine months ended September 30,2007 and 2006, respectively, related to stock-based awards, consisting of stockoptions and employee stock purchase rights, during those periods. At September30, 2007, total unrecognized estimated compensation cost related to non-vestedshare based awards granted prior to that date was $124.3 million, which isexpected to be recognized over a weighted-average period of 2.6 years. TheCompany issued 2.5 million and 3.9 million shares upon the exercise of stockoptions and warrants in the three and nine months ended September 30, 2007,respectively.

 

**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.

 

# **IncomeTaxes**

#  

InJuly 2006, the FASB issued Interpretation No. 48 (FIN 48) “*Accountingfor Uncertainty in Income Taxes* - *AnInterpretation of FASB Statement No. 109.”*FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an entity’s financialstatements in accordance with FASB Statement No. 109, “*Accountingfor Income Taxes,*” and prescribes a recognition threshold andmeasurement attributes for financial statement disclosure of tax positionstaken or expected to be taken on a tax return. Under FIN 48, the impact of anuncertain income tax position on the income tax return must be recognized atthe largest amount that is more-likely-than-not to be sustained upon audit bythe relevant taxing authority. An uncertain income tax position will not berecognized if it has less than a 50% likelihood of being sustained. Additionally,FIN 48 provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition.

 

TheCompany adopted the provisions of FIN 48 on January 1, 2007. No unrecognizedtax benefits were recorded as of the date of adoption. As a result of theimplementation of FIN 48, the Company recognized a $23.6 million increase inunrecognized tax benefits which was accounted for as a reduction to deferredtax assets (primarily related to reductions in tax credits) and a correspondingreduction to the valuation allowance, resulting in no net effect on accumulateddeficit.

 

Thebalance of unrecognized tax benefits at January 1, 2007 of $23.6 million aretax benefits that, if recognized, would not affect the Company’s effective taxrate since they are subject to a full valuation allowance. The Company has notrecognized any accrued interest and penalties related to unrecognized taxbenefits during the years ended December 31, 2006 and 2005. The Company issubject to taxation in the United States and various states and foreignjurisdictions. Effectively, all of the Company’s historical tax years aresubject to examination by the Internal Revenue Service and various state andforeign jurisdictions due to the generation of net operating loss and creditcarryforwards. The Company does not foresee any material changes tounrecognized tax benefits within the next twelve months. The Company will electa treatment for interest and penalties when they occur.

 

**Recently Issued Accounting Pronouncements**

** **

InFebruary 2007, the FASB issued SFAS No. 159 “*The FairValue Option for Financial Assets and Financial Liabilities*.”  SFAS No. 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value.

 

8

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Theprovisions of SFAS No. 159 will be effective for the Company beginning January1, 2008. The Company is in the process of determining the effect, if any, theadoption of SFAS No. 159 will have on its financial statements.

 

InJune 2007, the EITF issued EITF Issue No. 07-3, Accounting for NonrefundableAdvance Payments for Goods or Services to be Used in Future Research andDevelopment Activities. EITF Issue No. 07-3 provides guidance concerning theaccounting for non-refundable advance payments for goods and services that willbe used in future R&D activities and requires that they be expensed whenthe research and development activity has been performed and not at the time ofpayment. The provisions of EITF Issue No. 07-3 are effective for the fiscalyears beginning after December 15, 2007, with a cumulative-effect adjustment toRetained Earnings as of the beginning of the year of adoption. The Company isin the process of evaluating the effect, if any, of adopting EITF Issue No.07-3 on our financial statements.

 

**2.     Investments**

 

The Company’s investments, consisting principally ofdebt securities are classified as available-for-sale and are stated at fairvalue. 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 $2.2 million and $0.4 million at September 30, 2007 and December31, 2006, respectively. Raw materials consist of bulk drug material,work-in-process primarily consists of in-process SYMLIN vials and cartridges,and in-process BYETTA cartridges, and finished goods consist of finished SYMLINdrug product in vials for syringe administration and BYETTA drug product incartridges for pen administration.

 

Inventoriesconsist of the following (in thousands):

 

| ** **      | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                            | 50,629     |                        | $          | 37,564 |   |
| Work-in-process |       | 27,400                       |       | 12,589                      |       |
| Finished goods  |       | 25,451                       |       | 9,146                       |       |
|            |       | $                            | 103,480    |                        | $          | 59,299 |   |

 

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

 

Debtissuance costs relate to the $200 million principalamount of 2.5% convertible senior notes, due April 15, 2011, issued inApril 2004, referred to as the 2004 Notes. Debt issuance costs also relateto the $575 million principal amount of 3.0% convertible senior notes, due June15, 2014, issued in June 2007, referred to as the 2007 Notes. Amortization ofdebt issuance costs are recorded as interest expense in the consolidatedstatement of operations on a straight-line basis, which approximates theinterest method, over the contractual term of the notes. The Company incurredtotal debt issuance costs of $22.7 million in connection with the 2004 Notesand the 2007 Notes. Amortization expense of $0.8 million and $0.4 million wasrecorded in each of the three months ended September 30, 2007 and 2006,respectively. Amortization expense of $1.4 million was recorded in each of thenine months ended September 30, 2007 and 2006.

 

 

 

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

 

Othercurrent liabilities consist of the following (in thousands):

 

| ** **                                          | ** ** | **September 30,****2007** | ** ** | **December 31,****2006** | ** ** |
|-----------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| Accrued property, plant and equipment  additions    |       | $                              | 21,110     |                          | $          | 21,219 |   |
| Other current liabilities                           |       | 36,357                         |       | 28,489                        |       |
| Accrued contract research and development  expenses |       | 14,507                         |       | 11,635                        |       |
| Accrued rebate  discounts                           |       | 17,967                         |       | 9,835                         |       |
|                                                |       | $                              | 89,941     |                          | $          | 71,178 |   |
|                                                     |            |                                |            |                               |            |  |  |  |  |

 

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

 

SFAS No. 130, “*ReportingComprehensive Income,”* requires reporting and displayingcomprehensive income (loss) and its components, which, for the Company,includes net loss and unrealized gains and losses on investments. In accordancewith SFAS No. 130, the accumulated balance of other comprehensive income (loss)is disclosed as a separate component of stockholders’ equity. For the three andnine months ended September 30, 2007 and 2006, the comprehensive loss consistedof (in thousands):  

 

| ** **                            | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                            | ** ** | **2007**                                                 | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net loss                              |       | $                                                        | (39,758    | )                                                  | $          | (46,140 | ) | $ | (134,195 | ) | $ | (160,435 | ) |
| Other comprehensive loss:             |       |                                                     |       |                                               |       |   |   |   |   |
| Unrealized gain/(loss) on investments |       | (1,016                                                   | )          | 1,159                                              |       | (388 | ) | 1,615 |   |
| Comprehensive loss                    |       | $                                                        | (40,774    | )                                                  | $          | (44,981 | ) | $ | (134,583 | ) | $ | (158,820 | ) |

 

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

 

InApril 2004, the Company issued the 2004 Notes, which have an aggregateprincipal amount of $200 million, and are due April 15, 2011, in a privateplacement. The 2004 Notes are senior unsecured obligations and rank equallywith all other existing and future senior unsecured debt. The 2004 Notes bearinterest at 2.5% per year, payable in cash semi-annually and are convertibleinto a total of up to 5.8 million shares of common stock at a conversion priceof $34.35 per share, subject to customary adjustments for stock dividends andother dilutive transactions. The Company may not redeem the 2004 Notes prior tomaturity.

 

Upona change 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. The Company has agreed to use its reasonableefforts to keep the shelf registration statement effective until the earliestof (i) the date when all securities covered by the registration statementhave been sold, or (ii) the expiration of the applicable holding periodwith respect to the 2004 Notes and common stock issuable upon conversion of the2004 Notes under Rule 144(k) under the Securities Act of 1933, as amended, orany successor provision. The Company may suspend the use of the registrationstatement to resell 2004 Notes or shares of common stock issued upon conversionof 2004 Notes for reasons relating to acquisition or divesture of assets,pending corporate developments, and similar events.

 

InJune 2007, the Company issued the 2007 Notes, which have an aggregate principalamount of $575 million, and are due June 15, 2014, in a private placement. The2007 Notes are senior unsecured obligations and rank equally with all otherexisting and future senior unsecured debt. The 2007 Notes bear interest at 3.0%per year, payable in cash semi-annually, and are initially convertible into atotal of up to 9.4 million shares of common stock at a conversion price of$61.07 per share, subject to the customary adjustment for stock dividends andother dilutive transactions. In addition, if a “fundamental change” (as definedin the 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. Themaximum conversion rate is 22.9252, which would result in a maximum issuance13.2 million shares of common stock if all holders converted at the maximumconversion 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, determinedin accordance with the associated indenture agreement, calculated on a proportionatebasis for each day of the

 

10

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relevant20-day observation period. Holders may convert the 2007 Notes only in thefollowing circumstances and to the following extent: (1) during the fivebusiness-day period after any five consecutive trading period (the measurementperiod) in which the trading price per note for each day of such measurementperiod was less than 97% of the product of the last reported sale price of theCompany’s common stock and the conversion rate on each such day;(2) during any calendar quarter after the calendar quarter endingMarch 31, 2007, if the last reported sale price of the Company’s common stockfor 20 or more trading days in a period of 30 consecutive trading days endingon the last trading day of the immediately preceding calendar quarter exceeds130% of the applicable conversion price in effect on the last trading day ofthe immediately preceding calendar quarter; (3) upon the occurrence ofspecified events; and (4) the 2007 Notes will be convertible at any timeon or after April 15, 2014 through the scheduled trading day immediatelypreceding the maturity date.

 

Subjectto certain exceptions, if the Company undergoes a “designated event” (asdefined in the associated indenture agreement) including a “fundamentalchange,” holders of the 2007 Notes will, for the duration of the notes, havethe option to require the Company to repurchase all or any portion of their2007 Notes. The designated event repurchase price will be 100% of the principalamount of the 2007 Notes to be purchased plus any accrued interest up to butexcluding the relevant repurchase date. The Company will pay cash for all notesso repurchased. 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. The Company has agreed to use its reasonableefforts to keep the shelf registration statement effective until the earliestof (i) the date when all securities covered by the registration statementhave been sold, or (ii) the expiration of the applicable holding periodwith respect to the 2007 Notes and common stock issuable upon conversion of the2007 Notes under Rule 144(k) under the Securities Act of 1933, as amended, orany successor provision. The Company may suspend the use of the registrationstatement to resell 2007 Notes or shares of common stock issued upon conversionof 2007 Notes for reasons relating to acquisition or divesture of assets,pending corporate developments, and similar events.

 

Subjectto certain limitations, the Company will be required to pay the holders of the2007 Notes special interest on the 2007 Notes if the Company fails to keep suchregistration statement effective during specified time periods. The 2007 Notespay interest in cash, semi-annually in arrears on June 15 and December 15of each year, beginning on December 15, 2007.

 

**8.     Commitments andContingencies**

 

# **OtherCommitments**

#  

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.

 

Asof September 30, 2007, if all such milestones are successfully achieved, thepotential future milestone and other contingency payments due under certaincontractual agreements are approximately $247 million in aggregate, of which $9million are 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 $56.4 million as of September 30, 2007, the majority of whichrelate to BYETTA.

 

**9.     Subsequent Event**

** **

OnOctober 31, 2007 the Company, Lilly, and Alkermes, Inc., or Alkermes, announcedpositive results from a 30-week comparator study of once-weekly exenatidelong-acting release (LAR) injection and BYETTA taken twice daily in patientswith type 2 diabetes. In connection with the results of this study, the Companyexpects to make a $5 million development milestone payment to Alkermes, whichwill be recorded as a research and development expense during the quarter endedDecember 31, 2007.

 

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

 

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

 

**Overview**

 

AmylinPharmaceuticals, Inc. is a biopharmaceutical company committed to improving thelives of people with diabetes, obesity and other diseases through thediscovery, development and commercialization of innovative medicines. We havedeveloped and gained approval for two first-in-class medicines to treatdiabetes, BYETTA® (exenatide) injection and SYMLIN®(pramlintide acetate) injection, both of which were commercially launched inthe United States during the second quarter of 2005. BYETTA has also beenapproved in the European Union, or EU, and the first commercial launch occurredin Germany in April 2007 through our collaboration partner Eli Lilly andCompany, or Lilly. Lilly has launched, and we expect Lilly to continue tolaunch, BYETTA in additional EU member states and other countries during 2007.We also have two late-stage programs in development and multiple early-stageprograms. BYETTA is the first and only approved medicine in a new class ofcompounds called incretin mimetics. We began selling BYETTA in the UnitedStates in June 2005. BYETTA is approved in the United States for thetreatment of patients with type 2 diabetes who have not achieved adequateglycemic control and are taking metformin, sulfonylurea and/or athiazolidinedone, or TZD, common oral therapies for type 2 diabetes. Netproduct sales of BYETTA were $161.1 million and $126.4 million for the threemonths ended September 30, 2007 and 2006, respectively, and $459.7 million and$293.2 million for the nine months ended September 30, 2007 and 2006,respectively.

 

Wehave an agreement with Lilly for the global development and commercializationof exenatide. This agreement includes BYETTA and any long-acting releaseformulations of exenatide such as exenatide LAR, our once-weekly formulation ofexenatide for the treatment of type 2 diabetes. Under the terms of theagreement, operating profits from products sold in the United States are sharedequally between Lilly and us. The agreement provides for tiered royaltiespayable to us by Lilly based upon the annual gross margin for all exenatideproduct sales, including any long-acting release formulations, outside of theUnited States. Royalty payments for exenatide product sales outside of theUnited States will commence after a one-time cumulative gross margin thresholdamount has been met. We expect royalty payments to commence in 2009. Lilly isresponsible for 100% of the costs related to development of twice-daily BYETTAfor 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 for100% of the costs related to commercialization of all exenatide products forsale outside of the United States.

 

SYMLINis the first and only approved medicine in a new class of compounds calledamylinomimetics. We began selling SYMLIN in the United States in April 2005for the treatment of patients with either type 1 or type 2 diabetes who aretreated with mealtime insulin but who have not achieved adequate glycemiccontrol. In October 2007 we received approval from the U.S. Food andDrug Administration, or FDA, for the SymlinPen(TM) 120 and theSymlinPen(TM) 60 pen-injector devices for administering SYMLINinjection. In October 2007, theFDA issued a “Not Approvable” letter for SYMLIN use with basal insulin (withoutmealtime insulin) in patients with type 2 diabetes. We intend to initiatediscussions with the FDA to clarify further requirements for this approval. Netproduct sales of SYMLIN were $16.3 million and $12.4 million for the threemonths ended September 30, 2007 and 2006, respectively, and $47.0 million and$30.3 million for the nine months ended September 30, 2007 and 2006,respectively.

 

Wehave a field force of approximately 580 people dedicated to marketing BYETTAand SYMLIN in the United States. Our field force includes our specialty andprimary care sales forces and field management, a managed care and governmentaffairs organization, a medical science organization and diabetes carespecialists. Lilly co-promotes BYETTA in the United States and has primaryresponsibility for developing and commercializing BYETTA outside of the UnitedStates, including any long-acting release formulations.

 

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Inaddition to our marketed products, we have several programs in development,including late-stage programs****fordiabetes and obesity.

 

Indiabetes, we are working with Lilly and Alkermes, Inc., or Alkermes, to developexenatide LAR. We recently completed a clinical study evaluating exenatide LARin patients with type 2 diabetes that is designed to generate the type of safetyand efficacy data that could form the basis of a New Drug Application, or NDA,submission to the FDA. On October 31, 2007 we announced positive results fromthis 30-week comparator study of once-weekly exenatide long-acting release LARinjection and BYETTA taken twice daily in patients with type 2 diabetes.Once-weekly exenatide, an investigational drug, showed a statisticallysignificant improvement in A1C of approximately 1.9 percentage points frombaseline, compared to an improvement of approximately 1.5 percentage points forBYETTA. Approximately three out of four subjects treated with once-weeklyexenatide achieved an A1C of 7 percent or less. A1C of less than 7 percent isthe target for good glucose control as recommended by the American Diabetes Association. In addition, we and Lilly are working with Alkermes and Parsons, Inc.on the construction of a manufacturing facility for exenatide LAR in Ohio. Weexpect to complete the commercial scale manufacturing process in this facilityin the second half of 2008.

 

Wehave multiple early-stage programs for diabetes and obesity. We have a numberof compounds in development for the potential treatment of obesity which arepart of a broader program which we refer to as INTO: Integrated NeurohormonalTherapies for Obesity. As part of this program, we are currently conductingseveral clinical trials of our drug candidates, or combinations of our drugcandidates. We also maintain an active discovery research program focused onnovel peptide therapeutics. We are actively seeking to in-license additionaldrug candidates. We have partnered with PsychoGenics, Inc., to form PsylinNeurosciences, Inc., or Psylin, a company that will focus on the discovery anddevelopment of peptide hormones for treatment of psychiatric indications. Duringthe second quarter of 2007, we made a strategic equity investment in BioSeek,Inc., or BioSeek, a company that specializes in predictive human cell-baseddisease models, and contracted with BioSeek to assess the potential utility ofAmylin’s peptide hormones in immune/inflammatory disorders.

 

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, we beganto derive revenues from product sales of BYETTA and SYMLIN. We have been unprofitable since inception andmay incur additional operating losses for at least the next few years.At September 30, 2007, our accumulated deficit was approximately $1.4 billion.At September 30, 2007, we had approximately $1.1 billion in cash, cashequivalents and short-term investments. We may not generate positive operatingcash flows for at least the next few years and accordingly, we may need to raise additional funds from outsidesources. Refer to the discussions under the headings “Liquidity andCapital Resources” below and “Cautionary Factors That May Affect FutureResults” in Part II, Item 1A for further discussion regarding our anticipatedfuture capital requirements.

 

**Applicationof Critical Accounting Policies**

 

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

 

Thefinancial information as of September 30, 2007, should be read in conjunctionwith the financial statements for the year ended December 31, 2006, containedin our annual report on Form 10-K filed on February 26, 2007.

 

Fora discussion of the Company’s critical accounting policies, see “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in our annual report on Form 10-K filed on February 26, 2007.

 

**Results of Operations**

 

**Comparison of Three Months Ended September 30, 2007 to ThreeMonths Ended September 30, 2006**

 

***Net Product Sales***

 

Netproduct sales for the three months ended September 30, 2007 and 2006 were$177.4 million and $138.8 million, respectively, and consisted of shipments ofBYETTA and SYMLIN, less allowances for product returns, rebates and wholesalerchargebacks, wholesaler discounts, and prescription vouchers.

 

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

 

| ** ** | ** ** | **Three months ended September 30,** | ** ** |
|------------|------------|----------------------------------------------------------|------------|
| ** ** | ** ** | **2007**                                                 | ** ** | **2006** | ** ** |
| BYETTA     |       | $                                                        | 161.1      |   | $ | 126.4 |   |
| SYMLIN     |       | 16.3                                                     |       | 12.4 |   |
|       |       | $                                                        | 177.4      |   | $ | 138.8 |   |

 

Theincreases in net product sales for BYETTA and SYMLIN in the current period,both of which were launched in the United States during the second quarter of2005, reflect continued growth in patient demand.

 

***Revenues Under CollaborativeAgreements***

 

Revenues under collaborative agreements for the threemonths ended September 30, 2007, were $12.6****millioncompared to $8.2 million for the same period in 2006. Substantially all of therevenue recorded in these periods consists of amounts earned pursuant to ourBYETTA collaboration agreement with Lilly. The $4.4 million increase inrevenues under collaborative agreements in the current quarter compared to thesame period in 2006 reflects higher cost-sharing payments from Lilly due toincreased development expenses for exenatide LAR. The following table summarizesthe components of revenues under collaborative agreements for the three monthsended September 30, 2007 and 2006 (in millions):

 
| ** **                        | ** ** | **Three months ended  September 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| Amortization of up-front payments |       | $                                               | 1.1        |   | $ | 1.1 |   |
| Cost-sharing payments             |       | 11.5                                            |       | 7.1 |   |
|                              |       | $                                               | 12.6       |   | $ | 8.2 |   |

 

In future periods, revenues under collaborativeagreements will consist of ongoing cost-sharing payments from Lilly to equalizedevelopment costs, possible future milestone payments and the continuedamortization of the $30 million portion of the up-front payment received fromLilly upon signing of our collaboration agreement in 2002. The amount ofcost-sharing revenue recorded will be dependent on the timing, extent andrelative proportion of total development costs for the exenatide LAR 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 and, for certaindevelopment milestones, the expiration of stock conversion rights associatedwith such payments.

 

***Cost of Goods Sold***

 

Costof goods sold for the three months ended September 30, 2007 and 2006 was $13.8million, representing a gross margin of 92%, and $14.5 million, representing agross margin of 90%, respectively, and is comprised primarily of manufacturingcosts associated with BYETTA and SYMLIN sales during the period. Theimprovement in gross margin for the three months ended September 30, 2007compared to the same period in 2006 primarily reflects a higher average netsales price per unit for BYETTA and lower unit costs for BYETTA resulting fromhigher production volumes. The increase in average net sales price per unit forBYETTA is due to price increases, a change in product mix, and a decrease insales allowances. Quarterly fluctuations in gross margins may be influenced byproduct mix, pricing, and the level of sales allowances.

 

***Selling, Generaland Administrative Expenses***

 

Selling,general and administrative expenses increased to $87.7 million for the threemonths ended September 30, 2007, from $69.0 million for the same period in2006. The increase primarily reflects higher promotional expenses for BYETTAand SYMLIN, expenses associated with our expanded sales force, and increasedbusiness infrastructure to support our growth.

 

Selling,general and administrative expenses are expected to continue to increase duringthe remainder of 2007, which reflects increased promotional expenses due primarilyto our and Lilly’s ongoing direct-to-consumer education program for BYETTA,ongoing sales and marketing activities and expanded business infrastructure tosupport our growth.

 

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***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 LAR, a long acting release formulation of exenatide, the activepharmaceutical ingredient in BYETTA. In obesity, we have a number of compoundsin development for the potential treatment of obesity which are part of a broaderprogram which we refer to as INTO: Integrated Neurohormonal Therapies forObesity. As part of this program, we are currently conducting several clinicaltrials of our drug candidates, or combinations of our drug candidates.

 

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

 

| ** **                         | ** ** | **Three months ended September 30,** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **Increase  (Decrease)** | ** ** |
| Diabetes                           |       | $                                                   | 34.4       |   | $ | 24.5 |   | $ | 9.9 |   |
| Obesity                            |       | 8.6                                                 |       | 10.2 |   | (1.6 | ) |
| Research and early-stage  programs |       | 9.7                                                 |       | 10.5 |   | (0.8 | ) |
| Indirect costs                     |       | 8.8                                                 |       | 8.5 |   | 0.3 |   |
|                               |       | $                                                   | 61.5       |   | $ | 53.7 |   | $ | 7.8 |   |

 

The $7.8 million increase in research and developmentexpenses for the three months ended September 30, 2007 as compared to the sameperiod in 2006 primarily reflects increased expenses of $9.9 million for ourdiabetes programs, partially offset by decreased expenses for our obesityprograms, and research and early-stage programs. The increase in expenses forour diabetes programs primarily reflects increased expenses for exenatide LARassociated with manufacturing scale-up and the recently completed clinicalstudy discussed above.

 

***CollaborativeProfit Sharing***

 

Collaborative profit sharing was $75.0 million and$57.0 million for the three months ended September 30, 2007 and 2006,respectively, and consists of Lilly’s 50% share of the gross margin for BYETTAin the United States.

 

***Make-wholePayment on Debt Redemption***

 

In July 2006, we called for the redemption on August24, 2006 of all our outstanding 2003 Notes under a provisional redemption basedupon the market price of our common stock exceeding certain thresholds. All holders elected to convert their 2003 Notes into shares of our commonstock.  In connection with the conversion, we issued approximately 5.6million shares, including 180,005 shares as a make-whole payment, representing$112.94 per $1,000 principal amount of the 2003 Notes converted less interestactually paid.  During the quarter ended September 30, 2006 werecorded a one-time, non-cash, non-operating charge of $7.9 million for amake-whole payment associated with an early redemption of convertible seniornotes. 

 

***Interest and Other Income andExpense***

 

Interest and other income consist primarily ofinterest income from investment of cash and other investments. Interest andother income increased to $14.2 million for the three months ended September30, 2007, from $10.7 million for the same period in 2006. The increase reflectshigher average investment balances due to proceeds of $559 million from our2007 Notes issued in June 2007.

 

Interest and other expenseconsist primarily of interest expense resulting from our long-term debtobligations. Interest expense in the three months ended September 30, 2007consists of interest on our $775 million of outstanding convertible seniornotes and the amortization of associated debt issuance costs. Interestand other expense was $6.1 million and $1.7 

 

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million for the three months ended September 30, 2007and 2006, respectively. The increase reflects additional interest expense forour 2007 Notes issued in June 2007.

 

***Net Loss***

 

Our net loss for the three months ended September30, 2007 was $39.8 million compared to a net loss of $46.1 million for the sameperiod in 2006. The decrease in net loss primarily reflects the increased netproduct sales and revenues under collaborative agreements, partially offset bythe increased selling, general and administrative expenses, increased researchand development expenses, and increased collaborative profit-sharing discussedabove. Net loss for the quarter ended September 30, 2006 also included a $7.9million make-whole payment on debt redemption. 

 

We may incur operating losses for the next few years.Our ability to reach profitability in the future will be heavily dependent uponthe amount of product sales that we achieve for BYETTA and SYMLIN. In addition,ongoing and potential increased expenses associated with the continuedcommercialization of BYETTA and SYMLIN, and expenses associated with thepotential expansion of our research and development programs, including ourlate-stage programs and our early-stage development programs, and relatedsupport infrastructure, may impact our ability to reach profitability in thefuture. Our operating results may fluctuate from quarter to quarter as a resultof differences in the timing of expenses incurred and revenues recognized.

 

**Comparison of Nine Months Ended September 30, 2007 toNine Months Ended September 30, 2006**

 

***Net Product Sales***

 

Net product sales for the nine months endedSeptember 30, 2007 and 2006 were $506.7 million and $323.5 million,respectively, and consisted of shipments of BYETTA and SYMLIN, less allowancesfor product returns, rebates and wholesaler chargebacks, wholesaler discounts,and prescription vouchers.

 

The following table provides information regardingnet product sales (in millions):

 

| ** ** | ** ** | **Nine months ended September 30,** | ** ** |
|------------|------------|---------------------------------------------------------|------------|
| ** ** | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| BYETTA     |       | $                                                       | 459.7      |   | $ | 293.2 |   |
| SYMLIN     |       | 47.0                                                    |       | 30.3 |   |
|       |       | $                                                       | 506.7      |   | $ | 323.5 |   |

 

The increases in net product sales for BYETTA andSYMLIN in the current period, both of which were launched in the United Statesduring the second quarter of 2005, reflect continued growth in patient demand.

 

***Revenues UnderCollaborative Agreements***

 

Revenuesunder collaborative agreements for the nine months ended September 30, 2007were $52.2 million compared to $24.1 million for the same period in 2006.Substantially all of the revenue recorded in these periods consists of amountsearned pursuant to our BYETTA collaboration agreement with Lilly. The $28.1million increase in revenues under collaborative agreements in the nine monthsended September 30, 2007 compared to the same period in 2006 reflects $15.0million in milestone revenue associated primarily with Lilly’s launch of BYETTAin the EU and higher cost-sharing payments due to increased developmentexpenses for exenatide LAR.

 

Thefollowing table summarizes the components of revenues under collaborativeagreements for the nine months ended September 30, 2007 and 2006 (in millions):

 

| ** **                        | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Amortization of up-front payments |       | $                                                   | 3.2        |   | $ | 3.2 |   |
| Milestones                        |       | 15.0                                                |       | — |   |
| Cost-sharing payments             |       | 34.0                                                |       | 20.9 |   |
|                              |       | $                                                   | 52.2       |   | $ | 24.1 |   |

 

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***Cost of GoodsSold***

 

Cost of goods sold for the nine months endedSeptember 30, 2007 and 2006 was $43.3 million, representing a gross margin of91%, and $38.9 million, representing a gross margin of 88%, respectively, andis comprised primarily of manufacturing costs associated with BYETTA and SYMLINsales during the period. The improvement in gross margin for the nine monthsended September 30, 2007 compared to the same period in 2006 reflects the same factorsthat influenced similar fluctuations in the three months ended September 30,2007 discussed above.

 

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

 

Selling, general and administrative expensesincreased to $268.6 million for the nine months ended September 30, 2007, from$192.4 million for the same period in 2006. The increase primarily reflects the same factorsthat influenced similar fluctuations in the three months ended September 30,2007 discussed above.

 

***Research and Development Expenses***

 

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

 
| ** **                         | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                                | ** ** | **2006** | ** ** | **Increase** | ** ** |
| Diabetes                           |       | $                                                       | 97.4       |   | $ | 72.3 |   | $ | 25.1 |   |
| Obesity                            |       | 40.3                                                    |       | 32.8 |   | 7.5 |   |
| Research and  early-stage programs |       | 28.9                                                    |       | 28.0 |   | 0.9 |   |
| Indirect costs                     |       | 26.2                                                    |       | 22.8 |   | 3.4 |   |
|                               |       | $                                                       | 192.8      |   | $ | 155.9 |   | $ | 36.9 |   |

 

The $36.9 million increase in research and developmentexpenses for the nine months ended September 30, 2007 as compared to the sameperiod in 2006 primarily reflects increased expenses of $25.1 million for ourdiabetes programs, and $7.5 million for our obesity programs. The increase inexpenses for our diabetes programs primarily reflects increased expenses forexenatide LAR associated with manufacturing scale-up and the recently completedclinical study discussed above. The increase in expenses for our obesityprograms primarily reflects expenses for ongoing clinical trials associatedwith our INTO program.

 

***CollaborativeProfit Sharing***

 

Collaborative profit sharing was $212.3 million and$130.4 million for the nine months ended September 30, 2007 and 2006,respectively, and consists of Lilly’s 50% share of the gross margin for BYETTAin the United States.

 

***Interest andOther Income and Expense***

 

Interest and other income consist primarily of interestincome from investment of cash and other investments. Interest and other incomeincreased to $33.6 million for the nine months ended September 30, 2007, from$24.5 million for the same period in 2006. The increase of $9.1 million is dueto higher interest rates received on our investments and higher averageinvestment balances in 2007 as compared to 2006.

 

Interest and other expenseconsist primarily of interest expense resulting from our long-term debtobligations. Interest expense in the nine months ended September 30, 2007consists of interest on our $775 million of outstanding convertible seniornotes and the amortization of associated debt issuance costs. Interestand other expense was $9.7 million and $7.0 million for the nine months endedSeptember 30, 2007 and 2006, respectively. The increase in 2007 reflects higherinterest expense following the issuance of $575 million of 3.00% convertiblesenior notes issued in June 2007, partially offset by lower interest expensefollowing the August 2006 conversion of $175 million of all outstanding 2.25%convertible senior notes issued in 2003.

 

***Net Loss***

 

Our net loss for the nine months ended September 30,2007 was $134.2 million compared to a net loss of $160.4 million for the sameperiod in 2006. The decrease in net loss primarily reflects the same factors that influencedsimilar fluctuations in the three months ended September 30, 2007 discussedabove.

 

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# **Liquidityand Capital Resources**

#  

Since our inception, we have financed our operationsprimarily through public sales and private placements of our common andpreferred stock, debt financings, payments received pursuant to our BYETTAcollaboration with Lilly, reimbursement of SYMLIN development expenses throughearlier collaboration agreements, and since the second quarter of 2005, throughproduct sales of BYETTA and SYMLIN.

 

At September 30, 2007, we had $1.1 billion in cash,cash equivalents and short-term investments, compared to $767.3 million at December31, 2006. We used cash of $87.7 million and $101.9 million for our operatingactivities in the nine months ended September 30, 2007 and 2006, respectively. Ourcash used for operating activities in the nine months ended September 30, 2007included uses of cash due to increases in current assets, consisting primarilyof an increase in inventories, of $44.2 million, offset by sources of cash dueto increases in accounts payable and accrued liabilities of $16.6 million,payable to collaborative partner of $13.1 million, and other assets andliabilities, net, of $14.7 million. The increase in inventories reflectsincreased inventory purchases to support sales growth and investment ininventory to support the planned launch of SYMLIN in a new pen delivery system.The increase in accounts payable and accrued liabilities primarily reflectsincreases for accrued interest related to our convertible debt and an increasein accrued rebate discounts. The increase in payable to collaborative partner,which represents Lilly’s 50% share of BYETTA gross margins in the UnitedStates, primarily reflects increased net product sales for BYETTA. The increasein other assets and liabilities, net, primarily represents an increase indeferred rent due to expanded corporate facilities.

 

Our investing activities used cash of $261.4 millionand $357.9 million for the nine months ended September 30, 2007 and 2006,respectively. Investing activities in both quarters consisted primarily ofpurchases and sales of short-term investments and purchases of property, plantand equipment and increases in other long-term assets. Purchases of property,plant and equipment increased to $202.7 million for the nine months endedSeptember 30, 2007 from $51.5 million for the nine months ended September 30,2006. The increase during the nine months ended September 30, 2007 primarilyreflects costs associated with our manufacturing facility for exenatide LARand, to a lesser extent, expenditures for tenant improvements, office equipmentand scientific equipment to support our growth. We expect that our capitalexpenditures will continue to significantly increase in future periods dueprimarily to costs associated with ongoing construction of our manufacturingfacility for exenatide LAR. We expect to complete the commercial-scalemanufacturing process in the second half of 2008. Through September 30, 2007,we had incurred $237 million associated with the construction of this facility.As previously disclosed, we are increasing our expenditures from $180 millionto an approximate total of $400 million over the next two years. The fullexpansion of this project is dependent upon on the continued progress ofexenatide LAR through the development process. In addition, we anticipatecontinued investments in tenant improvements, office equipment and scientificequipment. We are evaluating various forms of secured debt financing to fund aportion of the cost of our manufacturing facility. In addition, we areevaluating the potential utility of other financing mechanisms, includingrevolving credit lines or similar facilities, which may be secured by ourinventories, accounts receivable or other assets. The $12.6 million increase inother long-term assets primarily reflects our investments in Psylin andBioSeek.

 

Financing activities provided cash of $619.7 millionand $541.3 million for the nine months ended September 30, 2007 and 2006,respectively. Financing activities for the nine months ended September 30, 2007include $559 million in net proceeds from our issuance of $575 million inaggregate principal amount of our 3.0% convertible senior notes due in 2014, orthe 2007 Notes, the exercise of stock options and proceeds from our employeestock purchase plan.

 

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

 

 

 

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The following table summarizesour contractual obligations and maturity dates as of September 30, 2007 (inthousands):

 
| ** **                           | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**     | ** ** | **Total**                                 | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
| Long-term debt                       |       | $                                         | 775,000    |   | $ | — |   | $ | — |   | $ | 200,000 |   | $ | 575,000 |   |
| Interest payments on long-term  debt |       | 141,085                                   |       | 22,585 |   | 44,500 |   | 39,500 |   | 34,500 |   |
| Inventory purchase  obligations(1)   |       | 159,069                                   |       | 86,142 |   | 56,805 |   | 14,498 |   | 1,624 |   |
| Operating lease obligations          |       | 129,261                                   |       | 16,840 |   | 29,873 |   | 28,552 |   | 53,996 |   |
| Total(2)                             |       | $                                         | 1,204,415  |   | $ | 125,567 |   | $ | 131,178 |   | $ | 282,550 |   | $ | 665,120 |   |

 

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(1)   Includes$102.7 million of outstanding purchase orders, cancelable by us upon 30 days’written notice, subject to reimbursement of costs incurred through the date ofcancellation.

 

(2)   Excludeslong-term obligation of $9.1 million related to deferred compensation, thepayment of which is dependent upon elections made by participants that aresubject to change.

 

In addition, under certain license and collaborationagreements we are required to pay royalties and/or milestone payments upon thesuccessful development and commercialization of related products. We expect tomake development milestone payments up to $9 million associated with licensingagreements in the next 12 months. Additional milestones of up to approximately$238 million could be paid over the next ten to fifteen years if developmentand commercialization of all our early stage programs continue and are successful.The significant majority of these milestones relate to potential futureregulatory approvals and subsequent sales thresholds. Given the inherent riskin pharmaceutical development, it is highly unlikely that we will ultimatelymake all of these milestone payments; however, we would consider these paymentsas positive because they would signify that the related products are movingsuccessfully through development and commercialization.

 

Our future capitalrequirements will depend on many factors, including: the amount of productsales we achieve for BYETTA and SYMLIN; costs associated with the continuedcommercialization of BYETTA and SYMLIN; costs associated with the establishmentof our exenatide LAR manufacturing facility; costs of potential licenses oracquisitions; the potential need to repay existing indebtedness; costsassociated with an increase in our infrastructure; our ability to receive orneed to make milestone payments; our ability, and the extent, to which weestablish collaborative arrangements for SYMLIN or any of our productcandidates; progress in our research and development programs and the magnitudeof these programs; costs involved in preparing, filing, prosecuting,maintaining, enforcing or defending our patents; competing technological andmarket developments; and costs of manufacturing, including costs associatedwith establishing our own manufacturing capabilities or obtaining andvalidating additional manufacturers of our products; and scale-up costs for ourdrug candidates.

 

**ITEM 3.****                                               ****Quantitative and QualitativeDisclosures about Market Risk**

 

We invest our excess cashprimarily in U.S. Government securities, asset-backed securities and debtinstruments of financial institutions and corporations with strong creditratings. These instruments have various short-term maturities. We do notutilize derivative financial instruments, derivative commodity instruments orother market risk sensitive instruments, positions or transactions in anymaterial fashion. Accordingly, we believe that, while the instruments held aresubject to changes in the financial standing of the issuer of such securities,we are not subject to any material risks arising from changes in interestrates, foreign currency exchange rates, commodity prices, equity prices orother market changes that affect market risk sensitive investments. Our debt isnot subject to significant swings in valuation as interest rates on our debtare fixed. The fair value of our 2004 Notes and 2007 Notes at September 30,2007 was approximately $312.5 million and $629.8 million, respectively. Ahypothetical 1% adverse move in interest rates along the entire interest rateyield curve would not materially affect the fair value of our financialinstruments that are exposed to changes in interest rates, which consistsprimarily of debt securities in our short-term investment portfolio.

 

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

 

As of September 30, 2007, an evaluation wasperformed under the supervision and with the participation of our management,including our President and Chief Executive Officer (referred to as our CEO)and our Senior Vice President, Finance and Chief Financial Officer (referred toas our CFO), of the effectiveness of the design and operation of our disclosurecontrols and procedures. In designing and evaluating the disclosure controlsand procedures, management recognizes that any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily isrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures. Based on that evaluation, our management, 

 

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includingour CEO and CFO, concluded that our disclosure controls and procedures wereeffective at a reasonable level of assurance as of September 30, 2007.

 

Our management does not expect that our disclosurecontrol and procedures or our internal control over financial reporting willprevent all error and all fraud. A control system, no matter how well conceivedand operated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Because of the inherent limitationsin all control systems, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, ormisstatements due to error, if any, within the company have been detected.While we believe that our disclosure controls and procedures and internalcontrol over financial reporting are and have been effective, in light of theforegoing we intend to continue to examine and refine our disclosure controlsand procedures and internal control over financial reporting.

 

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

 

**PART II. OTHER INFORMATION**

 

**1A. Risk Factors**

 

**CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS**

** **

Thefollowing sets forth cautionary factors that may affect our future results,including clarifications to the cautionary factors included in our AnnualReport on Form 10-K for the fiscal year ended December 31, 2006 and oursubsequent filings with the Securities and Exchange Commission.

 

***We have a history of operating losses, anticipate future losses and maynever become profitable.***

 

We have experiencedsignificant operating losses since our inception in 1987, including losses of$134.2 million for the nine months ended September 30, 2007, $218.9 million in2006, $206.8 million in 2005 and $157.2 million in 2004. As of September 30,2007, we had an accumulated deficit of approximately $1.4 billion. The extentof our future losses and the timing of potential profitability are uncertain,and we may never achieve profitable operations. We have been engaged indiscovering and developing drugs since inception, which has required, and willcontinue to require, significant research and development expenditures. Wederived substantially all of our revenues prior to 2005 from development funding,fees and milestone payments under collaborative agreements and from interestincome. BYETTA and SYMLIN may not be as commercially successful as we expectand we may not succeed in commercializing any of our other drug candidates. Wemay incur substantial operating losses for at least the next few years as wecontinue to expand our commercial function for BYETTA and SYMLIN and ourresearch and development activities for the other drug candidates in ourdevelopment pipeline. These losses, among other things, have had and will havean adverse effect on our stockholders’ equity and working capital. Even if webecome profitable, we may not remain profitable.

 

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

 

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

 

•      acceptanceof these first-in-class medicines by the medical community, patients receivingtherapy and third party payors;

 

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

 

•      successfullyexpanding and sustaining manufacturing capacity to meet demand;

 

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

 

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

 

 

 

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***If we encounter safety issues with BYETTA or SYMLIN or any other drugswe market or fail to comply with extensive continuing regulations enforced bydomestic and foreign regulatory authorities, it could cause us to discontinuemarketing those drugs, reduce our revenues and harm our ability to generatefuture 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 anyof our marketed drugs by a wide patient population, serious adverse events mayoccur from time to time that initially do not appear to relate to the drugitself, and only if the specific event occurs with some regularity over aperiod of time does the drug become suspect as having a causal relationship tothe adverse event. Any safety issues could cause us to suspend or ceasemarketing of our approved products, subject us to substantial liabilities, andadversely affect our revenues and financial condition.

 

Moreover, the marketing ofour 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. The manufacturing facilities for our approvedproducts are also subject to continual review and periodic inspection andapproval of manufacturing modifications. Manufacturing facilities thatmanufacture 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 appliesregulatory 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 ofthese enforcement actions, any unanticipated changes in existing regulatoryrequirements or the adoption of new requirements, or any safety issues that arisewith any approved products, could adversely affect our ability to marketproducts and generate revenues and thus adversely affect our ability tocontinue our business.

 

The manufacturers of 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 the future, our manufacturers may incursignificant costs to comply with those laws and regulations, which couldincrease our manufacturing costs and reduce our ability to operate profitably.

 

***We currently do not manufacture our own drug products or drugcandidates and may not be able to obtain adequate supplies, which could causedelays, 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. We currently have no manufacturingcapabilities. In order to successfully commercialize our products, includingBYETTA and SYMLIN, and continue to develop our drug candidates, includingexenatide LAR, 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, there are a limited number of peptidesuppliers, cartridge manufacturers and disposable pen manufacturers. If we arenot able to arrange for and maintain third-party manufacturing on commerciallyreasonable terms, or we lose one of our sole source suppliers used for ourexisting products or for some components of our manufacturing processes for ourproducts or drug candidates, we may not be able to market our products orcomplete development of our drug candidates on a timely basis, if at all.

 

Reliance on third-partymanufacturers limits our ability to control certain aspects of themanufacturing process and therefore exposes us to a variety of significantrisks, including, but not limited to, risks to our ability to commercialize ourproducts or conduct clinical trials, risks of reliance on the third-party forregulatory compliance and quality assurance, third-party refusal to supply on along-term basis, the possibility of breach of the manufacturing agreement bythe third-party and the 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 any of these risks occur, our productsupply will be interrupted resulting in lost or delayed revenues and delayedclinical trials. Our reliance on third-party manufacturers for the productionof our two commercial products is described in more detail below.

 

We rely on BachemCalifornia, or Bachem, and Mallinckrodt, Inc., or Mallinckrodt, to manufactureour long-term commercial supply of bulk exenatide, the active ingredient inBYETTA. In addition, we rely on single-source manufacturers for some of our rawmaterials used by Bachem and Mallinckrodt to produce bulk exenatide. We alsorely on Wockhardt UK (Holdings) Ltd., or Wockhardt, and Baxter PharmaceuticalSolutions LLC, a subsidiary of Baxter, Inc., or Baxter, to

 

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manufacture the dosage formof BYETTA in cartridges. We are further dependent upon Lilly to supply pens fordelivery of BYETTA in cartridges.

 

We rely on Bachem and LonzaLtd. to manufacture our commercial supply of bulk pramlintide acetate, theactive ingredient contained in SYMLIN. In addition, we rely on Baxter tomanufacture the dosage form of SYMLIN in vials. We recently received FDAapproval of a disposable pen for the delivery of SYMLIN in cartridges, and planto make the SYMLIN pen available to patients in late 2007 or early 2008. Wewill rely on Wockhardt for the dosage form of SYMLIN in cartridges and YpsomedAG to manufacture the components for the SYMLIN disposable pen. We will alsorely on Hollister-Stier Laboratories LLC for the assembly 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. Anydelay or disruption in the manufacturing of bulk product, the dosage form ofour products or other product components, including pens for delivery of ourproducts, could also harm our reputation in the medical and patientcommunities. In addition, we may need to engage additional manufacturers sothat we will be able to continue our commercialization and development effortsfor these products or drug candidates. The cost and time to establish these newmanufacturing facilities would be substantial.

 

Our manufacturers have notproduced BYETTA or SYMLIN for commercial use for a sustained period of time. Assuch, additional unforeseeable risks may be encountered as we, together withour manufacturers, continue to develop familiarity and experience with regardto manufacturing our products. Furthermore, we and the other manufacturers usedfor our drug candidates may not be able to produce supplies in commercialquantities if our drug candidates are approved. While we believe that businessrelations between us and our manufacturers are generally good, we cannotpredict whether any of the manufacturers that we may use will meet ourrequirements for quality, quantity or timeliness for the manufacture of bulkexenatide or pramlintide acetate, dosage form of BYETTA or SYMLIN, or pens.Therefore, we may not be able to obtain necessary supplies of products withacceptable quality, on acceptable terms or in sufficient quantities, if at all.Our dependence on third parties for the manufacture of products may also reduceour gross profit margins and our ability to develop and deliver products in atimely manner.

 

In order to manufacture on acommercial scale the once-weekly formulation of exenatide LAR, if it isapproved by the FDA, we must design, construct, commission and validate a newfacility. We are dependent on Alkermes and Parsons to assist us in the design,construction and validation of the manufacturing facility. We have neverestablished or operated a manufacturing facility and cannot assure you that wewill be able to successfully establish or operate such a facility in a timelyor economical manner, or at all. In addition, we are dependent on Alkermes tosuccessfully develop and transfer to us its technology for manufacturing theonce-weekly formulation of exenatide LAR. Although we have completedmanufacturing scale-up to intermediate batch size, and together with Alkermeswe have completed engineering batches of commercial scale at a third partyfacility, we cannot be assured that a commercial scale manufacturing processfor exenatide LAR will be successfully developed and/or transferred to us in atimely or economical manner, or at all. In addition, we are dependent onAlkermes to supply us with commercial quantities of the polymer required tomanufacture exenatide LAR. We also will need to obtain sufficient supplies of diluents,solvents, devices, packaging and other components necessary for commercialmanufacture of exenatide LAR. If we, together with Alkermes, are unable tosuccessfully develop a commercial scale manufacturing process and increase ourmanufacturing scale to a commercially viable level, we may not be able tocommercially launch exenatide LAR.

 

***Our ability to generate revenues will be diminished if we fail toobtain acceptable prices or an adequate level of reimbursement for our productsfrom 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, we expect that there will continue to be anumber of federal and state proposals to implement government control over thepricing of prescription pharmaceuticals. In addition, increasing emphasis onmanaged care in the United States will continue to put pressure on the rate ofadoption and pricing of pharmaceutical products.

 

Significant uncertaintyexists as to the reimbursement status of health care products. Third-partypayors, including Medicare, are challenging the prices charged for medicalproducts and services. Government and other third-party payors increasingly areattempting to contain health care costs by limiting both coverage and the levelof reimbursement for new drugs and by refusing to provide coverage for uses ofapproved products for disease indications for which the FDA has not grantedlabeling approval. Third-party insurance coverage may not be available topatients for BYETTA and/or SYMLIN or any other products we discover anddevelop. If government and other third-party payors do not provide adequatecoverage and reimbursement levels for our products, the market acceptance ofthese products may be reduced.

 

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***Competition in the biotechnology and pharmaceutical industries mayresult in competing products, superior marketing of other products and lowerrevenues 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 multinationalpharmaceutical and chemical companies, specialized biotechnology firms anduniversities and other research institutions. 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 have substantially greater financial,technical, human and other resources than we do and may be better equipped todevelop, manufacture and market technologically superior products. In addition,many of these competitors have significantly greater experience than we do inundertaking preclinical testing and human clinical studies of new pharmaceuticalproducts and in obtaining regulatory approvals of human therapeutic products.Accordingly, our competitors may succeed in obtaining FDA approval for superiorproducts. Furthermore, now that we have received FDA approval for BYETTA andSYMLIN, we may also be competing against other companies with respect to ourmanufacturing and product distribution efficiency and sales and marketingcapabilities, areas in which we have limited or no experience as anorganization.

 

Our target patientpopulation for BYETTA includes people with diabetes who have not achievedadequate glycemic control using metformin, sulfonylurea and/or a TZD, the threemost common oral therapies for type 2 diabetes. Our target population forSYMLIN is people with either type 2 or type 1 diabetes whose therapy includesmultiple mealtime insulin injections daily. 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 indevelopment to treat type 2 diabetes, including:

 

•      sulfonylureas;

 

•      metformin;

 

•      insulins,including injectable and inhaled versions;

 

•      TZDs;

 

•      glinides;

 

•      DPP-IVinhibitors;

 

•      incretin/GLP-1agonists;

 

•      CB-1antagonists;

 

•      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. Our products could become obsolete before werecover expenses incurred in developing these products.

 

***Delays in the conduct or completion of our clinical trials, theanalysis 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 whether wewill encounter problems with any of our completed, ongoing or planned clinicalstudies that will cause us to delay or suspend our ongoing and planned clinicalstudies, delay the analysis of data from our completed or ongoing clinicalstudies or perform additional clinical studies prior to receiving necessaryregulatory approvals. We also cannot predict whether we will encounter delaysor an inability to create manufacturing processes for drug candidates thatallow us to produce drug product in sufficient quantities to be economical,otherwise known as manufacturing scale-up.

 

 

 

23

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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:

 

•      wemay be unable to complete our development programs for exenatide LAR or ourobesity clinical trials;

 

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

 

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

 

•      wemay not be able to enter into, if we chose to do so, any 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. Furthermore,if the FDA does not accept for filing an NDA for a sustained-releaseformulation of exenatide by December 31, 2007 Lilly may elect to convertpotential future milestone payments that we may receive under our collaborationagreement into shares of our common stock for up to 60 days following December31, 2007. The conversion price will equal the immediately preceding twenty dayaverage closing market price of the Company’s common stock on the date of suchelection to convert. We currently do not expect the NDA to be filed by thisdate.

 

Any of the following coulddelay the completion of our ongoing and planned clinical studies:

 

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

 

•      delaysin enrolling volunteers;

 

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

 

•      negativeresults of clinical studies;

 

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

 

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

 

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

 

***We are substantially dependent on our collaboration with Lilly for thedevelopment and commercialization of BYETTA and dependent on Lilly and Alkermesfor the development of exenatide LAR.***

 

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, including exenatideLAR. We entered into this 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 LAR.

 

In general, we cannotcontrol the amount and timing of resources that Lilly may devote to ourcollaboration. If Lilly fails to assist in the further development of exenatideLAR or the commercialization of BYETTA, or if Lilly’s efforts are not effective,our business may be negatively affected. We are relying on Lilly to obtainregulatory approvals for and successfully commercialize BYETTA and exenatideLAR outside the United States. Our collaboration with Lilly may not continue orresult in additional successfully commercialized drugs. Lilly can terminate ourcollaboration at any time upon 60 days notice. If Lilly ceased funding and/ordeveloping and commercializing BYETTA or exenatide LAR, 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 these compounds.We are also dependent on Alkermes for the development of exenatide LAR. IfAlkermes’ technology is not successfully developed to effectively deliverexenatide in a sustained release formulation, or Alkermes does not devotesufficient resources to the collaboration, our efforts to develop sustainedrelease formulations of exenatide could be delayed or curtailed.

 

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***If our patentsare determined to be unenforceable or if we are unable to obtain new patentsbased on current patent applications or for future inventions, we may not beable to prevent others from using our intellectual property. If we are unableto obtain licenses to third party patent rights for required technologies, wecould be adversely affected.***

 

We own or hold exclusive rights to many issuedUnited States patents and pending United States patent applications related tothe development and commercialization of exenatide, including BYETTA andexenatide LAR, SYMLIN and our other drug candidates. These patents andapplications cover composition-of-matter, medical indications, methods of use,formulations and other inventive results. We have issued and pendingapplications for formulations of BYETTA and exenatide LAR, but we do not have acomposition-of-matter patent covering exenatide. We also own or hold exclusiverights to various foreign patent applications that correspond to issued UnitedStates patents or pending United States patent applications.

 

Our success will depend in part on our ability toobtain patent protection for our products and drug candidates and technologiesboth in the United States and other countries. We cannot guarantee that anypatents will issue from any pending or future patent applications owned by orlicensed to us. Alternatively, a third party may successfully challenge orcircumvent our patents. Our rights under any issued patents may not provide uswith sufficient protection against competitive products or otherwise covercommercially valuable products or processes. In addition, because patentapplications in the United States are maintained 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 have filed, and in the future are likely tofile, patent applications on inventions similar to ours. From time-to-time wehave participated in, and in the future are likely to participate in, interferenceproceedings declared by the United States Patent and Trademark Office todetermine priority of invention, which could result in a loss of our patentposition. We may also have to participate in opposition proceedings against ourpatents in other jurisdictions, such as Europe. Furthermore, we may not haveidentified all United States and foreign patents that pose a risk ofinfringement.

 

We also rely upon licensing opportunities for someof our technologies. We cannot be certain that we will not lose our rights tocertain patented technologies under existing licenses or that we will be ableto obtain a license to any required third-party technology. If we lose ourlicensed technology rights or if we are not able to obtain a required license,we could be adversely affected.

 

***We may be unableto obtain regulatory clearance to market our drug candidates in the UnitedStates or foreign countries on a timely basis, or at all.***

 

Our drug candidates are subject to extensivegovernment regulations related to development, clinical trials, manufacturingand commercialization. The process of obtaining FDA and other regulatoryapprovals is costly, time-consuming, uncertain and subject to unanticipateddelays. Regulatory authorities may refuse to approve an application forapproval of a drug candidate if they believe that applicable regulatorycriteria are not satisfied. Regulatory authorities may also require additionaltesting 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 authorities may apply similar limitations or mayrefuse to grant any approval. Unexpected changes to the FDA or foreignregulatory approval process could also delay or prevent the approval of ourdrug candidates.

 

The data collected from ourclinical trials may not be sufficient to support approval of our drugcandidates or additional or expanded indications by the FDA or any foreignregulatory authorities. Biotechnology stock prices have declined significantlyin certain instances where companies have failed to meet expectations with respectto FDA approval or the timing for FDA approval. If the FDA’s or any foreignregulatory authority’s response is delayed or not favorable for any of our drugcandidates, our stock price could decline significantly.

 

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 obtainingthese approvals could prohibit or delay us or any of our business partners frommarketing 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 are not approved, our ability to generaterevenues may be limited and our business will be adversely affected.

 

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***Litigation regarding patents and other proprietary rights may beexpensive, cause delays in bringing products to market and harm our ability tooperate.***

 

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 pharmaceuticalcompanies against the patents of competitors 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, our ability to obtain and enforce patents isuncertain and involves complex legal and factual questions. Third parties maychallenge, in courts or through patent office proceedings, or infringe upon,existing or future patents. In the event that a third party challenges apatent, a court or patent office may invalidate the patent or determine thatthe patent is not enforceable. Proceedings involving our patents or patentapplications or those of others could result in adverse decisions about:

 

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

 

•      theenforceability, validity or scope of protection offered 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 areunable to avoid infringement of the patent rights of others, we may be requiredto seek a license, defend an infringement action or challenge the validity ofthe patents in court. Patent litigation is costly and time consuming. We maynot have sufficient resources to bring these actions to a successfulconclusion. In addition, if we do not obtain a license, develop or obtain non-infringingtechnology, fail to successfully defend an infringement action or haveinfringing patents declared invalid, we may:

 

•      incursubstantial monetary damages;

 

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

 

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

 

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

 

Upon approval of BYETTA andSYMLIN by the FDA, we became subject to various health care “fraud and abuse”laws, such as the Federal False Claims Act, the federal anti-kickback statuteand other state and federal laws and regulations. Pharmaceutical companies havefaced lawsuits and investigations pertaining to violations of these laws andregulations. We cannot guarantee that measures that we have taken to preventsuch violations, including our corporate compliance program, will protect usfrom future violations, lawsuits or investigations. If any such actions areinstituted against us, and we are not successful in defending ourselves orasserting our rights, those actions could have a significant impact on ourbusiness, including the imposition of significant fines or other sanctions.

 

***Our financial results will fluctuate, and these fluctuations may causeour stock price to fall.***

 

Forecasting future revenuesis difficult, especially since we launched our first products in 2005 and whenthe level of market acceptance of these products may change rapidly. Inaddition, our customer base is highly concentrated with four customersaccounting for most of our net product sales. Fluctuations in the buyingpatterns of these customers, which may result from seasonality, wholesalerbuying decisions or other factors outside of our control, could significantlyaffect the level of our net sales on a period to period basis. As a result, itis reasonably likely that our financial results will fluctuate to an extent,that may not meet with market expectations and that also may adversely affectour stock price. There are a number of other factors that could cause ourfinancial results to fluctuate unexpectedly, including:

 

•      productsales;

 

•      costof product sales;

 

•      achievementand timing of research and development milestones;

 

•      collaborationrevenues;

 

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

 

•      marketingand other expenses;

 

•      manufacturingor supply issues; and

 

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

 

***We may require additional financing in the future, which may not beavailable to us on favorable terms, or at all.***

 

We intend to use ouravailable cash for:

 

•      Commercializationof BYETTA and SYMLIN;

 

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

 

•      Developmentof exenatide LAR and other pipeline candidates;

 

•      Executingour INTO strategy;

 

•      Ourother research and development activities;

 

•      Otheroperating expenses;

 

•      Potentialacquisitions or investments in complementary technologies or businesses; and

 

•      Othergeneral corporate purposes.

 

We may also be required touse our cash to pay principal and interest on outstanding debt, including $775million in outstanding principal amount of convertible senior notes, of which$200 million is due in 2011 and $575 million is due in 2014.

 

***Our business has a substantial risk of product liability claims, andinsurance may not be adequate to cover these claims.***

 

Our business exposes us topotential product liability risks that are inherent in the testing,manufacturing and marketing of human therapeutic products. Product liabilityclaims could result in the imposition of substantial liability on us, a recallof products, or a change in the indications for which they may be used. Wecurrently have limited product liability insurance coverage. We cannot assureyou that our insurance will provide adequate coverage against potentialliabilities.

 

***Our ability to enter into and maintain third-party relationships isimportant to our successful development and commercialization of BYETTA, SYMLINand our other drug candidates and to our potential profitability.***

 

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 LAR. We believe that we will likelyneed to enter into marketing and distribution arrangements with third partiesfor, or find a corporate partner who can provide support for, the developmentand commercialization of SYMLIN or our other drug candidates outside the UnitedStates. We may also enter into arrangements with third parties for thecommercialization of SYMLIN or any of our other drug candidates within theUnited States.

 

With respect to BYETTA and,if approved, exenatide LAR, Lilly is co-promoting within the United States. IfLilly ceased commercializing BYETTA or, if approved, exenatide LAR, 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 to enterinto marketing and distribution arrangements or find a corporate partner forSYMLIN or our other drug candidates as we deem necessary. If we are not able toenter into a marketing or distribution arrangement or find a corporate partnerwho can provide support for commercialization of our drug candidates as we deemnecessary, we may not be able to successfully perform these marketing ordistribution activities. Moreover, any new marketer or distributor

 

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or corporate partner for ourdrug candidates, including Lilly, with whom we choose to contract may notestablish adequate sales and distribution capabilities or gain marketacceptance for our products, if any.

 

***We have a significant amount of indebtedness. We may not be able tomake payments on our indebtedness, and we may incur additional indebtedness inthe future, which could adversely affect our operations.***

 

In April 2004, we issued$200 million of the 2004 Notes and in June 2007, we issued $575 million of the2007 Notes. Our ability to make payments on our debt, including the 2004 and2007 Notes, will depend on our future operating performance and ability togenerate cash and may also depend on our ability to obtain additional debt orequity financing. During each of the last five years, our operating cash flowswere negative and insufficient to cover our fixed charges. We may need to useour cash to pay principal and interest on our debt, thereby reducing the fundsavailable to fund our research and development programs, strategic initiativesand working capital requirements. Our ability to generate sufficient operatingcash flow to service our indebtedness, including the 2004 and 2007 Notes, andfund our operating requirements will depend on our ability, alone or withothers, to successfully develop, manufacture, obtain required regulatoryapprovals for and market our drug candidates, as well as other factors,including general economic, financial, competitive, legislative and regulatoryconditions, some of which are beyond our control. Our debt service obligationsincrease our vulnerabilities to competitive pressures, because many of ourcompetitors are less leveraged than we are. If we are unable to generatesufficient operating cash flow to service our indebtedness and fund ouroperating requirements, we may be forced to reduce 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 maymake us more vulnerable to economic or industry downturns. If we incur newindebtedness, the risks relating to our business and our ability to service ourindebtedness will intensify.

 

***We may be required to redeem our convertible senior notes upon adesignated event.***

 

Holders of the 2004 and 2007Notes 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. We may not have sufficient cash funds to redeem the notesupon a designated event. We may elect, subject to certain conditions, to paythe redemption price for the 2004 Notes in our common stock or a combination ofcash and our common stock. We may be unable to satisfy the requisite conditionsto enable us to pay some or all of the redemption price for the 2004 Notes inour common stock. In addition, although there are currently no restrictions onour ability to pay the redemption price under our existing debt agreements,future debt agreements may prohibit us from repaying the redemption price ofeither of the notes in either cash or common stock. If we are prohibited fromredeeming the 2004 Notes or 2007 Notes, we could seek consent from our lendersto redeem the notes. If we are unable to obtain their consent, we could attemptto refinance the notes. If we were unable to obtain a consent or refinance, wewould be prohibited from redeeming the notes. If we were unable to redeem thenotes upon a designated event, it would result in an event of default under theindentures governing the notes. An event of default under the indentures couldresult in a further event of default under our other then-existing debt. Inaddition, the occurrence of a designated event may be an event of default underour other debt.

 

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

 

Certain of our research anddevelopment programs for drug candidates are at an early stage and will requiresignificant research, development, preclinical and clinical testing,manufacturing scale-up activities, regulatory approval and/or commitments ofresources 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 otherkey executives and our ability to attract, retain and motivate qualifiedpersonnel.***

 

We are highly dependent onour chief executive officer, and the other principal members of our executiveand scientific teams. The unexpected loss of the services of any of thesepersons might impede the achievement of our research, development andcommercialization objectives. Recruiting and retaining qualified sales,marketing, regulatory, scientific and other personnel and consultants will alsobe critical to our success. We may not be able to attract and retain thesepersonnel and consultants on acceptable terms given the competition between numerouspharmaceutical and biotechnology companies. We do not maintain “key person”insurance on any of our employees.

 

***We may be unable to adequately prevent disclosure of trade secrets andother 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

 

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other advisors. Theseagreements may not effectively prevent disclosure of confidential informationand may not provide an adequate remedy in the event of unauthorized disclosureof confidential information. In addition, others may independently discover ourtrade 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 planned manufacturingactivities involve the use of hazardous materials, which subject us toregulation, related costs and delays and potential liabilities.***

 

Our research and developmentand our planned manufacturing activities involve the controlled use ofhazardous materials, chemicals and various radioactive compounds. Although webelieve that our research and development safety procedures for handling anddisposing of these materials comply with the standards prescribed by state andfederal regulations, the risk of accidental contamination or injury from thesematerials cannot be eliminated. In addition, as part of the development of ourplanned manufacturing activities, we will need to develop additional safetyprocedures for the handling and disposing of hazardous materials. If anaccident occurs, we could be held liable for resulting damages, which could besubstantial. We are also subject to numerous environmental, health and workplacesafety laws and regulations, including those governing laboratory procedures,exposure to blood-borne pathogens and the 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 tocomply with, and substantial fines or penalties if we violate, any of theselaws or regulations.

 

***We are exposed to potential risks from recent legislation requiringcompanies 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 other things, we must perform systems andprocesses 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 assessment of our internalcontrol over financial reporting, as required by Section 404 of theSarbanes-Oxley Act. In connection with our Section 404 compliance efforts, wehave incurred or expended, and expect to continue to incur or expend,substantial accounting and other expenses and significant management time andresources. We have implemented certain remediation activities resulting fromour ongoing assessment of internal control over financial reporting. Our futureassessment, or the future assessments by our independent registered publicaccounting firm, may reveal material weaknesses in our internal control. Ifmaterial weaknesses are identified in the future we would be required toconclude that our internal control over financial reporting are ineffective andwe could be subject to sanctions or investigations by the SEC, the NASDAQ StockMarket 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 could discourage orprevent an acquisition of our company, even if the acquisition would bebeneficial to our stockholders, and as a result our management may becomeentrenched 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 our stockholders.These provisions include:

 

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

 

•      allowingour board of directors to issue, without stockholder approval, up to 5.5million shares of preferred stock with terms set by the board of directors;

 

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

 

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

 

Each of these provisions, aswell 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. Inaddition to provisions in our charter documents and under Delaware law, anacquisition of our company could be made more difficult by our employeebenefits plans and our employee change in control plan, under which, inconnection with a change in control, stock options held by our employees maybecome vested and our officers may receive severance

 

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benefits. We also haveimplemented a stockholder rights plan, also called a poison pill, which couldmake it uneconomical for a third party to acquire us on a hostile basis.

 

***Our executive officers, directors and major stockholders controlapproximately 58% of our common stock.***

 

As of September 30, 2007,executive officers, directors and holders of 5% or more of our outstandingcommon stock, in the aggregate, owned or controlled approximately 58% of ouroutstanding common stock. As a result, these stockholders are able to influenceall matters requiring approval by our stockholders, including the election ofdirectors and the approval of corporate transactions. This concentration ofownership may also delay, deter or prevent a change in control of our companyand may make some transactions more difficult or impossible to complete withoutthe support of these stockholders.

 

***Substantial future sales of our common stock by us or our existingstockholders or the conversion of our convertible senior notes to common stockcould 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 the tradingprice of our common stock to drop. Likewise, the issuance of shares of commonstock upon conversion of our convertible notes or redemption of our convertiblenotes upon a designated event, or upon additional convertible debt or equityfinancings or other share issuances by us, including shares issued inconnection with potential future strategic alliances and the uncertain numberof additional shares that we may be required to issue under our agreements withLilly, could adversely affect the trading price of our common stock. Ourconvertible notes are currently convertible into a total of up to 15.2 millionshares. In addition, the existence of these notes may encourage short sellingof our common stock by market participants.

 

***Significant volatility in the market price for our common stock couldexpose 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, 2005, the high and low sales price ofour common stock varied significantly, as shown in the following table:

 
| ** **                                | ** ** | **High**   | ** ** | **Low**    | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| **Year ending December 31, 2007**         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fourth Quarter (through October 29, 2007) |       | $          | 51.10      |       | $          | 43.91 |   |
| 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 |   |
| **Year ended December 31, 2005**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fourth Quarter                            |       | $          | 42.36      |       | $          | 32.63 |   |
| Third Quarter                             |       | $          | 35.47      |       | $          | 18.50 |   |
| Second Quarter                            |       | $          | 21.73      |       | $          | 14.50 |   |
| First Quarter                             |       | $          | 24.95      |       | $          | 17.15 |   |

 

Given the uncertainty of ourfuture funding, whether BYETTA and SYMLIN will meet our expectations, and theregulatory approval of our other drug candidates, we may continue to experiencevolatility in our stock price for the foreseeable future. In addition, thefollowing factors may significantly affect the market price of our commonstock:

 

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

 

•      safetyissues with BYETTA, SYMLIN or our product candidates;

 

•      clinicalstudy results;

 

•      determinationsby regulatory authorities with respect to our drug candidates;

 

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•      ourability to complete our Ohio manufacturing facility and the commercialmanufacturing process for exenatide LAR;

 

•      developmentsin our relationships with current or future collaborative partners;

 

•      ourability to successfully execute our commercialization strategies;

 

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

 

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

 

•      developmentsin patent or other proprietary rights; and

 

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

 

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

 

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**ITEM 6. Exhibits**

 

The following exhibits areincluded as part of this report:

 
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                    |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                               |
| 3.1             |       | Amended and Restated  Certificate of Incorporation (filed as an exhibit to Registrant’s  registration statement on Form S-1 (File No. 333-44195) or  amendments thereto and incorporated herein by reference)                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 3.2             |       | Third Amended and  Restated Bylaws (filed as an exhibit to Registrant’s Current Report on Form  8-K filed on October 31, 2007 and incorporated herein by reference)                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 3.3             |       | Certificate of  Amendment of Amended and Restated Certificate of Incorporation (filed as an  exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter  ended September 30, 2001 and incorporated herein by reference)                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 3.4             |       | Certificate of  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  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)                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 4.2             |       | Rights Agreement, dated  as of June 17, 2002, between the Registrant and American Stock  Transfer & Trust Company (filed as an exhibit to Registrant’s  Current Report on Form 8-K filed on June 18, 2002 and incorporated  herein by reference)                                      |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 4.3             |       | First Amendment to  Rights Agreement dated December 13, 2002, between the Registrant and  American Stock Transfer & Trust Company (filed as an exhibit to  Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2002 and incorporated herein by reference) |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 4.4             |       | Form of Rights  Certificate (filed as an exhibit to Registrant’s Current Report on  Form 8-K filed on June 18, 2002 and incorporated herein by  reference)                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 4.5             |       | Certificate of  Designation of Series A Junior Participating Preferred Stock (filed as  an exhibit to Registrant’s Current Report on Form 8-K filed on  June 18, 2002 and incorporated herein by reference)                                                                                    |
|            |       |                                                                                                                                                                                                                                                                                                               |
| 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                                                                                                                                                                                   |

** **

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**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                        | Amylin  Pharmaceuticals, Inc.                                                                                                                                     |
|------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                   |                                                                                                                                                                   |
| Date: November 6, 2007 | 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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