Table of Contents

 

 

 

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

----

 

**(MarkOne)**

 
| **x** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------|

 

**For thequarterly period ended March 31, 2010**

** **

**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 of registrant asspecified in its charter)**

 

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

 

**(858) 552-2200**

(Registrant’s telephone number, includingarea code)

 

**Not Applicable**

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

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).   Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See definitionsof “large accelerated filer,” “accelerated filer,” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).   Yes o No x

 

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

 
| **Class**                      | ** ** | **Outstanding  on April 30, 2010** |
|--------------------------------|------------|------------------------------------|
| Common Stock,  $.001 par value |       | 143,625,643                        |

 

 

 

----

**Tableof Contents**

** **

**AMYLIN PHARMACEUTICALS,INC.**

** **

**TABLE OF CONTENTS**

 
| COVER PAGE                        |                                                                                                  |
|-----------------------------------|-------------------------------------------------------------------------------------------------------|
| ** **                        | ** **                                                                                            |
| TABLE  OF CONTENTS                | 2                                                                                                     |
|                              |                                                                                                  |
| **PART I. FINANCIAL INFORMATION** | ** **                                                                                            |
|                              |                                                                                                  |   |
| ITEM 1.                           | Financial Statements                                                                                  | 3 |
|                              |                                                                                                  |   |
|                              | Consolidated Balance Sheets as of March 31, 2010  (unaudited) and December 31, 2009                   | 3 |
|                              |                                                                                                  |   |
|                              | Consolidated Statements of Operations for the three  months ended March 31, 2010 and 2009 (unaudited) | 4 |
|                              |                                                                                                  |   |
|                              | Consolidated Statements of Cash Flows for the three  months ended March 31, 2010 and 2009 (unaudited) | 5 |
|                              |                                                                                                  |   |
|                              | Notes to Consolidated Financial Statements (unaudited)                                                | 6 |
|                              |                                                                                                  |   |
| ITEM 2.                           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations           | 19 |
|                              |                                                                                                  |   |
| ITEM 3.                           | Quantitative and Qualitative  Disclosures about Market Risk                                           | 26 |
|                              |                                                                                                  |   |
| ITEM 4.                           | Controls and Procedures                                                                               | 26 |
|                              |                                                                                                  |   |
| **PART II.  OTHER INFORMATION**   | ** **                                                                                            |
|                              |                                                                                                  |   |
| ITEM 1.                           | Legal Proceedings                                                                                     | 27 |
|                              |                                                                                                  |   |
| ITEM 1A.                          | Risk Factors                                                                                          | 27 |
|                              |                                                                                                  |   |
| ITEM 6.                           | Exhibits                                                                                              | 39 |
|                              |                                                                                                  |   |
| SIGNATURE                         | 40                                                                                                    |

 

2

----

**Table of Contents**

** **

**PART I. FINANCIALINFORMATION**

** **

**ITEM 1. Financial Statements**

** **

**AMYLIN PHARMACEUTICALS,INC.**

** **

**Consolidated BalanceSheets**

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

 
| ** **                                                                                                                                                   | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                                                                                                                   | ** ** | **(unaudited)**     | ** ** | ** **             | ** ** |
| Assets                                                                                                                                                       | ** ** | ** **          | ** ** | ** **             | ** ** |
| Current assets:                                                                                                                                              |       |                |       |                   |       |
| Cash and cash equivalents                                                                                                                                    |       | $                   | 134,813    |                   | $          | 120,825 |   |
| Short-term investments                                                                                                                                       |       | 463,438             |       | 546,944                |       |
| Accounts receivable, net                                                                                                                                     |       | 56,011              |       | 60,732                 |       |
| Inventories, net                                                                                                                                             |       | 93,518              |       | 99,700                 |       |
| Other current assets                                                                                                                                         |       | 95,523              |       | 78,481                 |       |
| Total current assets                                                                                                                                         |       | 843,303             |       | 906,682                |       |
|                                                                                                                                                         |       |                |       |                   |       |
| Property, plant and equipment, net                                                                                                                           |       | 792,498             |       | 780,058                |       |
| Other long-term assets                                                                                                                                       |       | 39,973              |       | 39,679                 |       |
|                                                                                                                                                         |       | $                   | 1,675,774  |                   | $          | 1,726,419 |   |
|                                                                                                                                                         |       |                |       |                   |       |
| Liabilities and  Stockholders’ Equity                                                                                                                   |       |                |       |                   |       |
|                                                                                                                                                         |       |                |       |                   |       |
| Current liabilities:                                                                                                                                         |       |                |       |                   |       |
| Accounts payable                                                                                                                                             |       | $                   | 37,511     |                   | $          | 39,146 |   |
| Accrued compensation                                                                                                                                         |       | 32,559              |       | 70,961                 |       |
| Payable to collaborative partner                                                                                                                             |       | 41,064              |       | 49,645                 |       |
| Restructuring liability, current portion                                                                                                                     |       | 7,674               |       | 9,204                  |       |
| Notes payable, current portion                                                                                                                               |       | 85,938              |       | 93,750                 |       |
| Deferred revenue, current portion                                                                                                                            |       | 7,500               |       | 7,500                  |       |
| Other current liabilities                                                                                                                                    |       | 88,551              |       | 95,163                 |       |
| Total current liabilities                                                                                                                                    |       | 300,797             |       | 365,369                |       |
|                                                                                                                                                         |       |                |       |                   |       |
| Deferred revenue, net of current portion                                                                                                                     |       | 64,375              |       | 66,250                 |       |
| Long-term deferred credit                                                                                                                                    |       | 125,000             |       | 125,000                |       |
| Deferred collaborative profit-sharing                                                                                                                        |       | 68,384              |       | 54,570                 |       |
| Restructuring liability, net of current portion                                                                                                              |       | 21,648              |       | 22,776                 |       |
| Other long-term obligations, net of current  portion                                                                                                         |       | 24,136              |       | 26,158                 |       |
| Convertible senior notes                                                                                                                                     |       | 649,783             |       | 643,762                |       |
|                                                                                                                                                         |       |                |       |                   |       |
| Commitments and contingencies                                                                                                                                |       |                |       |                   |       |
|                                                                                                                                                         |       |                |       |                   |       |
| Stockholders’ equity:                                                                                                                                   |       |                |       |                   |       |
| Preferred stock, $.001 par value, 7,500 shares  authorized, none issued and outstanding at March 31, 2010 and December 31,  2009                             |       | —              |       | —                 |       |
| Common stock, $.001 par value, 450,000 shares  authorized, 143,452 and 141,747 issued and outstanding at March 31, 2010 and  December 31, 2009, respectively |       | 143                 |       | 142                    |       |
| Additional paid-in capital                                                                                                                                   |       | 2,408,540           |       | 2,371,939              |       |
| Accumulated deficit                                                                                                                                          |       | (1,986,070          | )          | (1,947,867             | )          |
| Accumulated other comprehensive loss                                                                                                                         |       | (962                | )          | (1,680                 | )          |
| Total stockholders’ equity                                                                                                                              |       | 421,651             |       | 422,534                |       |
|                                                                                                                                                         |       | $                   | 1,675,774  |                   | $          | 1,726,419 |   |

 

See accompanyingnotes to consolidated financial statements.

 

3

----

**Table of Contents**

** **

**AMYLIN PHARMACEUTICALS,INC.**

** **

**Consolidated Statementsof Operations**

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

**(unaudited)**

 
| ** **                                                      | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                      | ** ** | **2010**                          | ** ** | **2009 (1)** | ** ** |
| Revenues:                                                       |       |                              |       |   |   |
| Net product sales                                               |       | $                                 | 172,261    |   | $ | 179,332 |   |
| Revenues under collaborative agreements                         |       | 1,875                             |       | 1,071 |   |
| Total revenues                                                  |       | 174,136                           |       | 180,403 |   |
|                                                            |       |                              |       |   |   |
| Costs and expenses:                                             |       |                              |       |   |   |
| Cost of goods sold                                              |       | 20,502                            |       | 18,632 |   |
| Selling, general and administrative                             |       | 76,747                            |       | 87,556 |   |
| Research and development                                        |       | 41,827                            |       | 46,748 |   |
| Collaborative profit sharing                                    |       | 67,900                            |       | 73,017 |   |
| Total costs and expenses                                        |       | 206,976                           |       | 225,953 |   |
|                                                            |       |                              |       |   |   |
| Operating loss                                                  |       | (32,840                           | )          | (45,550 | ) |
|                                                            |       |                              |       |   |   |
| Interest and other income                                       |       | 716                               |       | 3,023 |   |
| Interest and other expense                                      |       | (6,079                            | )          | (4,427 | ) |
| Net loss                                                        |       | $                                 | (38,203    | ) | $ | (46,954 | ) |
|                                                            |       |                              |       |   |   |
| Net loss per share, basic and diluted                           |       | $                                 | (0.27      | ) | $ | (0.34 | ) |
|                                                            |       |                              |       |   |   |
| Shares used in computing net loss per share, basic  and diluted |       | 142,702                           |       | 138,804 |   |

 

----

(1) Adjusted forthe change in our method of accounting for reimbursed research and developmentcosts under collaborative arrangements (Note 1).

 

See accompanying notes to consolidatedfinancial statements.

 

4

----

**Table of Contents**

** **

**AMYLIN PHARMACEUTICALS,INC.**

** **

**Consolidated Statementsof Cash Flows**

**(in thousands)**

**(unaudited)**

 
| ** **                                                                    | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                    | ** ** | **2010**                          | ** ** | **2009** | ** ** |
| Operating activities:                                                         |       |                              |       |   |   |
| Net loss                                                                      |       | $                                 | (38,203    | ) | $ | (46,954 | ) |
| Adjustments to reconcile net loss to net cash used  for operating activities: |       |                              |       |   |   |
| Depreciation and amortization                                                 |       | 14,153                            |       | 8,722 |   |
| Amortization of debt discount and debt issuance  costs                        |       | 2,775                             |       | 2,201 |   |
| Employee stock-based compensation                                             |       | 9,703                             |       | 10,954 |   |
| Stock-settled compensation accruals                                           |       | 7,088                             |       | 7,352 |   |
| Other non-cash expenses                                                       |       | 974                               |       | 600 |   |
| Changes in operating assets and liabilities:                                  |       |                              |       |   |   |
| Accounts receivable                                                           |       | 4,721                             |       | 304 |   |
| Inventories                                                                   |       | 6,182                             |       | (3,890 | ) |
| Other current assets                                                          |       | (9,804                            | )          | (20,143 | ) |
| Accounts payable and accrued liabilities                                      |       | (9,680                            | )          | (64 | ) |
| Accrued compensation                                                          |       | (25,790                           | )          | (11,971 | ) |
| Payable to collaborative partner                                              |       | (8,581                            | )          | 6,889 |   |
| Deferred revenue                                                              |       | (1,875                            | )          | (1,071 | ) |
| Deferred collaborative profit sharing                                         |       | 13,814                            |       | — |   |
| Restructuring liabilities                                                     |       | (2,658                            | )          | (12,421 | ) |
| Other assets and liabilities, net                                             |       | (1,320                            | )          | (4,369 | ) |
| Net cash flows used for operating activities                                  |       | (38,501                           | )          | (63,861 | ) |
|                                                                          |       |                              |       |   |   |
| Investing activities:                                                         |       |                              |       |   |   |
| Purchases of short-term investments                                           |       | (159,418                          | )          | (242,256 | ) |
| Sales and maturities of short-term investments                                |       | 243,288                           |       | 291,626 |   |
| Purchases of property, plant and equipment                                    |       | (27,532                           | )          | (38,833 | ) |
| Increase in other long-term assets                                            |       | (3,198                            | )          | (217 | ) |
| Net cash flows provided by investing activities                               |       | 53,140                            |       | 10,320 |   |
|                                                                          |       |                              |       |   |   |
| Financing activities:                                                         |       |                              |       |   |   |
| Issuance of common stock, net                                                 |       | 7,161                             |       | 3,838 |   |
| Repayment of notes payable                                                    |       | (7,812                            | )          | (7,812 | ) |
| Net cash flows used for financing activities                                  |       | (651                              | )          | (3,974 | ) |
|                                                                          |       |                              |       |   |   |
| Change in cash and cash equivalents                                           |       | 13,988                            |       | (57,515 | ) |
|                                                                          |       |                              |       |   |   |
| Cash and cash equivalents at beginning of period                              |       | 120,825                           |       | 237,263 |   |
| Cash and cash equivalents at end of period                                    |       | $                                 | 134,813    |   | $ | 179,748 |   |
|                                                                          |       |                              |       |   |   |
| **Supplemental disclosure of cash  flow information:**                        | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Property, plant and equipment additions in other  current liabilities         |       | $                                 | 2,333      |   | $ | 5,472 |   |
| Receivable arising from sale of property, plant  and equipment                |       | $                                 | 6,500      |   | — |   |
| Non-cash interest capitalized to property, plant  and equipment               |       | $                                 | 4,007      |   | $ | 4,055 |   |
|                                                                          |       |                              |       |   |   |
| **Non-cash financing activities:**                                            | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Shares contributed as employer 401(k) match                                   |       | $                                 | 3,851      |   | $ | 5,104 |   |
| Shares contributed to employee stock ownership  plan                          |       | $                                 | 15,848     |   | $ | 20,250 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

5

----

**Table of Contents**

** **

**AMYLIN PHARMACEUTICALS,INC.**

** **

**Notes to ConsolidatedFinancial Statements**

**March 31, 2010**

**(unaudited)**

** **

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

 

**Basis of Presentation**

** **

The information contained herein has been prepared inaccordance with instructions for Form 10-Q and Article 10 of Regulation S-X.The information as of March 31, 2010, and for the three months ended March 31,2010 and 2009, is unaudited. In the opinion of management, the informationreflects all adjustments necessary to make the results of operations for theinterim periods a fair statement of such operations. All such adjustments areof a normal recurring nature. Interim results are not necessarily indicative ofresults for a full year. The balance sheet at December 31, 2009 has beenderived from the audited consolidated financial statements at that date, butdoes not include all information and footnotes required by U.S. generallyaccepted accounting principles for complete financial statements. For morecomplete financial information, these financial statements should be read inconjunction with the audited consolidated financial statements included inAmylin Pharmaceuticals, Inc.’s (referred to as we, us or Amylin) Annual Reporton Form 10-K for the year ended December 31, 2009.

 

**Change in AccountingPolicy**

** **

During the fourth quarter of 2009, we changed our method of accountingfor reimbursed research and development costs under collaborative arrangementsfrom reporting them as revenue to reporting them as a reduction of research anddevelopment costs. We believe this method is consistent with industry practicefor companies whose primary focus is the commercialization of pharmaceuticalproducts. This change in accounting had no effect on operating loss or net loss.

 

Consistent with the accounting guidance addressing accounting changes,the effect of the change in accounting method has been made retroactive to thebeginning of the earliest period presented with the accompanying consolidatedfinancial statements.

 

The following tables summarize the impact of the change in accountingfor reimbursed research and development costs on the consolidated statements ofoperations for the three months ended March 31, 2009.  Only the line items affected by the change inaccounting are reflected in the tables below (in thousands):

 
| ** **                              | ** ** | **Three months ended  March 31, 2009** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                              | ** ** | **As originally  reported**            | ** ** | **As adjusted** | ** ** |
| Revenues under collaborative agreements |       | $                                      | 14,342     |   | $ | 1,071 |   |
| Research and development                |       | $                                      | 60,019     |   | $ | 46,748 |   |

** **

**Revenue Recognition**

** **

***Net Product Sales***

*** ***

We sell BYETTA® (exenatide) injection for the treatment oftype 2 diabetes and SYMLIN® (pramlintide acetate)injection for the treatment of type 1 and type 2 diabetes primarily towholesale distributors, who, in turn, sell to retail pharmacies and governmententities. Product sales are recognized when delivery of the products hasoccurred, title has passed to the customer, the selling price is fixed ordeterminable, collectability is reasonably assured and we have no further obligations.We record product sales net of allowances for product returns, rebates,wholesaler chargebacks, wholesaler discounts and prescription vouchers at thetime of sale and report product sales net of such allowances. We must makesignificant judgments in determining these allowances. If actual results differfrom our estimates, we will be required to make adjustments to these allowancesin the future.  We continue to record allowances relatedto the United States Department of Defense’s Tricare Retail Pharmacy programpursuant to a final rule that was issued in March 2009 and became effective on May26, 2009.  In consideration of this finalrule we recorded an allowance of $1.8 million for such rebates in the threemonths ended March 31, 2010 and $5.8 million for such rebates in the threemonths ended March 31, 2009, of which $4.8 million represents a retroactiverebate assessment recorded in 2009 for sales made during 2008 that now appearprobable of being assessed and paid.

 

6

----

Table of Contents

 

In March 2010, PresidentObama signed into law the Patient Protection and Affordable Care Act (PPACA) asamended by the Health Care and Education Reconciliation Act.  There are a number of provisions in the newlegislation that will impact the pharmaceutical industry through increaseddiscounts and an expansion of government funded insurance programs.  The provisions become effective over time,however, certain provisions became effective in the first quarter of 2010.  These provisions are related to increasedMedicaid discounts, an increase in the population of patients eligible forMedicaid discounts, and the expansion of the 340 (B) Public Health Servicesdrug pricing program, which provides outpatient drugs at reduced rates, toinclude additional hospitals, clinics and healthcare centers.  These new provisions did not have a materialimpact on our results for the three months ended March 31, 2010.  We are currently evaluating the newlegislation to determine its impact on our business and future financialresults.  We expect the financial impactof the new legislation to grow over time.

 

Werecord all United States BYETTA and SYMLIN product sales. With respect toBYETTA, we have determined that we are qualified as a principal based on ourresponsibilities under our contracts with Eli Lilly and Company, or Lilly,which include manufacture of product for sale in the United States, responsibilityfor establishing pricing in the United States, distribution, ownership ofproduct inventory and credit risk from customers.

 

***Revenues Under Collaborative Agreements***

*** ***

Revenues under collaborative agreements consist of the amortization ofproduct and technology license fees and milestone payments earned.  Upfront product and technology license feesunder multiple-element arrangements are deferred and recognized over the periodof such services or performance if such arrangements require on-going servicesor performance. Non-refundable amounts received for substantive milestones arerecognized upon achievement of the milestone. Any amounts received prior tosatisfying these revenue recognition criteria are recorded as deferred revenue.

 

***Collaborative Profit-Sharing***

*** ***

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

 

***Accounts***Receivable

*** ***

Trade accounts receivable are recorded net ofallowances for cash discounts for prompt payment, doubtful accounts, productreturns and chargebacks. Allowances for rebate discounts and distribution feesare included in other current liabilities in the accompanying consolidatedbalance sheets. Estimates for allowances for doubtful accounts are determinedbased on existing contractual obligations, historical payment patterns andindividual customer circumstances.  Theallowance for doubtful accounts was $0.8 million and $0.7 million at March 31,2010 and December 31, 2009, respectively.

 

**Investments in UnconsolidatedEntities**

 

We use the equity method ofaccounting for investments in other companies that are not controlled by us andin which our interest is generally between 20% and 50% of the voting shares orwe have significant influence over the entity, or both.  Our share of the income or losses of theseentities is included in interest and other expense, and the investments, whichhave a net book value of $4.8 million and $3.2 million at March 31, 2010 and December31, 2009, respectively, are included in other long-term assets.  We recorded $0.9 million and $0.6 million for our share of equity method investee losses during the three months ended March 31,2010 and 2009, respectively.

 

**Fair Value Measurements**

 

In January2010, we adopted a newly issued accounting standard which requires additionaldisclosure about the amounts of and reasons for significant transfers in andout of Level 1 and Level 2 fair value measurements. This standard alsoclarifies existing disclosure requirements related to the level of disaggregationof fair value measurements for each class of assets and liabilities anddisclosures about inputs and valuation techniques used to measure fair valuefor both recurring and nonrecurring Level 2 and Level 3 measurements. As thisnewly issued accounting standard only requires enhanced disclosure, theadoption of this standard did not impact our financial position or results ofoperations. In addition, effective for interim and annual periods beginningafter December 15, 2010, this standard will require additional disclosure andrequire an entity to present disaggregated information about activity in Level 3fair value measurements on a gross basis, rather than as one net amount.

 

7

----

Table ofContents

 

The authoritative guidance for fair value measurements defines fairvalue as the exchange price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date. Market participants are buyers andsellers in the principal market that are (i) independent, (ii) knowledgeable, (iii)able to transact and (iv) willing to transact. The guidance prioritizes theinputs used in measuring fair value into the following hierarchy:

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

 

Therehave been no transfers of assets or liabilities between the fair valuemeasurement classifications.

 

The following table summarizes the assets andliabilities measured at fair value on a recurring basis (in thousands):

 
| ** **                                                | ** ** | **Fair value measurements as of March 31, 2010** | ** **    |
|-----------------------------------------------------------|------------|--------------------------------------------------|---------------|
| ** **                                                | ** ** | **Total**                                        | ** **    | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Short-term investments                                    |       | $                                                |  463,438 |   | $ |  463,438 |   | $ |  — |   | $ |  — |   |
| Cash and cash equivalents                                 |       | 134,813                                          |          | 134,813 |   | — |   | — |   |
| Derivative financial instrument contracts, net  liability |       | (2,408                                           | )             | — |   | (2,408 | ) | — |   |
|                                                      |       | $                                                |  595,843 |   | $ |  598,251 |   | $ |  (2,408 | ) | $ |  — |   |

 

# **Researchand Development Expenses**

#  

# Research and developmentcosts are expensed as incurred and include salaries and bonuses, benefits, non-cash stock-basedcompensation, license fees, milestone payments due under license agreements,costs paid to third-party contractors to perform research, conduct clinicaltrials and develop drug materials and delivery devices and associated overheadexpenses and facilities costs.Reimbursements for research and development costs under collaborativearrangements are recorded as a reduction to research and development expensesand are recognized in the period in which the related costs are incurred.  Clinical trial costs, including costsassociated with third-party contractors, are a significant component ofresearch and development expenses. Invoicing from third-party contractors forservices performed can lag several months. We accrue the costs of servicesrendered in connection with such activities based on our estimate of managementfees, site management and monitoring costs and data management costs. Actualclinical trial costs may differ from estimates and are adjusted in the periodin which they become known.

#  

**Derivative FinancialInstruments**

 

**Wemitigate certain financial exposures, including currency risk and interest raterisk, through a controlled program of risk management that includes the use ofderivative financial instruments. Derivatives are recorded on the balance sheetat fair value, with changes in value being recorded in interest and otherincome and interest and other expense. The fair value of our derivativefinancial instruments was a net liability of $2.4 million and $2.9 million at March31, 2010 and December 31, 2009, respectively. We have determined that our derivative financial instruments are definedas Level 2 in the fair value hierarchy. We recognized net gains of $0.5 millionand $0.7 million on derivative financial instruments for the three months endedMarch 31, 2010 and 2009, respectively.**

** **

Thefollowing table summarizes the fair value and balance sheet classification ofour derivative financial instruments (in thousands):

 
| ** **                                   | ** ** | **March 31, 2010** | ** ** | **December 31, 2009**       | ** **                                          |
|----------------------------------------------|------------|--------------------|------------|-----------------------------|-----------------------------------------------------|
| ** **                                   | ** ** | **Fair Value**     | ** ** | **Balance sheet  location** | ** **                                          | **Fair Value** | ** ** | **Balance sheet  location** | ** ** |
| Foreign currency derivative contracts        |       | $                  | (284       | )                           | Other current liabilities                           |   | $ | (100 | ) | Other current liabilities |   |
| Interest rate derivative contract, current   |       | (2,124             | )          | Other current liabilities   |                                                | — |   | Other current liabilities |   |
| Interest rate derivative contract, long-term |       | $                  | —     |                        | Other long-term obligations, net of current portion |   | $ | (2,813 | ) | Other long-term obligations, net of current portion |   |
|                                         |       |               |       |                        |                                                |   |   |   |   |
|                                         |       | $                  | (2,408     | )                           |                                                |   | $ | (2,913 | ) |   |   |

 

8

----

Table of Contents

 

**Per Share Data**

** **

Basic and diluted netloss applicable to common stock per share is computed using the weighted averagenumber of common shares outstanding during the period. Shares used incalculating basic and diluted net loss per common share exclude the followingcommon share equivalents (in thousands):

 
| ** **                                                | ** ** | **Three  Months********ended  March 31,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                | ** ** | **2010**                                  | ** ** | **2009** | ** ** |
| Antidilutive  options and awards to purchase common stock |       | 1,475                                     |       | 266 |   |
| Antidilutive  shares underlying convertible senior notes  |       | 15,238                                    |       | 15,238 |   |
|                                                      |       | 16,713                                    |       | 15,504 |   |

 

Infuture periods, if we report net income and the common share equivalents forour convertible 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.

 

**Accounting for Stock-Based Compensation**

 

Weutilize the fair value method of accounting for stock-based compensationarrangements.  Accordingly, we expensethe estimated fair value of non-cash stock-based awards granted to ouremployees over the requisite employee service period, which is generally thevesting period. The fair value method of accounting applies to awards grantedsubsequent to January 1, 2006, the date the fair value method of accounting forstock-based compensation arrangements became effective, and to awards that wereoutstanding on the effective date and subsequently modified or cancelled.Estimated non-cash stock-based compensation expense for awards outstanding asof January 1, 2006 is being recognized over the remaining service period of theaward using the compensation cost calculated for pro-forma disclosure purposesunder the former guidance.

 

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

 
| ** **                                               | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                               | ** ** | **2010**                          | ** ** | **2009** | ** ** |
| Selling, general and administrative expenses             |       | $                                 | 6,292      |   | $ | 7,305 |   |
| Research and development expenses                        |       | 3,411                             |       | 3,649 |   |
|                                                     |       | $                                 | 9,703      |   | $ | 10,954 |   |
|                                                     |       |                              |       |   |   |
| Net stock-based compensation expense, per common  share: |       |                              |       |   |   |
| Basic                                                    |       | $                                 | 0.07       |   | $ | 0.08 |   |
| Diluted                                                  |       | $                                 | 0.07       |   | $ | 0.08 |   |

 

Werecorded $9.7 million and $11.0 million of total non-cash stock-basedcompensation expense during the three months ended March 31, 2010 and 2009,respectively, related to stock-based awards consisting of stock options,performance based restricted stock units and employee stock purchaserights.  At March 31, 2010, totalunrecognized estimated compensation cost related to non-vested stock-basedawards granted prior to that date was $65.6 million, which is expected to berecognized over a weighted-average period of 2.5 years.  We issued 0.3 million shares upon theexercise of stock options in the three months ended March 31, 2010.

 

Inaddition to the stock-based compensation discussed above, we also recorded $5.8million of expense associated with our Employee Stock Ownership Plan, or ESOP,for each of the three month periods ended March 31, 2010 and 2009.  The breakdown of non-cash ESOP expense byoperating statement classification is presented below (in thousands):

 
| ** **                                   | ** ** | **Three  months ended  March 31,** | ** **  |
|----------------------------------------------|------------|------------------------------------|-------------|
| ** **                                   | ** ** | **2010**                           | ** **  | **2009** | ** ** |
| Selling, general and administrative expenses |       | $                                  |  3,013 |   | $ |  3,231 |   |
| Research and development expenses            |       | 2,756                              |        | 2,522 |   |
|                                         |       | $                                  |  5,769 |   | $ |  5,753 |   |

 

**Consolidation**

 

The consolidated financial statements include our accounts and those ofour wholly owned subsidiaries, Amylin Ohio, LLC, and Amylin Investments, LLC.All significant intercompany transactions and balances have been eliminated inconsolidation.

 

9

----

**Tableof Contents**

 

**Recently Issued Accounting Pronouncements**

** **

In October 2009, the FASB issued authoritative guidance that amendsexisting revenue recognition accounting pronouncements related tomultiple-deliverable revenue arrangements. The new guidance provides accountingprinciples and application guidance on whether multiple deliverables exist, howthe arrangement should be separated, and how the consideration should beallocated. This guidance expands the methods under which a company canestablish the fair value of undelivered products and services and provides forseparate revenue recognition based upon management’s estimate of the sellingprice for an undelivered item when there is no other means to determine thefair value of that undelivered item. The new guidance is effectiveprospectively for revenue arrangements entered into or materially modified infiscal years beginning on or after June 15, 2010. Earlier application ispermitted as of the beginning of a fiscal year. We are currently evaluating thepotential impact of this standard on our financial position and results ofoperations.

 

EffectiveJanuary 1, 2010, we adopted a newly issued accounting standard which amends theevaluation criteria to identify the primary beneficiary of a variable interestentity and requires a quarterly reassessment of the treatment of suchentities.  The guidance also requiresadditional disclosures about an enterprise’s involvement in a variable interestentity.  The adoption of this standarddid not have an impact on our financial position or results of operations.

 

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

 

Our short-term investments,consisting principally of debt securities, are classified as available-for-saleand are stated at fair value based upon observed market prices (Level 1 in thefair value hierarchy). Unrealized holding gains or losses on these securitiesare included in other comprehensive loss. 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 premiums and accretion of discounts are recognized in interestincome using the interest method, adjusted for anticipated prepayments asapplicable. Estimates of expected cash flows are updated periodically andchanges are recognized in the calculated effective yield prospectively asappropriate. Such amortization is included in interest income. Realized gainsand losses are included in interest income and declines in value judged to beother-than-temporary on available-for-sale securities are included inimpairment loss on investments, a component of other expense. In assessingpotential impairment of our short-term investments, we evaluate the impact ofinterest rates, potential prepayments on mortgage-backed securities, changes incredit quality, the length of time and extent to which the market value hasbeen less than cost, and our intent and ability not to sell the security inorder to allow for an anticipated recovery in fair value. The cost ofsecurities sold is based on the specific-identification method.  Thefollowing is a summary of short-term investments as of March 31, 2010 and December31, 2009 (in thousands):

 
| ** **                                            | ** ** | **Available-for-Sale  Securities** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | **Amortized  Cost**                | ** ** | **Gross  Unrealized  Gains (1)** | ** ** | **Gross  Unrealized  Losses (1)** | ** ** | **Estimated  Fair Value** | ** ** |
| **March 31, 2010**                                    |       |                               |       |   |   |   |   |   |   |
| U.S. Treasury securities                              |       | $                                  | 99,872     |   | $ | 20 |   | $ | (4 | ) | $ | 99,888 |   |
| Obligations of U.S. Government-sponsored  enterprises |       | 47,324                             |       | 21 |   | (274 | ) | 47,071 |   |
| Corporate debt securities                             |       | 307,418                            |       | 999 |   | (62 | ) | 308,355 |   |
| Asset backed securities                               |       | 8,524                              |       | 18 |   | (418 | ) | 8,124 |   |
| Total                                                 |       | $                                  | 463,138    |   | $ | 1,058 |   | $ | (758 | ) | $ | 463,438 |   |
|                                                  |       |                               |       |   |   |   |   |   |   |
| **December 31, 2009**                                 |       |                               |       |   |   |   |   |   |   |
| U.S. Treasury securities                              |       | $                                  | 187,892    |   | $ | 66 |   | $ | (2 | ) | $ | 187,956 |   |
| Obligations of U.S. Government-sponsored  enterprises |       | 60,280                             |       | 47 |   | (453 | ) | 59,874 |   |
| Corporate debt securities                             |       | 278,872                            |       | 917 |   | (99 | ) | 279,690 |   |
| Asset backed securities                               |       | 19,963                             |       | 37 |   | (576 | ) | 19,424 |   |
| Total                                                 |       | $                                  | 547,007    |   | $ | 1,067 |   | $ | (1,130 | ) | $ | 546,944 |   |

 

----

(1)Other comprehensive loss included a net unrealized loss of $0.9 million $1.6million on investments underlying our 2001 Non-Qualified Deferred CompensationPlan at March 31, 2010 and December 31, 2009, respectively.

 

10

----

Table ofContents

 

Contractual maturities of short-term investments at March 31, 2010 wereas follows (in thousands):

 
| ** **                  | ** ** | **Fair Value** | ** ** |
|-----------------------------|------------|----------------|------------|
| Due within 1 year           |       | $              | 389,690    |   |
| After 1 but within 5 years  |       | 45,235         |       |
| After 5 but within 10 years |       | 678            |       |
| After 10 years              |       | 27,835         |       |
| Total                       |       | $              | 463,438    |   |

 

For purposes of thesematurity classifications, the final maturity date is used for securities notdue at a single maturity date. Securities not due at a single maturity date includemortgage-backed securities, which are included in Obligations of U.SGovernment-sponsored enterprises in the table above, and asset-backedsecurities.

 

The following table showsthe gross unrealized losses and fair value of our investments with unrealizedlosses that are not deemed to be other-than-temporarily impaired, aggregated byinvestment category and length of time that individual securities have been ina continuous unrealized loss position, at March 31, 2010 (in thousands):

 
| ** **                                          | ** ** | **Less than 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total**       | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------|------------|
| ** **                                          | ** ** | **Fair  Value**         | ** ** | **Unrealized  Losses**   | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| U.S. Treasury securities                            |       | $                       | 68,602     |                     | $          | (4              | )          | $ | — |   | $ | — |   | $ | 68,602 |   | $ | (4 | ) |
| Obligations of U.S Government-sponsored enterprises |       | 7,879                   |       | (92                      | )          | 15,702          |       | (182 | ) | 23,581 |   | (274 | ) |
| Corporate debt securities                           |       | 43,677                  |       | (39                      | )          | 5,527           |       | (23 | ) | 49,204 |   | (62 | ) |
| Asset backed securities                             |       | 400                     |       | (48                      | )          | 3,487           |       | (370 | ) | 3,887 |   | (418 | ) |
| Mortgage-backed securities                          |       | —                  |       | —                   |       | —          |       | — |   | — |   | — |   |
|                                                |       | $                       | 120,558    |                     | $          | (183            | )          | $ | 24,716 |   | $ | (575 | ) | $ | 145,274 |   | $ | (758 | ) |

 

Our investments had grossunrealized losses of $0.8 million and $1.1 million at March 31, 2010 andDecember 31, 2009, respectively.  Theunrealized losses on our investments in marketable securities are due in most instancesto the increased volatility in the markets impacting the classes of securitieswe invest in and not deterioration in credit ratings. Our investments have ashort effective duration, and since we have the ability and intent not to sellthese investments until a recovery of fair value, which may be maturity, we donot consider these investments to be other-than-temporarily impaired at March31, 2010.

 

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

 

Inventories are stated at the lower of cost (FIFO)or market and net of a valuation allowance for potential excess and/or obsoletematerial of $0.8 million and $0.3 million at March 31, 2010 and December 31,2009, respectively. Raw materials consist of bulk drug material for BYETTA andSYMLIN.  Work-in-process inventoriesconsist of in-process BYETTA cartridges, in-process SYMLIN cartridges andin-process SYMLIN vials.  Finished goodsinventories consist of BYETTA drug product in a disposable pen/cartridgedelivery system, finished SYMLIN drug product in vials for syringeadministration and finished SYMLIN drug product in a disposable pen/cartridgedelivery system.

 

We expense costs relating to the purchase andproduction of pre-approval inventories as research and development expense inthe period incurred until such time as we believe future commercialization isprobable and future economic benefit is expected to be realized.  As of March 31, 2010 and December 31, 2009,we have not capitalized any costs associated with pre-launch inventory specificto BYDUREONTM(exenatide for extended-release injectable suspension).

 

Inventories consist of the following (inthousands):

 
| ** **      | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------|------------|---------------------|------------|------------------------|------------|
| Raw materials   |       | $                   | 60,881     |                   | $          | 67,446 |   |
| Work-in-process |       | 21,063              |       | 18,335                 |       |
| Finished goods  |       | 11,574              |       | 13,919                 |       |
|            |       | $                   | 93,518     |                   | $          | 99,700 |   |

 

11

----

Table of Contents

 

**4.****             ****Other Current Assets**

 

Othercurrent assets consist of the following (in thousands):

 
| ** **                            | ** ** | **March 31,****2010** | ** ** | **December 31,****2009** | ** ** |
|---------------------------------------|------------|-----------------------|------------|--------------------------|------------|
| Prepaid expenses                      |       | $                     | 60,427     |                     | $          | 58,032 |   |
| Receivable from collaborative partner |       | 15,749                |       | 7,924                    |       |
| Interest and other receivables        |       | 11,556                |       | 5,816                    |       |
| Other current assets                  |       | 7,791                 |       | 6,709                    |       |
|                                  |       | $                     | 95,523     |                     | $          | 78,481 |   |

 

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

 

Othercurrent liabilities consist of the following (in thousands):

 
| ** **                 | ** ** | **March 31,****2010** | ** ** | **December 31,****2009** | ** ** |
|----------------------------|------------|-----------------------|------------|--------------------------|------------|
| Accrued rebates            |       | $                     | 39,971     |                     | $          | 40,735 |   |
| Accrued expenses           |       | 37,847                |       | 34,789                   |       |
| Other  current liabilities |       | 10,733                |       | 19,639                   |       |
|                       |       | $                     | 88,551     |                     | $          | 95,163 |   |

 

**6. Collaborative Agreements**

 

We have entered into various collaborative agreements which provide uswith rights to develop, produce and market products using certain know-how,technology and patent rights maintained by our collaborative partners. Terms ofthe various collaboration agreements may require us to make and/or receivemilestone payments upon the achievement of certain product research anddevelopment objectives and pay and/or receive royalties on future sales, ifany, of commercial products resulting from the collaboration.

 

Amounts due from our collaborative partners related to developmentactivities are generally reflected as a reduction of research and developmentexpenses and amounts due to our collaborative partners related to sharing ofcommercialization expenses are generally reflected as selling, general andadministrative expenses. Milestone payments and up-front payments received aregenerally reflected as collaborative revenue as discussed above in Note 1, andmilestone payments and up-front payments made are generally recorded asresearch and development expenses if the payments relate to drug candidatesthat have not yet received regulatory approval. Milestone payments and up-frontpayments that we make related to approved drugs (of which there have been noneto date) will generally be capitalized and amortized to cost of goods sold overthe economic life of the product. Royalties received (of which there have beennone to date) will generally be reflected as collaborative revenues androyalties paid are generally reflected as cost of goods sold.

 

For collaborations with commercialized products, if we are theprincipal we record revenue and the corresponding operating costs in theirrespective line items within our statement of operations based on the nature ofthe shared expenses. If we are not the principal, we record operating costs asa reduction of revenue. The principal is the party who is responsible fordelivering the product or service to the customer, has latitude with establishingprice and has the risks and rewards of providing product or service to thecustomer, including inventory and credit risk.

 

***Collaboration with Eli Lilly andCompany***

 

In September 2002, we and Lilly entered into a Collaboration Agreementfor the global development and commercialization of exenatide (the “agreement”).The agreement was amended in 2006 and in 2009.

 

This agreement includes BYETTA and any sustained release formulationsof exenatide such as BYDUREON, our once-weekly formulation of exenatide for theproposed treatment of type 2 diabetes. Under the terms of the agreement,operating profits from products sold in the United States are shared equallybetween us and Lilly. In 2005, we received United States Food and DrugAdministration, or FDA, approval for the twice-daily formulation of exenatide,which is marketed in the United States under the trade name BYETTA. Theagreement provides for tiered royalties payable to us by Lilly based upon theannual gross margin for all exenatide product sales, including any long-actingrelease formulations, outside of the United States. Royalty payments forexenatide product sales outside of the United States will commence after aone-time cumulative gross margin threshold amount has been met. Lilly is responsiblefor 100% of the costs related to development of BYDUREON and BYETTA for saleoutside of the United States and 100% of the costs related to commercializationof all exenatide products for sale outside of the United States.

 

12

----

Table ofContents

 

At signing, Lilly made initial non-refundable payments to us totaling$80 million, of which $50 million was amortized to revenues undercollaborative agreements prior to 2004. The remaining $30 million wasamortized to revenues ratably over a seven-year period which ended in 2009 andrepresented our estimate of the period of our performance of significantdevelopment activities under the agreement.

 

In addition to these up-front payments, Lilly agreed to make futuremilestone payments of up to $85 million upon the achievement of certaindevelopment milestones, including milestones relating to both twice daily andsustained release formulations of exenatide such as BYDUREON, of which$75 million have been paid through March 31, 2010. No additionaldevelopment milestones may be earned under the collaboration agreement.

 

Lilly also agreed to make additional future milestone payments of up to$130 million contingent upon the commercial launch of exenatide inselected territories throughout the world, including both twice-daily andsustained release formulations, of which $40 million have been paidthrough March 31, 2010. Remaining milestones relate primarily to thecommercial launch of BYDUREON in selected territories throughout the world,including $40 million for the launch in the United States.

 

In December 2005, our wholly-owned subsidiary, AmylinOhio LLC, purchased an existing building and land to house our BYDUREON manufacturingfacility in Ohio and we are responsible for all costs and expenses associatedwith the design, construction, validation and utilization of the facility. At March 31,2010 we had capitalized $600.9 million associated with the constructionand validation of this facility.  Asdiscussed below, through March 31, 2010 we have incurred $122.4 million incapital expenditures associated with a BYDUREON pen device, which will befunded 60% by Lilly and 40% by us. Through March 31, 2010, the total combined capital expenditures forthe manufacturing facility and pen device is $723.3 million.

 

In October 2008, we and Lilly entered into an Exenatide OnceWeekly Supply Agreement (the “supply agreement”) pursuant to which we willsupply commercial quantities of BYDUREON for sale in the United States, ifapproved by the FDA. In addition, if Lilly receives approval to market theproduct in jurisdictions outside the United States, we will be required tomanufacture the product intended for commercial sale by Lilly in thosejurisdictions.

 

Under the terms of the supply agreement, Lilly made a cash payment of$125 million to us, which represents an amount to compensate us for theestimated past and future cost of carrying Lilly’s share of the capitalinvestment made in our manufacturing facility in Ohio, that otherwise wouldhave been included in the cost of product produced at the facility and chargedto Lilly through our arrangements with them. In addition to this cash payment,we will recover Lilly’s share of the capital investment in the facility throughan allocation of depreciation expense in cost of goods as discussed below.Under the terms of the supply agreement, we have agreed not to charge Lilly forLilly’s share of the interest costs capitalized to the facility or any futurefinancing cost that may be related to financing the facility. Accordingly wehave determined that a portion of the $125 million payment, amounting to$40.8 million at March 31, 2010, represents a reimbursement to us ofLilly’s share of interest costs capitalized to the facility that will becredited to Lilly for its share of the amortization of capitalized interestincluded in the cost of goods sold for BYDUREON as incurred. We have concludedthat any excess amount represents deferred collaborative revenue for servicesto be provided to Lilly under the supply agreement that will be amortizedratably over the economic useful life of the BYDUREON product following itscommercial launch, if approved. The ultimate allocation of the $125 millionpayment, which is classified as a long-term deferred credit in the accompanyingConsolidated Balance Sheets at March 31, 2010, will be dependent upon thetotal amount of interest costs capitalized to the facility when it is placed inservice. Under certain circumstances, including upon an impairment of theBYDUREON manufacturing facility, Lilly may receive a credit for the unearnedportion of the $125 million payment which will be applied against Lilly’sshare of the impairment charge. The $125 million payment is not refundableto Lilly if BYDUREON does not receive regulatory approval unless suchnon-approval results in an impairment as discussed above.

 

In addition to the $125 million cash payment, we will recoverLilly’s share of the initial capital investment in the facility, excluding theBYDUREON pen device capital which is subject to a different cost-sharingarrangement discussed below, through an allocation of depreciation to cost ofgoods sold in accordance with the collaboration agreement. Subsequent capitalinvestments, including those for the BYDUREON pen device, are subject toseparate cost sharing terms, as described below. We retain ownership of thefacility and Lilly’s share of the capital investment to be recovered throughthe sharing of cost of goods sold is initially estimated to be 55% subject toadjustment based upon the allocation of the proportion of product supplied forsale in the United States, the cost of which is shared equally by the parties,and the proportion of product supplied for sale outside of the United States,the cost of which is paid for 100% by Lilly.

 

In May 2009, we and Lilly entered into a joint supply agreementfor a BYDUREON pen device. We and Lilly agreed to collaborate in thedevelopment, manufacturing and marketing of BYDUREON in a dual chambercartridge pen device. We and Lilly will share the capital and development costsof the pen, including the estimated total capital investment of approximately$216 million which is expected to be incurred over the next few years. Weand Lilly have agreed that the estimated cost of the total capital 

 

13

----

Table ofContents

 

investmentwill be allocated 60% to Lilly and 40% to us, with Lilly funding its share asthe capital expenditures are incurred. Through March 31, 2010, we haveincurred $122.4 million in capital expenditures associated with theBYDUREON pen, which amount is included in construction in progress. We havebilled Lilly $68.4 million for these expenditures, of which $52.7 millionhas been received by us. Capital reimbursements from Lilly, which are includedin deferred collaborative profit-sharing in the accompanying consolidated balancesheet, are being deferred and will be amortized to collaborative profit sharingfor Lilly’s share of the depreciation included in cost of goods sold for theBYDUREON pen device as incurred.

 

In October 2008, we and Lilly also entered into a loan agreement pursuantto which Lilly made available to us a $165 million unsecured line ofcredit that we can draw upon from time to time until June 30, 2011. Anyinterest due under the credit facility will bear interest at the five-dayaverage three-month LIBOR rate immediately prior to the date of the advanceplus 5.25% and shall be due and payable quarterly in arrears on the firstbusiness day of each quarter. All outstanding principal, together with allaccrued and unpaid interest shall be due and payable the earlier of36 months following the date on which the loan commitment is fullyadvanced or June 30, 2014. As of March 31, 2010 we have not drawnupon this credit facility.

 

The following is a summary of activity related to our collaborationwith Lilly and the location in the consolidated statements of operations (inthousands):

 
| ** **                                                                                                                                  | ** ** | ** **                                                                           | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **Activity**                                                                                                                                | ** ** | **Classification within  Consolidated Statements of Operations** | ** ** | **March 31,****2010** | ** ** | **March 31,****2009** | ** ** |
| Amortization of up-front  payments                                                                                                          |       | Revenues under collaborative agreements                                              |       | $                          | —     |   | $ | 1,071 |   |
|                                                                                                                                        |       |                                                                                 |       |                       |       |   |   |
| Gross margin cost-sharing                                                                                                                   |       | Collaborative profit sharing                                                         |       | $                          | 67,900     |   | $ | 73,017 |   |
|                                                                                                                                        |       |                                                                                 |       |                       |       |   |   |
| Development expense  cost-sharing payments received from Lilly for BYETTA and BYDUREON development  expense                                 |       | Reduction of research and development expense                                        |       | $                          | 16,741     |   | $ | 12,933 |   |
| Cost-sharing payments due  from/(to) Lilly for shared sales force expenses, marketing expenses and other  commercial or operational support |       | Reduction of / (increase to) selling, general and administrative  expense            |       | $                          | 8,650      |   | $ | (2,950 | ) |

 

***Collaboration with Alkermes, Inc.***

 

In May 2000, we signed an agreement with Alkermes, Inc., acompany specializing in the development of products based on proprietary drugdelivery technologies, for the development, manufacture and commercializationof BYDUREON.

 

Under the terms of the agreement, Alkermes has granted us an exclusive,worldwide license to its Medisorb® technologyfor the development and commercialization of injectable sustained releaseformulations of exendins, such as exenatide, and other related compounds thatwe may develop. In exchange, Alkermes receives funding for research anddevelopment and may earn future milestone payments upon achieving specifieddevelopment and commercialization goals. Alkermes will also receive royaltieson any future product sales.

 

In October 2005, we and Alkermes Controlled Therapeutics II, awholly owned subsidiary of Alkermes, Inc., entered into an Amendment toDevelopment and License Agreement (the “Amendment”), which amends the Developmentand License Agreement between the parties dated May 15, 2000. Under theterms of the Amendment, we will be responsible for manufacturing for commercialsale the once weekly dosing formulation of BYDUREON, if approved. The royaltyto be paid from us to Alkermes for commercial sales of BYDUREON was adjusted toreflect the new manufacturing arrangement.

 

***Collaboration with TakedaPharmaceutical Company, Ltd***

 

On October 30, 2009, we and Takeda Pharmaceutical Company Limited,or Takeda, entered into a License, Development and Commercialization Agreement,or the development agreement, pursuant to which the companies will co-developand commercialize pharmaceutical products containing compounds specified in thedevelopment agreement for the treatment of human indications including, but notlimited to, (i) weight management and/or obesity, (ii) glycemiccontrol and (iii) cardiovascular disease. We received a one-time,nonrefundable cash payment of $75 million from Takeda in connection withthe execution of the development agreement. 

 

14

----

Table ofContents

 

Werecorded the up-front payment as deferred revenue in our consolidated balancesheets and will recognize the revenue over the estimated development period often years. As of March 31, 2010 deferred revenue associated with theTakeda collaboration equaled $71.9 million, of which $64.4 is classifiedas long-term.

 

The following is a summary of activity related to our collaborationwith Takeda and the location in the consolidated statements of operations (inthousands):

 
| ** **                                                             | ** ** | ** **                                                                                 | ** ** | **Three Months Ended**     | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **Activity**                                                           | ** ** | **Classification within   Consolidated Statements of Operations** | ** ** | **March 31,****2010** | ** ** | **March 31,****2009** | ** ** |
| Amortization of up-front  payments                                     |       | Revenues under collaborative agreements                                                    |       | $                          | 1,875      |   | $ | — |   |
|                                                                   |       |                                                                                       |       |                       |       |   |   |
| Cost-sharing payments due  from Takeda for shared development expenses |       | Reduction of research and development expense                                              |       | $                          | 3,336      |   | $ | — |   |

 

***Other Collaborations***

 

In connection with our strategic equity investments, we have enteredinto collaborative agreements with certain of our equity method investees. Wereceived research and development cost-sharing reimbursements under thesecollaborative agreements of $0.1 million and $0.3 million for the threemonths ended March 31, 2010 and 2009, respectively.  The cost sharing reimbursements were recordedas a reduction to research and development expenses.

 

**7.****             ****Restructuring**

 

The following table sets forth activity in therestructuring liability for recent restructuring activities for the threemonths ended March 31, 2010, all of which is comprised of facilitiesrelated charges (in thousands):

 
| Balance at December 31, 2009 |   | $      | 31,980 |   |
|-----------------------------------|--------|--------|--------|--------|
| Accruals                          |   | — |   |
| Payments                          |   | (2,658 | )      |
| Balance at March 31, 2010    |   | $      | 29,322 |   |

 

The $2.7 million reduction in the restructuringliability during the three months ended March 31, 2010 consists of ongoingrental payments for leases associated with vacated facilities.

 

**8.****             ****Comprehensive Loss**

 

Comprehensive lossincludes net loss and unrealized gains and losses on investments. We disclosethe accumulated balance of other comprehensive loss as a separate component ofstockholders’ equity. For the three months ended March 31, 2010 and 2009,comprehensive loss consisted of (in thousands):

 
| ** **                         | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Net loss                           |       | $                                                    | (38,203    | ) | $ | (46,954 | ) |
| Other comprehensive loss:          |       |                                                 |       |   |   |
| Net unrealized gain on investments |       | 718                                                  |       | 1,138 |   |
| Comprehensive loss                 |       | $                                                    | (37,485    | ) | $ | (45,816 | ) |

 

15

----

Table of Contents

 

**9.****             ****Convertible Senior Notes**

 

The following table summarizes the principal amountof the liability component, the unamortized discount and the net carryingamount of our convertible senior notes (in thousands):

 
| ** **                     | ** ** | **March 31,********2010** | ** ** | **December 31,********2009** | ** ** |
|--------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| **2007 Notes**                 | ** ** | ** **                     | ** ** | ** **                        | ** ** |
| Principal  amount              |       | $                              | 575,000    |                              | $          | 575,000 |   |
| Unamortized  debt discount     |       | (125,217                       | )          | (131,238                          | )          |
| Net  carrying amount           |       | 449,783                        |       | 443,762                           |       |
|                           |       |                           |       |                              |       |
| **2004 Notes**                 |       |                           |       |                              |       |
| Principal  amount              |       | 200,000                        |       | 200,000                           |       |
| Convertible  senior notes, net |       | $                              | 649,783    |                              | $          | 643,762 |   |

 

In June 2007, we issued the 2007 Notes in aprivate placement, which have an aggregate principal amount of $575 million,and are due June 15, 2014. The 2007 Notes are senior unsecured obligationsand rank equally with all other existing and future senior unsecured debt. The2007 Notes bear interest at 3.0% per year, payable in cash semi-annually, andare initially convertible into a total of up to 9.4 million shares ofcommon stock at a conversion price of $61.07 per share, subject to thecustomary adjustment for stock dividends and other dilutive transactions. Wemay not redeem the 2007 Notes prior to maturity. In addition, if a “fundamentalchange” (as defined in the associated indenture agreement) occurs prior to thematurity date, we will in some cases increase the conversion rate for a holderof notes that elects to convert its notes in connection with such fundamentalchange. The maximum conversion rate is 22.9252 ($43.62 per share), which wouldresult in a maximum issuance of 13.2 million shares of common stock if allholders converted at the maximum conversion rate.  The principal amount of the 2007 Notesexceeds the current if-converted value.

 

The 2007 Notes will be convertible into sharesof our common stock unless we elect net-share settlement. If we elect net-sharesettlement, we will satisfy the accreted value of the obligation in cash andwill satisfy the excess of conversion value over the accreted value in sharesof our common stock based on a daily conversion value, determined in accordancewith the associated indenture agreement, calculated on a proportionate basisfor each day of the relevant 20-day observation period. Holders may convert the2007 Notes only in the following circumstances and to the following extent: (1) duringthe five business-day period after any five consecutive trading day period (themeasurement period) in which the trading price per note for each day of suchmeasurement period was less than 97% of the product of the last reported saleprice of our common stock and the conversion rate on each such day; (2) duringany calendar quarter after the calendar quarter ending March 31, 2007, ifthe last reported sale price of our common stock for 20 or more trading days ina period of 30 consecutive trading days ending on the last trading day of theimmediately preceding calendar quarter exceeds 130% of the applicableconversion price in effect on the last trading day of the immediately precedingcalendar quarter; (3) upon the occurrence of specified events; and (4) the2007 Notes will be convertible at any time on or after April 15, 2014through the scheduled trading day immediately preceding the maturity date.

 

Subject to certain exceptions, if we undergo a “designatedevent” (as defined in the associated indenture agreement) including a “fundamentalchange,” such as if a majority of our Board of Directors ceases to be composedof the existing directors or other individuals approved by a majority of theexisting directors, holders of the 2007 Notes will, for the duration of thenotes, have the option to require us 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. We will pay cash for all notes sorepurchased. The 2007 Notes have been registered under the Securities Act of1933, as amended, to permit registered resale of the 2007 Notes and of thecommon stock issuable upon conversion of the 2007 Notes. The 2007 Notes payinterest in cash, semi-annually in arrears on June 15 and December 15of each year, which began on December 15, 2007.

 

The fair value of the 2007 Notes, determined byobserved market prices, was $512.3 million and $453.0 million at March 31,2010 and December 31, 2009, respectively. Since we have the option to elect net-share settlement upon conversionof the 2007 Notes, we account for the 2007 Notes in accordance with theauthoritative guidance for accounting for convertible debt instruments that maybe settled in cash upon conversion.

 

The carrying amount of the equity component of the2007 Notes was $180.3 million at March 31, 2010 and December 31,2009.  At March 31, 2010, theunamortized balance of the debt discount will be amortized over the remaininglife of the 2007 Notes, or approximately four years.  The effective interest rate on the net carrying valueof the 2007 Notes was 9.3% in the three months ended March 31, 2010 and2009.

 

16

----

Table of Contents

 

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

 

Upon a change in control, the holders of the 2004Notes may elect to require us to repurchase the 2004 Notes. We may elect to paythe purchase price in common stock instead of cash, or a combination thereof.If paid with common stock, the number of shares of common stock a holder willreceive will be valued at 95% of the closing prices of our common stock for thefive trading day period ending on the third day before the purchase date.

 

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

 

Thefair value of the 2004 Notes, determined by observed market prices, was $206.0million and $192.1 million at March 31, 2010 and December 31,2009, respectively.

 

We capitalized $3.3 million and$3.7 million of coupon interest expense and $4.0 million of non-cashinterest in debt discount for each of the three month periods ended March 31,2010 and 2009, respectively, associated with construction in progress .

 

**10.****      ****Note Payable**

 

In December 2007, we****entered into a$140 million credit agreement with Bank of America, N.A., as administrativeagent, collateral agent and letter of credit issuer, Silicon Valley Bank andRBS Asset Finance, Inc., as syndication agents, and Comerica Bank and BMOCapital Markets Financing, Inc., as documentation agents.  The creditagreement provides for a $125 million Term Loan and a $15 million revolvingcredit facility.  The proceeds of both loans have been used for generalcorporate purposes.  The revolving creditfacility also provides for the issuance of letters of credit and foreignexchange hedging up to the $15 million borrowing limit.  We had an outstanding balance of $85.9million and $93.8 million under the Term Loan at March 31, 2010 and December 31,2009, respectively and had issued $8.5 million and $8.9 million of stand-byletters of credit under the revolving credit facility primarily in connectionwith office leases, at March 31, 2010 and December 31, 2009,respectively.

 

Our domesticsubsidiaries, Amylin Ohio LLC and Amylin Investments LLC, are co-borrowersunder the credit agreement.  The loans under the revolving credit facilityare secured by substantially all of our (including the two domesticsubsidiaries) assets (other than intellectual property and certain otherexcluded collateral).  The Term Loan is repayable on a quarterlybasis, with no principal payments due quarters one through four, 6.25% of theoutstanding principal due quarters five through eleven, and 56.25% of theoutstanding principal due in quarter twelve. Interest on the Term Loan will be paid quarterly on the unpaid principalbalance at 1.75% above the London Interbank Offered Rate, or LIBOR, based onour election of either one, two, three or six months LIBOR term, and payable atthe end of the selected interest period but no less frequently than quarterlyas of the first business day of the quarter prior to the period in which thequarterly installment is due.  We haveelected to use the three month LIBOR, which was 0.29% and .025% at March 31,2010 and December 31, 2009, respectively. Interest periods on the revolving credit facility may be either one,two, three or six months, and payable at the end of the selected interestperiod but no less frequently than quarterly, and the interest rate will beeither LIBOR plus 1.0% or the Bank of America prime rate, as selected by us.  Both loans have a final maturity date of December 21,2010 and are therefore classified as current liabilities.

 

The credit agreement contains certain covenants, including arequirement to maintain minimum unrestricted cash and cash equivalentsbalances, as defined in the agreement, in excess of $400 million, belowwhich certain limitations provided for in the agreement become effective. Thecredit agreement also contains certain events of default including unrestrictedcash and cash equivalents balances, as defined in the agreement, falling below$280 million, nonpayment of principal, interest, fees or other amounts,violation of covenants, inaccuracy of representations and warranties anddefault under other indebtedness that would permit the administrative agent toaccelerate our outstanding obligations if not cured within applicable graceperiods. In addition, the credit agreement provides for automatic accelerationupon the occurrence of bankruptcy, other insolvency events and a change incontrol, as defined in the credit agreement as amended. There is an annualcommitment fee associated with the revolving credit facility of 0.25%.

 

In connection with theexecution of the Term Loan, we entered into an interest rate swap with aninitial notional amount of $125 million on December 21, 2007 that hasresulted in a net fixed rate of 5.717% and matures on December 21,2010.  We determined that the interestrate swap agreement is defined as Level 2 in the fair value hierarchy.  The fair value of the interest rate swapagreement was a liability of $2.1 million and $2.8 million at March 31,2010 and December 31, 2009, respectively. For the three months ended March 31, 2010 and 2009, we recognized again on the interest rate swap of $0.7 million and $0.6 million,respectively.  Recognized gains andlosses on the interest rate swap are included in interest and other expense.

 

17

----

Table of Contents

 

**11.****      ****Stockholders’ Equity**

 

InMarch 2010, we contributed approximately 0.9 million newly issued sharesof our common stock, valued at $18.01 per share, to our ESOP for amounts earnedby participants during the year ended December 31, 2009.

 

InMarch 2010, we contributed approximately 0.2 million newly issued sharesof its common stock, valued at $17.83 per share, to our 401(k) plan foramounts earned by participants during the year ended December 31, 2009.

 

**12.****      ****Commitments and Contingencies**

 

# **Other Commitments**

#  

Wehave committed to make potential future milestone payments to third parties aspart of in-licensing and development programs primarily related to research anddevelopment agreements. Potential future payments generally become due andpayable only upon the achievement of certain developmental, regulatory and/orcommercial milestones, such as achievement of regulatory approval, successfuldevelopment and commercialization of products, and subsequent product sales.Because the achievement of these milestones is neither probable nor reasonablyestimable, we have not recorded a liability on the balance sheet for any suchcontingencies.

 

As of March 31,2010, if all such milestones are successfully achieved, the potential futuremilestone and other contingency payments we could be required to make undercertain contractual agreements are approximately $179.5 million in aggregate,of which $9.5 million are expected to be paid within the next 12 months.

 

We have committedto make future minimum payments to third parties for certain inventories in thenormal course of business. The minimum purchase commitments total approximately$39.8 million as of March 31, 2010. The majority of theseinventory commitments relate to BYDUREON and BYETTA, including minimuminventory purchases for BYDUREON of $26.7 million that are contingent uponFDA approval of BYDUREON.

 

As of March 31, 2010, commitments to complete construction of ourBYDUREON manufacturing facility in Ohio are $1.7 million and commitmentsassociated with capital investments on the BYDUREON pen device are $38.1million.

 

**13.****      ****Litigation**

 

Fromtime to time in the ordinary course of business, we become involved in variouslawsuits, claims and proceedings relating to the conduct of our business,including those pertaining to product liability, patent infringement andemployment claims. Since August 2008, we and Lilly have been named asdefendants in 58 separate product liability cases involving approximately 378plaintiffs in various courts in the United States.  These cases have been brought by individualswho allege they have used BYETTA.  Theygenerally seek compensatory and punitive damages for alleged injuries,consisting primarily of pancreatitis, and in some cases, wrongful death.  Most of the cases are pending in California statecourt, where the Judicial Council has granted our petition for a “coordinatedproceeding” for all California state court cases alleging harm allegedly as aresult of BYETTA use.  We also havereceived notice from plaintiff’s counsel of additional claims by individualswho have not filed suit.  These mattersare at an early stage and, as a result, we cannot reasonably estimate potentiallosses, if any, at this time.  While we cannotreasonably predict the outcome of any lawsuit, claim or proceeding, we andLilly intend to vigorously defend these matters.  However, if we are unsuccessful in ourdefense, these matters could result in a material adverse impact to ourfinancial position and results of operations.

 

**14.****      ****Subsequent Events**

 

We did not have any material recognizable subsequentevents.

 

18

----

Table of Contents

 

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

 

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

 

**Overview**

 

Weare a biopharmaceutical company committed to improving the lives of people withdiabetes, obesity and other diseases through the discovery, development andcommercialization of innovative medicines. We are marketing two first-in-classmedicines to treat diabetes, BYETTA and SYMLIN and we are currently seekingapproval for BYDUREON, an investigational sustained-release medication for type2 diabetes that is administered once a week.

 

Highlightsfor the three months ended March 31, 2010 include:

 

·                  We received a complete response letter regarding theBYDUREON New Drug Application (NDA) from the FDA, and in May 2010, the FDAclassified the complete response as a Class 2 resubmission and assigned a newPrescription Drug User Fee Act, or PDUFA, action date of October 22, 2010;

 

·                  Our partner, Lilly submitted a marketing authorizationapplication to the European Medicines Agency for BYDUREON;

 

·                  We enrolled the first patient in DURATION-6 clinicalstudy, a head-to-head comparison of BYDUREON to liraglutide (Victoza®), a glucagon-like peptide-1(GLP-1) analog, withresults anticipated in the first half of 2011;

 

·                  We announced the combination treatment ofpramlintide/metreleptin will advance toward Phase 3 development.

 

***BYDUREON***

 

Weare working with Lilly and Alkermes, Inc., or Alkermes, to developBYDUREON, an investigational sustained-release medication for type 2 diabetesthat is administered once a week.  In March 2010,we received a complete response letter from the FDA regarding the NDA wesubmitted for BYDUREON in May 2009. The key components of the complete response letter that required aresponse related primarily to the finalization of the product labeling with anaccompanying Risk Evaluation and Mitigation Strategy, or REMS, andclarification of proprietary manufacturing processes.  We filed our response to the FDA’s completeresponse letter in April 2010 and in May 2010, the FDA notified us that they haveclassified the BYDUREON complete response as a Class 2 resubmission andassigned a new PDUFA action date of October 22, 2010.

 

In2010, we will continue to focus on building a superior profile for BYDUREON bycontinuing our DURATION series of clinical studies designed to compare BYDUREONagainst competing products.  We expect toreport results from our DURATION-4 study in the second half of 2010 comparingBYDUREON with metformin, sitagliptin or pioglitazone and we have initiatedDURATION-6 comparing BYDUREON with liraglutide (Victoza®). In addition, we expect tostart our EXSCEL study following the FDA’s review of the study protocol todemonstrate BYDUREON’s effect on cardiovascular endpoints. We plan to continuemaking strategic investments in the exenatide franchise including thedevelopment of a BYDUREON pen delivery system, an exenatide suspensionformulation and potential noninvasive delivery systems including transdermaland nasal.

 

***BYETTA and SYMLIN***

 

BYETTA is the first approved medicine in a class of compounds calledGLP-1 receptor agonists. In October 2009, the FDA approved an expanded indicationto include BYETTA as a first-line, stand-alone medication (monotherapy) alongwith diet and exercise to improve glycemic control in adults with type 2diabetes and changes to the BYETTA label to incorporate updated safetylanguage. Previously BYETTA was approved as an adjunctive therapy to improveglycemic control in patients with type 2 diabetes who have not achievedadequate glycemic control by using metformin, a sulfonylurea and/or athiazolidinediene (TZD), three common oral therapies for type 2 diabetes.We believe the expanded monotherapy indication and label update present newopportunities for the BYETTA brand. Net product sales of BYETTA were$149.8 million and $157.7 million for the three months ended March 31,2010 and 2009, respectively.

 

19

----

Table of Contents

 

We have an agreement with Lilly for the global development andcommercialization of exenatide. This agreement includes BYETTA and otherformulations of exenatide such as BYDUREON. Under the terms of the agreement,operating profits from products sold in the United States are shared equallybetween Lilly and us, and Lilly will pay us royalties for product sales outsideof the United States. Lilly has primary responsibility for developing andcommercializing BYETTA outside of the United States, including any sustainedrelease formulations of exenatide such as BYDUREON. As of March 31, 2010,BYETTA was commercially launched in 64 countries worldwide, including theUnited States.

 

SYMLIN is the first and only approved medicine in a class of compoundscalled amylinomimetics. It is approved as an adjunctive therapy to improveglycemic control in patients with either type 2 or type 1 diabeteswho are treated with mealtime insulin but who have not achieved adequateglycemic control. We own 100% of the global rights to SYMLIN and are exploringpartnering SYMLIN outside of the United States. Net product sales of SYMLIN were$22.5 million and $21.6 million for the three months ended March 31,2010 and 2009, respectively.

 

We have a field force of approximately 390 people dedicated tomarketing BYETTA and SYMLIN in the United States. Our field force includes ourspecialty sales force and our managed care organization. Lilly co-promotesBYETTA in the United States. In May 2009, we announced a restructuring ofour sales force, a new sales approach within the diabetes market and merged ourthen-existing primary care and specialty sales forces into a singleorganization that brings a specialty approach to endocrinologists anddiabetes-focused primary care physicians. This new sales force is focused ontargeting those doctors that write the majority of prescriptions for brandeddiabetes therapies.

 

***Obesity and related indications***

 

Our long-term growth strategy is focused on making prudent investmentdecisions based on strong clinical data to advance our obesity program andincludes our Integrated Neurohormonal Therapies for Obesity, or INTO, strategy.In October 2009, we entered into a worldwide exclusive license,development and commercialization agreement with Takeda Pharmaceutical CompanyLimited, or Takeda, to co-develop and commercialize pharmaceutical products forthe treatment of obesity and related indications. The agreement includesproducts to be developed from our product pipeline, includingpramlintide/metreleptin, which is a compound currently in phase 2development for the treatment of obesity. We recently announced results of a52-week phase 2 study of this compound and, based on those results, we andTakeda plan to advance pramlintide/metreleptin toward phase 3development.  Additionally, later thisyear we plan to submit the clinical sections of a rolling NDA for metreleptinas a treatment of severe lipodystrophy, a very rare metabolic condition,followed next year by the chemistry, manufacturing and controls section of theNDA.  Because severe lipodystrophyaffects a very small number of patients, metreleptin as a treatment for severelipodystrophy has received orphan drug designation by the FDA.

 

***Research and Development***

 

We maintain an active discovery research program focused on novelpeptide and protein therapeutics. We have also entered into a number ofstrategic alliances and business initiatives that support our expansion intonew therapeutic areas.

 

***Overview Summary***

 

Since our inception in September 1987, we havedevoted substantially all of our resources to our research and developmentprograms and, more recently, to the commercialization of our products. All ofour revenues prior to May 2005 were derived from fees and expensereimbursements under our exenatide collaboration agreement with Lilly, previousSYMLIN collaborative agreements and previous co-promotion agreements. Duringthe second quarter of 2005, we began to derive revenues from product sales ofBYETTA and SYMLIN.  At March 31, 2010, our accumulateddeficit was approximately $2.0 billion.

 

At March 31,2010, we had approximately $598.3 million in cash, cash equivalents andshort-term investments.  Additionally wehave availability of $165 million pursuant a loan agreement with Lilly.Although we may not generate positive operating cash flows for the next fewyears, we intend to improve our operating results and reduce our use of cashfor operating activities from current levels to achieve our goal to beoperating cash flow positive by the end of 2010. Additionally, we expect thatour use of cash for capital expenditures will decrease significantly from 2009levels. Refer to the discussions under the headings “*Liquidity and Capital Resources*” below and “*Cautionary Factors That May Affect FutureResults*” in Part I, Item 1A for further discussionregarding our anticipated future capital requirements.

 

20

----

Table of Contents

 

**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 ongoing basis, our actual results maydiffer significantly from our estimates.

 

Therewere no significant changes in critical accounting policies from those at December 31,2009.  The financial information as of March 31,2010 should be read in conjunction with the financial statements for the yearended December 31, 2009, contained in our annual report on Form 10-Kfiled on February 26, 2010.

 

For afurther discussion of our critical accounting policies, see “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inour annual report on Form 10-K filed on February 26, 2010.

 

**Results of Operations**

 

**Comparisonof Three Months Ended March 31, 2010 to Three Months Ended March 31,2009**

 

***Net Product Sales***

 

Netproduct sales for the three months ended March 31, 2010 and 2009 were$172.3 million and $179.3 million, respectively, and consisted of shipmentsof BYETTA and SYMLIN, less allowances for product returns, rebates, wholesalerchargebacks, wholesaler discounts and prescription vouchers.

 

The following table provides information regarding netproduct sales (in millions):

 
| ** ** | ** ** | **Three months ended  March 31,** | ** ** |
|------------|------------|--------------------------------------------------|------------|
| ** ** | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
| BYETTA     |       | $                                                | 149.8      |   | $ | 157.7 |   |
| SYMLIN     |       | 22.5                                             |       | 21.6 |   |
|       |       | $                                                | 172.3      |   | $ | 179.3 |   |

 

The decrease in net product sales for BYETTA in thecurrent period primarily reflects reduced prescription demand, partially offsetby the net impact of pricing actions.

 

The increase in net product sales for SYMLIN in thecurrent period primarily reflects the net impact of price actions, partiallyoffset by reduced prescription demand.

 

We continue to record allowances related to the DOD’sTricare Retail Pharmacy program pursuant to a final rule that was issuedin March 2009 and became effective on May 26, 2009.  In consideration of this final rule werecorded an allowance of $1.8 million for such rebates in the three monthsended March 31, 2010 and $5.8 million for such rebates in the three monthsended March 31, 2009, of which $4.8 million represents a retroactiverebate assessment for sales made during 2008 that now appear probable of beingassessed and paid.

 

Sales of our products in future periods may beimpacted by numerous factors, including current and potential competition, thepotential approval of additional products including BYDUREON, regulatorymatters, legislative changes, economic factors and other environmentalfactors.  In March 2010,President Obama signed into law the Patient Protection and Affordable Care Act(PPACA) as amended by the Health Care and Education Reconciliation Act.  There are a number of provisions in the newlegislation that will impact the pharmaceutical industry through increaseddiscounts and an expansion of government funded insurance programs.  The provisions become effective over time,however certain provisions became effective in the first quarter of 2010.  These provisions are related to increasedMedicaid discounts, an increase in the population of patients eligible forMedicaid discounts and the expansion of the 340(B) Public Health Servicesdrug pricing program, which provides outpatient drugs at reduced rates, toinclude additional hospitals, clinics and healthcare centers.  These new provisions did not have a materialimpact on our results for the three months ended March 31, 2010.  We are currently evaluating the newlegislation to determine its impact on our business and future financialresults.  We expect the financial impactof the new legislation to grow over time.

 

21

----

Table ofContents

 

***Revenues Under Collaborative Agreements***

 

Revenues under collaborative agreements for the threemonths ended March 31, 2010 increased to $1.9****millionfrom $1.1 million for the same period in 2009. Revenues under collaborativeagreements consist of amortization of up-front payments received from ourcollaborative partners.  For the threemonths ended March 31, 2010, the revenues consist of amortization of theup-front payment we received from Takeda in late 2009 while the revenues undercollaborative agreements for the same period in 2009 consist of amortization ofthe up-front payment received in connection with our Lilly collaboration, forwhich amortization ended in 2009.

 

For the year ended December 31, 2010 we expect torecognize $7.5 million of collaborative revenue in connection with the ratableamortization of the up-front payment we received from Takeda.  Additionally, we expect to earn a $40 millionmilestone from Lilly upon the launch of BYDUREON in the United States, ifapproved, which will be recorded as revenues under collaborative agreementswhen earned.

 

***Cost of Goods Sold***

 

Cost of goods sold was $20.5 million, representing agross margin of 88%, and $18.6 million, representing a gross margin of 90%, forthe three months ended March 31, 2010 and 2009, respectively, and iscomprised primarily of manufacturing costs associated with BYETTA and SYMLINsales during the period.  The decline ingross margin for the three months ended March 31, 2010, compared to thesame period in 2009, primarily reflects an increase in inventoryreserves during the period.  In thefuture we expect our gross margins for BYETTA and SYMLIN to be consistent withcurrent levels.  Quarterly fluctuations in gross marginsmay be influenced by product mix, pricing and the level of sales allowances.

 

Our manufacturing facility for BYDUREON hassignificant capacity to address expected patient demand.  This capacity will not be fully utilized forseveral quarters following launch, therefore gross margins for BYDUREON, ifapproved, will initially be lower than margins for BYETTA.  As demand for BYDUREON grows and productionincreases, we will realize economies of scale and drive toward our targetedmargins of at least 75%.

 

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

 

Selling, general and administrative expenses decreasedto $76.7 million for the three months ended March 31, 2010 from $87.6million for the same period in 2009. The decrease primarily reflects lowersales force expenses following the May 2009 sales force restructuring,partially offset by pre-launch activities for BYDUREON.

 

We, along with Lilly, are jointly responsible for the co-promotion ofBYETTA within the United States, and share equally in sales force costs andexternal marketing expenses. Accordingly, our selling, general andadministrative expenses include our 50% share of these costs in the UnitedStates.

 

***Research and Development Expenses***

 

Our research and development costs are comprised ofsalaries and bonuses, benefits and non-cash stock-based compensation; licensefees, milestones under license agreements and costs paid to third-partycontractors to perform research, conduct clinical trials and develop drugmaterials and delivery devices; and associated overhead expenses and facilitiescosts. Reimbursed research and development costs under collaborativearrangements are recorded as a reduction to research and development expensesand are recognized in the period in which the related costs are incurred.  We charge direct internal and externalprogram costs to the respective development programs. We also incur indirectcosts that are not allocated to specific programs because such costs benefitmultiple development programs and allow us to increase our pharmaceuticaldevelopment capabilities. These consist primarily of facilities costs and otherinternal shared resources related to the development and maintenance of systemsand processes applicable to all of our programs.

 

Ourresearch and development efforts are focused on diabetes, obesity and otherdiseases.  We also maintain an activediscovery research program.  In diabetes,we have two approved products, BYETTA and SYMLIN, and we are developingBYDUREON.  In 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.  As part of this program, we intend to conductadditional clinical trials of our drug candidates, or combinations of our drugcandidates.

 

22

----

Table ofContents

 

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

 
| ** **                         | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **2010**                                             | ** ** | **2009 (1)** | ** ** | **Increase/(Decrease)** | ** ** |
| Diabetes (2)                       |       | $                                                    | 20.8       |   | $ | 20.7 |   | $ | 0.1 |   |
| Obesity                            |       | 2.5                                                  |       | 8.2 |   | (5.7 | ) |
| Research  and early-stage programs |       | 7.6                                                  |       | 6.0 |   | 1.6 |   |
| Indirect  costs                    |       | 10.9                                                 |       | 11.9 |   | (1.0 | ) |
|                               |       | $                                                    | 41.8       |   | $ | 46.8 |   | $ | (5.0 | ) |

 

----

(1)  Research and development expenses by majorproject have been revised to conform to the current presentation with regard toour change in method of accounting for reimbursed research and developmentcosts under collaborative arrangements (see Note 1, “Summary ofSignificant Accounting Policies” in the notes to the consolidated financialstatements).

 

(2)  Researchand development expenses for our diabetes programs consist primarily of costsassociated with BYETTA and BYDUREON which are shared by Lilly pursuant to ourcollaboration agreement.  Cost-sharingpayments received by Lilly are recorded as a reduction to research anddevelopment costs.  Cost-sharing paymentsfrom Lilly for BYETTA and BYDUREON development expenses were $16.8 million and$12.9 million for the three months ended March 31, 2010 and 2009,respectively.

 

The$5.0 million decrease in research and development expenses for the three monthsended March 31, 2010 as compared to the same period in 2009 primarilyreflects decreased expenses of $5.7 million for our obesity developmentprograms.  The decrease in expenses inour obesity programs reflects reduced clinical trial expense due to thecompletion in 2009 of our dose-ranging clinical trial ofpramlintide/metreleptin combination therapy development program andcost-sharing of development expenses by Takeda.

 

***Collaborative Profit Sharing***

 

Collaborative profitsharing was $67.9 million and $73.0 million for the three months ended March 31,2010 and 2009, respectively, and consists of Lilly’s 50% share of the grossmargin for BYETTA in the United States.

 

***Interestand Other Income and Expense***

 

Interest and other incomeconsist primarily of interest income from investment of cash and otherinvestments. Interest and other income decreased to $0.7 million for the threemonths ended March 31, 2010 from $3.0 million for the same period in2009.  The decrease primarily reflectslower average balances available for investment and lower interest rates earnedon our short-term investments in the three months ended March 31, 2010 ascompared to the same period in 2009.

 

Interest and other expenseconsist primarily of interest expense resulting from our long-term debtobligations, amortization of debt issuance costs, mark-to-market gains andlosses on derivative financial instruments and foreign exchanges gains andlosses. Interest and other expense in the three months ended March 31,2010 consists of interest on our $775 million par value of outstandingconvertible senior notes and our $85.9 million of outstanding long-term notepayable, the amortization of associated debt issuance costs and recognizedgains and losses associated with recording economic hedge transactions at fairvalue. Interest andother expense was $6.1 million and $4.4 million for the three months ended March 31,2010 and 2009, respectively.  Theincrease in interest and other expense for the three months ended March 31,2010 primarily reflects a decrease in foreign exchange gains and a decrease inthe interest capitalized to our Ohio manufacturing facility.

 

23

----

Table ofContents

 

***Net Loss***

 

Our net loss for thethree months ended March 31, 2010 was $38.2 million compared to a net lossof $47.0 million for the same period in 2009. The decrease in net lossprimarily reflects decreased selling, general and administrative expenses,research and development expenses and collaborative profit-sharing discussedabove, partially offset by decreased net product sales.  We may incur operatinglosses for the next few years.  As aresult of recent restructuring activities, and other efforts to gainefficiencies in our business, we believe we are on track to achieve our statedgoals of positive operating cash flows by the end of 2010 and operatingprofitability by the end of 2011. However, our ability to reach profitability in the future will beheavily dependent upon the level of product sales that we achieve for BYETTA,SYMLIN and BYDUREON, if approved.  Ourability to achieve profitability in the future will also depend our ability tocontinue to control our operating expenses, including ongoing expensesassociated with the continued commercialization of BYETTA and SYMLIN, costsassociated with the development and commercialization of BYDUREON, if approved,and expenses associated with our research and development programs, includingour obesity and our early-stage development programs and related supportinfrastructure. Our operating results may fluctuate from quarter to quarter asa result of differences in the timing of expenses incurred and revenuesrecognized.

 

# **Liquidity and Capital Resources**

#  

Since our inception, wehave financed our operations primarily through public sales and privateplacements of our common and preferred stock, debt financings, paymentsreceived pursuant to our exenatide collaboration with Lilly and our obesitycollaboration with Takeda, reimbursement of SYMLIN development expenses throughearlier collaboration agreements and, since the second quarter of 2005, throughproduct sales of BYETTA and SYMLIN.

 

At March 31, 2010,we had approximately $598.3 million in cash, cash equivalents and short-terminvestments, compared to $667.8 million at December 31, 2009, and we have$165 million of cash available to us pursuant to the loan agreement withLilly described below. As a result of recent restructuring activities, andother efforts to gain efficiencies in our business, we believe we are on trackto achieve our stated goals of positive operating cash flows by the end of 2010and operating profitability by the end of 2011. Our current business plan does not contemplate a need to raiseadditional funds from outside sources, however we may evaluate opportunities torefinance existing indebtedness from time to time.  If we require additional financing in thefuture, we cannot assure you that it will be available to us on favorableterms, or at all. Although we have previously been successful in obtainingfinancing through our debt and equity securities offerings, there can be noassurance that we will be able to do so in the future, especially given thecurrent adverse economic and credit conditions.

 

We used cash of $38.5million and $63.9 million for our operating activities in the three months endedMarch 31, 2010 and 2009, respectively.  Our cash used for operating activities in the three months ended March 31,2010 included uses of cash due to decreases in accrued compensation, accountspayable and accrued liabilities, and payable to collaborative partner of $25.8million, $9.7 million and $8.6 million, respectively and an increase in othercurrent assets of $9.8 million.  Thedecrease in accrued compensation primarily reflects the payment of annualcompensation accruals in the three months ended March 31, 2010.  The decrease in accounts payable and accruedliabilities primarily reflects lower expense levels for the three months ended March 31,2010 compared to the same period of 2009. The decrease in the payable to collaborative partner reflects a reducednet payable to Lilly due to higher cost-sharing payments due from Lilly due toincreased development expenses for BYDUREON in the three months ended March 31,2010.  The increase in other currentassets is largely due to an increase in receivables from our collaborativepartners which are included in other current assets.

 

Our primary sources ofcash for our operating activities include an increase in deferred collaborativeprofit sharing of $13.8 million and a decrease in inventories of $6.2 million.  The increase in deferred collaborative profitsharing reflects payments due to us from Lilly for its 60% share of the capitalexpenditures we have made for the BYDUREON pen device.  The decrease in inventories largely reflectsreductions in raw materials and finished goods inventory due to the timing andvolume of production for BYETTA and SYMLIN.

 

Ourinvesting activities provided cash of $53.1 million and $10.3 million for thethree months ended March 31, 2010 and 2009, respectively.  Investing activities in both quarters consistedprimarily of purchases and sales of short-term investments and purchases ofproperty, plant and equipment, net. Purchases of property, plant and equipment, net decreased to $27.5 millionfor the three months ended March 31, 2010 from $38.8 million for the threemonths ended March 31, 2009.  Thedecrease in purchases of property reflects a reduction in purchases associatedwith our BYDUREON manufacturing facility, offset by costs incurred inconnection with the BYDUREON pen device. Through March 31, 2010, we had expended $600.9 million associatedwith the construction of the BYDUREON manufacturing facility, which includescosts associated with the construction of the facility, purchase andinstallation of equipment and capitalized labor and materials required tovalidate the facility.  The initial capital investment for thepen is expected to be $216.0 million over the next few years, which will befunded 60% by Lilly and 40% by us. Through March 31, 2010 we have incurred $122.4 million in capitalexpenditures associated with the BYDUREON pen device and incurred totalcombined capital expenditures for the manufacturing facility and the pen deviceof $723.3 million.  We have billed Lilly$68.4 million for its share of 

 

24

----

Table of Contents

 

expenditures for the pendevice, of which $52.7 million has been received to date, and is included incash used for operating activities as discussed above.  Additionally, we expect thatour use of cash for capital expenditures will decrease in 2010 as compared to2009 and will be principally focused on strategically investing in exenatidelife cycle management, of which Lilly shares 60% of the costs.  We will continue to evaluate potentialadditional investments in our Ohio manufacturing facility during the productlifecycle for BYDUREON, if approved.

 

Financing activities usedcash of $0.7 million and $4.0 million for the three months ended March 31,2010 and 2009, respectively.  Financingactivities in the three months ended March 31, 2010 include $7.8 millionin principal payments of our term loan, partially offset by proceeds of $7.2million from the exercise of stock options and proceeds from our employee stockpurchase plan.  Financing activities forthe three months ended March 31, 2009 include $7.8 million in principalpayments of our term loan, partially offset by proceeds of $3.8 million fromthe exercise of stock options and proceeds from our employee stock purchaseplan.

 

At March 31, 2010, we had $200 million in aggregate principalamount of convertible senior notes due 2011, or the 2004 Notes, and$575 million of the convertible senior notes due 2014, or the 2007 Notes,outstanding. The 2004 Notes are currently convertible into a total of up to5.8 million shares of our common stock at approximately $34.35 per shareand are not redeemable at our option. The 2007 Notes are currently convertibleinto a total of up to 9.4 million shares of our common stock atapproximately $61.07 per share and are not redeemable at our option.

 

In December 2007, we entered into a $140 million creditagreement. The credit agreement provides for a $125 million term loan anda $15 million revolving credit facility. The revolving credit facilityalso provides for the issuance of letters of credit and foreign exchangehedging up to the $15 million borrowing limit. At March 31, 2010 wehad an outstanding balance of $85.9 million under the term loan and had issued$8.5 million of standby letters of credit under the revolving creditfacility. Both loans have a final maturity date of December 21, 2010.Interest on the term loan is payable quarterly in arrears at a rate equal to1.75% above the London Interbank Offered Rate, or LIBOR, of either one, two,three or six months LIBOR term at our election. We have entered into aninterest rate swap agreement which resulted in a net fixed interest rate of5.717% under the term loan. The interest rate on the credit facility is LIBORplus 1.0% or the Bank of America prime rate, at our election.

 

In October 2008, we entered into a loan agreement with Lillypursuant to which Lilly made available to us a $165 million unsecured lineof credit that we can draw upon from time to time until June 30, 2011. Asof March 31, 2010 we had not drawn upon this line of credit.  Any interest due under this credit facilitywill bear interest at the five-day average three-month LIBOR rate immediatelyprior to the date of the advance plus 5.25% and shall be due and payablequarterly in arrears on the first business day of each quarter. All outstandingprincipal, together with all accrued and unpaid interest, shall be due andpayable the earlier of 36 months following the date on which the loancommitment is fully advanced or June 30, 2014.

 

The following table summarizes our contractualobligations and maturity dates as of March 31, 2010 (in thousands):

 
| ** **                                                                  | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**                                            | ** ** | **Total**                                 | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
| Long-term convertible debt                                                  |       | $                                         | 775,000    |   | $ | — |   | $ | 200,000 |   | $ | 575,000 |   | $ | — |   |
| Interest on long-term  convertible debt                                     |       | 85,125                                    |       | 22,250 |   | 37,000 |   | 25,875 |   | — |   |
| Long-term note payable                                                      |       | 85,938                                    |       | 85,938 |   | — |   | — |   | — |   |
| Interest on long-term note  payable, net of swap transactions (1) |       | 3,350                                     |       | 3,350 |   | — |   | — |   | — |   |
| Inventory purchase  obligations(2)                                          |       | 115,327                                   |       | 35,070 |   | 73,717 |   | 6,540 |   | — |   |
| Construction contracts                                                      |       | 40                                        |       | 16 |   | 24 |   | — |   | — |   |
| Operating lease obligations                                                 |       | 212,635                                   |       | 26,671 |   | 57,984 |   | 55,841 |   | 72,139 |   |
| Total(3)                                                                    |       | $                                         | 1,277,415  |   | $ | 173,295 |   | $ | 368,725 |   | $ | 663,256 |   | $ | 72,139 |   |

 

----

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

 

(2)   Includes$45.5 million of outstanding purchase orders, cancelable by us upon 30 days’written notice, subject to reimbursement of costs incurred through the date ofcancellation.

 

(3)   Excludeslong-term obligation of $7.9 million related to deferred compensation, thepayment of which is subject to elections made by participants that are subjectto change.

 

25

----

Table of Contents

 

Inaddition, under certain license and collaboration agreements we are required topay royalties and/or milestone payments upon the successful development andcommercialization of related products. We expect to make development milestone payments up to $9.5 millionassociated with licensing agreements in the next 12 months.  Additional milestones and other contingencypayments of up to approximately $179.5 million could be paid if development andcommercialization of all our early stage programs continue and aresuccessful.  The significant majority ofthese milestones relate to potential future regulatory approvals and subsequentsales thresholds.  Given the inherentrisk in pharmaceutical development, it is highly unlikely that we willultimately make all of these milestone payments; however, these payments wouldsignify that the related products are moving successfully through developmentand commercialization.

 

Our future capital requirements will depend on many factors, including:the level of product sales we and Lilly achieve for BYETTA and BYDUREON, ifapproved, net of profit sharing payments to Lilly, and product sales forSYMLIN; costs associated with the continued commercialization of BYETTA andSYMLIN and the commercialization of BYDUREON, if approved; costs associatedwith the operation of our BYDUREON manufacturing facility; costs of potentiallicenses or acquisitions; the potential need to repay existing indebtedness;our ability to receive or need to make milestone payments; our ability, and theextent to which we establish collaborative arrangements for SYMLIN or any ofour product candidates; progress in our research and development programs andthe magnitude of these programs; costs involved in preparing, filing,prosecuting, maintaining, enforcing or defending our patents; competingtechnological and market developments; and costs of manufacturing, includingcosts associated with establishing our own manufacturing capabilities orobtaining and validating additional manufacturers of our products; and scale-upcosts for our drug candidates.

 

**Off-Balance Sheet Arrangements**

 

We do not have any off-balance sheet arrangements that are currently orreasonably likely to be material to our consolidated financial position orresults of operations.

 

**ITEM3.**** ****Quantitative and Qualitative Disclosures about MarketRisk**

 

Weinvest our excess cash primarily in United States Government securities,asset-backed securities, and debt instruments of financial institutions andcorporations with investment-grade credit ratings. These instruments havevarious short-term maturities. We do not utilize derivative financialinstruments, derivative commodity instruments or other market risk sensitiveinstruments, positions or transactions in any material fashion. Accordingly, webelieve that, while the instruments held are subject to changes in thefinancial standing of the issuer of such securities, we are not subject to anymaterial risks arising from changes in interest rates, foreign currencyexchange rates, commodity prices, equity prices or other market changes thataffect market risk sensitive investments. Our debt is not subject tosignificant swings in valuation due to changes in interest rates as interestrates on our debt are fixed.  The fair value ofour 2004 Notes and 2007 Notes at March 31, 2010 was approximately $206.0million and $512.3 million, respectively. We have entered into an interest rate swap in connection with our$125 million term loan.  The fairvalue of the interest rate swap at March 31, 2010 was a liability of$2.1 million.  A hypothetical 1%adverse move in interest rates along the entire interest rate yield curve wouldnot materially affect the fair value of our financial instruments that areexposed to changes in interest rates.

 

**ITEM4.  Controlsand Procedures**

 

As of March 31,2010, an evaluation was performed under the supervision and with theparticipation of our management, including our President and Chief ExecutiveOfficer (referred to as our CEO) and our Senior Vice President, Finance andChief Financial Officer (referred to as our CFO), of the effectiveness of thedesign and operation of our disclosure controls and procedures. In designingand evaluating the disclosure controls and procedures, management recognizesthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management necessarily is required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures. Based on thatevaluation, our management, including our CEO and CFO, concluded that ourdisclosure controls and procedures were effective at a reasonable level ofassurance as of March 31, 2010.

 

Our management does notexpect that our disclosure control and procedures or our internal control overfinancial reporting will prevent all error and all fraud. A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Becauseof the inherent limitations in all control systems, no evaluation of controlscan provide absolute assurance that all control issues and instances of fraud,if any, or misstatements due to error, if any, within the company have beendetected. While we believe that our disclosure controls and procedures andinternal control over financial reporting are and have been effective, in lightof the foregoing we intend to continue to examine and refine our disclosure controlsand procedures and internal control over financial reporting.

 

26

----

Table of Contents

 

An evaluation wasalso performed under the supervision and with the participation of ourmanagement, including our CEO and CFO, of any change in our internal controlover financial reporting that occurred during our last fiscal quarter and thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting. That evaluation did not identify anychange in our internal control over financial reporting that occurred duringour latest fiscal quarter and that has materially affected, or is reasonablylikely to affect, our internal control over financial reporting.

 

**PART II. OTHERINFORMATION**

 

**Item 1.  Legal Proceedings**

 

From time to time in the ordinary course of business, we becomeinvolved in various lawsuits, claims and proceedings relating to the conduct ofour business, including those pertaining to product liability, patentinfringement and employment claims. Since August 2008, we and Lilly havebeen named as defendants in 58 separate product liability cases involvingapproximately 378 plaintiffs in various courts in the United States. Thesecases have been brought by individuals who allege they have used BYETTA. Theygenerally seek compensatory and punitive damages for alleged injuries,consisting primarily of pancreatitis, and in some cases, wrongful death. Mostof the cases are pending in California state court, where the Judicial Councilhas granted our petition for a “coordinated proceeding” for all Californiastate court cases alleging harm allegedly as a result of BYETTA use. We alsohave received notice from plaintiff’s counsel of additional claims byindividuals who have not filed suit. While we cannot reasonably predict theoutcome of any lawsuit, claim or proceeding, we and Lilly intend to vigorouslydefend these matters. However, if we are unsuccessful in our defense, thesematters could result in a material adverse impact to our financial position andresults of operations.

 

**Item 1A.  *Risk Factors***

 

**CAUTIONARYFACTORS THAT MAY AFFECT FUTURE RESULTS**

 

The following sets forth cautionary factors that may affect our futureresults, including clarifications to the cautionary factors included in ourAnnual Report on Form 10-K for the fiscal year ended December 31,2009.

 

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

 

We have experienced significant operating losses since our inception in1987, including losses of $38.2 million for the three months ended March 31,2010, $186.3 million in 2009, $321.9 million in 2008 and$216.5 million in 2007. As of March 31, 2010, we had an accumulateddeficit of approximately $2.0 billion. The extent of our future losses andthe timing of potential profitability are uncertain, and we may never achieveprofitable operations. We have been engaged in discovering and developing drugssince inception, which has required, and will continue to require, significantresearch and development expenditures. We derived substantially all of ourrevenues prior to 2005 from development funding, fees and milestone paymentsunder collaborative agreements and from interest income. BYETTA and SYMLIN maynot be as commercially successful as we expect and we may not succeed incommercializing any of our other drug candidates. We may incur substantialoperating losses for at least the next few years. These losses, among otherthings, have had and will have an adverse effect on our stockholders’ equityand working capital. Even if we become profitable, we may not remainprofitable.

 

***We began selling, marketing anddistributing our first products, BYETTA and SYMLIN, in 2005 and we will dependheavily on the success of those products and, if approved, BYDUREON, in themarketplace.***

 

Prior to the launch of BYETTA and SYMLIN in 2005, we had never sold ormarketed our own products. Our ability to generate product revenue for the nextfew years will depend solely on the success of these products and, if approved,BYDUREON. The ability of BYETTA, SYMLIN and, if approved, BYDUREON to generaterevenue at the levels we expect will depend on many factors, including thefollowing:

 

·                  the ability of patients inthe current uncertain economic climate to be able to afford our medications orobtain health care coverage that covers our products;

 

·                  our ability to obtainapproval for BYDUREON and the timing of the commercial launch of BYDUREON, ifapproved;

 

·                  acceptance of and ongoingsatisfaction with these first-in-class medicines in the United States andforeign markets by the medical community, patients receiving therapy and thirdparty payers;

 

·                  a satisfactory efficacy andsafety profile as demonstrated in a broad patient population;

 

27

----

Table of Contents

 

·                  successfully expanding andsustaining manufacturing capacity to meet demand;

 

·                  safety concerns in themarketplace for diabetes therapies;

 

·                  the competitive landscapefor approved and developing therapies that will compete with the products; and

 

·                  our ability to expand theindications for which we can market the products.

 

***If we encounter safety issues withBYETTA or SYMLIN or any other drugs we market or fail to comply with extensivecontinuing regulations enforced by domestic and foreign regulatory authorities,it could cause us to discontinue marketing those drugs, reduce our revenues andharm our ability to generate future revenues, which would negatively impact ourfinancial position.***

 

BYETTA and SYMLIN, in addition to any other of our drug candidates thatmay be approved by the FDA, will be subject to continual review by the FDA, andwe cannot assure you that newly discovered or developed safety issues will notarise. With the use of any of our marketed drugs by a wide patient population,serious adverse events may occur from time to time that initially do not appearto relate to the drug itself, and only if the specific event occurs with someregularity over a period of time does the drug become suspect as having acausal relationship to the adverse event. Some patients taking BYETTA havereported developing pancreatitis. We are working to better understand therelationship between BYETTA and pancreatitis described in some spontaneouslyreported cases. In keeping with our focus on patient safety, we continue topursue our drug safety program that includes thorough investigation ofindividual spontaneous case reports along with clinical and epidemiologicstudies. Within the detection limits of an initial epidemiology study which weprovided to the FDA, we have not observed an increased incidence ofpancreatitis associated with BYETTA compared to other treatments for diabetesand thus believe a definite causal relationship between BYETTA and pancreatitishas not been proved. In addition, since BYETTA was introduced, we have receivedother reports of adverse events, including rare reports of acute renal failurein patients using BYETTA, and in pre-clinical studies of BYDUREON, observationswere made of C-cell tumors in animals. Although direct relationships have not been established, it may bedifficult to rule out any particular direct relationship at any point in timefor these or other reports of adverse events or observations that may bemade.  Any safety issues could cause usto suspend or cease marketing of our approved products, cause us to modify howwe market our approved products, subject us to substantial liabilities, andadversely affect our revenues and financial condition.

 

Moreover, the marketing of our approved products will be subject toextensive regulatory requirements administered by the FDA and other regulatorybodies, including adverse event reporting requirements and the FDA’s generalprohibition against promoting products for unapproved uses. The manufacturingfacilities for our approved products are also subject to continual review andperiodic inspection and approval of manufacturing modifications. Manufacturingfacilities that manufacture drug products for the United States market, whetherthey are located 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 thatarise with any approved products, could adversely affect our ability to marketproducts and generate revenues and thus adversely affect our ability to continueour business.

 

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

 

***We currently do not manufacture ourown drug products or some of our drug candidates and may not be able to obtainadequate supplies, which could cause delays, subject us to product shortages,or reduce product sales.***

 

The manufacturing of sufficient quantities of newly-approved drugproducts and drug candidates is a time-consuming and complex process. Wecurrently have no manufacturing capabilities for our two marketed drugproducts. In order to successfully commercialize our products, including BYETTAand SYMLIN, and continue to develop our drug candidates, including BYDUREON, werely on various third parties to provide the necessary manufacturing.

 

There are a limited number of manufacturers that operate under the FDA’scGMP regulations capable of manufacturing for us. In addition, there are alimited number of bulk drug substance suppliers, cartridge manufacturers anddisposable pen manufacturers. If we are not able to arrange for and maintainthird-party manufacturing on commercially reasonable terms, or we lose one ofour sole source suppliers used for our existing products or for some componentsof our manufacturing processes for our products or drug candidates, we may notbe able to market our products or complete development of our drug candidateson a timely basis, if at all.

 

28

----

Table of Contents

 

Reliance on third-party suppliers limits our ability to control certainaspects of the manufacturing process and therefore exposes us to a variety ofsignificant risks, including, but not limited to, risks to our ability tocommercialize our products or conduct clinical trials, risks of reliance on thethird-party for regulatory compliance and quality assurance, third-partyrefusal to supply on a long-term basis, or at all, the possibility of breach ofthe manufacturing agreement by the third-party and the possibility oftermination or non-renewal of the agreement by the third-party, based on itsbusiness priorities, at a time that is costly or inconvenient for us. Inaddition, reliance on single-source suppliers subjects us to the risk of priceincreases by these suppliers which could negatively impact our operatingmargins. If any of these risks occur, our product supply will be interruptedresulting in lost or delayed revenues and delayed clinical trials. Our relianceon third-party manufacturers for the production of our two commercial productsis described in more detail below.

 

We rely on Bachem and Mallinckrodt to manufacture our long-termcommercial supply of bulk exenatide, the active ingredient in BYETTA. Inaddition, we rely on single-source manufacturers for some of our raw materialsused by Bachem and Mallinckrodt to produce bulk exenatide. We also rely onWockhardt and Baxter to manufacture the dosage form of BYETTA in cartridges. Weare further dependent upon Lilly to supply pens for delivery of BYETTA incartridges.

 

We rely on Bachem and Lonza to manufacture our commercial supply ofbulk pramlintide acetate, the active ingredient contained in SYMLIN. Inaddition, we rely on Baxter to manufacture the dosage form of SYMLIN in vials.We rely on Wockhardt for the dosage form of SYMLIN in cartridges and Ypsomed AGto manufacture the components for the SYMLIN disposable pen. We also rely onSharp Corporation for the assembly of the SYMLIN pen.

 

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

 

Our manufacturers have produced BYETTA and SYMLIN for commercial usefor approximately five years, however, unforeseeable risks related toenvironmental, economic, technical or other issues may be encountered as we,together with our manufacturers, continue to develop familiarity and experiencewith regard to manufacturing our products. Furthermore, we and the othermanufacturers used for our drug candidates may not be able to produce suppliesin commercial quantities if our drug candidates are approved. While we believe thatbusiness relations between us and our manufacturers are generally good, wecannot predict 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 BYDUREON on a commercial scale we must completefinal validation of the manufacturing process and obtain approval for ourmanufacturing facility from the FDA. We have never established, validated, andoperated a manufacturing facility and cannot assure you that we will be able tosuccessfully establish or operate such a facility in a timely or economical manner,or at all. The FDA has inspected our manufacturing facility and has made anumber of observations all of which we believe have been addressed. Although weare working diligently to qualify the commercial-scale manufacturing process atthis facility, we cannot be assured that we will be able to demonstratecomparability of product manufactured at development scale and productmanufactured at commercial scale. If we are unable to demonstrate comparabilityof product, we may not be able to commercially launch BYDUREON in a timelymanner or at all. In addition, we are dependent on Alkermes to supply us withcommercial quantities of the polymer required to manufacture BYDUREON. We alsowill need to obtain sufficient supplies of diluent, solvents, devices, packagingand other components necessary for commercial manufacture of BYDUREON. IfBYDUREON is approved, we will be dependent upon Mallinckrodt and Lonza tomanufacture our long-term commercial supply of bulk exenatide, the activeingredient in BYDUREON, and upon single suppliers to produce components forpackaging BYDUREON.

 

29

----

Table of Contents

 

***Our ability to generate revenueswill be diminished if we fail to obtain acceptable prices or an adequate levelof reimbursement for our products from third-party payers.***

 

The continuing efforts of government, private health insurers and otherthird- party payers to contain or reduce the costs of health care throughvarious means, including efforts to increase the amount of patient co-payobligations, may limit our commercial opportunity. In the United States, theFederal government recently passed health care reform legislation.  Many of the details regarding theimplementation of this legislation have yet to be determined and implementationmay ultimately adversely affect our business. Further, we expect that there will continue to be a number of federaland state proposals to implement government control over the pricing ofprescription pharmaceuticals. In addition, increasing emphasis on managed carein the United States will continue to put pressure on the rate of adoption andpricing of pharmaceutical products.

 

Significant uncertainty exists as to the reimbursement status of healthcare products. Third-party payers, including Medicare, are challenging theprices charged for medical products and services. Government and otherthird-party payers increasingly are attempting to contain health care costs bylimiting both coverage and the level of reimbursement for new drugs and byrefusing to provide coverage for uses of approved products for diseaseindications for which the FDA has not granted labeling approval. Third-partyinsurance coverage may not be available to patients for BYETTA and/or SYMLIN orany other products we discover and develop, including BYDUREON. If governmentand other third-party payers do not provide adequate coverage and reimbursementlevels for our products, the market acceptance of these products may bereduced.

 

***Competition in the biotechnology andpharmaceutical industries may result in competing products, superior marketingof other products and lower revenues or profits for us.***

 

There are many companies that are seeking to develop products andtherapies for the treatment of diabetes and other metabolic disorders. Ourcompetitors include multinational pharmaceutical and chemical companies,specialized biotechnology firms and universities and other research institutions.A number of our largest competitors, including AstraZeneca, Bristol-MyersSquibb, GlaxoSmithKline, Lilly, Merck & Co., Novartis, NovoNordisk, Pfizer, Sanofi-Aventis, Roche and Takeda, are pursuing the developmentor marketing of pharmaceuticals that target the same diseases that we aretargeting, and it is possible that the number of companies seeking to developproducts and therapies for the treatment of diabetes, obesity and othermetabolic disorders will increase. Many of our competitors have substantiallygreater financial, technical, sales force, human and other resources than we doand may be better equipped to develop, manufacture and market technologicallysuperior products. In addition, many of these competitors have significantlygreater experience than we do in undertaking preclinical testing and humanclinical studies of new pharmaceutical products and in obtaining regulatoryapprovals of human therapeutic products. Accordingly, our competitors maysucceed in obtaining FDA approval for superior products. Furthermore, now thatwe have received FDA approval for BYETTA and SYMLIN, we may also be competingagainst other companies with respect to our manufacturing and productdistribution efficiency and sales and marketing capabilities, areas in which wehave limited or no experience as an organization.

 

Our target patient population for BYETTA includes people with diabeteswho have not achieved adequate glycemic control with diet and exercise or byusing metformin, sulfonylurea and/or a TZD, three common oral therapies fortype 2 diabetes. Our target population for SYMLIN includes people witheither type 2 or type 1 diabetes whose therapy includes multiplemealtime insulin injections daily. Other products are currently in developmentor exist in the market that may compete directly with the products that we aredeveloping or marketing. Various other products are available or in developmentto treat type 2 diabetes, including:

 

·                  sulfonylureas;

 

·                  metformin;

 

·                  insulins, includinginjectable and inhaled versions;

 

·                  TZDs;

 

·                  glinides;

 

·                  DPP-IV inhibitors;

 

·                  incretin/GLP-1 receptoragonists;

 

·                  PPARs; and

 

·                  alpha-glucosidaseinhibitors.

 

30

----

Table of Contents

 

In addition, several companies are developing various approaches,including alternative delivery methods, 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 completionof our clinical trials, the analysis of the data from our clinical trials orour manufacturing scale-up activities may result in delays in our plannedfilings for regulatory approvals of our products, and may adversely affect ourability to enter into new collaborative arrangements.***

 

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

 

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

 

·                  we may be unable to completeour development programs for BYDUREON or our obesity clinical trials;

 

·                  we may have to delay orterminate our planned filings for regulatory approval;

 

·                  we may not have thefinancial resources to continue research and development of any of our drugcandidates; and

 

·                  we may not be able to enterinto, if we chose to do so, any additional collaborative arrangements.

 

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

 

·                  ongoing discussions with theFDA or comparable foreign authorities regarding the scope or design of ourclinical trials;

 

·                  delays in enrollingvolunteers;

 

·                  lower than anticipatedretention rate of volunteers in a clinical trial;

 

·                  negative results of clinicalstudies;

 

·                  insufficient supply ordeficient quality of drug candidate materials or other materials necessary forthe performance of clinical trials;

 

·                  our inability to reachagreement with Lilly regarding the scope, design, conduct or costs of clinicaltrials with respect to BYETTA, BYDUREON, nasal exenatide or transdermalexenatide; or

 

·                  serious side effectsexperienced by study participants relating to a drug candidate.

 

***We are substantially dependent onour collaboration with Lilly for the development and commercialization ofBYETTA and dependent on Lilly and Alkermes for the development of BYDUREON.***

 

We have entered into a collaborative arrangement with Lilly, whocurrently markets diabetes therapies and is developing additional diabetes drugcandidates, to commercialize BYETTA and further develop sustained-releaseformulations of BYETTA, including BYDUREON. We entered into this collaborationin order to:

 

·                  fund some of our researchand development activities;

 

·                  assist us in seeking andobtaining regulatory approvals; and

 

·                  assist us in the successfulcommercialization of BYETTA and BYDUREON, if approved.

 

In general, we cannot control the amount and timing of resources thatLilly may devote to our collaboration. If Lilly fails to assist in the furtherdevelopment of BYDUREON or the commercialization of BYETTA, or if Lilly’sefforts are not effective, our business may be negatively affected. We arerelying on Lilly to obtain regulatory approvals for and successfullycommercialize BYETTA and BYDUREON outside the United States. Our collaborationwith Lilly may not continue or result in additional 

 

31

----

Table of Contents

 

successfullycommercialized drugs. Lilly can terminate our collaboration at any time upontwelve months’ notice. If Lilly ceased funding and/or developing andcommercializing BYETTA or BYDUREON, we would have to seek additional sourcesfor funding and may have to delay, reduce or eliminate one or more of ourcommercialization and development programs for these compounds. If Lilly doesnot successfully commercialize BYETTA outside the United States, we may receivelimited or no revenues from them. In addition, we are dependent on Alkermes tosuccessfully develop and transfer to us its technology for manufacturingBYDUREON. If Alkermes’ technology is not successfully developed to effectivelydeliver exenatide in a sustained release formulation, or Alkermes does notdevote sufficient resources to the collaboration, our efforts to developsustained release formulations of exenatide could be delayed or curtailed.

 

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

 

We own or hold exclusive rights to many issued United States patentsand pending United States patent applications related to the development andcommercialization of exenatide, including BYETTA and BYDUREON, SYMLIN and ourother drug candidates. These patents and applications covercomposition-of-matter, medical indications, methods of use, formulations andother inventive results. We have issued and pending applications for formulationsof BYETTA and BYDUREON, but we do not have a composition-of-matter patentcovering exenatide. We also own or hold exclusive rights to various foreignpatent applications that correspond to issued United States patents or pendingUnited States patent applications.

 

Our success will depend in part on our ability to obtain patentprotection for our products and drug candidates and technologies both in theUnited States and other countries. We cannot guarantee that any patents willissue from any pending or future patent applications owned by or licensed tous. Alternatively, a third party may successfully challenge or circumvent ourpatents. Our rights under any issued patents may not provide us with sufficientprotection against competitive products or otherwise cover commerciallyvaluable products or processes. For example, our SYMLIN and BYETTA products aresubject to the provisions of the Drug Price Competition and Patent TermRestoration Act of 1984, also known as the “Hatch-Waxman Act,” which providesdata exclusivity for a certain period of time. Beginning one year beforeexpiration of the data exclusivity period, the Hatch-Waxman Act allows genericmanufacturers to file Abbreviated New Drug Applications, or ANDAs, requestingthe FDA’s approval of generic versions of previously-approved products. Forexample, generic pharmaceutical manufacturers could file an ANDA for SYMLIN asof March 2009 and for BYETTA as of April 2009. If an ANDA is filedfor one of our approved products prior to expiration of the patents coveringthose products, it could result in our initiating patent infringementlitigation to enforce our rights. We can provide no assurances that we wouldprevail in such an action or in any challenge related to our patent rights.

 

In addition, because patent applications in the United States aremaintained, in general, in secrecy for 18 months after the filing of theapplications, and publication of discoveries in the scientific or patentliterature often lag behind actual discoveries, we cannot be sure that theinventors of subject matter covered by our patents and patent applications werethe first to invent or the first to file patent applications for theseinventions. Third parties have filed, and in the future are likely to file,patent applications on inventions similar to ours. From time-to-time we haveparticipated 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 have also participated in, and in the future are likely toparticipate in, opposition proceedings against our patents in otherjurisdictions, such as Europe and Australia. Furthermore, we may not haveidentified all United States and foreign patents that pose a risk ofinfringement.

 

We also rely upon licensing opportunities for some of our technologies.We cannot be certain that we will not lose our rights to certain patentedtechnologies under existing licenses or that we will be able to obtain alicense to any required third-party technology. If we lose our licensedtechnology rights or if we are not able to obtain a required license, we couldbe adversely affected.

 

***We may be unable to obtainregulatory clearance to market our drug candidates, including BYDUREON, in theUnited States or foreign countries on a timely basis, or at all.***

 

Our drug candidates, including BYDUREON, 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 for approvalof a drug candidate if they believe that applicable regulatory criteria are notsatisfied. Regulatory authorities may also require additional testing forsafety and efficacy. Moreover, if the FDA grants regulatory approval of aproduct, the approval may be limited to specific indications or limited withrespect to its distribution, and expanded or additional indications forapproved drugs may not be approved, which could limit our revenues. Foreignregulatory authorities may apply similar limitations or may refuse to grant anyapproval. Unexpected changes to the FDA or foreign regulatory approval processcould also delay or prevent the approval of our drug candidates.

 

32

----

Table ofContents

 

Thedata collected from our clinical trials may not be sufficient to supportapproval of our drug candidates or additional or expanded indications by theFDA or any foreign regulatory authorities. Biotechnology stock prices havedeclined significantly in certain instances where companies have failed to meetexpectations with respect to FDA approval or the timing for FDA approval. Ifthe FDA’s or any foreign regulatory authority’s response is delayed or notfavorable for any of our drug candidates, including BYDUREON, our stock pricecould decline significantly.

 

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

 

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

 

***Litigation regarding patents andother proprietary rights may be expensive, cause delays in bringing products tomarket and harm our ability to operate.***

 

Our success will depend in part on our ability to operate withoutinfringing the proprietary rights of third parties and preventing others frominfringing our patents. Challenges by pharmaceutical companies against thepatents of competitors are common. Legal standards relating to the validity ofpatents covering pharmaceutical and biotechnological inventions and the scopeof claims made under these patents are still developing. As a result, ourability to obtain and enforce patents is uncertain and involves complex legaland factual questions. Third parties may challenge, in courts or through patentoffice proceedings, or infringe upon, existing or future patents. In the eventthat a third party challenges a patent, a court or patent office may invalidatethe patent or determine that the patent is not enforceable. Proceedingsinvolving our patents or patent applications or those of others could result inadverse decisions about:

 

·                  the patentability of ourinventions, products and drug candidates; and/or

 

·                  the enforceability, validityor scope of protection offered by our patents.

 

The manufacture, use or sale of any of our products or drug candidatesmay infringe on the patent rights of others. If we are unable to avoidinfringement of the patent rights of others, we may be required to seek alicense, defend an infringement action or challenge the validity of the patentsin court. Patent litigation is costly and time consuming. We may not havesufficient resources to bring these actions to a successful conclusion. Inaddition, 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:

 

·                  incur substantial monetarydamages;

 

·                  encounter significant delaysin bringing our drug candidates to market; and/or

 

·                  be precluded fromparticipating in the manufacture, use or sale of our products or drugcandidates 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 and SYMLIN by the FDA, we became subject tovarious health care “fraud and abuse” laws, such as the Federal False ClaimsAct, the federal anti-kickback statute and other state and federal laws andregulations. Pharmaceutical companies have faced lawsuits and investigationspertaining to violations of these laws and regulations. We cannot guaranteethat measures that we have taken to prevent such violations, including ourcorporate compliance program, will protect us from future violations, lawsuitsor investigations. If any such actions are instituted against us, and we arenot successful in defending ourselves or asserting our rights, those actionscould have a significant impact on our business, including the imposition ofsignificant fines or other sanctions.

 

33

----

Table of Contents

 

***Our financial results willfluctuate, and these fluctuations may cause our stock price to fall.***

 

Forecasting future revenues is difficult, especially since we launchedour first products in 2005 and the level of market acceptance of these productsmay change rapidly. In addition, our customer base is highly concentrated withfour customers accounting for most of our net product sales. Fluctuations inthe buying patterns of these customers, which may result from seasonality,wholesaler buying decisions or other factors outside of our control, couldsignificantly affect the level of our net sales on a period to period basis. Asa result, it is reasonably likely that our financial results will fluctuate toan extent that may not meet with market expectations and that also mayadversely affect our stock price. There are a number of other factors thatcould cause our financial results to fluctuate unexpectedly, including:

 

·                  product sales;

 

·                  cost of product sales;

 

·                  achievement and timing ofresearch and development milestones;

 

·                  collaboration revenues;

 

·                  cost and timing of clinicaltrials, regulatory approvals and product launches;

 

·                  marketing and otherexpenses;

 

·                  manufacturing or supplyissues; and

 

·                  potential acquisitions ofbusinesses and technologies and our ability to successfully integrate any suchacquisitions into our existing business.

 

***We may require additional financingin the future, which may not be available to us on favorable terms, or at all.***

 

We intend to use our available cash for:

 

·                  Commercialization of BYETTAand SYMLIN and, if approved, the launch and commercialization of BYDUREON;

 

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

 

·                  Development of BYDUREON andother pipeline candidates;

 

·                  Executing our INTO strategy;

 

·                  Our other research anddevelopment activities;

 

·                  Other operating expenses;

 

·                  Potential acquisitions orinvestments in complementary technologies or businesses; and

 

·                  Other general corporatepurposes.

 

We may also be required to use our cash to pay principal and intereston outstanding debt, including a term loan with a current balance ofapproximately $86 million due in 2010, referred to as the Term Loan, and$775 million in outstanding principal amount of convertible senior notes,of which $200 million is due in 2011, referred to as the 2004 Notes, and $575 millionis due in 2014, referred to as the 2007 Notes.

 

If we require additional financing in the future, we cannot assure youthat it will be available to us on favorable terms, or at all. Although we havepreviously been successful in obtaining financing through our debt and equitysecurities offerings, there can be no assurance that we will be able to so inthe future, especially given the current adverse economic and creditconditions.

 

34

----

Table of Contents

 

***Our investments in marketable debtsecurities are subject to credit and market risks that may adversely affecttheir fair value.***

 

We maintain a portfolio of investments in marketable debt securitieswhich are recorded at fair value. Although we have established investmentguidelines relative to diversification and maturity with the objective ofmaintaining safety of principal and liquidity, credit rating agencies mayreduce the credit rating of our individual holdings which could adverselyaffect their value. Lower credit quality and other market events, such asincreases in interest rates, and further deterioration in the credit marketsmay have an adverse effect on the fair value of our investment holdings andcash position.

 

***Our business has a substantial riskof product liability claims, and insurance may not be adequate to cover theseclaims.***

 

Our business exposes us to potential product liability risks that areinherent in the testing, manufacturing and marketing of human therapeuticproducts. On March 4, 2009, the Supreme Court held in *Wyeth v. Levine* that federal law does notpreempt state product liability claims involving pharmaceuticals. We arecurrently involved in fifty-eight product liability cases which have beenbrought by individuals who have used BYETTA and generally seek compensatory andpunitive damages for alleged injuries, consisting primarily of pancreatitis,and in a few cases wrongful death. We have also been notified of other claimsof individuals who have not filed suit. Product liability claims could resultin the imposition of substantial defense costs and liability on us, a recall ofproducts, 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 andmaintain third-party relationships is important to our successful developmentand commercialization of BYETTA, SYMLIN and our other drug candidates and toour potential profitability.***

 

With respect to sales, marketing and distribution outside the UnitedStates, we will be substantially dependent on Lilly for activities relating toBYETTA and sustained-release formulations of BYETTA, including BYDUREON, ifapproved. We believe that we will likely need to enter into marketing anddistribution arrangements with third parties for, or find a corporate partnerwho can provide support for, the development and commercialization of SYMLIN orour other drug candidates outside the United States. We may also enter intoarrangements with third parties for the commercialization of SYMLIN or any ofour other drug candidates within the United States.

 

With respect to BYETTA and, if approved, BYDUREON, Lilly isco-promoting within the United States. If Lilly ceased commercializing BYETTAor, if approved, BYDUREON, for any reason, we would likely need to either enterinto a marketing and distribution arrangement with a third party for thoseproducts or significantly increase our internal sales and commercializationinfrastructure.

 

With respect to our obesity product candidates, we will generally bedependent upon Takeda for development activities beyond phase 2 forapproval in the United States and all development activities outside the UnitedStates. We will also be dependent upon Takeda for commercializing approvedproducts that result from our co-development activities, if any, in and outsidethe United States. If Takeda were to terminate our collaboration with them, wewould likely need to find a third party collaborator to continue developing ourobesity program, which we may be unable to do.

 

We may not be able to enter into marketing and distributionarrangements or find a corporate partner for SYMLIN or our other drugcandidates as we deem necessary. If we are not able to enter into a marketingor distribution arrangement or find a corporate partner who can provide supportfor commercialization of our drug candidates as we deem necessary, we may notbe able to successfully perform these marketing or distribution activities.Moreover, any new marketer or distributor or corporate partner for our drugcandidates, including Lilly and Takeda, 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 ofindebtedness. We may not be able to make payments on our indebtedness, and wemay incur additional indebtedness in the future, which could adversely affectour operations.***

 

In April 2004, we issued $200 million of the 2004 Notes andin June 2007, we issued $575 million of the 2007 Notes. In December 2007,we entered into the $125 million Term Loan, of which approximately$86 million is currently outstanding and due in 2010. Our ability to makepayments on our debt, including the 2004 and 2007 Notes and the Term Loan, willdepend on our future operating performance and ability to generate cash and mayalso depend on our ability to obtain additional debt or equity financing.During four of the last five years, our operating cash flows were negative andinsufficient to cover our fixed costs. We may need to use our cash to payprincipal and interest on our debt, thereby reducing the funds available tofund our research and development programs, strategic initiatives and workingcapital requirements. Our ability to generate sufficient operating cash flow toservice our indebtedness, including the 2004 and 2007 Notes and the Term Loan,and fund our operating requirements will depend on our ability, 

 

35

----

Table of Contents

 

aloneor with others, to successfully develop, manufacture, obtain requiredregulatory approvals for and market our drug candidates, as well as otherfactors, including general economic, financial, competitive, legislative andregulatory conditions, some of which are beyond our control. Our debt serviceobligations increase our vulnerabilities to competitive pressures because manyof our competitors 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 or defer our developmentprograms, sell assets or seek additional debt or equity financing, which maynot be available to us on satisfactory terms or at all. Our level ofindebtedness may make us more vulnerable to economic or industry downturns. Ifwe incur new indebtedness, the risks relating to our business and our abilityto service our indebtedness will intensify.

 

***We may be required to redeem ourconvertible senior notes upon a designated event or repay the Term Loan upon anevent of default.***

 

Holders of the 2004 and 2007 Notes may require us to redeem all or anyportion of their notes upon the occurrence of certain designated events whichgenerally involve a change in control of our company. The lenders under theTerm Loan may require us to repay outstanding principal and accrued interestdue under the Term Loan upon the occurrence of an event of default, which couldinclude, among other things, nonpayment of principle and interest, violation ofcovenants and a change in control. We may not have sufficient cash funds toredeem the 2004 and 2007 Notes upon a designated event or repay the Term Loanupon an event of default. 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. If we are prohibited from redeeming the 2004 or 2007 Notes,we could seek consent from our lenders to redeem the 2004 or 2007 notes. If weare unable to obtain their consent, we could attempt to refinance the 2004 or2007 Notes. If we were unable to obtain a consent or refinance, we would beprohibited from redeeming the 2004 or 2007 Notes. If we were unable to redeemthe 2004 or 2007 Notes upon a designated event, it would result in an event ofdefault under the indentures governing the 2004 or 2007 Notes. An event ofdefault under the indentures could result in a further event of default underour other then-existing debt, including the Term Loan. In addition, theoccurrence of a designated event may be an event of default under our otherdebt. Further, an event of default under the Term Loan could result in an eventof default under the indentures governing the 2004 or 2007 Notes.

 

***If our research and developmentprograms fail to result in additional drug candidates, the growth of ourbusiness could be impaired.***

 

Certain of our research and development programs for drug candidatesare at an early stage and will require significant research, development,preclinical and clinical testing, manufacturing scale-up activities, regulatoryapproval and/or commitments of resources before commercialization. We cannotpredict whether our research will lead to the discovery of any additional drugcandidates that could generate additional revenues for us.

 

***Our future success depends on ourchief executive officer, and other key executives and our ability to attract,retain and motivate qualified personnel.***

 

We are highly dependent on our chief executive officer, and the otherprincipal members of our executive and scientific teams. The unexpected loss ofthe services of any of these persons might impede the achievement of ourresearch, development and commercialization objectives. Recruiting andretaining qualified sales, marketing, regulatory, scientific and otherpersonnel and consultants will also be critical to our success. We may not beable to attract and retain these personnel and consultants on acceptable termsgiven the competition between numerous pharmaceutical and biotechnologycompanies. We do not maintain “key person” insurance on any of our employees.

 

***We may be unable to adequatelyprevent disclosure of trade secrets and other proprietary information.***

 

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

 

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

 

36

----

Table of Contents

 

***Our research and developmentactivities and planned manufacturing activities involve the use of hazardousmaterials, which subject us to regulation, related costs and delays andpotential liabilities.***

 

Our research and development and our planned manufacturing activities involvethe controlled use of hazardous materials, chemicals and various radioactivecompounds. Although we believe that our research and development safetyprocedures for handling and disposing of these materials comply with thestandards prescribed by state and federal regulations, the risk of accidentalcontamination or injury from these materials cannot be eliminated. In addition,as part of the development of our planned manufacturing activities, we willneed to develop additional safety procedures for the handling and disposing ofhazardous materials. If an accident occurs, we could be held liable forresulting damages, which could be substantial. We are also subject to numerousenvironmental, health and workplace safety laws and regulations, including thosegoverning laboratory procedures, exposure to blood-borne pathogens and thehandling of biohazardous materials. Additional federal, state and local lawsand regulations affecting our operations may be adopted in the future. We mayincur substantial costs to comply with, and substantial fines or penalties ifwe violate any of these laws or regulations.

 

***We are exposed to potential risksfrom legislation requiring companies to evaluate internal control overfinancial reporting.***

 

The Sarbanes-Oxley Act requires that we report annually on theeffectiveness of our internal control over financial reporting. Among otherthings, we must perform systems and processes evaluation and testing. We mustalso conduct an assessment of our internal control to allow management toreport on, and our independent registered public accounting firm to attest to,our internal control over financial reporting, as required by Section 404of the Sarbanes-Oxley Act. In connection with our Section 404 complianceefforts, we have incurred or expended, and expect to continue to incur orexpend, substantial accounting and other expenses and significant managementtime and resources. We have implemented certain remediation activitiesresulting from our ongoing assessment of internal control over financialreporting. Our future assessment, or the future assessments by our independentregistered public accounting firm, may reveal material weaknesses in ourinternal control. If material weaknesses are identified in the future we wouldbe required to conclude that our internal control over financial reporting isineffective and we could be subject to sanctions or investigations by theSecurities and Exchange Commission, the NASDAQ Stock Market or other regulatoryauthorities, which would require additional financial and management resourcesand could adversely affect the market price of our common stock.

 

***We have implemented anti-takeoverprovisions that could discourage or prevent an acquisition of our company, evenif the acquisition would be beneficial to our stockholders, and as a result ourmanagement may become entrenched and hard to replace.***

 

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

 

·                  allowing our board ofdirectors to elect a director to fill a vacancy created by the expansion of theboard of directors;

 

·                  allowing our board ofdirectors to issue, without stockholder approval, up to 5.5 million sharesof preferred stock with terms set by the board of directors;

 

·                  limiting the ability ofholders of our outstanding common stock to call a special meeting of ourstockholders; and

 

·                  preventing stockholders fromtaking actions by written consent and requiring all stockholder actions to betaken at a meeting of our stockholders.

 

Each of these provisions, as well as selected provisions of Delawarelaw, could discourage potential takeover attempts, could adversely affect thetrading price of our securities and could cause our management to becomeentrenched and hard to replace. In addition to provisions in our charterdocuments and under Delaware law, an acquisition of our company could be mademore difficult by our employee benefits plans and our employee change incontrol severance plan, under which, in connection with a change in control andtermination of employment, stock options held by our employees may becomevested and our officers may receive severance 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, directorsand major stockholders control approximately 51% of our common stock.***

 

As of March 31, 2010, executive officers, directors and holders ofapproximately 5% or more of our outstanding common stock, in the aggregate,owned or controlled approximately 51% of our outstanding common stock. As aresult, these stockholders are 

 

37

----

Table of Contents

 

ableto influence all matters requiring approval by our stockholders, including theelection of directors and the approval of corporate transactions. Thisconcentration of ownership may also delay, deter or prevent a change in controlof our company and may make some transactions more difficult or impossible tocomplete without the support of these stockholders.

 

***Substantial future sales of ourcommon stock by us or our existing stockholders or the conversion of ourconvertible senior notes to common stock could cause the trading price of ourcommon stock to fall.***

 

Sales by existing stockholders of a large number of shares of ourcommon stock in the public market or the perception that additional sales couldoccur could cause the trading price of our common stock to drop. Likewise, theissuance of shares of common stock upon conversion of our convertible notes orredemption of our convertible notes upon a designated event, or upon additionalconvertible debt or equity financings or other share issuances by us, includingshares issued in connection with potential future strategic alliances, couldadversely affect the trading price of our common stock. Our convertible notesare currently convertible into a total of up to 15.2 million shares. Inaddition, the existence of these notes may encourage short selling of ourcommon stock by market participants.

 

***Significant volatility in the marketprice for our common stock could expose us to litigation risk.***

 

The market prices for securities of biopharmaceutical and biotechnologycompanies, including our common stock, have historically been highly volatile,and the market from time to time has experienced significant price and volumefluctuations that are unrelated to the quarterly operating performance of thesebiopharmaceutical and biotechnology companies. Since January 1, 2008, thehigh and low sales price of our common stock varied significantly, as shown inthe following table:

 
| ** **                                   | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------------|------------|----------|------------|---------|------------|
| **Year ending December 31,  2010**      |       |     |       |    |       |
| Second Quarter (through April 21, 2010) |       | $        | 24.21      |    | $          | 20.49 |   |
| First Quarter                                |       | $        | 23.93      |    | $          | 14.13 |   |
| **Year ending December 31,  2009**      |       |     |       |    |       |
| Fourth Quarter                               |       | $        | 15.63      |    | $          | 11.01 |   |
| Third Quarter                                |       | $        | 15.69      |    | $          | 11.73 |   |
| Second Quarter                               |       | $        | 14.30      |    | $          | 8.56 |   |
| First Quarter                                |       | $        | 14.13      |    | $          | 7.89 |   |
| **Year ended December 31, 2008**        |       |     |       |    |       |
| Fourth Quarter                               |       | $        | 20.47      |    | $          | 5.50 |   |
| Third Quarter                                |       | $        | 35.00      |    | $          | 18.55 |   |
| Second Quarter                               |       | $        | 33.22      |    | $          | 25.30 |   |
| First Quarter                                |       | $        | 37.38      |    | $          | 23.75 |   |

 

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

 

·                  our financial results and/orfluctuations in our financial results;

 

·                  safety issues with BYETTA,SYMLIN or our product candidates;

 

·                  clinical study results;

 

·                  determinations by regulatoryauthorities with respect to our drug candidates, including BYDUREON;

 

·                  our ability to validate ourOhio manufacturing facility and the commercial manufacturing process forBYDUREON;

 

·                  developments in our relationshipswith current or future collaborative partners;

 

·                  our ability to successfullyexecute our commercialization strategies;

 

·                  developments in ourrelationships with third-party manufacturers of our products and other partieswho provide services to us;

 

38

----

Table of Contents

 

·                  technological innovations ornew commercial therapeutic products by us or our competitors;

 

·                  developments in patent orother proprietary rights; and

 

·                  governmental policy orregulation, including with respect to pricing and reimbursement.

 

Broadmarket and industry factors also may materially adversely affect the marketprice of our common stock, regardless of our actual operating performance.Periods of volatility in the market price of our common stock expose us tosecurities class-action litigation, and we may be the target of such litigationas a result of market price volatility in the future.

 

**ITEM 6.  Exhibits**

 

Thefollowing exhibits are included 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                 |       | Fourth  Amended and Restated Bylaws (filed as an exhibit to Registrant’s Current  Report on Form 8-K filed on December 8, 2008 and incorporated  herein by reference)                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 3.3                 |       | Certificate  of Amendment of Amended and Restated Certificate of Incorporation (filed as  an exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter  ended September 30, 2001 and incorporated herein by reference)                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 3.4                 |       | Certificate  of Amended and Restated Certificate of Incorporation (filed as an exhibit to  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2007 and incorporated herein by reference)                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.1                 |       | Specimen  Common Stock Certificate (filed as an exhibit to Registrant’s registration  statement on Form S-1 (File No. 333-44195) or amendments thereto  and incorporated herein by reference)                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.2                 |       | Rights  Agreement, dated as of June 17, 2002, between the Registrant and  American Stock Transfer & Trust Company (filed as an exhibit to  Registrant’s Current Report on Form 8-K filed on June 18, 2002 and  incorporated herein by reference)                                      |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.3                 |       | First  Amendment to Rights Agreement dated December 13, 2002, between the  Registrant and American Stock Transfer & Trust Company (filed as an  exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year  ended December 31, 2002 and incorporated herein by reference) |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.4                 |       | Form of  Rights Certificate (filed as an exhibit to Registrant’s Current Report on  Form 8-K filed on June 18, 2002 and incorporated herein by  reference)                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 4.5                 |       | Certificate  of Designation of Series A Junior Participating Preferred Stock (filed  as an exhibit to Registrant’s Current Report on Form 8-K filed on  June 18, 2002 and incorporated herein by reference)                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 10.1                |       | Registrant’s  2009 Equity Incentive Plan Restricted Stock Unit Award Agreement†                                                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 10.2                |       | Amendment  to Exenatide Manufacturing Agreement, dated January 8, 2010, between  Registrant and Mallinckrodt Inc.*                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 10.3                |       | Amendment  to Commercial Supply Agreement, dated February 11, 2010, between  Registrant and Baxter Pharmaceutical Solutions LLC*                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                               |
| 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                                                                                                                                                                                   |

 

----

| † |   | Indicates  management or compensatory plan or arrangement required to be identified  pursuant to Item 15(c).                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *      |   | Confidential treatment has been requested with respect  to certain portions of this exhibit. Omitted portions have been filed  separately with the Securities and Exchange Commission. |

 

39

----

Table of Contents

 

**SIGNATURE**

 

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

 

 
|                         | Amylin  Pharmaceuticals, Inc. |
|------------------------------|------------------------------------|
|                         |                               |   |
| Date: May 6,  2010 | 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)* |

 

40

----